SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

               TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITEIS EXCHANGE ACT OF 1934

            Transition period from July 1, 1996 to December 31, 1996

                         Commission file number 0-18265

                         GUARANTY FINANCIAL CORPORATION
                 (Name of Small Business Issuer in its Charter)

            Virginia                                     54-1786496
       (State or Other Jurisdiction                   (I.R.S. Employer
               of Incorporation)                      Identification No.)

   1658 State Farm Boulevard
      Charlottesville, Virginia                             22911
   (Address of Principal Executive Offices)               (Zip Code)

                                 (804) 970-1100
                (Issuer's Telephone Number, Including Area Code)

              Securities registered under Section 12(g) of the Act:

                          Common Stock, $1.25 par value
                                (Title of Class)

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 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 past 90 days.

                                                           Yes __X__   No_____

         Check if there is no  disclosure  of  delinquent  filers in response to
Item 405 of  Regulation  S-B contained in this form,  and no disclosure  will be
contained,  to the  best of  registrant's  knowledge,  in  definitive  proxy  or
information statements incorporated by reference in Part III of this Form 10-KSB
or any amendment to this Form 10-KSB.

         The  issuer's  gross  income  for  its  most  recent  fiscal  year  was
$8,723,750.

         The aggregate market value of the voting stock held by non-affiliates 
computed by reference to the average of the closing bid and asked prices of such
stock as of December 31, 1996 was approximately $4,382,985.  (The exclusion from
such amount of the market  value of the shares  owned by any person shall not be
deemed an  admission by the  registrant  that such person is an affiliate of the
registrant.)

         The number of shares  outstanding  of Common  Stock as of December  31,
1996 was 924,008.

                       DOCUMENTS INCORPORATED BY REFERENCE

         Part III of Form 10-KSB - Proxy  Statement for the 1996 Annual  Meeting
of Stockholders.


<PAGE>

                                     PART I

Item 1.  Description of Business

General

         Guaranty Financial  Corporation  ("Guaranty" or the "Corporation") is a
Virginia  corporation  which was organized in 1995 by Guaranty Savings and Loan,
F.A.,  now  Guaranty  Bank,  (the  "Bank") for the purpose of becoming a unitary
savings and loan holding  company.  The Bank,  which began  business in February
1981  and  is  headquartered  in  Charlottesville,   Virginia,   obtained  final
regulatory  approval  on June 30,  1997 to convert  from a  federally  chartered
savings  association  to  a  state  chartered  commercial  bank.  Prior  to  the
conversion, Guaranty was a member of the Federal Home Loan Bank System ("FHLBS")
and its  deposits  were  insured  by the  Savings  Associations  Insurance  Fund
("SAIF") of the Federal Deposit Insurance  Corporation  ("FDIC").  The Office of
Thrift  Supervision  ("OTS"),  created  by the  Financial  Institutions  Reform,
Recovery and Enforcement Act of 1989 ("FIRREA"), served as the primary regulator
for thrifts such as the Bank.

         After  the  conversion,  Guaranty  will  be a  Federal  Reserve  member
commercial  bank and its  deposits  will be insured by the Bank  Insurance  Fund
("BIF") of the FDIC. The Federal Reserve,  the Bureau of Financial  Institutions
of the  Virginia  State  Corporation  Commission  and the FDIC will serve as the
Bank's primary regulators.

         Effective  December 29, 1995, the Bank completed the  reorganization of
the Bank and the Corporation  acquired all of the issued and outstanding  shares
of Common  Stock of the Bank.  The  principal  asset of the  Corporation  is the
outstanding  stock of the Bank,  its wholly owned  subsidiary.  The  Corporation
presently  has no separate  operations  and its  business  consists  only of the
business  of the Bank.  All  references  to the  Corporation,  unless  otherwise
indicated, at or before December 29, 1995 refer to the Bank and its subsidiaries
on a  consolidated  basis.  The  Corporation's  Common  Stock is  quoted  on the
National  Association  of Securities  Dealers  Automated  Quotations  ("NASDAQ")
System under the symbol "GSLC".

       During 1996,  the Bank hired  experienced  commercial  and consumer  loan
officers  and  began  offering   consumer  loans  and  government   insured  and
conventional  small business loans.  As a result of the anticipated  conversion,
the Board of Directors of the  Corporation  and the Bank voted on March 31, 1997
to change the year end of both the Corporation and the Bank from fiscal year end
June 30 to a calendar year end December 31.

         Historically,   Guaranty's  principal  business  activities  have  been
attracting  checking and savings  deposits from the general  public  through its
retail  banking  offices and  originating,  servicing,  investing in and selling
loans secured by first  mortgage  liens on  single-family  dwellings,  including
condominium  units.  Of  Guaranty's  $81  million of  mortgages  outstanding  at
December 31, 1996, 78% represented  residential  first mortgages.  Guaranty also
lends funds to retail  banking  customers by means of home  equity,  installment
loans, and, to a lesser extent,  originates loans secured by commercial property
and multi-family dwellings. Guaranty invests in certain 

                                      -2-
<PAGE>


United States government and agency obligations and other investments  permitted
by applicable laws and regulations.

         Like all  banks,  Guaranty's  operations  are  materially  affected  by
general  economic  conditions,  the monetary and fiscal  policies of the federal
government and the policies of the various regulatory  authorities.  Its results
of operations are largely  dependent upon its net interest income,  which is the
difference  between  the  interest it  receives  on its loan  portfolio  and its
investment securities portfolio and the interest it pays on its deposit accounts
and borrowings.

         Guaranty's main office is located at 1658 State Farm Boulevard, 
Charlottesville, Virginia 22911 and the telephone number is (804) 970-1100.


Market Area

         Guaranty  is the only  independent  community  bank or savings and loan
association  headquartered  in, or even with an office  in,  Charlottesville  or
Albemarle  County,   Virginia.   This  area  had  a  collective   population  of
approximately 108,000 in 1990 according to census figures, is located in central
Virginia 110 miles southwest of Washington,  D.C. and 70 miles west of Richmond,
Virginia,  and includes the University of Virginia, the area's largest employer.
Guaranty operates four full service retail branches, which serve Charlottesville
and  Albemarle  County.  In  October  1995,  construction  began  on a  combined
headquarters   and   fourth   retail   branch   located  on  the  east  side  of
Charlottesville  in the Pantops area of Albemarle  County.  The new facility was
opened in December 1996. Guaranty also constructed, in the city of Harrisonburg,
a fifth retail branch which opened in May 1997.

Competition

         Guaranty  faces strong  competition  both in  originating  loans and in
attracting  deposits.  Competition  in  originating  loans comes  primarily from
commercial  banks,  mortgage  bankers  and  to  a  lesser  extent  other  thrift
institutions  who also make loans in the Bank's  market area.  The Bank competes
for  loans  principally  on the  basis of the  interest  rates  and loan fees it
charges,  the  types of loans it  originates  and the  quality  of  services  it
provides to borrowers.

         Guaranty  faces  substantial  competition  in attracting  deposits from
commercial  banks,  money  market  and  mutual  funds,  credit  unions and other
investment vehicles.  Guaranty competes for these deposits by offering a variety
of deposit accounts at competitive rates,  convenient  business hours, and being
the only locally based bank in Charlottesville.

Lending Activities

General

         Guaranty's loan portfolio  consists  primarily of mortgage  loans,  the
majority of which are  residential  first  mortgage  loans.  Guaranty also holds
commercial  real  estate  mortgages,   residential  construction  loans,  second
mortgage  home equity  loans and  consumer  loans.  The primary  lending 

                                      -3-
<PAGE>


market consists of the City of  Charlottesville  and Albemarle County,  and to a
lesser extent, the surrounding counties of Greene, Fluvanna, Louisa, and Orange.

         Residential loan  originations  come primarily from walk-in  customers,
real estate brokers and builders.  Commercial real estate loan  originations are
obtained  through  broker  referrals,  direct  solicitation  of  developers  and
continued business from customers.  All completed loan applications are reviewed
by the  Bank's  salaried  loan  officers.  As part of the  application  process,
information is obtained concerning the income,  financial condition,  employment
and credit  history of the  applicant.  If  commercial  real estate is involved,
information  is also  obtained  concerning  cash flow after debt  service.  Loan
quality is analyzed based on the Bank's  experience and guidelines  with respect
to credit underwriting as well as the guidelines issued by the Federal Home Loan
Mortgage Corporation  ("FHLMC"),  Federal National Mortgage Association ("FNMA")
and other  purchasers  of loans,  depending  on the type of loan  involved.  The
non-conforming one- to four-family  adjustable-rate mortgage loans originated by
the Bank,  however,  are not readily saleable in the secondary market due to the
fact that they do not typically meet all of the secondary marketing  guidelines.
These loans are evaluated by the loan committee for "overall" merit and will not
exceed  an 80% LTV  ratio.  All real  estate is  appraised  by  independent  fee
appraisers who have been pre-approved by the Board of Directors.  All conforming
loans including HUD/FHA, VA and applicable VHDA loans are underwritten and acted
upon within loan administration requiring two signatures of approval.

         In the normal course of business,  Guaranty  makes various  commitments
and incurs certain contingent  liabilities which are disclosed but not reflected
in its annual financial  statements,  including commitments to extend credit. At
December 31, 1996,  commitments  to extend  credit  totaled $9.4  million.  (See
footnote 16 of the financial statements.)

         Pursuant  to  the  Financial   Institutions   Reform,   Recovery,   and
Enforcement Act of 1989 ("FIRREA"),  the aggregate amount of loans that Guaranty
is permitted to make to any one borrower,  including related  entities,  and the
aggregate  amount that Guaranty may invest in any one real estate project,  with
certain  exceptions,   is  15%  of  the  institution's  unimpaired  capital  and
unimpaired  surplus to a single  borrower,  plus an additional 10% of unimpaired
capital  and  unimpaired   surplus  for  loans  secured  by  readily  marketable
collateral.  Readily  marketable  collateral  does not include real  estate.  At
December,  1996,  the maximum  amount  which  Guaranty  could have loaned to one
borrower was approximately $950,000.

One- to Four-Family Residential Real Estate Lending

         Guaranty's  primary lending program is the origination of loans secured
by one- to four-family residences, all of which are located in the Bank's market
area.  Guaranty  evaluates  both the  borrower's  ability to make  principal and
interest  payments  and the value of the  property  that will  secure  the loan.
Federal  law  permits  the Bank to make  loans in  amounts  of up to 100% of the
appraised  value of the  underlying  real estate.  Loans are made with a loan to
value  up to 95%  for  conventional  mortgage  loans  and up to 100%  for  loans
guaranteed  by either the  Federal  Housing  Authority  ("FHA") or the  Veterans
Administration  ("VA").  For conventional  loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75%

                                      -4-
<PAGE>

loan to value.  In addition to fixed mortgage loans,  Guaranty makes  adjustable
rate mortgages with the primary loan indexed to the one year treasury. Generally
if the loans are not made to credit  standards of FHLMC,  additional  fees and a
higher  interest  rate are charged and the loans are  maintained  in  Guaranty's
portfolio.  If the loan to value  exceeds  80%,  private  mortgage  insurance is
generally secured.

         Most savings institutions,  including Guaranty,  historically made one-
to four-family  residential mortgage loans on a 30-year fixed rate basis. Due to
prepayments  and  refinancings,  the average actual maturity of 30-year loans in
the past has been substantially shorter.

         In order to reduce its exposure to changes in interest rates,  the Bank
has  de-emphasized  the  origination of 30-year  fixed-rate  one- to four-family
residential mortgage loans for retention in its own portfolio. For the six-month
period ended  December 31, 1996,  29.7% of all one- to  four-family  residential
loans  originated by the Bank had adjustable  interest rates.  Although,  due to
competitive market pressures, the Bank does originate fixed-rate mortgage loans,
it currently  underwrites  and  documents all such loans to permit their sale in
the secondary mortgage market. At December 31, 1996, $26.1 million, or 41.7%, of
the Bank's one- to four-family  residential mortgage loan portfolio consisted of
fixed-rate mortgage loans.

         The Bank's  current  one- to  four-family  residential  adjustable-rate
mortgage  ("ARMs")  have  interest  rates that adjust  every year,  generally in
accordance  with the rates on  one-year  U.S.  Treasury  Bills.  The Bank's ARMs
generally  limit interest rate increases to 2% each rate  adjustment  period and
have an established ceiling rate at the time the loans are made of up to 6% over
the original  interest rate.  Borrowers are qualified at the first year interest
rate plus 2%. To compete with other lenders in its market area,  Guaranty  makes
one-year ARMs at interest  rates which,  for the first year, are below the index
rate which would  otherwise  apply to these loans.  At December 31, 1996,  $36.5
million, or 58.3%, of the Bank's one- to four-family  residential  mortgage loan
portfolio  consisted of ARMs.  There are  unquantifiable  risks  resulting  from
potential  increased  costs to the  borrower  as a result  of  repricing.  It is
possible,  therefore,  that during periods of rising interest rates, the risk of
defaults on ARMs may increase due to the upward  adjustment of interest costs to
borrowers.

         All one- to four-family  real estate mortgage loans being originated by
the Bank contain a "due-on-sale"  clause providing that the Bank may declare the
unpaid principal balance due and payable upon the sale of the mortgage property.
It is  the  Bank's  policy  to  enforce  these  due-on-sale  clauses  concerning
fixed-rate  loans and to permit  assumptions  of ARMs,  for a fee, by  qualified
borrowers.

         Guaranty  requires,  in connection  with the origination of residential
real estate loans, title opinions and fire and casualty insurance  coverage,  as
well as flood insurance where appropriate,  to protect the Bank's interest.  The
cost of this insurance  coverage is paid by the borrower.  The Bank does require
escrows for taxes and insurance.


                                      -5-
<PAGE>

Construction Lending

         As part of its community involvement, the Bank makes local construction
loans,  primarily  residential and lot loans. The construction loans are secured
by the  property  for  which  the loan  was  obtained.  At  December  31,  1996,
construction  and land loans  outstanding  was $7.4  million,  or 8.7%, of total
gross  loans   outstanding.   The  average  life  of  a  construction   loan  is
approximately  nine months and they reprice  daily to meet the market,  normally
prime plus two percent.  Because the interest  charged on these loans float with
the market they help the Bank in managing its interest rate sensitivity.

Commercial Real Estate Lending

         The Bank also originates  commercial real estate loans. These loans are
secured by various  types of  commercial  real  estate,  including  multi-family
residential  buildings,   commercial  buildings,   small  shopping  centers  and
churches.  At December 31, 1996,  commercial real estate aggregated $8.0 million
or 9.4% of the Bank's total loans receivable.  The Bank's commercial real estate
loans were  generally  made at interest  rates that  adjust  based on yields for
one-year U.S. Treasury securities,  with a 2% annual cap on rate adjustments and
a 6% cap on interest  rates over the life of the loan.  Beginning  in  September
1996, the interest rates on commercial  real estate loans,  in most cases,  have
been tied to the prime  lending rate.  Typically,  the Bank charges fees ranging
from 1% to 2% on these loans. At December 31, 1996, the Bank held no fixed- rate
commercial  real estate  loans.  Commercial  real estate  loans made by the Bank
generally  amortize over 20 to 30 years and may have a call  provision of 3 or 5
years. The Bank's  commercial real estate loans are secured by properties in the
Bank's market area.

         In its underwriting of commercial real estate, the Bank may lend, under
federal  regulation,  up to 100% of the  security  property's  appraised  value,
although the Bank's loan to original appraised value ratio on such properties is
80% or less.  The Bank's  commercial  real  estate  loan  underwriting  criteria
require  an  examination  of  debt  service  coverage  ratios,   the  borrower's
creditworthiness and prior credit history and reputation, and the Bank generally
requires  personal  guarantees  or  endorsements  of  borrowers.  The Bank  also
carefully considers the location of the security property.


Consumer Lending

         Federal  thrift  institutions  are  permitted  to make both secured and
unsecured consumer loans reasonably  incident to personal or household purposes.
In  general,  loans made under these  investment  powers may not exceed 30% of a
federally-chartered thrift institution's total assets. After the conversion to a
state  chartered bank on June 30, 1997,  these  restrictions  no longer apply to
Guaranty.

         Guaranty offers various secured and unsecured consumer loans, including
unsecured  personal loans and lines of credit,  share loans,  automobile  loans,
deposit account loans, installment and demand loans, letters of credit, and home
equity loans. At December 31, 1996, the Bank had $7.0 million of consumer loans,
or 8.2% of total loans. During fiscal year 1996, the

                                      -6-
<PAGE>

Bank  increased its level of consumer  loans.  Such loans were generally made to
customers  with  which  the  Bank  had an  pre-existing  relationships  and were
generally in amounts of under $75,000.  Guaranty  originates all of its consumer
loans in its market area and intends to continue  its  consumer  lending in this
geographic area.

         Consumer  loans may entail  greater risk than do  residential  mortgage
loans,  particularly in the case of consumer loans which are unsecured,  such as
lines of credit, or secured by rapidly  depreciable  assets such as automobiles.
In such cases, any repossessed  collateral for a defaulted consumer loan may not
provide an adequate  source of  repayment of the  outstanding  loan balance as a
result of the greater likelihood of damage, loss or depreciation.  The remaining
deficiency often does not warrant further substantial collection efforts against
the  borrower.  In addition,  consumer  loan  collections  are  dependent on the
borrower's  continuing  financial  stability,  and thus are  more  likely  to be
adversely  affected  by job  loss,  divorce,  illness  or  personal  bankruptcy.
Furthermore,  the  application  of various  federal  and state  laws,  including
federal and state bankruptcy and insolvency laws, may limit the amount which can
be recovered on such loans. Such loans may also give rise to claims and defenses
by a consumer loan  borrower  against an assignee of such loan such as the Bank,
and a borrower may be able to assert  against such assignee  claims and defenses
which it has  against  the seller of the  underlying  collateral.  The Bank adds
general  provisions  to its  loan  loss  allowance  at the time  the  loans  are
originated.  Consumer loan  delinquencies  often increase over time as the loans
age.

         The  underwriting  standards  employed by the Bank for  consumer  loans
include a determination of the applicant's payment history on other debts and an
assessment of ability to meet existing  obligations and payments on the proposed
loan.  The  stability of the  applicant's  monthly  income may be  determined by
verification of gross monthly income for primary  employment,  and  additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary  consideration,  the  underwriting  process also includes a of the
value of the security in relation to the proposed loan amount.

