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 SEPTEMBER 30, 2003.

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 file 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

Indicate by check mark whether the registrant is an accelerated filer (as defined in Rule 12 b-2 of the Exchange Act).
|_| Yes  |X| No

As of November 12, 2003, there were 2,921,928 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. INTERIM CONSOLIDATED FINANCIAL STATEMENTS

GUARANTY BANCSHARES, INC. AND SUBSIDIARIES
CONSOLIDATED BALANCE SHEETS
(DOLLARS IN THOUSANDS)

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 BANCSHARES, 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)
(UNAUDITED)

See accompanying Notes to Consolidated Financial Statements

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GUARANTY BANCSHARES, INC.
NOTES TO INTERIM CONSOLIDATED FINANCIAL STATEMENTS
SEPTEMBER 30, 2003
(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, Guaranty (TX) Capital Trust II, and Guaranty Financial Corp., Inc., which wholly owns Guaranty Bond Bank (the “Bank”). The 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 accounting principles generally accepted in the United States of America for a complete presentation of the 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 for the year ended December 31, 2002, filed with the Securities and Exchange Commission on March 14, 2003. 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 nine months ended September 30, 2003 are not necessarily indicative of the results that may be expected for the year ending December 31, 2003.

        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.

        Certain items in prior financial statements have been reclassified to conform with the current presentation.

NOTE 2. NEW ACCOUNTING PRONOUNCEMENTS

        In January 2003, the Financial Accounting Standards Board (FASB) issued Interpretation No. 46 (FIN 46), Consolidation of Variable Interest Entities, which establishes criteria to identify and assess a company’s interest in variable interest entities and for consolidating those entities. FIN 46 is currently effective for variable interest entities created or obtained after January 2003, and will be effective for all variable interest entities for periods beginning after December 15, 2003. The adoption of FIN 46 is not expected to require the consolidation by the Company of any additional entities.

        In May 2003, the FASB issued Statement of Financial Accounting Standards No. 150 (SFAS No. 150), “Accounting for Certain Financial Instruments with Characteristics of both Liabilities and Equity”, which establishes standards for how an issuer classifies and measures certain financial instruments with characteristics of both liabilities and equity. It requires that an issuer classify a financial instrument that is within its scope as a liability (or an asset in some circumstances). This Statement is effective for financial instruments entered into or modified after May 31, 2003, and otherwise is effective at the beginning of the first interim period beginning after June 15, 2003. It is to be implemented by reporting the cumulative effect of a change in an accounting principle for financial instruments created before the issuance date of the Statement and still existing at the beginning of the interim period of adoption. Adoption of SFAS No. 150 on July 1, 2003 did not have a material effect on the Company’s consolidated 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 were as follows:

NOTE 4. STOCK OPTIONS

        In 2000, the Company granted nonqualified stock options to certain officers of the Company and the Bank under the Company’s 1998 Stock Incentive Plan. The grants consisted of options to purchase 89,500 shares of common stock for a term of eight years 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 options to purchase 20,000 shares for a term of eight years 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. In April 2003, the Company granted options to purchase 38,000 shares at an exercise price of $15.23 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 grants and annually thereafter. As September 30, 2003, the 1998 Stock Incentive Plan has had 2,000 options exercised and has 855,500 options available for future grants.

        In accordance with a new accounting standard, SFAS No. 148, “Accounting for Stock-Based Compensation – Transition and Disclosure, an Amendment of FASB Statement No. 123,” the Company transitioned to the fair value method of accounting for stock-based compensation during 2002 using the modified prospective method prescribed by the standard. Under the modified prospective method, the Company began recognizing stock-based employee compensation expense from the beginning of 2002 as if the fair value method had been used to account for all employee awards granted, modified, or settled in fiscal years beginning after December 15, 1994. The fair value of options granted is determined using the Black-Scholes option valuation model. Stock-based employee compensation expense totaled approximately $21,000 and $13,000 for the three months ended September 30, 2003 and 2002, respectively, and approximately $52,000 and $36,000 for the nine months ended September 30, 2003 and 2002, respectively. Under the modified prospective method, no stock-based employee compensation expense is recognized for periods prior to adoption.

        The weighted-average fair value per share of options granted during 2003 was $4.19. 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 1.97%; expected volatility of 26.0%; risk-free interest rate of 3.2%, and an expected life of 8.00 years.

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NOTE 5. COMMITMENTS AND CONTINGENCIES

        In the normal course of business, the Company enters into various transactions, which, in accordance with accounting principles generally accepted 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.

        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 loan 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. In the event the customer does not perform in accordance with the terms of the agreement with the third party, the Company would be required to fund the commitment. The maximum potential amount of future payments the Company could be required to make is represented by the contractual amount shown in the table below. If the commitment is funded, the Company would be entitled to seek recovery from the customer. As of September 30, 2003 and December 31, 2002, no amounts have been recorded as liabilities for the Bank’s potential obligations under these guarantees.

