UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-Q

(Mark One)

|X| QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE QUARTERLY PERIOD ENDED JUNE 30, 2002.

OR

|_| TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM _____________ TO ____________

COMMISSION FILE NUMBER: 000-24235

GUARANTY BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

100 W. ARKANSAS
MT. PLEASANT, TEXAS 75455
(Address of principal executive offices, including zip code)

903-572-9881
(Registrant’s telephone number, including area code)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days.
|X| Yes    |_| No

As of August 12, 2002, there were 2,996,428 shares of the registrant’s Common Stock, par value $1.00 per share, outstanding.

GUARANTY BANCSHARES, INC.
INDEX TO FORM 10-Q

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PART I – FINANCIAL INFORMATION

ITEM 1. FINANCIAL STATEMENTS

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)

See accompanying Notes to Consolidated Financial Statements.

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GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED STATEMENTS OF EARNINGS
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

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GUARANTY BANCHSHARES, INC.
CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(DOLLARS IN THOUSANDS)
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

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GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(DOLLARS IN THOUSANDS)
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

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GUARANTY BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
(DOLLARS IN THOUSANDS, EXCEPT PER SHARE DATA)
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements.

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GUARANTY BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
JUNE 30, 2002
(UNAUDITED)

NOTE 1. BASIS OF PRESENTATION

     The accompanying unaudited consolidated financial statements include the accounts of Guaranty Bancshares, Inc. (the “Company”) and its wholly-owned subsidiaries Guaranty (TX) Capital Trust I and Guaranty Financial Corp., Inc., which wholly owns Guaranty Bank, and one non-bank subsidiary, Guaranty Company. Guaranty Bank has three wholly owned non-bank subsidiaries, Guaranty Leasing Company, Guaranty Company and GB Com, Inc. All significant intercompany balances and transactions have been eliminated in consolidation.

     The accompanying unaudited consolidated financial statements have been prepared in accordance with the rules and regulations of the Securities and Exchange Commission. Accordingly, they do not include all of the information and footnotes required by generally accepted accounting principles in the United States of America for a complete presentation of financial position. In the opinion of management, the accompanying unaudited consolidated financial statements reflect all adjustments necessary for a fair presentation of the financial position, results of operations and cash flows of the Company on a consolidated basis, and all such adjustments are of a normal recurring nature. These financial statements and the notes thereto should be read in conjunction with the Company’s Annual Report on Form 10-K filed with the Securities and Exchange Commission on March 15, 2002. Except for changes implemented due to recent accounting pronouncements as discussed below, the Company has consistently followed the accounting policies described in the Annual Report in preparing this Form 10-Q. Operating results for the three and six months ended June 30, 2002, are not necessarily indicative of the results that may be expected for the year ending December 31, 2002.

     In preparation of the accompanying unaudited consolidated financial statements, management is required to make estimates and assumptions, which are based on information available at the time such estimates and assumptions are made. These estimates and assumptions affect the amounts reported in the accompanying unaudited consolidated financial statements. Accordingly, future results may differ if the actual amounts and events are not the same as the estimates and assumptions of management. The collectability of loans, fair value of financial instruments and other real estate and status of contingencies are particularly subject to change.

NOTE 2. RECENT ACCOUNTING PRONOUNCEMENTS

     On January 1, 2002, the Company adopted new accounting policies related to goodwill, intangibles and other long-lived assets in accordance with several recently issued accounting pronouncements. Our new accounting policies are discussed below:

     Goodwill: On January 1, 2002, the Company stopped amortizing goodwill and adopted a new policy for measuring goodwill for impairment. The Company has completed its initial impairment test and no impairment of goodwill was recognized in connection with the adoption of this new policy. Under the new policy, goodwill is assigned to reporting units. Goodwill is then tested for impairment at least annually, or on an interim basis if an event occurs or circumstances change that would more-likely-than-not reduce the fair value of the reporting unit below its carrying value. Goodwill is tested for impairment using a two-step approach. The first step is to compare the fair value of the reporting unit to its carrying amount, including goodwill. If the fair value of the reporting unit is greater than its carrying amount, goodwill is not considered impaired and the second step is not required. If the fair value of the reporting unit is less than its carrying amount, the second step of the impairment test measures the amount of the impairment loss, if any. The second step of the impairment test is to compare the implied fair value of goodwill to its carrying amount. If the carrying amount of goodwill exceeds its implied fair value, an impairment loss is recognized equal to that excess. The implied fair value of goodwill is calculated in the same manner that goodwill is calculated in a business combination, whereby the fair value of the reporting unit is allocated to all of the assets and liabilities of that unit (including any unrecognized intangible assets) as if the reporting unit had been acquired in a business combination and the fair value of the reporting unit was the purchase price. The excess “purchase price” over the amounts assigned to assets and liabilities would be the implied fair value of goodwill.