         During fiscal year 1996,  Guaranty began offering all types of consumer
loans due to its improved capital position. Generally these loans provide higher
yields than one-to-four-family mortgages.

Commercial Loans

         In July 1996, Guaranty began making commercial loans to qualified small
businesses in its market area. Commercial business loans generally have a higher
degree of risk than residential  mortgage loans, but have commensurately  higher
yields. To manage these risks, Guaranty generally secures appropriate collateral
and  carefully  monitors the  financial  condition  of its  business  borrowers.
Commercial  loans are typically made on the basis of the  borrower's  ability to
make  repayment  from cash flow from its  business  and are  secured by business
assets such as  commercial  real  estate,  accounts  receivable,  equipment  and
inventory.  As a  result,  the  availability  of  funds  for  the  repayment  of
commercial  business loans may be substantially  dependent on the success of the
business  itself.  Further,  the collateral  for  commercial  business loans may
depreciate

                                      -7-
<PAGE>

over time and cannot be appraised  with as much  precision as  residential  real
estate.  Guaranty has a credit review and monitoring  system to regularly review
the cash flow of commercial borrowers.

REGULATION

General

         Prior to the  conversion  to a state  chartered  bank on June 30, 1997,
Guaranty  was  a  federally   chartered  savings  bank  subject  to  regulation,
supervision and periodic examination by the OTS and the FDIC. The regulations of
these agencies governed most aspects of the Bank's business and operations prior
to June 30, 1997. Prior to July 1, 1997, the Bank's deposits were insured by the
SAIF  administered  by the FDIC to the maximum amount by law, which is currently
$100,000 per depositor in most cases.

         On June 30,  1997,  Guaranty  received  final  regulatory  approval  to
convert from a federal savings bank to a state chartered  commercial  bank. Upon
conversion,  Guaranty  became a member of the  Federal  Reserve  system  and its
deposits  became  insured by the Bank  Insurance  Fund ("BIF") of the FDIC.  The
Federal  Reserve,  the Bureau of Financial  Institutions  of the Virginia  State
Corporation Commission and the FDIC will serve as the Banks primary regulators.

         The Financial Institutions Reform, Recovery and Enforcement Act of 1989
("FIRREA") effected sweeping changes in the regulatory  structure  applicable to
federally insured savings  institutions.  FIRREA abolished the Federal Home Loan
Bank Board and the role of its  Chairman as the chief  regulator  of the savings
and  loan  industry.  The  primary  regulator  for  federal  and  state  savings
institutions is now the Office of Thrift Supervision  ("OTS"),  an office in the
United States Department of the Treasury. The Director of the OTS is responsible
for the examination and supervision of all savings institutions.

         The OTS has authority to issue  regulations,  conduct  examinations and
supervise the operations of savings  institutions.  The OTS regulatory scheme is
comprehensive  and governs,  among other things,  capital  requirements,  equity
investments,  affordable housing,  liquidity,  securities issuances, the form of
savings instruments issued by savings institutions, certain aspects of a savings
association's lending activities, including appraisal requirements, maximum loan
amounts,   private   mortgage   insurance   coverage,   lending   authority  and
nondiscriminatory  lending practices. OTS regulations also restrict transactions
between  savings  institutions  and affiliated  parties which are deemed to be a
conflict of interest under the  regulations.  In addition,  the OTS's consent is
required  prior to any major  corporate  reorganization,  including  a merger or
purchase or disposition of assets.

         The FDIC  administers  insurance on deposits at all  federally  insured
institutions.  It operates two  subfunds:  the Bank  Insurance  Fund ("BIF") for
institutions  which  paid FDIC  insurance  in the  past;  and the SAIF for those
institutions  formerly  insured  by  the  Federal  Savings  and  Loan  Insurance
Corporation  ("FSLIC").  The  FDIC  must  segregate  assessments,  premiums  and
administrative  expenses between its two subfunds.  As administrator of the SAIF
and BIF, the FDIC may prohibit any activity found to pose a serious risk of loss
to the insurance funds.



                                       -8-
<PAGE>

         On  December  19,  1991,  the  Federal  Deposit  Insurance  Corporation
Improvement  Act of 1991  ("FDICIA")  was signed into law,  which  substantially
amended the Federal Deposit  Insurance Act ("FDIA").  FDICIA generally  provides
for the  recapitalization  of the federal deposit insurance funds as well as for
supervisory  and  regulatory  reforms  to be  administered  by  federal  banking
agencies.  For a further  description of FDICIA, see "-Federal Deposit Insurance
Corporation Improvement Act of 1991."


The Federal Home Loan Bank System

         All savings  institutions  that make  long-term home mortgage loans are
required to be members of the regional Federal Home Loan Banks ("FHLBs"),  which
in turn are overseen by the Federal Housing Finance Board. The Bank, as a member
of the  Federal  Home Loan Bank  System,  is  required to hold shares of capital
stock in the FHLB of Atlanta.

         The Bank is  authorized to apply for advances from the FHLB of Atlanta,
provided certain standards related to  creditworthiness  have been met. Advances
are made pursuant to several  different credit  programs,  each of which has its
own interest rate and range of  maturities.  The FHLB  prescribes the acceptable
uses for advances as well as limitations on the size of advances.  Under FIRREA,
long-term  advances may only be made by FHLBs for the purpose of providing funds
for residential  housing  finance.  Additionally,  at the time of origination or
renewal  of a loan  or  advance,  FHLBs  must  obtain  a  security  interest  in
collateral in the form of the following  low-risk  assets:  whole loans,  United
States Government or mortgage-backed securities, FHLB deposits, and certain real
estate.  At December 31, 1996,  the Bank had $17.5  million in advances from the
FHLB of Atlanta.

Federal Reserve System

         Pursuant  to the  Depository  Institutions  Deregulation  and  Monetary
Control  Act of 1980,  the Board of  Governors  of the  Federal  Reserve  System
("FRB")  adopted  regulations  that  require  savings  associations  to maintain
reserves  against  their  transaction  accounts  (primarily  NOW  accounts)  and
non-personal  time  deposits.  FRB  regulations  generally  exempt from  reserve
requirements the first $3.8 million in net transaction accounts.  Reserves of 3%
(subject to adjustment by the FRB) must be  maintained  against net  transaction
accounts  from $3.8 to $46.8  million,  and a  reserve  of  $1,404,000  plus 10%
against that portion of total  transaction  accounts in excess of $46.8  million
must be maintained.  The FRB regulations do not presently require reserves to be
maintained on time deposits and savings accounts.

         The balances on deposits to meet the reserve requirements imposed by 
the FRB may also be used to satisfy the liquidity  requirements that are imposed
by the OTS. See "-Liquidity Requirements."


                                       -9-
<PAGE>

Capital Requirements

         FIRREA   requires   that  capital   standards   applicable  to  savings
institutions  be no less  stringent  than those  applicable  to  national  banks
administered  by the Office of the  Comptroller of the Currency  ("OCC") (except
for special treatment of qualifying supervisory goodwill as discussed below). As
of  December  31,  1994,  OTS  regulations  set the minimum  risk-based  capital
requirements  at  8% of  risk-weighted  assets,  the  minimum  leverage  capital
requirements  at 3% of adjusted  total assets and the minimum  tangible  capital
requirements at 1.5% of adjusted total assets. In addition, the OTS has adopted,
but not yet implemented, rules which require savings institutions to incorporate
an interest-rate risk component into the OTS's risk-based capital rules. The OTS
has not indicated when the rules will be implemented.

         Under OTS regulations,  total capital consists of two types of capital:
"core  capital  elements" and  "supplementary  capital  elements."  Core capital
consists  of common and  qualifying  preferred  shareholders'  equity,  minority
interests   in  the  equity   accounts  of  fully   consolidated   subsidiaries,
nonwithdrawable  accounts and certain  pledged  deposits and certain  qualifying
supervisory  goodwill.  From January 1, 1993 to December  31,  1993,  qualifying
supervisory goodwill could not exceed 0.75% of total assets in the institution's
core capital  ratio,  from January 1, 1994 to December  31,  1994,  0.375%,  and
thereafter such percentage decrease to 0%. Supplementary  capital,  with certain
limitations,  may consist of the  allowance  for loans and lease  losses  (which
cannot  exceed  1.25%  of a  savings  bank's  risk-weighted  assets),  perpetual
preferred stock,  term  subordinated debt and intermediate term preferred stock,
certain hybrid capital instruments,  and mandatory  convertible debt securities.
The  maximum  amount  of  supplemental  capital  that  may  be  included  in  an
institution's qualifying capital is limited to 100% of core capital.

         Tangible  capital  includes  core capital less  qualifying  supervisory
goodwill and other intangible assets,  plus purchased mortgage servicing rights.
Risk-weighted  assets equal total  assets plus  consolidated  off-balance  sheet
items where each asset or item is multiplied  by a  risk-weight  assigned by the
OTS.  Off-balance  sheet items are converted to on-balance sheet equivalents and
then assigned a risk-weight.

         In  August  1993,  the  OTS  adopted  a  final  rule  incorporating  an
interest-rate risk component into the risk-based capital  regulation.  Under the
rule, an  institution  with a greater than "normal"  level of interest rate risk
will be subject to a deduction of its interest  rate risk  component  from total
capital for purposes of calculating  the risk-based  capital  requirement.  As a
result,  such an institution will be required to maintain  additional capital in
order to comply with the risk-based capital  requirement.  An institution with a
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio  value  exceeding  2.0% of the  estimated  market
value of its assets in the event of a 200 basis point increase or decrease (with
certain minor  exceptions) in interest  rates.  The interest rate risk component
will be calculated on a quarterly  basis, as one-half of the difference  between
an institution's  measured interest rate risk and 2.0%, multiplied by the market
value of its assets.  The rule also  authorizes  the Director of the OTS, or his
designee,  to waive or defer an institution's  interest rate risk component on a
case-by-case  basis.  The final rule was  originally  effective as of January 1,
1994, subject to a two quarter "lag" time between the reporting date of the data
used to calculate an institution's  interest




                                      -10-
<PAGE>

rate risk and the effective date of each quarter's interest rate risk component.
However,  in October 1994 and March 1995, the Director of the OTS indicated that
it would waive the  capital  deductions  for  institutions  with a greater  than
"normal" risk until the OTS publishes an appeals process,  which the OTS expects
will occur  shortly.  The OTS  indicated  in the final rule that it  intended to
lower the leverage ratio requirement to be "adequately  capitalized" (as defined
in its prompt  corrective  action  regulation) to 3.0% from the current level of
4.0% on July 1,  1994.  Management  of the Bank does not  believe  that the OTS'
adoption  of  an  interest  rate  risk  component  to  the  risk-based   capital
requirement  will have an adverse affect on the Bank if it becomes  effective in
its current form.

         Higher  individual  capital  requirements  may be imposed by the OTS on
savings  institutions  on a  case-by-case  basis if the OTS  determines it to be
necessary or appropriate,  pursuant to the regulations and guidelines  issued by
the OTS for this purpose.

         For a  discussion  of the Bank's  risk-based  and capital  ratios,  see
"Management's  Discussion  and Analysis of Financial  Conditions  and Results of
Operations - Capital Requirements."


Failure to Meet Capital Requirements

         A  savings  and loan  which  does not  meet  the  capital  requirements
described  above is required to submit a capital  plan to the OTS. The plan must
certify  that  during the period when the plan is under  review by the OTS,  the
savings institution will not, without the prior written approval of the District
Director  of the OTS,  grow  beyond  net  interest  credited,  make any  capital
distribution,  or act  inconsistently  with any other  limitation  on activities
established for savings associations not meeting capital standards.  The capital
plan has to be  acceptable  to the OTS in order  for an  institution  to  obtain
exemptions from the capital  standards and exemptions from sanctions for failure
to meet capital requirements.  If the plan submitted is not approved by the OTS,
the institution  cannot increase its assets beyond the amount held on the day it
received the notice of  disapproval,  and must comply with any  restrictions  or
limitations set forth in the written notice of disapproval.

         After  January  1,  1991,  the OTS must  prohibit  any asset  growth by
savings  institutions  not in  compliance  with  capital  standards,  except for
specific growth expressly approved according to certain guidelines. In addition,
through  enforcement  proceedings or otherwise,  the OTS may require any savings
institution not in compliance with the minimum capital  requirements to take one
or more of the following  corrective actions,  which include: (1) increasing the
amount of regulatory capital to a specified level; (2) reducing interest payable
on savings  account;  (3) ceasing or limiting  acceptance of new  accounts;  (4)
ceasing or limiting  lending or the making of a  particular  type of category of
loan;  (5) ceasing or limiting  the purchase of loans or the making of specified
other investments; (6) limiting operational expenditures;  (7) increasing liquid
assets; or (8) taking such other actions as the OTS may deem appropriate for the
safety and soundness of the institution, its depositors and investors.


                                      -11-
<PAGE>

         An institution not in compliance  either with the capital  regulations,
individual minimum leverage ratio requirements or requirements  included as part
of an agreement between the institution and the OTS, further may be subject to a
capital directive or such other  enforcement  actions as the OTS deems necessary
for the safety and  soundness  of the  association.  Failure to meet OTS capital
requirements can serve as a basis for placing an institution in  conservatorship
or in receivership. Failure to satisfy an individual capital ratio constitutes a
legal basis for a capital  directive  against an institution,  which may contain
those  restrictions the OTS deems appropriate.  A savings  institution may apply
for an  exemption  from the  provisions  of a capital  directive,  which must be
accompanied by a capital plan  acceptable to the OTS. The OTS District  Director
will treat as an unsafe and unsound  practice any material  failure by a savings
association to comply with any plan,  regulation or written agreement undertaken
to comply with these requirements.

         In addition to the OTS minimum regulatory capital requirements, FDICIA
has created capital  categories for the purpose of determining  when supervisory
or other  corrective  action is appropriate.  See "- Federal  Deposit  Insurance
Corporation Improvement Act of 1991."


Restrictions on Capital Distributions

         Savings   institutions   have  limitations   imposed  on  all  "capital
distributions,"  including cash  dividends,  payments to repurchase or otherwise
acquire  its  shares,  payments  to  shareholders  or another  institution  in a
cash-out merger and other distributions charged against capital. OTS regulations
generally create a safe harbor for specified  levels of capital  distribution by
most savings institutions  meeting at least their minimum capital  requirements,
so long as such  institutions  notify the OTS and  receive no  objection  to the
distribution from the OTS. Savings  institutions which make distribution that do
not qualify for the safe harbor are required to obtain prior OTS approval before
making any capital  distribution.  The OTS proposed  certain  amendments  to its
capital  distribution  regulations in December 1994. If the proposed  amendments
were adopted, Guaranty would be required to obtain prior approval of any capital
distribution until its regulatory classification is changed.


Liquidity Requirements

         The OTS requires  savings  institution  to maintain  for each  calendar
month an average daily balance of "liquid assets" (cash,  certain time deposits,
bankers' acceptances,  certain corporate obligations and specified United States
Government,  state or  federal  agency  obligations)  of not less than 5% of the
average daily balance of the  institution's  "liquidity base" (net  withdrawable
savings  deposits plus  short-term  borrowings)  during the  preceding  calendar
month. In addition,  savings associations must maintain an average daily balance
of short-term  liquid assets of not less than 1% of the average daily balance of
its liquidity base during the preceding calendar month.

         For the month ending  December 31, 1996, the Bank's  average  liquidity
ratio was 6.3%.


                                      -12-
<PAGE>


Investment and Lending Restrictions

         Under the Home Owner's Act of 1933, as amended,  the Bank is subject to
limitations on the nature and amount of some types of  investments  and loans it
may make. Under the regulations of the OTS,  savings  institutions are permitted
to invest up to 30% of assets in state housing corporations,  provided that such
loans are  secured by an insured  first lien on improved  real  estate  which is
insured under the National Housing Act, as amended.

         FIRREA   imposes   on   savings   institutions    loans-to-one-borrower
limitations  which are also  applicable  to national  banks.  Subject to certain
exceptions,  FIRREA  allows  savings  institutions  to  lend  up to  15%  of the
institution's  unimpaired  capital and unimpaired  surplus to a single borrower,
plus an additional 10% of unimpaired  capital and  unimpaired  surplus for loans
fully secured by readily marketable  collateral.  Readily marketable  collateral
does not include real estate.

         A  savings  institution  authorized  to make  loans in excess of 90% of
value on the  security  of real estate  comprising  single-family  dwellings  or
dwelling  units  for four or fewer  families  may do so only if such  loans  are
insured or  guaranteed  by various  government  agencies or if such loans comply
with real estate lending  standards as set forth in written policies adopted and
maintained by the institution.  The policies must establish  appropriate  limits
and standards for  extensions of credit that are secured by liens on or interest
in real  estate,  or that  are  made  for the  purpose  of  financing  permanent
improvements to real estate. This does not apply to loans to facilitate the sale
of real estate owned as a result of foreclosure,  or acquired by deed in lieu of
foreclosure.

         Real estate lending  policies adopted by a savings and loan must, among
other things,  reflect safe and sound banking  practices,  be appropriate to the
size, nature and scope of the operations of the institution, and be reviewed and
approved  by the  board  of  directors  at least  annually.  The  policies  must
establish  loan  portfolio  diversification   standards,   prudent  underwriting
standards,  loan  administration  procedures  and  documentation,  approval  and
reporting requirements to adequately monitor compliance.

         The Bank believes that it is in compliance  with each of the investment
and lending restrictions discussed above.


Qualified Thrift Lender Test

         All savings  associations,  including  the Bank are  required to meet a
qualified  thrift  lender  ("QTL") test to avoid certain  restrictions  on their
operations. This test requires a savings association to have at least 65% of its
portfolio  assets (which consists of total assets less  intangibles,  properties
used to  conduct  the  savings  association's  business  and  liquid  assets not
exceeding  20% of total  assets) in qualified  thrift  investments  on a monthly
average  for nine out of every  twelve  months on a rolling  basis.  Such assets
primarily consist of residential housing related loans and investments.