        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 operations.

        In November 1998, Guaranty Leasing was informed by the Internal Revenue Service (the “Service”) that it has taken the position that certain losses taken by one of the three Partnerships during 1994, 1995 and 1996 of $302,000, $410,000 and $447,000, respectively, would be disallowed. In October 2001, Guaranty Leasing was informed by the Service that it has taken the position that certain losses taken by the Partnership during 1997 of $487,000 would also be disallowed. In September 2002, the Company received from the Service a Notice of Final Partnership Administrative Adjustment (“FPAA”) disallowing these deductions. Based upon the advice of counsel, the Company believes that it has correctly reported these transactions for tax purposes and that it has obtained appropriate legal, accounting and appraisal opinions and authority to support its positions. However, as of December 31, 2002, the Company had recorded and expensed the tax affect of the disallowed deductions. In February 2003, the Company filed a petition to begin the process to litigate the matter in the United States District Court for the Eastern District of Texas. In September 2003, the Judge of this court issued a docket control order scheduling court ordered deadlines to be met with an expected trial date of second quarter 2004. Any final determination with respect to the Partnership will be binding on the Company. Should the Service pursue an investigation of and ultimately disallow the related tax deductions taken during the remaining years of the above partnership as well as the other two partnerships, the Company would be required to recognize an additional maximum tax liability of approximately $3.9 million plus possible penalty and interest. The Company is actively contesting the position of the Service in connection with this matter, and will take appropriate steps necessary to protect its legal position. During 2002, the Company sold its ownership in one of the partnerships and dissolved the other two, therefore no additional deductions have been taken in 2003.

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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. 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. These forward-looking statements may involve known and unknown risks and uncertainties and other factors beyond the Company’s control 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 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, 2002 as filed with the Securities and Exchange Commission.

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 Bond 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 an office in Fort Stockton, Texas that limits its product offerings to loans and time deposits.

FINANCIAL OVERVIEW

        Net earnings for the nine months ended September 30, 2003 were $2.8 million or $0.94 per share (basic and diluted) compared with $3.2 million or $1.06 per share (basic) and $1.05 per share (diluted) for the nine months ended September 30, 2002, a decrease of $412,000 or 13.0%. The decrease is due primarily to an increase in noninterest expense of $1.3 million or 12.0%, partially offset by (i) an increase in net interest income of $421,000 or 3.4%, (ii) an increase in noninterest income of $159,000 or 4.3%, and (iii) a decrease in provision for loan losses of $260,000 or 25.1%. Net earnings for the three months ended September 30, 2003 were $935,000 or $0.32 per share compared with $1.1 million or $0.36 per share for the three months ended September 30, 2002, a decrease of $157,000 or 14.4%. The decrease is primarily due to an increase in noninterest expense primarily due to additional employee compensation and benefit costs, partially offset by an increase in net interest income for the three months period.

        The first nine months of 2003 showed growth in total assets and decreases in loans and deposits. Total assets increased to $526.2 million at September 30, 2003, compared with $518.0 million at December 31, 2002. The increase of $8.2 million or 1.60% in total assets resulted primarily from the proceeds received from Federal Home Loan Bank (FHLB) advances and federal funds purchased of $12.8 million or 30.0%, partially offset by a decrease in deposits of $4.2 million or 1.0%. Total FHLB advances and federal funds purchased increased to $55.6 million at September 30, 2003 compared to $42.8 million at December 31, 2002 to help fund future growth in earning assets. Gross loans decreased to $356.8 million at September 30, 2003 from $365.6 million at December 31, 2002, a decrease of $8.8 million or 2.4%. Total deposits decreased to $420.7 million at September 30, 2003 compared to $425.0 million at December 31, 2002.

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        Total shareholders’ equity was $35.6 million at September 30, 2003, compared with $34.6 million at December 31, 2002, an increase of $1.0 million or 2.8%. This increase is due to earnings for the period of $2.8 million partially offset by a decrease in accumulated other comprehensive income of $1.1 million, the payment of dividends of $497,000 and the purchase of 10,000 shares of common stock as treasury stock at a cost of $161,000 pursuant to the Company’s repurchase program.