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     The following table presents reported net income and basic earnings per common share for the three and six months ended June 30, 2001 and 2002 adjusted to exclude goodwill amortization expense assuming the new standards were applied effective January 1, 2001 (dollars in thousands, except per share amounts):

     Intangible Assets and Other Long-Lived Assets: Intangible assets with definite useful lives are amortized on a straight-line basis over their estimated useful life. Intangible assets, premises and equipment and other long-lived assets are tested for impairment whenever events or changes in circumstances indicate the carrying amount of the assets may not be recoverable from future undiscounted cash flows. If impaired, the assets are recorded at fair value.

The following accounting standard was issued during the six months ended June 30, 2002:

     Statement of Financial Accounting Standards (SFAS) No. 145, “Rescission of FASB Statements No. 4, 44, and 64, Amendment of FASB Statement No. 13, and Technical Corrections.” SFAS 145 clarifies and simplifies existing accounting pronouncements related to gains and losses from debt extinguishments and certain lease modifications and eliminates certain transitional accounting standards that are no longer necessary. This statement also makes minor technical corrections to various other existing pronouncements. Certain provisions of this statement will become effective for the Company on January 1, 2003, while other provisions became effective for transactions occurring and financial statements issued after May 15, 2002. Adoption of the provisions of this statement that were effective after May 15, 2002 did not have a significant impact on the Company’s financial statements. Furthermore, adoption of the remaining provisions of this statement on January 1, 2003 is not expected to have a significant impact on the Company’s financial statements.

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NOTE 3. EARNINGS PER SHARE

     Earnings per share is computed in accordance with Statement of Financial Accounting Standards No. 128, which requires dual presentation of basic and diluted earnings per share (“EPS”) for entities with complex capital structures. Basic EPS is based on net earnings divided by the weighted-average number of shares outstanding during the period. Diluted EPS includes the dilutive effect of stock options granted using the treasury stock method.

     The weighted-average number of common shares outstanding for basic and diluted earnings per share computations was as follows:

NOTE 4. STOCK OPTIONS

     In 2000, the Company granted nonqualified stock options to certain executive officers of the Company and Guaranty Bank under the Company’s 1998 Stock Incentive Plan. The grants consisted of eight-year options to purchase 89,500 shares at an exercise price of $9.30 per share, which was the market price of the Company’s stock on the date the options were granted. In February 2002, the Company granted eight-year options to purchase 20,000 shares at an exercise price of $12.50 per share, which was the market price of the Company’s stock on the date the options were granted. The options fully vest and become exercisable in five equal installments commencing on the first anniversary of the date of grant and annually thereafter. At June 30, 2002, 2,000 shares of the options have been exercised and 893,500 options remain available for future grant under the 1998 Stock Incentive Plan.

     The weighted-average fair value per share of options granted during 2002 was $4.09. The fair value of options granted was estimated on the date of grant using the Black-Scholes option-pricing model with the following weighted-average assumptions: Dividend yield of 2.24%; expected volatility of 28.7%; risk-free interest rate of 5.0%, and an expected life of 8.00 years.

NOTE 5. COMMITMENT AND CONTINGENCIES

     In the normal course of business, the Company enters into various transactions, which, in accordance with generally accepted accounting principles in the United States of America, are not included in the consolidated balance sheets. These transactions are referred to as “off-balance sheet commitments.” The Company enters into these transactions to meet the financing needs of its customers. These transactions include commitments to extend credit and letters of credit, which involve elements of credit risk in excess of the amounts recognized in the consolidated balance sheets. The Company minimizes its exposure to loss under these commitments by subjecting them to credit approval and monitoring procedures.

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     The Company enters into contractual commitments to extend credit, normally with fixed expiration dates or termination clauses, at specified rates and for specific purposes. Customers use credit commitments to ensure that funds will be available for working capital purposes, for capital expenditures and to ensure access to funds at specified terms and conditions. Substantially all of the Company’s commitments to extend credit are contingent upon customers maintaining specific credit standards at the time of loan funding. Management assesses the credit risk associated with certain commitments to extend credit in determining the level of the allowance for credit losses.

     Letters of credit are conditional commitments issued by the Company to guarantee the performance of a customer to a third party. The Company’s policies generally require that letters of credit arrangements contain security and debt covenants similar to those contained in loan agreements.

     Outstanding commitments and letters of credit are approximately as follows (dollars in thousands):

     The Company is subject to various claims and legal actions occurring in the normal course of business. The Company accrues for estimated losses in the accompanying financial statements for those matters where management believes the likelihood of an adverse outcome is probable and the amount of the loss is reasonably estimable. After consultation with legal counsel, management currently believes the outcome of outstanding legal proceedings, claims and litigation involving the Company will not have a material adverse effect on the Company’s business, financial condition or results of operation.