                                      -13-
<PAGE>
         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the Bank  Insurance  Fund.  If an  association  that  fails the test has not yet
requalified  and has not converted to a national bank, its new  investments  and
activities are limited to those permissible for both a savings association and a
national bank,  and it is limited to national bank branching  rights in its home
state. In addition, the association is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such  association  has not requalified or converted to a national bank within
three years after the failure,  it must divest of all  investments and cease all
activities  not  permissible  for a national  bank.  In addition,  it must repay
promptly  any  outstanding  FHLB  borrowings,  which may  result  in  prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company,  then  within one year after the  failure,  the  holding  company  must
register as a bank holding  company,  and become subject to all  restrictions on
bank holding companies.  At December 31, 1996, the Bank met the QTL test and has
always  met  the  test  since  its  effective   date.  See  "-  Holding  Company
Regulation."


Transactions with Affiliates

         Generally,   transactions   between  a  savings   association   or  its
subsidiaries  and its affiliates are required to be on terms as favorable to the
association as transactions with non-affiliates.  In addition,  certain of these
transactions  are  restricted  to a  percentage  of the  association's  capital.
Affiliates  of Guaranty  include any company which is under common  control.  In
addition,  a  savings  association  may not  lend to any  affiliate  engaged  in
activities not  permissible for a bank holding company or acquire the securities
of most affiliates. The Bank's subsidiaries are not deemed affiliates,  however,
the OTS has the  discretion to treat  subsidiaries  of savings  associations  as
affiliates on a case by case basis.

         Certain  transactions with directors,  officers or controlling  persons
are also subject to conflict of interest  regulations enforced by the OTS. These
conflict of interest  regulations  and other statues also impose  restriction on
loans to such persons and their  related  interests.  Among other  things,  such
loans must be made on terms  substantially the same as for loans to unaffiliated
individuals.


Federal Deposit Insurance Corporation Improvement Act of 1991

         FDICIA  generally  addresses  the safety and  soundness  of the federal
deposit  insurance  funds,  supervision of and accounting by insured  depository
institutions  and  prompt  corrective  action  by the  federal  bank  regulatory
agencies  with respect to troubled  institutions.  FDICIA gives the FDIC, in its
capacity  as  federal  insurer  of  deposits,   broad  authority  to  promulgate
regulations to assure the viability of the deposit insurance funds.  FDICIA also
places  restrictions on institutions  failing to meet minimum capital  standards
and provides  enhanced  enforcement  authority for the federal banking agencies.
FDICIA also strengthened FRB regulations regarding insider transactions.


                                      -14-
<PAGE>

         FDICIA  established  five  capital  categories  for insured  depository
institutions:   (a)  Well   Capitalized;   (b)   Adequately   Capitalized;   (c)
Undercapitalized;   (d)  Significantly  Undercapitalized;   and  (e)  Critically
Undercapitalized.  Regulations which became effective  December 19, 1992, define
the relevant capital measures for the four highest capital  categories to be the
ratio of total  Tier 1 capital to  risk-weighted  assets  (the total  risk-based
ratio),  the ratio of Tier 1 to  risk-weighted  assets  (the  Tier 1  risk-based
ratio) and the ratio of Tier 1 capital to total  average  assets  (the  leverage
ratio).

         Well-Capitalized  means a financial institution with a total risk-based
ratio of 10% or more,  a Tier 1  risk-based  ratio of 6% or more and a  leverage
ratio of 5% or more,  so long as the  institution  is not  subject  to an order,
written  agreement,  capital  directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital  measure.  Adequately
Capitalized  means a total  risk-base  ratio of 8% or more,  a Tier 1 risk-based
ratio  of 4% or more  and a  leverage  ratio  of 4% or  more  (3% or more if the
institution has received the highest  corporate rating in its most recent report
of  examination)  and  does  not  meet  the  definition  of  a  Well-Capitalized
institution.  Undercapitalized  means  a  financial  institution  with  a  total
risk-based ratio of less than 8%, a Tier 1 risk-based ratio of less than 4% or a
leverage ratio of less than 4%. Significantly Undercapitalized means a financial
institution  with a total  risk-based ratio of less than 6%, a Tier 1 risk-based
ratio  of  less  than  3% or a  leverage  ratio  of  less  than  3%.  Critically
Undercapitalized  means a financial  institution with a ratio of tangible equity
to total assets that is equal to or less than 2%. At December 31, 1996, Guaranty
was Well Capitalized.

Deposit Insurance

         Federal law requires FDIC to establish a risk-based  assessment  system
for  calculating  a  depository  institution's   semi-annual  deposit  insurance
premiums.  Under  regulations  adopted by the FDIC,  the risk which each insured
depository institution poses to its insurance fund is determined on the basis of
capital and supervisory  evaluations.  For purposes of the risk-based assessment
system,  insured  institutions are divided into three main capital groups:  Well
Capitalized,  Adequately  Capitalized  and  Undercapitalized.  Each of the three
capital  categories  are  further  subdivided  by three  supervisory  subgroups:
healthy,   supervisory  concern  and  substantial   supervisory  concern.   Each
institution  is assigned an  assessment  based on its placement in the resulting
nine cell matrix. Assessments range from $0.23 per $100 of deposits for healthy,
Well Capitalized institutions to $0.31 per $100 of deposits for Undercapitalized
institutions for which there is substantial supervisory concern.

         This  risk-based   system  includes  factors  intended  to  assess  the
probability  that the deposit  insurance  fund will incur a loss with respect to
the institution.  In determining the probability of loss,  different  categories
and  concentrations  of assets and  liabilities  (both  insured  and  uninsured,
contingent and noncontingent) and any other factors that the FDIC determines are
relevant  to  assessing  such  probability  will be  taken  into  consideration.
Guaranty's deposit insurance premium is currently $0.26 per $100 of deposits.

         Pursuant to the Economic  Growth and Paper Work  Reduction  Act of 1996
(the "Act"), the FDIC imposed a special assessment on SAIF members to capitalize
the SAIF at the  designated 

                                      -15-
<PAGE>

reserve level of 1.25% as of September 30, 1996. Based on Guaranty's deposits at
March 31,  1995,  the date for  measuring  the amount of the special  assessment
pursuant  to the  Act,  Guaranty  paid a  special  assessment  of  approximately
$347,000 to capitalize the SAIF. In January 1997,  Guaranty's  insurance premium
was reduced to approximately $0.09 per $100 of deposits.

Holding Company Regulation

         Prior to the conversion to a state chartered bank on June 30, 1997, the
Corporation was a unitary savings and loan holding company subject to regulatory
oversight by the OTS. As such, the Corporation was required to file with the OTS
and is subject to regulation and  examination  by the OTS. In addition,  the OTS
had enforcement  authority over the Corporation and its non-savings  association
subsidiaries which also permits the OTS to restrict or prohibit  activities that
are determined to be a serious risk to the subsidiary savings association.  This
relation  and  oversight  is  intended  primarily  for  the  protection  of  the
depositors  of the  Corporation's  subsidiary  savings  association  and not for
stockholders of the Corporation.

         As  a  unitary  savings  and  loan  holding  company,  the  Corporation
generally  was not subject to activity  restrictions,  provided the  Corporation
satisfies the QTL test. If the Corporation  acquires  control of another savings
association  as a separate  subsidiary,  it would become a multiple  savings and
loan holding  company,  and the  activities  of the  Corporation  and any of its
subsidiaries (other than the Bank or any other SAIF-insured savings association)
would become subject to such  restrictions  unless such other  associations each
qualify as a QTL and were acquired in a supervisory acquisition.

         After the  charter  conversion,  Guaranty  will be  subject to the Bank
Holding  Company Act of 1956, as amended (the "Bank Holding  Company Act"),  and
will be  subject  to  regulation  by the  Federal  Reserve  with  respect to its
operations  as a bank  holding  company.  The  Bank  also  will  be  subject  to
regulation  by the  Bureau  of  Financial  Institutions  of the  Virginia  State
Corporation  Commission,  the Federal Reserve, and the FDIC. The powers of state
member banks and bank holding companies differ from those of federally chartered
savings associations. However, Guaranty does not anticipate any material changes
in its operations as a result of the changes in applicable  laws and regulations
that will result from the charter conversion.

Charter Conversion

         On June 30, 1997  Guaranty  obtained  final  approval from the Virginia
State  Corporation  Commission,  the Board of Governors  of the Federal  Reserve
System,  the  FDIC and the OTS to  convert  from a  federally-chartered  savings
association to a  Virginia-chartered,  Federal Reserve member  commercial  bank.
Federal and state  banking  regulators  obtained a commitment  from  Guaranty to
reduce its ratio of loans-to-deposits,  which was approximately 100% at December
31, 1996. Guaranty already is in the process of reducing such ratio and does not
expect that such requirement will materially affect its operations.

         After the  charter  conversion,  Guaranty  will be  subject to the Bank
Holding  Company Act of 1956, as amended (the "Bank Holding  Company Act"),  and
will be  subject  to  regulation  by the 

                                      -16-
<PAGE>

Federal  Reserve with respect to its operations as a bank holding  company.  The
Bank also will be subject to regulation by the Bureau of Financial  Institutions
of the Virginia State Corporation Commission, the Federal Reserve, and the FDIC.
The powers of state member banks and bank holding companies differ from those of
federally chartered savings associations.  However, Guaranty does not anticipate
any material  changes in its operations as a result of the changes in applicable
laws and regulations that will result from the charter conversion.

         As a federally  chartered  savings  association,  the Bank may not hold
secured or unsecured loans for commercial, corporate or agricultural purposes in
excess of 20% of its assets.  The sum of consumer loans and certain  investments
in corporate  obligations may not exceed 35% of the Bank's assets. The Bank also
is required to meet the qualified thrift lender test,  which generally  requires
the Bank to invest the  majority  of its  assets in  mortgage  loans.  After the
charter conversion, there would be no such limits on the commercial and consumer
lending  authority of the Bank,  nor would the Bank be subject to the  qualified
thrift lender test.  Recently,  the Bank has  emphasized  and expanded its small
business and consumer  lending  programs.  As these  programs  evolve,  the Bank
expects to reduce its reliance on permanent  residential  mortgage loans.  While
loans  secured by real estate are  expected to remain an  important  part of the
Bank's  business,  it expects that in several years its loan portfolio will more
closely resemble that of a commercial bank than a thrift. Consequently, the Bank
believes  that  operating  under a commercial  bank charter will better suit the
Bank's business plan than will the federal savings association charter.

Recent Tax Legislation

         For tax years  beginning  prior to January 1, 1996,  savings banks that
met certain  definitional tests and other conditions  prescribed by the Internal
Revenue Code were allowed, within limitations,  to deduct form taxable income an
allowance for bad debts using the "percentage of taxable income" method. Section
1616 of the Small Business Job Protection Act of 1996 repealed the percentage of
taxable income method of computing bad debt reserves, and requires the recapture
into taxable income of "excess  reserves",  on a ratable basis over the next six
years.  Excess reserves are defined, in general, as the excess of the balance of
tax bad reserve  (using the percentage of taxable income method) as of the close
of the last tax year  beginning  before  January 1, 1988.  The  recapture of the
reserves  is  deferred  if the Bank  meets the  "residential  loan  requirement"
exception  during either or both of the first two years beginning after December
31, 1995. The residential loan requirement is met, in general,  if the principal
amount of  residential  loans made by the Bank  during the year is not less than
the Bank's  "base  amount".  The base  amount is  defined as the  average of the
principal amounts of residential loans made during the six most recent tax years
beginning January 1, 1996.

         As a result of this law change,  Guaranty must  recapture  into taxable
income  approximately  $387,000  ratably  over the next six years  ($64,500  per
year),  beginning  with the year ending June 30, 1997. If the  residential  loan
requirement  exception is met, as discussed above, the income will be includable
in the third through eighth years following the year ended June 30, 1996.


                                      -17-
<PAGE>

Personnel

         As of June 30, 1997, Guaranty had a total of 47 employees,  including 2
part-time  employees.  None of the Corporation's  employees are represented by a
collective  bargaining  group.  Guaranty believes that its relationship with its
employees is good.

Item 2.  Description of Property

                                          Owned or
                                           Lease               Lease Renewal
                  Location               Expiration               Options
                  --------               ----------               -------

Executive Offices and Main Branch
1658 State Farm Boulevard
Charlottesville, Virginia                Owned

Rio Road Branch
1700 Seminole Trail
Charlottesville, Virginia                Owned

Downtown Charlottesville Branch
520 E. Main Street                                                  Three
Charlottesville, Virginia                August 31, 1997     five-year options

Arlington Boulevard Branch
1924 Arlington Boulevard                                            Three
Charlottesville, Virginia                September 30, 1997  five-year options

Harrisonburg Branch
Neff Ave. & Reservoir St.
Harrisonburg, Virginia                   Owned

Warehouse
1110 East Market Street
Charlottesville, Virginia                February 28, 1998

         At  December  31,  1996,  the  net  book  value  of  the  Corporation's
investment in premises and equipment was approximately $4.9 million.

         The Bank uses the  service of an outside  processing  firm for its data
processing and record keeping  functions as to loan accounts,  deposit accounts,
and ATM services.


                                      -18-
<PAGE>

Item 3. Legal Proceedings

         No legal proceedings are pending at this time involving the Corporation
as a party or affecting any property of the Corporation.

Item 4. Submission of Matters to a Vote of Security Holders

         The Annual Meeting of  Shareholders of Guaranty  Financial  Corporation
was held  December  11, 1996 in  Charlottesville  Virginia  for the  purposes of
electing four  individuals  to the Board of Directors  and  amending  Guaranty's
1991  Incentive  Plan (the  "Plan").  Proxies  for the  meeting  were  solicited
pursuant to  Regulation  14(a) of the  Securities  and Exchange Act of 1934,  as
amended.

         There was no solicitation in opposition to management's nominees to the
Board of Directors as listed in the proxy  statement,  and all of such  nominees
were elected with the following vote:
<TABLE>
<CAPTION>

                                         Shares             Shares            Shares
                                        voted for          withheld         not voted           Total
                                    ------------------ ----------------- ----------------- -----------------
<S>                                           <C>                 <C>             <C>               <C>    
For 3 - Year Term
     Thomas P. Baker                          468,728             3,180           447,260           919,168
     Charles R. Borchardt                     467,928             3,980           447,260           919,168
     Harry N. Lewis                           468,828             3,080           447,260           919,168
For 1 - Year Term
     James R. Sipe, Jr.                       468,828             3,080           447,260           919,168
</TABLE>

         There  were no  abstentions  or broker  non-votes  in the  election  of
directors.

         In addition,  Guaranty's  shareholders voted on a proposal to amend the
Plan.  The Plan  initially  authorized  the  issuance of up to 50,000  shares of
Common  Stock.  Options to purchase  36,000  shares have been granted and 14,000
share  remain  available  for  grants and awards  under the Plan.  The Plan,  as
amended, reserves 111,000 shares, increasing the shares available for new grants
under the Plan from 14,000 to 75,000 shares.  To date,  none of the options have
been  exercised.  The Plan, as amended,  was approved with 295,762 shares voting
for, 46,280 shares voting against,  6,814 shares abstaining,  and 123,052 shares
counting as broker non-votes, and 447,260 shares did not vote.

                                      -19-
<PAGE>

                                     PART II

Item 5. Market for Registrant's Common Equity and Related Stockholder Matters

         The Common  Stock has been listed on the Nasdaq  SmallCap  Market under
the symbol "GSLC" since June 29, 1995. As of December 31, 1996, the  Corporation
has approximately 533 shareholders of record.

         The following  table lists the high and low prices for the common stock
for the four  quarters  ended  December 31, 1996.  Prices have been  adjusted to
reflect the two for one stock split paid in January 1996.

              1996            HIGH           LOW
              ----            ----           ---
          1st Quarter         $8.50          $7.75
          2nd Quarter         $8.50          $7.50
          3rd Quarter         $9.25          $7.25
          4th Quarter         $9.50          $8.25





         The Corporation paid a cash dividend on its Common Stock of 5 cents per
share in June 1996.  That was the first dividend paid since July 1993,  when the
Corporation  paid 50 cents per share on its Common Stock.  In December 1996, the
Corporation paid a dividend on its Common Stock of 5 cents per share.

Item 6. Management's Discussion and Analysis of Financial Condition and Results
of Operations

         The  information  contained under the section  captioned  "Management's
Discussion  and Analysis of Financial  Condition and Results of  Operations"  on
pages  four to  twenty  of the 1996  Annual  Report  is  incorporated  herein by
reference.  Management's  Discussion  and  Analysis of Financial  Condition  and
Results of Operations  for the six-month  transition  period ended  December 31,
1996 follows.

                                  INTRODUCTION

         At the 1995 Annual Meeting,  stockholders approved a plan providing for
the formation of a holding  company with Guaranty  Savings and Loan, F.A. as the
subsidiary.  On November  26, 1996,  the board of  directors  during a regularly
scheduled meeting voted to change the name of Guaranty Savings and Loan, F.A. to
Guaranty Bank (the "Bank").

         Pursuant to the approved plan,  which was consummated in December 1995,
each  existing  share of  Guaranty  Savings  and  Loan,  F.A.  common  stock was
converted  into one share of common  stock in the new holding  company  known as
Guaranty  Financial  Corporation  (the  "Corporation").   As  a  result  of  the
reorganization,  the Bank's stock holders  became the owners of the newly formed
holding company,  which in turns owns all the outstanding stock of the Bank. 

                                      -20-
<PAGE>

The Corporation's  only direct subsidiary is the Bank and the Corporation has no
material assets or liabilities other than the stock of the Bank.

         Following consummation of the holding company reorganization, the Board
of Directors  declared a two (2) for one (1) stock split,  paid January 31, 1996
to holders of record January 15, 1996.

         For the six months ended December 31, 1996, the Corporation experienced
a 102% decrease in earnings from the same period in 1995.  During the six months
ended  December  31, 1996,  the  Corporation's  net loss was $6,382  compared to
earnings of $298,821 for the same period in 1995.  Income  decreased  during the
six  months  ended  December  31,  1996,  due  to a loss  of  $237,000  when  it
restructured  its  investment  portfolio  and a one time special  assessment  of
$347,000 to recapitalize  the Savings  Association  Insurance Fund ("SAIF").  In
order for Guaranty to convert to a commercial  bank,  securities  classified  as
available for sale had to be reclassified as trading  securities.  This resulted
in a mark to market  loss of $237,000  which was charged  against net income and
adjusted the basis of the securities.  Without these losses, Guaranty would have
reported an after tax net income of $376,000 for the six months  ended  December
31, 1996.