RESULTS OF OPERATIONS

Interest Income

        Interest income for the nine months ended September 30, 2003 was $20.8 million, a decrease of $866,000 or 4.0% compared with the nine months ended September 30, 2002. Despite the increase in average interest-earning assets, interest income decreased primarily due to lower rates earned on earnings assets as a result of the falling interest rate environment. The average interest rate earned on interest-earnings assets decreased from 6.58% during the nine months ended September 30, 2002 to 5.79% during the nine months ended September 30, 2003. Average loans were $360.4 million for the nine months ended September 30, 2003, compared with $338.7 million for the nine months ended September 30, 2002, an increase of $21.7 million or 6.4%. Average securities were $111.3 million for the nine months ended September 30, 2003, compared with $87.6 million for the nine months ended September 30, 2002, an increase of $23.7 million or 27.1%. Growth in the average volume of interest-earning assets was primarily funded by a growth in deposits for the comparable periods and an increase in FHLB advances.

        Interest income for the three months ended September 30, 2003 was $6.7 million, a decrease of $635,000 or 8.6% compared with the three months ended September 30, 2002. The decrease was primarily due to a decrease in the average yield on interest-earning assets from 6.43% during the three months ended September 30, 2002 to 5.56% during the three months ended September 30, 2003, partially offset by a $25.3 million increase in average interest-earning assets.

Interest Expense

        Interest expense on deposits and other interest-bearing liabilities was $8.0 million for the nine months ended September 30, 2003, compared with $9.3 million for the nine months ended September 30, 2002, a decrease of $1.3 million or 13.8%. The decrease in interest expense is due primarily to a decrease in average interest rate paid on interest-bearing liabilities from 3.26% for the nine months ended September 30, 2002 to 2.55% for the nine months ended September 30, 2003. The decrease is partially offset by a $38.0 million or 10.0% increase in average interest-bearing liabilities to $419.7 million for the nine months ended September 30, 2003, from $381.8 million for the nine months ended September 30, 2002.

        Interest expense was $2.4 million for the three months ended September 30, 2003, compared with $3.1 million for the three months ended September 30, 2002, a decrease of $648,000 or 21.2%. The decrease in interest expense for the comparable three month period is also due to decreases in average interest rates paid on interest-bearing liabilities, partially offset by increases in average balances.

Net Interest Income

        Net interest income was $12.8 million for the nine months ended September 30, 2003 compared with $12.3 million for the nine months ended September 30, 2002, an increase of $421,000 or 3.4%. The increase in net interest income resulted primarily from growth in average interest-earnings assets to $479.4 million for the nine months ended September 30, 2003, from $439.5 million for the nine months ended September 30, 2002, an increase of $39.9 million or 9.1%, partially offset by growth in average interest-bearing liabilities to $419.7 million for the nine months ended September 30, 2003, from $381.8 million for the nine months ended September 30, 2002, an increase of $38.0 million, or 10.0%. Net interest income was $4.3 million for the three months ended September 30, 2003 and September 30, 2002. The net interest margin decreased from 3.75% to 3.57% for the three months ended September 30, 2003 and decreased from 3.75% to 3.56% for the nine months ended September 30, 2003 compared to the same three and nine-month periods ended September 30, 2002. The decrease for the three and nine months ended September 30, 2003 can be attributed to the fact that the percentage growth in average interest bearing liabilities exceeded the percentage growth in average interest-earning assets causing the ratio of average interest-earning assets to average interest-bearing liabilities to decrease.

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        Additionally, the average rate earned on interest-earning assets decreased at a faster rate than the average rate paid on interest-bearing liabilities due to the Bank’s positive gap position in a down interest rate environment.

        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 average rate earned or paid for the three and nine months ended September 30, 2003 and 2002, 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. No tax equivalent adjustments were made and all average balances are derived from average daily balances. Nonaccruing loans have been included in the tables as loans carrying a zero yield.

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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 proportionately to changes due to rate and changes due to volume (dollars in thousands):

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Provision for Loan Losses

        Provisions for loan losses are charged to income to bring the total allowance for loan losses to a level deemed appropriate by management of the Company based on such factors as the industry diversification of the Company’s commercial loan portfolio, the effect of changes in the local real estate market on collateral values, the results of recent regulatory examinations, the effects on the loan portfolio of current economic indicators and their probable impact on borrowers, the amount of charge-offs for the period, the amount of nonperforming loans and related collateral security, and the evaluation of the Company’s loan portfolio by an external loan review firm. The provision for loan losses for the nine months ended September 30, 2003, was $775,000 compared to $1.0 million for the nine months ended September 30, 2002, a decrease of $260,000 or 25.1%. The provision for loan losses for the three months ended September 30, 2003, was $250,000 compared to $335,000 for the three months ended September 30, 2002, a decrease of $85,000 or 25.4%. The decrease for both periods was partially due to the decrease in the ratio of net charge offs to average loans from 0.22% for the nine-months ended September 30, 2002 to 0.17% for the nine months ended September 30, 2003. Management believes the allowance for loan losses is adequate as of the dates indicated based on its assessment of the factors listed above.

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Noninterest Income

        The following table presents, for the periods indicated, the major categories of noninterest income (dollars in thousands):