     Guaranty Leasing Company, a non-bank subsidiary of the Bank, is a substantial partner in various complex equipment leasing transactions primarily originated in 1992, 1994 and 1995 involving leveraged leases. During 2001 and 1998, Guaranty Leasing was informed by the Internal Revenue Service (the “Service”) that certain losses taken by the Partnership during 1992 and 1994 through 1996 amounting to approximately $1.7 million would be disallowed. The Partnership plans to appeal the Service’s determination and to actively contest the Service’s position. However, if the Service is ultimately successful in re-determining the amount of the Partnership’s taxable loss, the Company’s tax liability would be increased. Such adjustment may have a material adverse effect on the Company’s consolidated financial statements.

     There can be no assurance that the Service will not contest and ultimately disallow similar types of deductions and losses for other open tax years by the Partnerships in which Guaranty Leasing has ownership. If the Service is successful in its challenge of the Partnership’s losses, the potential additional tax liability to the Company may have a material adverse effect on its consolidated financial statements.

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ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

     Certain statements in this Quarterly Report on Form 10-Q include forward-looking information within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, and are subject to the “Safe Harbor” created by those sections. These forward-looking statements involve certain risks and uncertainties that could cause actual results to differ materially from those in the forward-looking statements. Such risks and uncertainties include, but are not limited to, the following factors: competitive pressure in the banking industry significantly increasing; changes in the interest rate environment reducing margins; general economic conditions, either nationally or regionally, are less favorable than expected, resulting in, among other things, a deterioration in credit quality and an increase in the provision for possible loan losses; changes in the regulatory environment; changes in business conditions; volatility of rate sensitive deposits; operational risks including data processing system failures or fraud; asset/liability, matching risks and liquidity risks; and changes in the securities markets and the factors contained in the Company’s Annual Report on Form 10-K for the year ended December 31, 2001 as filed with the Securities and Exchange Commission.

     These risks and uncertainties are beyond the Company’s control and, in many cases, the Company cannot predict the risks and uncertainties that could cause its actual results to differ materially from those indicated by the forward-looking statements. When used in this document, the words “believes,” “plans,” “expects,” “anticipates,” “intends,” “continue,” “may,” “will,” “should” or the negative of such terms and similar expressions as they relate to the Company, its customers or its management are intended to identify forward-looking statements.

GENERAL OVERVIEW

     Guaranty Bancshares, Inc. (the “Company”) is a registered bank holding company that derives substantially all of its revenues and income from the operation of its subsidiary, Guaranty Bank (the “Bank”). The Bank is a full service bank that provides a broad line of financial products and services to small and medium-sized businesses and consumers through ten banking locations in the Texas communities of Mount Pleasant (two offices), Bogata, Commerce, Deport, Paris, Pittsburg, Sulphur Springs, Talco and Texarkana. The Company also maintains a loan production office in Fort Stockton, Texas.

FINANCIAL OVERVIEW

     Net earnings for the six months ended June 30, 2002 were $2.1 million, or $0.69 per share, compared with $1.5 million, or $0.48 per share, for the six months ended June 30, 2001, an increase of $614,000 or 42.0%. The increase is due primarily to an increase in net interest income of $1.7 million, or 26.8%, and an increase in noninterest income of $159,000, or 6.8%, offset by an increase in noninterest expense of $592,000, or 9.1%, an increase in provision for loan losses of $360,000, or 105.9%, and an increase in provision for income taxes of $292,000, or 70.7%. These increases are due in part to the growth in loans, in deposits and in net earnings. Net earnings for the three months ended June 30, 2002 were $1.1 million, or $0.36 per share, compared with $723,000, or $0.24 per share, for the three months ended June 30, 2001, an increase of $370,000, or 51.2%. The increase is primarily due to an increase in net interest income and noninterest income and a gain on sale of securities during the quarter partially offset by an increase in noninterest expense primarily due to additional employee compensation and benefits cost.

     The first six months of 2002 showed steady growth. Gross loans increased to $348.0 million at June 30, 2002, from $331.3 million at December 31, 2001, an increase of $16.7 million, or 5.0%. Total assets increased to $491.5 million at June 30, 2002, compared with $460.5 million at December 31, 2001. The increase of $31.0 million in total assets resulted primarily from the investment of increased deposits of $19.5 million, and a net increase in FHLB advances of $9.8 million. Total deposits increased to $402.8 million at June 30, 2002 compared to $383.3 million at December 31, 2001, an increase of $19.5 million, or 5.1%.

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     Total shareholders’ equity was $33.7 million at June 30, 2002, compared with $31.8 million at December 31, 2001, an increase of $1.9 million, or 6.0%. This increase was due to earnings for the period of $2.1 million and an increase in accumulated other comprehensive income of $405,000 offset by the purchase of 10,000 shares of treasury stock at a cost of $130,000, and the payment of dividends of $450,000.