         In October  1995,  construction  began on a combined  headquarters  and
retail branch located on the east side of Charlottesville in the Pantops area of
Albemarle County. This facility was completed in the fall of 1996 and was opened
to the public for business  December 9, 1996.  Guaranty  occupies  approximately
15,500 sq. ft. of the building's  20,000 sq. ft., with the remainder  split into
two offices for lease, one of which is currently being leased.  In addition,  in
June 1996  Guaranty  purchased  its Rio Road office  which had  previously  been
leased.  After  renovations are completed to modernize the site and make it more
attractive  and  accessible  for tenants and customers  Guaranty will maintain a
2,500 sq. ft.  retail  branch with the  remainder to be leased.  As of May 1997,
100%  of  this  space  was  leased.  In  addition  to the  opening  of  the  new
headquarters  and the Rio Road purchase,  construction has begun on a new retail
branch at the  intersection  of Neff Avenue and Reservoir  Street in the city of
Harrisonburg. The branch opened on May 21, 1997.

                             RESULTS OF OPERATIONS

           Comparison of Six Months Ended December 31, 1996 and 1995

General

         The Bank's results of operations  depend  primarily on the level of its
net income and noninterest income and the level of its operating  expenses.  Net
interest  income  depends  upon  the  balance  of  interest-earning  assets  and
interest-bearing liabilities and the interest rate earned or paid on them.

                                      -21-
<PAGE>

Interest Income

         Interest  income was $4.3 million for the six months ended December 31,
1996,  an increase of $570,000,  or 15% from $3.7 million for the same period in
1995.  Volume  increases in the average  bearing assets were the primary reasons
for the increase in interest  income.  Average loans were 7.6% higher,  at $83.8
million, and average investment securities were 124.7% higher, at $17.6, for the
six month  period  ended  December  1996 over the same six month period in 1995.
Total average  interest earning assets were 19% higher,  at $106.7 million,  for
the six months ended December 1996 compared to the same period in 1995. Interest
rates were lower during the six months ended  December 31, 1996  compared to the
same period in 1995. Yet, Guaranty still experienced moderate growth in deposits
during the six months ended December 31, 1996. This growth was invested in loans
and supplemented with mortgage-backed securities. The average yield on loans was
4 basis points higher,  at 8.24%,  during the six months ended December 31, 1996
compared to 8.20% for the same period in 1995.  The average  yield on investment
securities  was lower by 182 basis points,  at 7.15%,  compared to 8.97% for the
same period in 1995.  Interest  income was  greater  due to the  increase in the
average  interest-earning  assets despite the overall yield paid on those assets
being 26 basis points lower, at 8.01%,  compared to 8.27% for the same period in
1995.

Interest Expense

         Interest expense was $2.9 million for the six months ended December 31,
1996, an increase of $396,000,  or 16%, from $2.5 million for the same period in
1995. While the overall rate paid on average interest bearing liabilities was 38
basis  points  lower,  at  5.55%,  compared  to 5.93% for the six  months  ended
December 31, 1995, net interest expense  increased due to an increase in overall
volume.  Average interest bearing deposits were $22 million,  or 40%, higher for
the six months ended  December 31, 1996 compared to the same period in 1995. The
average  rate paid on these  deposits  was 5 basis points lower at 5.09% for the
six months ended  December 1996 compared to the six months ended  December 1995.
The most  significant  change was in time deposits.  The average balance of time
deposits was $22.2 million, or 53.8%, higher with the average rate paid being 32
basis points lower at 5.54% during the six months ended  December  1996 compared
to the same period in 1995.  Average  FHLB  advances and other  borrowings  were
lower by $1.2 million, at $25.9 million, while the rate paid on these borrowings
was 57 basis points lower,  at 5.76%,  during the six months ended  December 31,
1996 compared to the six months ended December 31, 1995.


Provision for Loan Losses

         The  provision  increased to $91,800 for the six months ended  December
31,  1996  compared  to a  provision  of  $10,900  for the same  period in 1995.
Guaranty  monitors  its loan  loss  reserve  monthly  and makes  allocations  as
necessary.  Management  believes  that the  level of its loan  loss  reserve  is
adequate.  As of December 31, 1996 the total  allowance for loan losses amounted
to $870,000,  of which  $709,000 was not  specifically  allocated to  identified
problem loans.


                                      -22-
<PAGE>

Net Interest Income

         Net interest income was $1.34 million for the six months ended December
31, 1996 compared to $1.16 million for the same period in 1995. The  improvement
in net interest  income was primarily  due to the volume  increase in investment
securities and loans, and a shift from higher interest bearing FHLB advances and
other borrowings to certificates of deposit as a funding source.


         The following table describes the impact on Guaranty's  interest income
resulting  from changes in average  balances  and average  rates for the periods
indicated. The change in interest due to both volume and rate has been allocated
to volume and rate changes in  proportion  to the  relationship  of the absolute
dollar amounts of the change in each.
<TABLE>
<CAPTION>

                                Six months ended December 31,                          Years ended June 30,
                                    1996 compared to 1995            1996 compared to 1995            1995 compared to 1994
                                -----------------------------------------------------------------------------------------------
                                 Increase     Change Due To:      Increase     Change Due To:      Increase     Change Due To:
(Dollars in thousands)          (Decrease)    Rate    Volume     (Decrease)    Rate    Volume     (Decrease)    Rate   Volume
                                ----------    ----    ------     ----------    ----    ------     ----------    ----   ------
<S>                                    <C>     <C>       <C>            <C>       <C>     <C>           <C>       <C>  <C>     
Interest income:
   Securities                          $279    ($143)    $422           $226      ($9)    $235          ($722)    $403 ($1,125)
   Loans                                262       31      231            545      430      115            643      273     370
   Interest bearing deposits
     in other banks                      30      (39)      69             57      (38)      95            184       78     106
                                         --      ---       --             --      ---       --            ---       --     ---

        Total interests income          571     (151)     722            828      383      445            105      754    (649)

Interest expense:
   Interest bearing deposits:
      Demand/MMDA accounts               (6)      (2)      (4)           (35)      (9)     (26)           (51)     (18)    (33)
      Savings                             3       (0)       3            (41)      (5)     (36)           (24)     (17)     (7)
      Certificates of deposit           550     (132)     682            768      248      520            576      353     223
                                        ---     ----      ---            ---      ---      ---            ---      ---     ---
        Total interest bearing deposits 547     (134)     681            692      234      458            501      318     183
      FHLB advances and other          (111)    (154)      43           (135)    (129)      (6)            90      167     (77)
      Bonds payable                     (40)      35      (75)           (28)     166     (194)         (1001)    (547)   (454)
                                        ---       --      ---            ---      ---     ----          -----     ----    ---- 
       Total interest expense           396     (253)     649            529      271      258           (410)     (62)   (348)
                                        ---     ----      ---            ---      ---      ---           ----      ---    ---- 
      Net interest income              $175     $102      $73           $299     $112     $187           $515     $816   ($301)
                                ------------------------------   ------------------------------   -----------------------------

</TABLE>

         The following  table  illustrates  average  balances of total  interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the average  distribution of assets,  liabilities,  stockholders' equity
and the related income , expense, and corresponding  weighted average yields and
costs. The average balances used in these tables and other statistical data were
calculated using daily average balances.

                                      -23-
<PAGE>

<TABLE>
<CAPTION>

                                                     Six months ended
                                                       December 31,                      Years ended June 30,
--------------------------------------------------------------------------------- --------------------------------- 
  (Dollars in thousands)                                    1996                              1996                  
--------------------------------------------------------------------------------- --------------------------------- 
                                                          Interest   Average                  Interest    Average   
                                              Average      income/   yield/        Average    income/     yield/    
                                              balance      expense    rate         balance    expense      rate     
--------------------------------------------------------------------------------- --------------------------------- 
<S>                                               <C>          <C>          <C>    <C>           <C>          <C>   
Assets
Interest earning assets:
   Securities                                     $17,640      $631         7.15%  $10,374       $820         7.90% 
   Loans                                           83,816     3,455         8.24%   79,220      6,495         8.20% 
   Interest bearing deposits
      in other banks                                5,257       190         7.23%    4,187        355         8.48% 
--------------------------------------------------------------------------------- --------------------------------- 
   Total interest-earning
          assets/total interest income            106,713     4,276         8.01%   93,781      7,670         8.18% 
--------------------------------------------------------------------------------- --------------------------------- 
   Noninterest earning assets:
      Cash and due from banks                       1,082                            1,634                          
      Non accrued loans                             1,618                            1,339                          
      Purchased mortgage servicing                    933                              833                          
      Other assets                                    447                            1,070                          
      Less: Allowance for loan losses                (826)                            (768)                         
      Less: Deferred loan fees                       (318)                            (319)                         
      Fixed Assets                                  4,038                            1,981                          
--------------------------------------------------------------------------------- --------------------------------- 
          Total noninterest earning assets          6,974                            5,770                          
--------------------------------------------------------------------------------- --------------------------------- 
             Total Assets                        $113,687                          $99,551                          
================================================================================= ================================= 

Liabilities and stockholders equity
Interest bearing liabilities:
  Interest bearing deposits:
      Demand/MMDA accounts                          8,765       121         2.76%    8,975        245         2.73% 
      Savings                                       4,870        83         3.41%    4,677        152         3.25% 
      Certificates of deposit                      63,346     1,756         5.54%   49,102      2,735         5.57% 
--------------------------------------------------------------------------------- --------------------------------- 
          Total interest bearing deposits          76,981     1,960         5.09%   62,754      3,132         4.99% 
--------------------------------------------------------------------------------- --------------------------------- 
      FHLB advances and other borrowings           25,871       745         5.76%   25,766      1,553         6.03% 
      Bonds payable                                 3,060       235        15.36%    3,562        507        14.23% 
--------------------------------------------------------------------------------- --------------------------------- 
          Total interest bearing
             liabilities/total interest expense   105,912     2,940         5.55%   92,082      5,192         5.64% 
--------------------------------------------------------------------------------- --------------------------------- 
      Non interest bearing liabilities:
        Demand deposits                             1,324                              621                          
        Other liabilities                             809                              645                          
--------------------------------------------------------------------------------- --------------------------------- 
          Total liabilities                       108,045                           93,348                          
--------------------------------------------------------------------------------- --------------------------------- 
      Stockholders equity                           5,642                            6,203                          
--------------------------------------------------------------------------------- --------------------------------- 
          Total liabilities and stockholders
            equity                               $113,687                          $99,551                          
================================================================================= ================================= 
      Interest spread (1)                                                   2.46%                             2.54% 
      Net interest income/net interest
        margin (2)                                           $1,336         2.50%              $2,478         2.64% 
================================================================================= ================================= 
</TABLE>
(1)   Interest  spread is the average yield earned on earning  assets,  less the
      average rate incurred on noninterest bearing liabilities.
(2)   Net interest margin is net interest income, expressed as a percentage of 
      average earning assets.

<TABLE>
<CAPTION>

                                                
                                                      Years ended June 30,
------------------------------------------------ --------------------------------   
  (Dollars in thousands)                                     1995                     
------------------------------------------------ --------------------------------   
                                                            Interest     Average    
                                                  Average    income/      yield/    
                                                  balance    expense       rate     
------------------------------------------------ --------------------------------   
<S>                                               <C>         <C>           <C>     
Assets                                                                              
Interest earning assets:                                                            
   Securities                                     $8,225      $698          8.49%   
   Loans                                          76,193     6,193          8.13%   
   Interest bearing deposits                                                        
      in other banks                               3,532       304          8.61%   
------------------------------------------------ --------------------------------   
   Total interest-earning                                                           
          assets/total interest income            87,950     7,195          8.18%   
------------------------------------------------ --------------------------------   
   Noninterest earning assets:                                                      
      Cash and due from banks                      1,284                            
      Non accrued loans                            1,635                            
      Purchased mortgage servicing                   779                            
      Other assets                                   141                            
      Less: Allowance for loan losses               (748)                           
      Less: Deferred loan fees                      (345)                           
      Fixed Assets                                   619                            
------------------------------------------------ --------------------------------   
          Total noninterest earning assets         3,365                            
------------------------------------------------ --------------------------------   
             Total Assets                        $91,315                            
================================================ ================================   
                                                                                    
Liabilities and stockholders equity                                                 
Interest bearing liabilities:                                                       
  Interest bearing deposits:                                                        
      Demand/MMDA accounts                         9,400       260          2.77%   
      Savings                                      4,901       166          3.39%   
      Certificates of deposit                     39,523     2,212          5.60%   
------------------------------------------------ --------------------------------   
          Total interest bearing deposits         53,824     2,638          4.90%   
------------------------------------------------ --------------------------------   
      FHLB advances and other borrowings          27,648     1,761          6.37%   
      Bonds payable                                3,987       520         13.04%   
------------------------------------------------ --------------------------------   
          Total interest bearing                                                    
             liabilities/total interest expense   85,459     4,919          5.76%   
------------------------------------------------ --------------------------------   
      Non interest bearing liabilities:                                             
        Demand deposits                              883                            
        Other liabilities                            769                            
------------------------------------------------ --------------------------------   
          Total liabilities                       87,111                            
------------------------------------------------ --------------------------------   
      Stockholders equity                          4,204                            
------------------------------------------------ --------------------------------   
          Total liabilities and stockholders                                        
            equity                               $91,315                            
================================================ ================================   
      Interest spread (1)                                                   2.42%   
      Net interest income/net interest                                              
        margin (2)                                          $2,276          2.59%   
================================================ ================================   
</TABLE>
(1)   Interest  spread is the average yield earned on earning  assets,  less the
      average rate incurred on noninterest bearing liabilities.
(2)   Net interest margin is net interest income, expressed as a percentage of 
      average earning assets.
                                                


Non-Interest Income

         Non-interest income was $462 thousand for the six months ended December
31, 1996  compared  to $515  thousand  for the same period in 1995.  Included in
non-interest  income  are  fees  for  mortgage  loans  serviced  for  others,  a
significant  business for Guaranty as discussed  below,  and a by-product of its
residential lending. Also included are gains and losses on the sale of loans and
securities.  Gains  decreased $84 thousand for the six months ended December 31,
1996 to

                                      -24-
<PAGE>

$72 thousand  compared to the same period in 1995.  The majority of the decrease
is  due to the  restructuring  of the  investment  portfolio.  Because  of  this
restructuring,  Guaranty took a one time loss of $237  thousand.  Offsetting the
one time investment  portfolio loss was the gain on the sale of $11.8 million of
loans of $217 thousand.

         Guaranty derives fees from originated  servicing and purchased mortgage
service rights ("MSRs").  Loan servicing includes  collecting and remitting loan
payments,  accounting  for  principal  and  interest,  holding  escrow funds for
payment of taxes and  insurance,  making  required  inspections of the mortgaged
premises,  contacting  delinquent  mortgagors,  supervising  foreclosures in the
event of  unremitted  defaults  and  generally  administering  the loans for the
investors to whom they have been sold. MSRs are intangible assets that represent
the rights to service  mortgage  loans and in turn to receive  the  service  fee
income  associated  the mortgage  loans.  MSRs are volatile  assets if the loans
being  serviced  prepay  faster  than the  intangible  asset is  amortized.  See
"Financial Statements - Summary of Accounting Policies." Guaranty serviced loans
for others aggregating approximately $172.8 million, of which 70% was originated
locally, and $174.4 million, of which 67% was originated locally at December 31,
1996 and 1995, respectively.  Revenues recognized from these activities amounted
to $267,000 and  $263,000  for the six months ended  December 31, 1996 and 1995,
respectively.

Non-Interest Expenses

         Non-interest  expenses  were $1.72  million  for the six  months  ended
December 31, 1996  compared to $1.21  million for the same period in 1995, a 42%
increase.  Part of this  increase  is directly  connected  to the opening of the
fourth retail branch  office and the  relocation of the corporate  headquarters.
Although  additional  personnel  have been hired to staff the new retail  branch
office that opened in December  1996,  the majority of this  increase was due to
the federal  legislation  enacted in September 1996 to recapitalize  the Savings
and Loan  Association  Insurance  Fund ("SAIF").  With out the SAIF  assessment,
non-interest expenses for the six months ended December 31, 1996 would have been
$1.4 million.



Income Taxes

         Guaranty  recognized  an income tax benefit of $4 thousand  for the six
months  ended  December  31,  1996  compared  to an income  tax  expense of $158
thousand for the same period in 1995.  Guaranty's  net income was  significantly
lower for the six months ended  December 31, 1996 compared to the same period in
1995 due to the one time SAIF assessment and the restructuring of the investment
portfolio.



Interest Sensitivity

         An important  element of both  earnings  performance  and  liquidity is
management of the interest  sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive  liabilities
at a specific  time  interval.  The gap can be managed  by  repricing  assets or
liabilities,  by selling  investments  held for sale,  by  replacing an asset or
liability  prior to maturity,  or by adjusting the interest rate during the life
of an  asset or  liability.  Matching  


                                      -25-
<PAGE>

the amount of assets and  liabilities  repricing in the same time interval helps
to hedge the risk and minimize the impact on net interest in period of rising or
falling interest rates.

         Guaranty  evaluates  interest rate risk and then formulates  guidelines
regarding  asset  generation  and  pricing,  funding  sources and  pricing,  and
off-balance  sheet  commitments  in order to decrease  sensitivity  risk.  These
guidelines are based upon  management's  outlook  regarding future interest rate
movements,  the state of the regional and national economy,  and other financial
and business risk factors.

         At December 31, 1996, Guaranty had $16 million more in liabilities than
assets  that  reprice   within  one  year  or  less  and   therefore  was  in  a
liability-sensitive  position.  A negative gap adversely  impacts  earnings in a
period of rising interest rates.  This negative  position is the result of fixed
rate  borrowings and  certificates of deposit  reaching  maturity and short term
borrowings  used  to  fund  mortgage-backed  securities.  As  these  fixed  rate
borrowings mature, they will be extended to match the asset maturities. Guaranty
will also  increase its prime based  lending  products  going forward which will
also improve this negative position.

         Guaranty has an Asset/Liability  Committee ("ALCO").  The ALCO meets to
discuss deposit pricing, changes in borrowed money, investment trading activity,
loan sale activities, liquidity levels and the overall interest sensitivity. The
actions of this  committee  are  reported to the Board of  Directors.  The daily
monitoring of interest rate risk,  investment and trading  activity,  along with
any other significant  transactions are managed by the CEO with input from other
ALCO members.

         The  following  table  presents  the  amounts  of  Guaranty's  interest
sensitive  assets  and  liabilities  that  mature  or  reprice  in  the  periods
indicated.


                                      -26-
<PAGE>

<TABLE>
<CAPTION>
                                                                         December 31, 1996
                                                                       Maturing or Repricing In:
---------------------------------------------------------------------------------------------------------------
                                                      3 Months         4-12            1-5            Over
(Dollars in thousands)                                 or less        Months          Years         5 Years
---------------------------------------------------------------------------------------------------------------
<S>                                                      <C>            <C>             <C>            <C>    
Interest-sensitive assets:
  Loans                                                  $19,656        $32,154         $3,301         $24,751
  Investments and mortgage-backed securities(1)            1,718          2,079          4,941          12,532
  Deposits at other institutions                           5,038              0              0               0
---------------------------------------------------------------------------------------------------------------
     Total interest-sensitive assets                      26,412         34,233          8,242          37,283
---------------------------------------------------------------------------------------------------------------

   Cumulative interest-sensitive assets                   26,412         60,645         68,887         106,170
---------------------------------------------------------------------------------------------------------------

Interest-sensitive liabilities:
  NOW accounts (2)                                             0              0              0           6,936
  Money market deposit accounts                            3,410              0              0               0
  Savings accounts (3)                                     1,194            669            573           2,341
  Certificates of deposit                                 13,321         43,985          9,018               0
  Borrowed money                                           9,181          5,000         10,000               0
  Bonds payable                                               61            184            800           2,021
---------------------------------------------------------------------------------------------------------------
     Total interest-sensitive liabilities                 27,167         49,838         20,391          11,298
---------------------------------------------------------------------------------------------------------------

   Cumulative interest-sensitive liabilities             $27,167        $77,005        $97,396        $108,694
---------------------------------------------------------------------------------------------------------------

   Period gap                                               (755)       (15,605)       (12,149)         25,985

   Cumulative gap                                           (755)       (16,360)       (28,509)         (2,524)

   Ratio of cumulative interest-sensitive
    assets to interest-sensitive liabilities               97.22%         78.75%         70.73%          97.68%

   Ratio of cumulative gap to total assets                 -0.65%        -14.10%        -24.57%          -2.17%
</TABLE>

(1) Includes Federal Home Loan Bank stock.
(2) The  Corporation  has found that NOW accounts are generally not sensative to
    changes in interest  rstes and  therefore  has placed  such  deposits in the
    "over 5 years" category.
(3) In  accordance  with  standard  industry  practice,  decay factors have been
    applied to savings accounts.


                              FINANCIAL CONDITION

General

         Guaranty  experienced  moderate  growth  during  the six  months  ended
December 31, 1996. Total assets  increased 5.3%, or approximately  $5.9 million,
to $116.0 million at December 31, 1996 from June 30, 1996.  Securities increased
50% or $6.6 million to $21.2 million while loans decreased 3% or $2.8 million to
$81.3 million at December 31, 1996. On the liability  side of the balance sheet,
deposits  increased  $6.7  million or 9% to $81.4  million  while bonds  payable
decreased  $438,000 to $2.7 million at December 31,  1996.  Borrowings  from the
Federal Home Loan Bank remained unchanged at $17.5 million with other borrowings
increasing $577,000 to $6.7 million.

Investments

         As of July 1, 1995, Guaranty adopted Statement of Financial  Accounting
Standards  ("SFAS")  No. 115,  Accounting  for Certain  Investments  in Debt and
Equity  Securities,  which

                                      -27-
<PAGE>

requires investments to be classified as held to maturity,  trading or available
for sale. Upon adoption of SFAS 115, existing  investments were classified based
on Guaranty's intent. As a result of a federal and state examination relating to
the anticipated  conversion to a state  chartered  commercial  bank,  securities
classified as available for sale valued at $15.7  million were  reclassified  as
trading  securities.  At  December  31,  1996,  Guaranty  had  $3.2  million  of
mortgage-backed  securities  classified  as  held  to  maturity,  which  are the
securities collateralizing the bonds issued in 1987.

         Mortgage-backed  securities  increased  during  the  six  months  ended
December  31,  1996 due to the growth in  deposits.  Since  loan  growth was not
increasing  at the rate of deposit  growth,  the excess  funds were  invested in
mortgage-backed securities.

         The following table shows the carrying value of investment securities 
at the dates indicated.

                                             December 31,        June 30,
                                                          ----------------------
(Dollars in thousands)                           1996        1996         1996 
                                            ------------------------------------

Held-to-maturity
  Mortgage-backed securities ...............     $ 3,157     $ 3,731     $ 4,733
                                            ------------------------------------


Available for sale
Federal National Mortgage Assoc. stock .....           3           3           3
Mortgage-backed securities .................        --         9,564        --
                                            ------------------------------------
             Total available for sale ......           3       9,567           3
                                            ------------------------------------

Trading
Mortgage-backed securities .................      15,726        --          --
Treasury Notes .............................       1,007        --          --
                                            ------------------------------------
             Total trading .................      16,733        --          --
                                            ------------------------------------

Restricted
Federal Home Loan Bank stock ...............       1,360       1,360       1,360
                                            ------------------------------------

             Total securities ..............     $21,253     $14,658     $ 6,096
                                            ====================================



Investment Activities

         Federal thrift  institutions  have authority to invest in various types
of liquid assets,  including U.S. Treasury obligations and securities of various
federal  agencies,  certificates  of deposit at insured  institutions,  banker's
acceptances and federal funds.

         Historically,  Guaranty  has  maintained  its liquid  assets  above the
minimum  requirements  imposed by federal  regulations  and at a level  believed
adequate to meet requirements of normal daily  activities,  repaying of maturing
debt and  potential  deposit  outflows.  Cash  flow  projections  are  regularly
reviewed  and updated to assure  that  adequate  liquidity  is  provided.  As of
December  


                                      -28-
<PAGE>

31, 1996,  Guaranty's  liquidity  ratio was 6.3%. See "Regulation - Federal Home
Loan Bank System."

         The following table sets forth the composition of Guaranty's investment
portfolio at the dates indicated.

<TABLE>
<CAPTION>

                                              Six months ended                       Years ended June 30,
                                              December 31, 1996                 1996                       1995
                                            Book             % of          Book        % of          Book        % of
(Dollars in thousands)                      Value            Total         Value       Total         Value       Total
                                         ------------------------------------------------------------------------------

<S>                                          <C>             <C>         <C>           <C>         <C>           <C>    
Interest-bearing
deposits with banks                          $  5,038        100.00%     $ 3,779       100.00%     $ 4,022       100.00%

Investment securities:
FHLMC mortgage-backed
securities                                      6,819         32.08%       7,459        50.89%       4,733        77.64%
GNMA mortgage-backed
securities                                     11,967         56.31%       5,836        39.81%           -         0.00%
Treasury notes                                  1,104          5.19%           -         0.00%           -         0.00%
Subtotal                                       19,890         93.59%      13,295        90.70%       4,733        77.64%

FHLB stock                                      1,360          6.40%       1,360         9.28%       1,360        22.31%
FNMA stock                                          3          0.01%           3         0.02%           3         0.05%
                                         -------------------------------------------------------------------------------

Total Investment securities                 $ 21,253         100.00%     $14,658       100.00%     $ 6,096       100.00%
                                         ===============================================================================
</TABLE>

Lending

         Guaranty's loan portfolio  consists  primarily of mortgage  loans,  the
majority of which are  residential  first mortgage  loans. Of the $81 million of
mortgages  outstanding at December 31, 1996, 78.4% represent  residential  first
mortgages.  The primary lending market  consists of the City of  Charlottesville
and Albermarle  County,  and to a lesser  extent,  the  surrounding  counties of
Greene, Fluvanna, Louisa, and Orange.

         Net loans  consist  of total  loans  minus  deferred  loan fees (net of
origination  costs)  and the  allowance  for loan  losses.  Net loans were $81.3
million at December  31,  1996,  a 3% decrease in net loans of $84.1  million at
June 30,  1996.  The decrease is the result of the sale of loans with a value of
$11.8 million,  offset by new loan  originations.  The average  balance of total
loans as a percentage  of average  assets was 73.7% at December  31, 1996,  down
from 79.6% at June 30, 1996.

         The following table sets forth the composition of Guaranty's total loan
portfolio in dollars as well as percentages for the dates indicated.


                                      -29-
<PAGE>

<TABLE>
<CAPTION>

                                                December 31,                                June 30,
                                          -------------------------   --------------------------------------------------
                                                   1996                        1996                      1995           
                                                   ----                        ----                      ----           
                                                         Percent                     Percent                   Percent  
                                                        of Gross                     of Gross                  of Gross 
                                             Amount       Loans          Amount       Loans        Amount       Loans   
                                             ------       -----          ------       -----        ------       -----   
                                                                                               (Dollars in thousands)

<S>                                        <C>             <C>       <C>              <C>        <C>            <C>     
Real Estate
      Residential                          $    62,602      73.74%   $   66,136         75.15%   $ 62,175       77.57%  
      Commercial                                 7,962       9.38%        7,670          8.72%      4,508        5.62%  
      Construction and land loans                7,369       8.68%        8,813         10.01%      8,887       11.09%  
                                                ------                   ------                    ------               
         Total real estate                      77,933      91.80%       82,619         93.88%     75,570       94.29%  
                                                ------                   ------                    ------               
                                                                                                                        
Consumer Loans:                                  6,964       8.20%        5,386          6.12%      4,580        5.71%  
                                                ------                   ------                    ------               
         Total adjustable-rate loans            84,897     100.00%       88,005        100.00%     80,150      100.00%  
                                                ------                   ------                    ------               
Less:                                                                                                                   
   Undispersed loans in process                  2,467                    2,824                     3,858               
   Deferred fees and unearned                                                                                           
      discounts                                    290                      314                       323               
   Allowance for losses                            870                      786                       747               
                                                ------                   ------                    ------               
      Total net items                            3,627                    3,924                     4,928               
                                                ------                   ------                    ------               
         Total loans receivable, net           $81,270                  $84,081                   $75,222               
                                               =======                  =======                   =======               

</TABLE>
<TABLE>
<CAPTION>

                                                            June 30,                   
                                        ----------------------------------------------------    
                                                  1994                      1993                
                                                  ----                      ----                
                                                        Percent                   Percent       
                                                        of Gross                  of Gross      
                                            Amount       Loans        Amount       Loans        
                                            ------       -----        ------       -----        
                                                                                                
                                                                                                
<S>                                     <C>              <C>       <C>             <C>          
Real Estate                                                                                     
      Residential                       $ 67,385         83.05%    $  59,845         81.57%     
      Commercial                           4,251          5.24%        4,155          5.66%     
      Construction and land loans          5,819          7.17%        4,900          6.68%     
                                          ------                      ------                    
         Total real estate                77,455         95.46%       68,900         93.92%     
                                          ------                      ------                    
                                                                                                
Consumer Loans:                            3,685          4.54%        4,462          6.08%     
                                          ------                      ------                    
         Total adjustable-rate loans      81,140        100.00%       73,362        100.00%     
                                          ------                      ------                    
Less:                                                                                           
   Undispersed loans in process            2,249                       1,978                    
   Deferred fees and unearned                                                                   
      discounts                              382                         442                    
   Allowance for losses                      754                         746                    
                                          ------                      ------                    
      Total net items                      3,385                       3,166                    
                                          ------                      ------                    
         Total loans receivable, net     $77,755                     $70,196                    
                                         =======                     =======                    
                                          
</TABLE>



         The following  table shows the composition of Guaranty's loan portfolio
by fixed and adjustable  rate at the dates  indicated. 

<TABLE>
<CAPTION>

                                               December 31,                                June 30,      
                                          -------------------------- -----------------------------------------------------
                                                    1996                      1996                      1995              
                                                    ----                      ----                      ----              
                                                            Percent                  Percent                   Percent    
                                                            of Gross                 of Gross                  of Gross   
                                            Amount           Loans     Amount         Loans      Amount          Loans    
                                            ------           -----     ------         -----      ------          -----    
                                                                                        (Dollars in thousands)
<S>                                          <C>              <C>      <C>             <C>       <C>             <C>      
Fixed-Rate Loans:
   Real Estate
      Residential                            $26,061          30.70%   $28,907         32.85%    $23,577         29.42%   
      Commercial                                   0           0.00%         0          0.00%          0          0.00%   
      Construction and land loans                138           0.16%       339          0.39%         69          0.09%   
                                             -------                   -------                   -------                        
         Total real estate                    26,199          30.86%    29,246         33.23%     23,646         29.50%   
                                             -------                   -------                   -------                        
   Consumer Loans:                             1,396           1.64%       597          0.68%        736          0.92%   
                                             -------                   -------                   -------                        
         Total fixed-rate loans               27,595          32.50%    29,843         33.91%     24,382         30.42%   
                                             -------                   -------                   -------                        
                                                                                                                          
Adjustable-Rate Loans:                                                                                                    
   Real Estate                                                                                                            
      Residential                             36,541          43.04%    37,229         42.30%     38,598         48.16%   
      Commercial                               7,962           9.38%     7,670          8.72%      4,508          5.62%   
      Construction and land loans              7,231           8.52%     8,474          9.63%      8,818         11.00%   
                                             -------                   -------                   -------                        
         Total real estate                    51,734          60.94%    53,373         60.65%     51,924         64.78%   
                                             -------                   -------                   -------                        
   Consumer Loans:                             5,568           6.56%     4,789          5.44%      3,844          4.80%   
                                             -------                   -------                   -------                        
         Total adjustable-rate loans          57,302          67.50%    58,162         66.09%     55,768         69.58%   
                                             -------                   -------                   -------                        
            Total loans receivable            84,897         100.00%    88,005        100.00%     80,150        100.00%   
                                             -------                   -------                   -------                        
Less:                                                                                                                     
   Undispersed loans in process                2,467                     2,824                     3,858                  
   Deferred fees and unearned                                                                                             
      discounts                                  290                       314                       323                  
   Allowance for losses                          870                       786                       747                  
                                             -------                   -------                   -------                        
      Total net items                          3,627                     3,924                     4,928                  
                                             -------                   -------                   -------                        
         Total loans receivable, net         $81,270                   $84,081                   $75,222                  
                                             -------                   -------                   -------                        
</TABLE>

*
<TABLE>
<CAPTION>

                                                                    June 30,                    
                                          ----------------------------------------------------  
                                                    1994                       1993             
                                                    ----                       ----             
                                                            Percent                   Percent   
                                                           of Gross                   of Gross  
                                              Amount          Loans     Amount          Loans   
                                              ------          -----     ------          -----   
                                                                                                
<S>                                          <C>              <C>      <C>             <C>      
Fixed-Rate Loans:                                                                               
   Real Estate                                                                                  
      Residential                            $27,796          34.26%   $22,105         30.13%   
      Commercial                                   0           0.00%         0          0.00%   
      Construction and land loans                  0           0.00%         0          0.00%   
                                             -------                    ------                  
         Total real estate                    27,796          34.26%    22,105         30.13%   
                                             -------                    ------                  
   Consumer Loans:                               691           0.85%     1,547          2.11%   
                                             -------                    ------                  
         Total fixed-rate loans               28,487          35.11%    23,652         32.24%   
                                             -------                    ------                  
                                                                                                
Adjustable-Rate Loans:                                                                          
   Real Estate                                                                                  
      Residential                             39,590          48.79%    37,740         51.44%   
      Commercial                               4,251           5.24%     4,155          5.66%   
      Construction and land loans              5,819           7.17%     4,900          6.68%   
                                             -------                    ------                  
         Total real estate                    49,660          61.20%    46,795         63.79%   
                                             -------                    ------                  
   Consumer Loans:                             2,993           3.69%     2,915          3.97%   
                                             -------                    ------                  
         Total adjustable-rate loans          52,653          64.89%    49,710         67.76%   
                                             -------                    ------                  
            Total loans receivable            81,140         100.00%    73,362        100.00%   
                                             -------                    ------                  
Less:                                                                                           
   Undispersed loans in process                2,249                     1,978                  
   Deferred fees and unearned                                                                   
      discounts                                  382                       442                  
   Allowance for losses                          754                       746                  
                                             -------                    ------                  
      Total net items                          3,385                     3,166                  
                                             -------                    ------                  
         Total loans receivable, net         $77,755                   $70,196                  
                                             -------                   -------                  
                                           
</TABLE>


         Asset quality  is an  important  factor in the  successful  operation
of a financial  institution.  The loss of interest income and principal that may
result from  nonperforming  assets has an adverse  effect on  earnings,  and the
resolution of those assets requires the use of capital and management resources.
Guaranty  maintains  a  conservative   philosophy   regarding  its  underwriting



                                      -30-
<PAGE>

guidelines.  It also maintains loan monitoring policies and systems that require
detailed  monthly analysis of  delinquencies,  nonperforming  loans,  nonaccrual
loans and  repossessed  assets.  Reports of such loan and asset  categories  are
reviewed by management and the Board of Directors.

         Guaranty places loans on a nonaccrual  status after being delinquent 90
days,  or  earlier in  situations  in which the loans  have  developed  inherent
problems  that  indicate  payment of  principal  and interest may not be made in
full.  Whenever  the  accrual of interest  is  stopped,  previously  accrued but
uncollected interest income is reversed. Thereafter, interest is recognized only
as cash is received.  The loan is  reinstated  to an accrual  basis after it has
been brought current as to its principal and interest under the contractual term
of the loan.

         At June 30,  1996,  Guaranty had two  commercial  loans to one borrower
that were considered impaired under the criteria established by SFAS 114. Due to
a significant  principal  paydown during the six-month period ended December 31,
1996 and the  current  status of this  relationship,  these loans were no longer
considered  impaired at December  31, 1996.  In addition,  Guaranty had no other
loans considered impaired under SFAS 114 as of December 31, 1996.