RESULTS OF OPERATIONS

Interest Income

     Interest income for the six months ended June 30, 2002 was $14.3 million, a decrease of $835,000, or 5.5%, compared with the six months ended June 30, 2001. Despite the increase in average interest-earning assets, interest income decreased primarily due to lower interest rates earned on earning assets as a result of the falling interest rate environment. The average interest rate earned on interest-earning assets decreased from 8.02% during the six months ended June 30, 2001 to 6.66% during the six months ended June 30, 2002. Average loans were $334.3 million for the six months ended June 30, 2002, compared with $290.6 million for the six months ended June 30, 2001, an increase of $43.7 million, or 15.0%. Average securities were $84.9 million for the six months ended June 30, 2002, compared with $68.5 million for the six months ended June 30, 2001, an increase of $16.4 million or 23.9%. Interest income for the three months ended June 30, 2002 was $7.2 million, a decrease of $299,000, or 4.0%, compared with the three months ended June 30, 2001. The decrease was primarily due to a decrease in the average yield on interest-earning assets from 7.84% during the three months ended June 30, 2001 to 6.54% during the three months ended June 30, 2002.

Interest Expense

     Interest expense on deposits and other interest-bearing liabilities was $6.2 million for the six months ended June 30, 2002, compared with $8.8 million for the six months ended June 30, 2001, a decrease of $2.6 million, or 28.9%. The decrease in interest expense is due primarily to a lower average rate paid on interest-bearing liabilities, which decreased from 5.31% for the six months ended June 30, 2001, to 3.35% for the six months ended June 30, 2002. The effect of this decrease was partially offset by growth in the average volume of interest-bearing liabilities. Average interest bearing deposits were $331.8 million for the six months ended June 30, 2002, compared to $317.5 million for the six months ended June 30, 2001, an increase of $14.3 million or 4.5%. Average Federal Home Loan Bank (FHLB) advances were $36.3 million for the six months ended June 30, 2002 compared to $8.7 million for the six months ended June 30, 2001, an increase of $27.6 million or 317.8%. Average long-term debt remained at $7.0 million for both comparative periods. Interest expense was $3.1 million for the three months ended June 30, 2002, compared with $4.3 million for the three months ended June 30, 2001, a decrease of $1.2 million, or 27.5%. The decrease for the comparable three-month periods was also due to decreases in average interest rates of interest-bearing liabilities offset by increases in average balances.

Net Interest Income

     Net interest income was $8.0 million for the six months ended June 30, 2002 compared with $6.3 million for the six months ended June 30, 2001, an increase of $1.7 million, or 26.8%. The increase in net interest income resulted primarily from growth in average interest-earning assets to $432.3 million for the six months ended June 30, 2002, from $379.7 million for the six months ended June 30, 2001, an increase of $52.5 million, or 13.8%, offset by growth in average interest-bearing liabilities to $375.1 million for the six months ended June 30, 2002, from $333.2 million for the six months ended June 30, 2001, an increase of $41.9 million, or 12.6%. Net interest income was $4.1 million for the three months ended June 30, 2002, compared with $3.2 million for the three months ended June 30, 2001, an increase of $875,000, or 27.2%. The net interest margin increased from 3.37% to 3.72% for the three months ended June 30, 2002 and from 3.36% to 3.75% for the six months ended June 30, 2002 compared to the same three and six month periods ended June 30, 2001. These increases can be attributed to the fact that the percentage growth in average interest-earning assets exceeded the percentage growth in average interest-bearing liabilities causing the ratio of average interest-earning assets to average interest-bearing liabilities to increase.

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     The Company’s net interest income is affected by changes in the amount and mix of interest-earning assets and interest-bearing liabilities, referred to as a “volume change.” It is also affected by changes in yields earned on interest-earning assets and rates paid on interest-bearing deposits and other borrowed funds, referred to as a “rate change.” The following tables set forth, for each category of interest-earning assets and interest-bearing liabilities, the average amounts outstanding, the interest earned or paid on such amounts, and the annualized average rate earned or paid for the three and six months ended June 30, 2002 and 2001, respectively. The tables also set forth the average rate earned on total interest-earning assets, the average rate paid on total interest-bearing liabilities, the net interest spread and the net interest margin for the same periods. The net interest spread is the difference between the average rate earned on total interest-earning assets less the average rate paid on total interest-bearing liabilities. The net interest margin is net interest income as a percentage of average interest-earning assets. Average balances are derived from daily average balance, which include nonaccrual loans in the loan portfolio.

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     The following tables present the dollar amount of changes in interest income and interest expense for the major components of interest-earning assets and interest-bearing liabilities and distinguishes between the increase (decrease) related to outstanding balances and the volatility of interest rates. For purposes of these tables, changes attributable to both rate and volume that can be segregated have been allocated (dollars in thousands):

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