         The following table reflects the composition of nonperforming assets at
the dates indicated.


<TABLE>
<CAPTION>

                                                         Six Months Ended
                                                           December 31,                     Years ended June 30,
(Dollars in thousands)                                         1996            1996         1995            1994        1993
                                                       ------------------------------------------------------------------------
<S>                                                            <C>             <C>           <C>              <C>         <C> 
Nonaccrual loans                                               $1,670          $1,458        $1,556           $887        $934
Restructured loans                                                 11              11            12            415       1,143
   Total non-performing loans                                   1,681           1,469         1,568          1,302       2,077
Foreclosed assets                                                  51              41           122              -           -
   Total non-performing assets                                  1,732           1,510         1,690          1,302       2,077
Loans past due 90 or more days and accruing interest                -              19             1            288         190
Non-performing loans to total loans, at period end               1.91%           1.67%         2.06%          1.65%       2.91%
Non-performing loans to period
   end total loans and foreclosed assets                         1.91%           1.67%         2.05%          1.65%       2.91%

</TABLE>

         Reserves are  established  based on historical  loss  experience  and a
review  of  significant  larger  credits.   A  loss  experience   percentage  is
established for each loan type and is reviewed  annually.  Each quarter the loss
percentage  is applied to the  portfolio,  by product  type,  to  determine  the
minimum amount of reserves required.  After the minimum reserve  requirement has
been met,  the Bank  targets  1.25% of  risk-weighted  assets to be the goal for
reserves.  The long term goal is to maintain reserves at 1% of total loans. This
methodology  for reserves was  implemented  in 1990 by management  when reserves
were found to be  inadequate.  Management  determined  that a provision for loan
losses of $91,800  should be charged  against  operations  during the six months
ended  December 31, 1996 to maintain the reserve  level at  approximately  1% of
loans.  The total allowance of  approximately  $870,000 at December 31, 1996 was
deemed adequate by management.

                                      -31-
<PAGE>

         The  following  table  provides an analysis of the  allowance  for loan
losses for the dates indicated.

<TABLE>
<CAPTION>

                                                                              Years ended June 30,
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                    1996         1996          1995             1994          1993
---------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>          <C>           <C>              <C>           <C> 
Balance at beginning of period                            $788         $747          $754             $746          $689
---------------------------------------------------------------------------------------------------------------------------
Provision (credit) charged to operations                    92           57           (10)              74            37
---------------------------------------------------------------------------------------------------------------------------
Charge-offs:
  Real estate                                               10           39             0               66             0
  Consumer                                                   0            0             1                0             0

Recoveries:
  Real Estate                                                0           19
  Consumer                                                   0            4             4                0            20
---------------------------------------------------------------------------------------------------------------------------
Net Charge-offs                                             10           16            (3)              66           (20)
---------------------------------------------------------------------------------------------------------------------------
Balance, end of period                                    $870         $788          $747             $754          $746
---------------------------------------------------------------------------------------------------------------------------

Allowance for loan losses to period end total loans      1.07%        0.94%         0.98%            0.96%         1.05%

Allowance for loan losses to nonaccrual loans           52.10%       54.05%        48.01%           85.01%        79.87%

Net charge-offs to average loans                         0.01%        0.02%         0.00%            0.09%        -0.03%
</TABLE>



Loan Maturity and Repricing

         The following  schedule  illustrates  the interest rate  sensitivity of
Guaranty's loan portfolio at December 31, 1996.  Mortgages which have adjustable
interest rates are shown as maturing  based on  contractual  maturity and demand
loans are shown as maturing in one year or less.  This schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.

<TABLE>
<CAPTION>

                                 Balance
                               Outstanding                              Principal Repayment Contractually Due
                              December 31,                             in 12-Month Periods Ending December 31,
                           -------------------------------------------------------------------------------------------------------
                                                                                               2000-        2002-        2007 and
(In thousands)                    1996                  1997         1998         1999          2001         2006       Thereafter
                                  ----                  ----         ----         ----          ----         ----       ----------

<S>                           <C>                   <C>          <C>           <C>          <C>          <C>           <C>       
Residential and
   commercial real estate     $      70,564         $   1,994    $     146     $      18    $   2,548    $   2,660     $   63,198
Construction                          7,369             5,952        1,061            65          291            -              -
Consumer and other loans              6,964             1,619          923         1,036        2,583          803              -
                           -------------------------------------------------------------------------------------------------------
   Total                      $      84,897         $   9,565    $   2,130     $   1,119    $   5,422    $   3,463     $   63,198
                           =======================================================================================================
</TABLE>



         The total  amount  of loans due after  December  31,  1997  which  have
predetermined  interest rates is $27.6 million,  while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $57.2
million.

                                      -32-
<PAGE>

Loan Originations, Purchases and Sales

         Federal  regulations  authorize  the  Bank to make  real  estate  loans
anywhere in the United  States.  However,  at December 31, 1996,  all the Bank's
real estate loans were secured by real estate located in the Bank's market area.

         Management  generally  does not  purchase  loans.  When local  mortgage
demand  is  less  than  the  supply  of  funds   available  for  local  mortgage
originations, management invests in mortgage backed securities.

         For the six month period ended December 31, 1996, the Bank originated 
$11.9 million in first mortgage loans.


Income From Lending Activities

         Guaranty  realizes  interest  and loan  fee  income  from  its  lending
activities.  The  Bank  receives  loan  fees on both  construction  and  one- to
four-family  residential  loans. The Bank receives loan fees and charges related
to existing loans, which include late charges.  Interest on loans, loan fees and
service charges  together  comprise 75% of the Bank's total revenues for the six
months  ended  December  31,  1996.  Income  from loan fees and other  fees is a
volatile  source  of  income,  varying  with the  volume  and type of loans  and
commitments made and with competitive and economic conditions.

         Generally accepted  accounting  principles ("GAAP") allow the inclusion
of  loan  fees in  current  income  to an  amount  limited  to the  Bank's  loan
underwriting and closing costs.  The remaining  deferred fees are amortized into
income over the  estimated  remaining  lives of the loans to which they  relate,
using a method which approximates level yield. The Bank had deferred fees net of
direct underwriting costs of approximately $290,000 at December 31, 1996.

         An ancillary function of lending is the mortgage  servicing  operation.
When mortgage loans are sold the Bank generally retains the right to service the
loans for a servicing fee. A typical  servicing  agreement  requires the Bank to
carry out the servicing function, including billing and collection of borrower's
payments,   remittance  of  payments  to  the  investor,  insurers,  and  taxing
authorities,  maintenance of custodial bank accounts; and related activities. In
addition  to loans  originated  by the Bank it has also  acquired  the rights to
service other mortgage  loans.  At December 31, 1996 the Bank serviced loans for
others   aggregating   approximately   $172.8  million  and  generated  fees  of
approximately $247,600 thousand for the six months ended December 31, 1996.


Delinquent and Problem Loans

         When a borrower  fails to make a required  payment on a loan,  the Bank
attempts to cause the  deficiency  to be cured by  contacting  the  borrower.  A
notice is mailed to the  borrower  after a payment is 16 days past due and again
when the loan is 28 days past due.  For most loans,  if the  delinquency  is not
cured  within 30 days,  the Bank issues a notice of intent to  foreclose  on the

                                      -33-
<PAGE>

property  and if the  delinquency  is not  cured  within  60 days,  the Bank may
institute  foreclosure  action.  If  foreclosed  on, real  property is sold at a
public sale and may be purchased by the Bank.  In most cases,  deficiencies  are
cured promptly.

         Loans are generally placed on nonaccrual  status when the collection of
principal or interest is 90 days or more past due, or earlier if  collection  is
uncertain based upon evaluation of the collateral and the financial  strength of
the borrower.  Loans may be  reinstated to accrual  status when all payments are
brought  current and, in the opinion of management,  collection of the remaining
balances can be  reasonably  expected.  Loans  greater than 90 days past due may
remain on accrual status if management  determines it has adequate collateral to
cover the principal and interest.

         The  following  table  sets  forth  information  concerning  delinquent
mortgage and other loans at December 31, 1996. The amounts  presented  represent
the total  remaining  principal  balances of the related loans,  rather that the
actual payment amounts which are overdue.

<TABLE>
<CAPTION>

                                       Residential               Commercial         Construction
                                       Real Estate              Real Estate            and Land                     Consumer
--------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)          Number         Amount      Number       Amount      Number       Amount       Number    Amount
--------------------------------------------------------------------------------------------------------------------------------
<S>                                <C>        <C>              <C>         <C>         <C>        <C>            <C>      <C>
Loans delinquent for:
31-59 days                          0             $0           0           $0          0           $0            5        $11
60-89 days                          9          1,248           0            0          1           82            0          0
90 days and over                   15          1,253           0            0          0            0            3         44
--------------------------------------------------------------------------------------------------------------------------------
     Total delinquent loans        24         $2,501           0           $0          1          $82            8        $55
--------------------------------------------------------------------------------------------------------------------------------
</TABLE>



         Federal  regulations  provide for the  classification  of loans,  debt,
equity  securities  and  other  assets  considered  to be of lesser  quality  as
"substandard,"  "doubtful" or "loss" assets.  The  regulations  require  insured
institutions  to  classify  their own assets and to  establish  prudent  general
allowances for losses for assets classified "substandard" or "doubtful." For the
portion of assets  classified  as "loss," an  institution  is required to either
establish  specific  allowances of 100% of the amount  classified or charge such
amounts  off its  books.  Assets  which  do not  currently  expose  the  insured
institution  to  sufficient  risk  to  warrant  classification  in  one  of  the
aforementioned  categories but possess  potential  weaknesses are required to be
designated "special mention" by management. In addition, the OTS may require the
establishment  of a general  allowance for losses based on assets  classified as
"substandard"  and  "doubtful"  or based on the  general  quality  of the  asset
portfolio  of an  institution.  In  connection  with the filing of its  periodic
reports with the OTS and in accordance with its classification of assets policy,
the Bank regularly  reviews the loans in its portfolio to determine  whether any
loans require classification in accordance with applicable  regulations.  On the
basis of management's  review of its assets, at December 31, 1996,  Guaranty had
classified approximately $2,980,000 of its assets as substandard,  approximately
$157,000 as loss and none as  doubtful.  Not all of the Bank's  assets that have
been  classified  are  included  in the table  below of  non-performing  assets.
Several of these loans are classified  because of previous  credit  problems but
are  performing.  In addition,  the Bank had  approximately  $779,000 in special
mention assets.


                                      -34-
<PAGE>

Non-Performing Assets

         The table below sets forth the amounts and categories of non-performing
assets in the Bank's loan  portfolio.  Non-performing  assets  include  accruing
loans delinquent 90 days or more and real estate acquired  through  foreclosure,
which include  assets  acquired in settlement of loans.  All consumer loans more
than 120 days delinquent are charged against the expense for bad dept.  Accruing
mortgage loans delinquent more than 90 days are loans that the Bank considers to
be well secured and in the process of collection.

<TABLE>
<CAPTION>

                                                         Six Months Ended
                                                           December 31,                     Years ended June 30,
(Dollars in thousands)                                         1996            1996         1995            1994        1993
                                                       ------------------------------------------------------------------------
<S>                                                            <C>             <C>           <C>              <C>         <C> 
Nonaccrual loans                                               $1,670          $1,458        $1,556           $887        $934
Restructured loans                                                 11              11            12            415       1,143
   Total non-performing loans                                   1,681           1,469         1,568          1,302       2,077
Foreclosed assets                                                  51              41           122              -           -
   Total non-performing assets                                  1,732           1,510         1,690          1,302       2,077
Loans past due 90 or more days and accruing interest                -              19             1            288         190
Non-performing loans to total loans, at period end               1.91%           1.67%         2.06%          1.65%       2.91%
Non-performing loans to period
   end total loans and foreclosed assets                         1.91%           1.67%         2.05%          1.65%       2.91%

</TABLE>


         At December 31, 1996, the Bank's  non-accrual  loans were comprised of:
twenty one (19) single-family mortgage loans and three (3) consumer loans. Based
on current  market values of the  properties  securing  these loans,  management
anticipates no significant losses.

         As of December 31,  1996,  there were  approximately  $779,000 in loans
with respect to which known  information  about the possible  credit problems of
the  borrowers  or  the  cash  flows  of the  security  properties  have  caused
management  to have  doubts as to the  ability of the  borrowers  to comply with
present  loan  repayment  terms and which may result in the future  inclusion of
such  items in the  non-performing  asset  categories.  These  loans  have  been
classified as special mention.

         Although  management  believes that these loans are adequately  secured
and no material loss is expected,  certain  circumstances may cause the borrower
to be unable to comply  with the  present  loan  repayment  terms at some future
date.




Allowance for Losses on Loans and Real Estate

         The Bank provides  valuation  reserves for anticipated  losses on loans
and real estate when its management determines that a significant decline in the
value of the  collateral  has  occurred,  as a result  of which the value of the
collateral  is less than the amount of the unpaid  principal of the related loan
plus  estimated  costs of  acquisition  and  sale.  In  addition,  the Bank also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to protect against  unanticipated  losses.  Although  management
believes   that  it  uses  the  best   information   


                                      -35-
<PAGE>

available to make such  determinations,  future  adjustments  to reserves may be
necessary,  and net income could be  significantly  affected,  if  circumstances
differ   substantially   from  the  assumptions   used  in  making  the  initial
determinations. In recent years, the Bank had increased its allowance for losses
on loans  due to  general  economic  downturns  in the real  estate  market.  At
December 31, 1996,  the Bank had an allowance for loan losses of $870  thousand,
which is predominantly a general allowance.

         An analysis of the  allowance  for loan  losses,  including  charge-off
activity, is presented below for the years indicated.

<TABLE>
<CAPTION>

                                                                              Years ended June 30,
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)                                    1996         1996          1995             1994          1993
---------------------------------------------------------------------------------------------------------------------------

<S>                                                       <C>          <C>           <C>              <C>           <C> 
Balance at beginning of period                            $788         $747          $754             $746          $689
---------------------------------------------------------------------------------------------------------------------------
Provision (credit) charged to operations                    92           57           (10)              74            37
---------------------------------------------------------------------------------------------------------------------------
Charge-offs:
  Real estate                                               10           39             0               66             0
  Consumer                                                   0            0             1                0             0

Recoveries:
  Real Estate                                                0           19
  Consumer                                                   0            4             4                0            20
---------------------------------------------------------------------------------------------------------------------------
Net Charge-offs                                             10           16            (3)              66           (20)
---------------------------------------------------------------------------------------------------------------------------
Balance, end of period                                    $870         $788          $747             $754          $746
---------------------------------------------------------------------------------------------------------------------------

Allowance for loan losses to period end total loans      1.07%        0.94%         0.98%            0.96%         1.05%

Allowance for loan losses to nonaccrual loans           52.10%       54.05%        48.01%           85.01%        79.87%

Net charge-offs to average loans                         0.01%        0.02%         0.00%            0.09%        -0.03%
</TABLE>

         A breakdown  of the  allowance  for loan losses in dollars and loans in
each category to total loans in percentages is provided in the following tables.
However,  Guaranty's  management  does not believe that the  allowance  for loan
losses can be fragmented  by category  with a degree of precision  that would be
useful to  investors.  Because all of these  factors are subject to change,  the
breakdown is not  necessarily  predictive of future loan losses in the indicated
categories.

                                      -36-
<PAGE>

<TABLE>
<CAPTION>
                                        Six Months
                                           Ended
                                          December 31,                          Years ended June 30,
                                           1996                1996           1995              1994              1993
                                    --------------------   ----------------------------------------------------------------
(Dollars in thousands)
<S>                                        <C>              <C>             <C>               <C>               <C>       
Residential real estate                    $        710     $      675      $      620        $      625        $      617
Non-residential real estate                         160            113             127               129               129
Total allowance for loan losses            $        870     $      788      $      747        $      754        $      746
</TABLE>

<TABLE>
<CAPTION>

                                        Six Months
                                           Ended
                                          December 31,                              Years ended June 30,
                                           1996                     1996            1995            1994           1993
                                    --------------------     -------------------------------------------------------------


<S>                                          <C>                      <C>             <C>             <C>            <C>  
Residential real estate                      81.6%                    85.7%           83.0%           82.9%          82.7%
Non-residential real estate                  18.4%                    14.3%           17.0%           17.1%          17.3%
Total allowance for loan losses             100.0%                   100.0%          100.0%          100.0%         100.0%
</TABLE>




Subsidiary Activities

         The Bank has two wholly owned  subsidiaries,  GMSC,  Inc.  ("GMSC") and
Guaranty  Investments  Corporation  ("GICO").  GMSC  is a  financing  subsidiary
through  which  the  Bank  formed  a Real  Estate  Mortgage  Investment  Conduit
("REMIC").  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."  The Bank sells insurance  annuities  through GICO. GICO
had a net income of $2,547 for the six months ended December 31, 1996.

         In 1987,  the Bank's  prior  management  formed GMSC and entered into a
REMIC in order to create  liquidity.  The Bank  utilized the REMIC to pool $19.9
million of fixed rate mortgages into mortgage backed securities, which were used
as collateral for bonds sold to private investors. The bonds bore a coupon of 8%
and were sold at a discount and costs of issuance of approximately $3.3 million.
The bond discount and issuance  costs are amortized  against  income as mortgage
underlying the bonds repay. In the six months ended December 31, 1996,  Guaranty
amortized  $97,000 of REMIC expenses.  The amortization of the REMIC expenses is
treated as interest expense.

                                SOURCES OF FUNDS

General

         Deposit  accounts have  traditionally  been the principal source of the
Bank's  funds for use in lending and for other  general  business  purposes.  In
addition to deposits,  the Bank derives funds from loan  repayments,  cash flows
generated from operations, which includes interest credited to deposit accounts,
repurchase  agreements  entered into with  commercial  banks and FHLB of Atlanta
advances.  Contractual  loan  payments are a relatively  stable source of funds,
while  deposit  inflows and  outflows  and the  related  cost of such funds have
varied widely.  

                                      -37-
<PAGE>

Borrowings  may be used on a short-term  basis to compensate  for  reductions in
deposits or deposit-inflows at less than projected levels and has been used on a
longer-term basis to support expanded lending activities.

Deposits

         The Bank  attracts  both  short-term  and  long-term  deposits from the
general  public by offering a wide  assortment  of accounts and rates.  The Bank
offers statement  savings  accounts,  various checking  accounts,  various money
market accounts,  fixed-rate  certificates with varying maturities,  $100,000 or
above certificates of deposit and individual retirement accounts.  The Bank does
not solicit brokered deposits.

         The  following  table sets forth the dollar  amount of  deposits in the
various types of deposit programs offered by the Bank for the periods indicated.

<TABLE>
<CAPTION>

                                      December 31,                                        June 30,
                                                            ---------------------------------------------------------------------
(Dollars in thousands)                    1996                     1996                     1995                    1994
                                 -----------------------   ---------------------    ---------------------   ---------------------
<S>                                            <C>                     <C>                      <C>                     <C>   
Statement savings accounts                       $4,738                  $4,654                   $4,688                  $7,610
Now accounts                                      6,929                   6,440                    5,818                   6,005
Money market accounts                             3,410                   3,213                    4,131                   5,392
30- to 180-day certificates                         250                     227                      324                     528
One- to five-year
   fixed-rate certificates                       66,013                  52,698                   29,987                  33,932
Eighteen-month prime rate
   certificate                                       61                   7,455                    7,513                       0
                                 -----------------------   ----------------------------------------------------------------------
     Total                                      $81,401                 $74,687                  $52,461                 $53,467
                                 -----------------------   ----------------------------------------------------------------------
</TABLE>


         The  following  table  sets forth the  changes in the dollar  amount of
savings  deposits in the various types of deposit  programs  offered by the Bank
for the periods indicated.

<TABLE>
<CAPTION>

                                       Six months
                                     Ended Dec. 31,                                Years ended June 30,
                                 -----------------------   ----------------------------------------------------------------------
(Dollars in thousands)                             1996                    1996                     1995                    1994
                                                   ----                    ----                     ----                    ----
<S>                                              <C>                    <C>                      <C>                      <C>   
Statement savings accounts                          $84                    ($34)                 ($2,922)                 $1,549
Now accounts                                        489                     622                     (187)                    281
Money market accounts                               197                    (918)                  (1,261)                 (2,014)
30- to 180-day certificates                          23                     (97)                    (204)                   (291)
One- to five-year
   fixed-rate certificates                       13,315                  22,711                   (3,945)                  3,921
Eighteen-month prime rate
   certificate                                   (7,394)                    (58)                   7,513                       0
                                 -----------------------   ----------------------------------------------------------------------
     Total                                       $6,714                 $22,226                  ($1,006)                 $3,446
                                 -----------------------   ----------------------------------------------------------------------
</TABLE>


         The  following  table  contains  information  pertaining to the average
amount of and the average rate paid on each of the following deposit  categories
for the periods indicated.


                                      -38-
<PAGE>

<TABLE>
<CAPTION>

                         Six months ended
                              December 31,                                          Years ended June 30,
                                                    --------------------------------------------------------------------------
                                     1996              1996                     1995                    1994
                        ------------------------    --------------------------------------------------------------------------
                                      Average                     Average                  Average                 Average
                          Average      Rate           Average      Rate       Average       Rate       Average       Rate
                          Balance      Paid           Balance      Paid       Balance       Paid       Balance       Paid
                        ------------------------    --------------------------------------------------------------------------

<S>                      <C>               <C>      <C>               <C>     <C>             <C>     <C>             <C>  
Noninterest bearing
demand deposits          $     1,324       0.00%    $      621        0.00%   $   744         0.00%   $    554        0.00%
Interest bearing
demand deposits                 8,765      2.76%         8,975        2.73%     9,924         2.77%     11,709        2.81%
Savings deposits                4,870      3.41%         4,677        3.25%     6,155         3.39%      6,836        3.05%
Time deposits                 63,346       5.54%        49,102        5.57%    36,142         5.71%     32,646        4.54%
                        ------------------------    --------------------------------------------------------------------------
Total deposits            $  78,305        5.00%    $   63,375        4.94%   $52,965         4.81%   $ 51,745        3.90%
                        ========================    ==========================================================================
</TABLE>


         The variety of deposit  accounts  offered by the Bank has allowed it to
be competitive in obtaining funds and has allowed it to respond with flexibility
(by  paying  rates  of  interest  more  closely  approximating  market  rates of
interest) to, although not eliminate the threat of,  disintermediation (the flow
of funds away from  depository  institutions  such as thrift  institutions  into
direct  investment  vehicles such as government  and corporate  securities).  In
addition,  the Bank has become much more subject to short-term  fluctuations  in
deposit  flows,  as customers  have become more  interest  rate  conscious.  The
ability of the Bank to attract and maintain deposits, and its cost of funds, has
been,  and  will  continue  to  be,  significantly   affected  by  money  market
conditions.

         The following table sets forth the deposit flows of the Bank during the
periods indicated.

<TABLE>
<CAPTION>

                                               Six months
                                              Ended Dec 31,             Years ended June 30,
(Dollars in thousands)                            1996           1996           1995           1994
                                              -------------  -------------------------------------------
<S>                                                <C>            <C>            <C>            <C>    
Opening balance                                    $74,687        $52,461        $53,467        $50,021
Net deposits (withdrawals)                           4,754         19,093         (3,446)         1,507
Interest credited                                    1,960          3,133          2,440          1,939
                                              ==========================================================
Ending balance                                      81,401         74,687         52,461         53,467
                                              ==========================================================

Net increase (decrease)                             $6,714        $22,226        ($1,006)        $3,446
Percent increase (decrease)                          8.99%         42.37%          -1.88%         6.89%
</TABLE>


         In 1995,  Guaranty has had a savings  deposit  outflow before  interest
credited due to a pricing  policy  attributable  to  management's  decision that
additional  savings deposits were not needed during those periods and borrowings
were  available at a lower overall cost to the Guaranty.  To the extent that the
Guaranty may rely on sources of funds other than deposits,  the Bank's  earnings
may be adversely affected.  The Bank may use borrowings as an alternative source
of funds. See "Borrowings".


         The following table shows rate information for Guaranty's  certificates
of deposits as indicated.

                                      -39-
<PAGE>

<TABLE>
<CAPTION>

                                0.00-       4.01-      5.01-      6.01-      7.01-      8.01-
(Dollars in thousands)          4.00%      5.00%      6.00%       7.00%      8.00%      10.00%     Total
                              ------------------------------------------------------------------------------
<S>                                  <C>       <C>     <C>          <C>            <C>        <C>   <C>    
December 31, 1996                    $84       $446    $61,045      $4,749         $0         $0    $66,324
June 30, 1996                        136        193     55,491       4,560          0          0     60,380
June 30, 1995                         53      7,076     18,868      11,827          0          0     37,824
June 30, 1994                      8,565     16,738      7,580       1,577          0          0     34,460
</TABLE>


         The  following  table  shows  rate  and  maturity  information  for the
Guaranty's certificates of deposits as of December 31, 1996.

<TABLE>
<CAPTION>

                                          0.00-        4.00-        6.00-       8.00-                   Percent
(Dollars in thousands)                    3.99%       5.99%        7.99%        9.99%       Total       of Total
------------------------------------------------------------------------------------------------------------------
       Certificate Accounts
            Maturing in
          Quarter Ending
------------------------------------
<S>                                         <C>      <C>             <C>           <C>     <C>               <C>   
March 31, 1997                              $23      $12,128         $994          $0      $13,145           19.82%
June 30, 1997                                 0       10,692          716           0       11,408           17.20%
September 30, 1997                            0       13,274        1,304           0       14,578           21.98%
December 31, 1997                             0       17,530          645           0       18,175           27.40%
March 31, 1998                                0        1,110        1,320           0        2,430            3.66%
June 30, 1998                                61          624          597           0        1,282            1.93%
September 30, 1998                            0          465          138           0          603            0.91%
December 31, 1998                             0          780            0           0          780            1.18%
March 31, 1999                                0          525           21           0          546            0.82%
June 30, 1999                                 0          168            8           0          176            0.27%
September 30, 1999                            0           65          234           0          299            0.45%
December 31, 1999                             0           51          309           0          360            0.54%
Thereafter                                    0          461        2,081           0        2,542            3.83%
----------------------------------------------------------------------------------------------------------------
                                            $84      $57,873       $8,367          $0      $66,324          100.00%
----------------------------------------------------------------------------------------------------------------
</TABLE>



         The following table indicates the amount of the Bank's  certificates of
deposits by time remaining until maturity as of December 31, 1996.

<TABLE>
<CAPTION>

                                                                            Maturity
                                                 ----------------------------------------------------------------
                                                  3 Months    Over 3 to    Over 6 to    Over 12
(Dollars in thousands)                            or less      6 months    12 months     months        Total
                                                  -------      --------    ---------     ------        -----

<S>                                                  <C>          <C>         <C>           <C>          <C>    
Certificates of deposit less than $100,000           $12,051      $11,203     $22,967       $8,536       $54,757

Certificates of deposit of $100,000 or more            1,094          205       9,786          482        11,567
                                                -----------------------------------------------------------------

     Total of certificates of deposits               $13,145      $11,408     $32,753       $9,018       $66,324
                                                -----------------------------------------------------------------
</TABLE>

         The  Corporation's  principal use of its deposits is to originate loans
and to fund investment securities.  Guaranty experienced moderate deposit growth
during the six months ended  December 31, 1996.  Net deposits  increased 9.0% to
$81.4  million  from $74.7  million at June 30, 



                                      -40-
<PAGE>

1996. The deposit growth is a reflection of continued  marketing and the opening
of a new branch.

Borrowings

         Guaranty  also  uses  non-deposit  borrowings  to fund its  residential
lending primarily through its membership in the Federal Home Loan Bank ("FHLB").
The FHLB was established to provide funds to savings institutions that originate
residential loans.

         As a member of the FHLB of Atlanta, Guaranty is required to own capital
stock in the FHLB of Atlanta and is  authorized  to apply for advances  from the
FHLB of Atlanta.  Each FHLB credit program has its own interest rate,  which may
be fixed or variable, and range of maturities. The FHLB of Atlanta may prescribe
the  acceptable  uses to which these advances may be put, as well as limitations
on the  size  of  the  advances  and  repayment  provisions.  The  advances  are
collateralized  by the  investment  in Federal  Home Loan Bank stock and certain
mortgage loans.  At December 31, 1996,  Guaranty owed $17.5 million to the FHLB,
unchanged from June 30, 1996. The $17.5 million outstanding at December 31, 1996
were at fixed rates ranging from 5.59% to 7.10%, with maturities through 1999.

         Guaranty's borrowings,  from time to time, also include securities sold
under  agreements to  repurchase,  with  mortgage-backed  securities or Treasury
securities  pledged as  collateral.  The  proceeds  are utilized by the Bank for
general  corporate  purposes.  At December 31,  1996,  Guaranty had $6.7 million
outstanding in securities sold under agreement to repurchase.

         Guaranty  utilizes  borrowings  to  supplement  deposits  when they are
available  at a lower  overall  cost to  Guaranty  or they can be  invested at a
positive rate of return.

         The following table sets forth the maximum month-end  balance,  average
balance and weighted  average rate, of FHLB advances and  securities  sold under
agreements to repurchase for the periods indicated.

<TABLE>
<CAPTION>

                                    Six months ended
                                   December 31, 1996                                   Year ended June 30,
                                 -----------------------   ------------------------------------------------------------------------
                                          1996                      1996                     1995                      1994
                                          ----                      ----                     ----                      ----

Maximum Balance:
<S>                                             <C>                        <C>                       <C>                   <C>    
     FHLB Advances                              $22,500                    $28,050                   $28,250               $28,750
     Securities sold under
        agreements to repurchase                  9,957                      9,930                     4,230                11,630
</TABLE>
<TABLE>
<CAPTION>

                                              Weighted                  Weighted                  Weighted                 Weighted
                                   Average    Average        Average     Average       Average     Average       Average    Average
                                   Balance      Rate         Balance      Rate         Balance      Rate         Balance     Rate
                                   -------      ----         -------      ----         -------      ----         -------     ----

<S>                                <C>             <C>       <C>              <C>     <C>               <C>      <C>           <C>  
FHLB Advances                      $19,550         5.79%     $22,829          6.21%   $26,208           6.67%    $26,017      6.63%
Securities sold under
     agreements to repurchase        6,321         5.66%       3,112          5.65%       783           7.98%      7,201      3.85%

</TABLE>


         The following  table sets forth  information  as the Bank's  short-term
borrowings at the dates indicated.


                                      -41-
<PAGE>

<TABLE>
<CAPTION>

                                                        Six Months
                                                      Ended Dec. 31,               Years Ended June 30,
                                                     -----------------  -------------------------------------------
                                                                 1996            1996           1995          1994
                                                                 ----            ----           ----          ----
                                                                               (Dollars in thousands)
<S>                                                            <C>            <C>            <C>           <C>    
FHLB advances                                                  $7,500         $12,500        $19,550       $13,950
Securities sold under agreements
  to repurchase                                                 6,681           6,104              0             0
                                                     -----------------  -------------------------------------------
     Total short-term borrowings                              $14,181         $18,604        $19,550       $13,950
                                                     -----------------  -------------------------------------------
Weighted average interest rate of
  short-term FHLB advances                                      6.35%           6.02%          4.52%         3.24%

Weighted average interest rate of
  securities sold under agreements to
  repurchase                                                    5.66%           5.65%          0.00%         0.00%
</TABLE>

         Included in borrowings  are the REMIC bonds.  In 1987, the Bank entered
into a financing transaction known as a REMIC for liquidity purposes. In lieu of
selling  mortgages for cash,  $19.9 million in fixed rate below market mortgages
were put into mortgage backed securities, which were then used as collateral for
mortgage  backed bonds to private  investors.  The bonds bore a coupon of 8% and
were sold at a substantial  discount of approximately $3 million. In addition to
the  discount,  approximately  $300,000 of expenses  were incurred in connection
with the  transaction.  Both  the  discount  and the  associated  expenses  were
deferred  by the Bank in 1987 and are  being  amortized  against  income  as the
underlying  mortgages in the mortgage  backed bonds repay.  The mortgages had an
average interest rate of 8.875%. At the time the transaction was entered into it
was assumed that the  mortgages  would repay over a normal  repayment  period of
approximately  12 - 15  years.  The  total  costs  charged  against  net  income
associated  with the  REMIC  for the six  months  ended  December  31,  1996 was
$97,000.  At December 31, 1996, $3.1 million of bonds remain  outstanding versus
$3.7 at June 30, 1996.


                        LIQUIDITY AND CAPITAL RESOURCES

         Liquidity  is  the  ability  to  meet  present  and  future   financial
obligations   either  through  the  sale  of  existing  assets  or  through  the
acquisition  of additional  funds through  asset and  liability  management.  By
regulatory  definition,  liquid assets include cash,  interest  bearing deposits
with banks,  federal funds sold, and government  agency and high rated corporate
securities  with  maturities  of five years or less.  Guaranty  is  required  to
maintain  liquid assets on an average  monthly basis equal to at least 5% of its
liquidity  base.  Liquidity  base is further  defined as total deposits plus all
short term  borrowings.  At December 31, 1996,  Guaranty's  liquidity  ratio was
6.3%.

         Guaranty's  primary  sources  of funds  are  deposits,  borrowings  and
amortization,    prepayments   and   maturities   of   outstanding   loans   and
mortgage-backed  securities.  While scheduled  payments from the amortization of
loans and  mortgage-backed  securities  are  relatively  predictable  sources of
funds,  deposit  flows and loan  prepayments  are greatly  influenced by general

                                      -42-
<PAGE>

interest rates,  economic conditions and competition.  Excess funds are invested
in overnight deposits to fund cash requirements experienced in the normal course
of  business.  Guaranty  has been able to generate  sufficient  cash through its
deposits as well as through its borrowings.

         Guaranty  uses its  sources  of funds  primarily  to meet its  on-going
operating expenses, to pay deposit withdrawals and to fund loan commitments.  At
December 31, 1996, the total approved loan commitments  outstanding  amounted to
$3.0  million.  At the same  date,  commitments  under  unused  lines of  credit
amounted to $6.4  million.  Certificates  of deposit  scheduled to mature in one
year or less at December 31, 1996 totaled  $57.3  million.  Management  believes
that a significant portion of maturing deposits will remain with Guaranty.

         In January 1997,  Guaranty completed a secondary offering of its common
stock  at a price of $8.50  per  share.  Proceeds  to the  corporation  from the
offering (net of offering expenses of approximately $280,000) were approximately
$3,970,000.

         Guaranty is subject to OTS regulations  requiring savings  institutions
to meet the following minimum levels of regulatory  capital (1) tangible capital
of at least  1.5% of total  adjusted  assets,  (2) core  capital  of 3% of total
adjusted assets and (3) risk-based capital of 8% of total risk-weighted  assets.
At December 31, 1996, Guaranty exceeded all such regulatory capital requirements
as shown in the following table.

<TABLE>
<CAPTION>

                                                            Percent of
(Dollars in thousands)                    Amount         Adjusted Assets
                                     ---------------------------------------
<S>                                   <C>                            <C>  
Tangible Capital:
Reulatory capital                     $          6,639               5.72%
Minimum capital requirement                      1,743               1.50%
Excess regulatory capital             $          4,896               4.22%

Core Capital:
Reulatory capital
Minimum capital requirement           $          6,639               5.72%
Excess regulatory capital                        3,490               3.00%
                                      $          3,149               2.72%
Risk-based Capital:
Reulatory capital                     $          7,345              13.00%
Minimum capital requirement                      4,519               8.00%
Excess regulatory capital             $          2,826               5.00%
</TABLE>


            IMPACT OF INFLATION AND CHANGING PRICES AND SEASONALITY

         The  financial  statements  in this  document  have  been  prepared  in
accordance  with  generally  accepted  accounting  principles  which require the
measurement of financial  position and operating  results in terms of historical
dollars,  without  considering changes in the relative purchasing power of money
over time due to inflation.

                                      -43-
<PAGE>

         Unlike   industrial   companies,   virtually  all  of  the  assets  and
liabilities  of a financial  institution  are  monetary in nature.  As a result,
interest  rates  have a more  significant  impact on a  financial  institution's
performance  than the effects of general levels of inflation.  Interest rates do
not necessarily move in the same direction or in the same magnitude as the price
of goods and services, since such prices are affected by inflation.

                         NEW ACCOUNTING PRONOUNCEMENTS

         In June 1996,  the FASB issued its  Statement of  Financial  Accounting
Standards No. 125,  "Accounting for Transfers and Servicing of Financial  Assets
and  Extinguishments  of  Liabilities"  ("SFAS 125").  This  statement  provides
accounting  and  reporting  standards  for  transfers and servicing of financial
assets and extinguishments of liabilities. After a transfer of financial assets,
an entity recognizes the financial and servicing assets that it controls and the
liabilities that it has incurred, derecognizes financial assets when control has
been surrendered, and derecognizes liabilities when extinguished. In addition, a
transfer of financial  assets in which the  transferor  surrenders  control over
those assets is accounted for as a sale to the extent that  consideration  other
than  beneficial  interests in the  transferred  assets is received in exchange.
SFAS 125 is effective  for  transfers  and  servicing  of  financial  assets and
extinguishments  of  liabilities  after  December 31, 1996, and is to be applied
prospectively.  Management does not expect the application of this pronouncement
to have a material effect on the financial statements of Corporation.

         In February  1997,  the  Financial  Accounting  Standards  Board issued
Statement on Financial Accounting Standards No. 128, "Earnings per Share" ("SFAS
128").  SFAS 128 provides a different method for calculating  earnings per share
than is currently used in accordance with APB 15, "Earnings per Share." SFAS 128
provides for the  calculation  of basic and diluted  earnings  per share.  Basic
earnings  per share  includes  no dilution  and is  computed by dividing  income
available to common shareholders by the weighted average number of common shares
outstanding  for the period.  Diluted  earnings per share reflects the potential
dilution of  securities  that could  share in earnings of an entity,  similar to
fully diluted earnings per share.  Management does not expect the application of
this pronouncement to have a material effect of the financial  statements of the
Corporation.


                                      -44-
<PAGE>

Item 7. Financial Statements

         The following  financial  statements are filed as a part of this report
following Item 13 below:

         Independent Auditors' Report
         Consolidated  Balance  Sheets as of December 31, 1996 and June 30, 1996
and 1995
         Consolidated  Statements of Income for the  Six-month  period ending 
December 31, 1996 and the Years Ended June 30, 1996 , 1995 and 1994
         Consolidated  Statements  of  Stockholders'  Equity  for the  Six-month
period ending December 31, 1996 and the Years Ended June 30, 1996, 1995 and 1994
         Consolidated  Statements of Cash Flows for the Six-month  period ending
December 31, 1996 and the Years Ended June 30, 1996, 1995 and 1994
         Notes to Consolidated Financial Statements

Item 8. Changes in and Disagreements with Accountants on Accounting and 
Financial Disclosure

         There  were  no  changes  in  or  disagreements   with  accountants  on
accounting and financial disclosure during the last two fiscal years.

                                      -45-
<PAGE>

                                    PART III

Item 9. Directors, Executive Officers, Promoters and Control Person: Compliance
with Section 16(a) of the Exchange Act

         Information set forth under the captions  "Election of Directors" and
"Section 16(a) Beneficial Ownership Reporting Compliance" in the definitive 1996
Proxy  Statement  of the  Corporation  filed  with  the  SEC  and  furnished  to
shareholders in connection  with the Annual Meeting of  Shareholders  (the "1996
Proxy Statement") is hereby incorporated by reference.

Executive Officers

         The following information as to the business experience during the past
five years is supplied with respect to executive officers of Guaranty. Except as
otherwise indicated, the persons named have served as officers of Guaranty since
it became  the  holding  company  of the Bank,  and all  offices  and  positions
described  below  are  also  with  the  Bank.   There  are  no  arrangements  or
understandings  between the persons named and any other person pursuant to which
such officers were selected.

         Thomas P. Baker.  Mr. Baker, age 52, is Guaranty's President and Chief
Executive  Officer and  Director,  a position  he has held since 1990.  Prior to
joining Guaranty, Mr. Baker served as the President of Investors Savings Bank.

         Kathleen M. Focht.  Ms. Focht, age 36, is Guaranty's Chief Financial
Officer.  She was  elected  in April  1995.  Ms.  Focht has been  Secretary  and
Treasurer of Guaranty  since 1990.  Ms. Focht served as Assistant Vice President
and  Controller of Guaranty from 1988 until 1991,  when she was promoted to Vice
President and retained her position as Controller.

         Rita J. Lynch.  Ms. Lynch, age 42, is Guaranty's Vice President of 
Retail  Operations.  She was elected in May 1995. Ms. Lynch has been employed by
Guaranty  since October 1989 and prior to her promotion to Vice  President,  was
the  Manager  of Retail  Services.  Prior to  joining  Guaranty,  Ms.  Lynch was
employed by First Union National Bank of N.C.

         Donna W. Richards.  Ms. Richards, age 33, is Guaranty's Vice President
of Mortgage Lending. She was elected in May 1995. Ms. Richards has been employed
by Guaranty since April 1993 and prior to her promotion to Vice  President,  was
the Manager of Loan  Originations and Loan Officer.  Prior to joining  Guaranty,
Ms. Richards was employed by Virginia Federal.

Item 10. Executive Compensation

         Information  set  forth  under  the  headings  "Directors'  Fees,"  and
"Employment  Agreements" in the 1996 Proxy  Statement is hereby  incorporated by
reference.

                                      -46-
<PAGE>

Summary of Cash and Certain Other Compensation

         The  following  table  shows,  for  the  periods  indicated,  the  cash
compensation  paid by Guaranty,  as well as certain other  compensation  paid or
accrued in those periods,  to the named executive  officer inn all capacities in
which he served.

<TABLE>
<CAPTION>
                                                       Annual Compensation (1)
                                                   --------------------------------
      Name and               Year or Period                                                   Other
 Principal Position              Ended                Salary             Bonus           Compensation (2)
----------------------    ---------------------    --------------    --------------    ---------------------

<S>                       <C>                        <C>              <C>               <C>              
Thomas P. Baker           December 31, 1996          $    56,850      $          -      $             568
  President and           June 30, 1996                  113,700                 -                  1,137
  Chief Executive         June 30, 1995                  113,700                 -                  1,137
  Officer                 June 30, 1994                  113,700                 -                  1,421
</TABLE>


(1)  All benefits that might be  considered of a personal  nature did not exceed
     the lesser of $50,000 or 10% of the total  annual  salary and bonus for the
     officer named in the table.

(2)  Amounts reflect Guaranty's matching contribution under it Section 401 (k)
     retirement plan.


Stock Option Grants

         Guaranty's  named  Executive  Officer was not granted  stock options or
stock appreciation rights during the six-month period ended December 31, 1996.

Option Exercises and Holdings

         Set forth  in the table below is information  concerning  each exercise
of stock options during the six-month period ended December 31, 1996.

<TABLE>
<CAPTION>

                                                         Number of Securities Underlying        Value of Unexercised In-The-Money
                                                      Unexercised Options at year end (1)         Options at Year End ($) (2)
                      Shares                          -----------------------------------    -------------------------------------
                      Acquired On     Value
Name                  Exercise (#)    Realized ($)    Exercisable           Unexercisable       Exercisable          Unexercisable
------------------    --------------- --------------  -----------           -------------       -----------          -------------
                                                                                                                  
<S>                        <C>             <C>              <C>                       <C>           <C>                       <C>
Thomas P. Baker            10,000          43,000           4,000                     -             35,000                     -

</TABLE>


(1) Each of these options relates to Common Stock
(2) These values are based are based on $8.75, the closing price of Common Stock
    on December 31, 1996.


Item 11. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Management

         The  following  table sets forth  information  as of December  31, 1996
regarding  the  number  of  shares of  Common  Stock  beneficially  owned by all
directors and by all directors  and  executive 

                                      -47-
<PAGE>

officers as a group.  Beneficial  ownership includes shares, if any, held in the
name of the spouse,  minor children or other  relatives of the nominee living in
such  person's  home,  as well as  shares,  if any,  held in the name of another
person under an arrangement  whereby the director or executive  officer can vest
title in himself at once or at some future time.


<TABLE>
<CAPTION>

                                  Common Stock                Percentage Of
        Name                   Beneficially Owned                Class
----------------------        ----------------------      ------------------
<S>                                   <C>                       <C>  
Directors
  Thomas P. Baker (1)                   15,640                    1.69%
  Charles R. Borchardt                  23,564                    2.56%
  Henry J. Browne                       31,662                    3.44%
  Douglas E. Caton                     252,840                   27.51%
  Robert P. Englander                    9,760                    1.06%
  Harry N. Lewis                         4,888                    0.53%
  John R. Metz                          13,192                    1.44%
  James R. Sipe, Jr.                       100                    0.01%
  Oscar W. Smith, Jr.                   19,234                    2.09%

All present executive
  officers and directors
  as a group (12 persons)              371,860                   40.07%
</TABLE>


(1)  Includes  beneficial  ownership of 4,000 shares issuable upon the excercise
     of stock options excercisable within 60 days of December 31, 1996.


Security Ownership of Certain Beneficial Owners

         Douglas E.  Caton,  4 Deer Park,  Earlysville,  Virginia  owns  252,840
shares or 27.51% of the Common Stock of Guaranty as of December 31, 1996. To the
knowledge  of  Guaranty,  no other person owns 5% or more of the Common Stock of
Guaranty.


Item 12. Certain Relationships and Related Transactions

         Information set forth under the heading  "Transactions with Management"
in the 1996 Proxy Statement is hereby incorporated by reference.

         At  December  31,  1996,  loans  outstanding  to  directors,  executive
officers  and  their  associates  was  approximately   $163,000,   or  4.1%  of
stockholder's equity at that date.

Item 13. Exhibits and Reports on Form 8-K

         The following  documents are attached hereto or incorporated  herein by
reference as Exhibits:

                                      -48-
<PAGE>

         (a) Exhibits
             3.1      Amended and Restated Articles of Incorporation of Guaranty
                      Financial  Corporation,  attached  as  Exhibit  3.1 to the
                      Registrant's   Registration  Statement  on  Form  S-4,  as
                      amended, Registration No. 33-76064, incorporated herein by
                      reference.

             3.2      Bylaws of Guaranty Financial Corporation, attached  as 
                      Exhibit 3.2 to the Registrant's Registration  Statement on
                      Form S-4, as amended,  Registration No. 33-76064, 
                      incorporated herein by reference.

             10.1     Guaranty Savings and Loan, F.A. 1991 Incentive Plan, 
                      attached as Exhibit 10.1 to the Registrant's Registration
                      Statement on Form S-4, as amended, Registration No. 
                      33-76064, incorporated herein by reference.

         (b) Reports on Form 8-K

         No reports on Form 8-K were filed during the quarter ended December 31,
1996.

                                      -49-
<PAGE>


Guaranty Financial Corporation




Financial Statements
For the Six Months Ended December 31, 1996 and
for the Years Ended June 30, 1996, 1995, and 1994










                                                  BDO Seidman, LLP
                                                  Accountants and Consultants
<PAGE>

                         GUARANTY FINANCIAL CORPORATION

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS







Report of Independent Certified Public Accountants                           3

Consolidated Financial Statements

  Balance Sheets as of December 31, 1996 and June 30,
    1996 and 1995                                                            4

  Statements of  Operations  for the Six Months Ended  
    December 31, 1996 and for the Years Ended June 30,
    1996, 1995 and 1994                                                    5-6

  Statements of Stockholders' Equity for the Six Months
    Ended December 31, 1996 and for the Years Ended
    June 30, 1996, 1995 and 1994                                             7

  Statements of Cash Flows for the Six Months Ended
    December 31, 1996 and for the Years Ended June 30,
    1996, 1995 and 1994                                                   8-10

Summary of Accounting Policies                                           11-19

Notes to Consolidated Financial Statements
                                                                         20-42


                                        2

<PAGE>


Report of Independent Certified Public Accountants


To the Board of Directors and Stockholders
Guaranty Financial Corporation
Charlottesville, Virginia

We  have  audited  the  consolidated   balance  sheets  of  Guaranty   Financial
Corporation  and subsidiary as of December 31, 1996, and June 30, 1996 and 1995,
and the related consolidated statements of operations, stockholders' equity, and
cash flows for six months ended  December  31,  1996,  and for each of the three
years in the period  ended June 30, 1996.  These  financial  statements  are the
responsibility of the Corporation's management. Our responsibility is to express
an opinion on these consolidated financial statements based on our audits.

We  conducted  our  audits  in  accordance  with  generally   accepted  auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Guaranty Financial  Corporation and subsidiary as of December 31, 1996, and June
30, 1996 and 1995, and the results of their  operations and their cash flows for
the six months  ended  December  31, 1996 and for each of the three years in the
period ended June 30, 1996 in  conformity  with  generally  accepted  accounting
principles.

As  explained  in  the  Summary  of  Accounting  Policies,   Guaranty  Financial
Corporation  adopted  Statement of Financial  Accounting  Standards  No. 122 and
Statement of Financial  Accounting Standards No. 109 in the years ended June 30,
1996 and 1994, respectively.


                                                    /s/ BDO Seidman, LLP

                                                    BDO Seidman, LLP
Richmond, Virginia
May 22, 1997







                                        3

<PAGE>

<TABLE>
<CAPTION>


                                                                    December 31,                      June 30,
                                                                        1996                  1996                 1995
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                                 <C>                   <C>                  <C>        
   Assets

Cash and cash equivalents                                           $  6,076,315          $  5,431,483         $ 5,752,735
Investment securities (Notes 1 and 7)
  Held-to-maturity                                                     3,156,857             3,730,589           4,732,638
  Available for sale                                                          -              9,563,605                  -
  Trading                                                             16,736,295                    -                   -
Investment in Federal Home Loan Bank stock, at
  cost (Note 9)                                                        1,360,200             1,360,200           1,360,200
Loans receivable, net (Notes 2, 9 and 11)                             81,270,173            84,081,110          75,220,673
Accrued interest receivable                                              671,211               711,842             584,242
Real estate owned                                                         50,964                32,898             122,043
Deferred income taxes (Note 10)                                           33,000                30,000                 -
Office properties and equipment, net (Note 3)                          4,946,153             3,525,199             436,909
Other assets (Note 2)                                                  1,718,757             1,693,840           1,251,543
-----------------------------------------------------------------------------------------------------------------------------







                                                                    $116,019,925          $110,160,766         $89,460,983
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


<PAGE>




                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                                   Consolidated Balance Sheets

<TABLE>
<CAPTION>

                                                                    December 31,                       June 30,
                                                                        1996                  1996                 1995
-----------------------------------------------------------------------------------------------------------------------------

<S>              <C>                                                <C>                   <C>                  <C>        
   Liabilities and Stockholders' Equity

Liabilities
  Deposits (Note 4)                                                 $ 81,401,071          $ 74,687,446         $52,460,639
  Bonds payable (Notes 1 and 7)                                        2,705,813             3,143,844           3,980,562
  Advances from Federal Home Loan Bank
    (Note 9)                                                          17,500,000            17,500,000          25,050,000
  Securities sold under agreement to
    repurchase (Notes 1 and 8)                                         6,681,000             6,104,000                 -
  Accrued interest payable                                                60,989                99,297              86,279
  Deferred income taxes (Note 10)                                             -                    -               120,000
  Prepayments by borrowers for taxes and insurance                       105,901               145,730             306,346
  Other liabilities                                                      989,402             2,131,300           1,441,418
-----------------------------------------------------------------------------------------------------------------------------


Total liabilities                                                    109,444,176           103,811,617          83,445,244
-----------------------------------------------------------------------------------------------------------------------------


Commitments and Contingencies (Notes 11, 12, 14 and 15)
-----------------------------------------------------------------------------------------------------------------------------


Stockholders' Equity (Notes 13 and 14)
  Preferred stock, par value $1 per share,
    500,000 shares authorized, none issued                                    -                    -                   -
  Common stock, par value $1.25 per share,
    4,000,000 shares authorized, 924,008,
    919,168 and 915,568 shares issued and
    outstanding                                                        1,155,010             1,148,960           1,144,460
  Additional paid-in capital                                           1,975,695             1,981,745           1,970,945
  Unrealized loss on available for sale
    securities (Note 1)                                                       -               (279,182)                -
  Retained earnings - substantially restricted                         3,445,044             3,497,626           2,900,334
-----------------------------------------------------------------------------------------------------------------------------


Total stockholders' equity                                             6,575,749             6,349,149           6,015,739
-----------------------------------------------------------------------------------------------------------------------------


                                                                    $116,019,925          $110,160,766         $89,460,983
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>



See  accompanying  summary of accounting  policies and notes to consolidated 
financial statements.


                                       4
<PAGE>





                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                        Consolidated Statements of Operations

<TABLE>
<CAPTION>


                                                    Six Months Ended
                                                       December 31,                          Year Ended June 30,
                                                          1996                       1996           1995           1994
-----------------------------------------------------------------------------------------------------------------------------


<S>                                                      <C>                       <C>            <C>           <C>       

Interest income
  Loans                                                  $3,454,559                $6,441,903     $5,897,002    $5,254,214
  Mortgage-backed securities                                564,079                   652,639        495,620       824,082
  Investment securities                                     254,833                   498,686        383,555       554,881
  Trading account assets                                      2,911                    23,390         12,176        50,695
-----------------------------------------------------------------------------------------------------------------------------


Total interest income                                     4,276,382                 7,616,618      6,788,353     6,683,872
-----------------------------------------------------------------------------------------------------------------------------


Interest expense
  Deposits                                                1,960,029                 3,132,660      2,439,585     1,939,300
  Borrowings (Notes 7, 8 and 9)                             979,936                 2,059,402      2,223,267     3,133,871
-----------------------------------------------------------------------------------------------------------------------------


Total interest expense                                    2,939,965                 5,192,062      4,662,852     5,073,171
-----------------------------------------------------------------------------------------------------------------------------


Net interest income                                       1,336,417                 2,424,556      2,125,501     1,610,701

Provision (credit) for loan losses
  (Note 2)                                                   91,850                    56,665         (9,443)       74,047
-----------------------------------------------------------------------------------------------------------------------------


Net interest income after
  provision for loan losses                               1,244,567                 2,367,891      2,134,944     1,536,654
-----------------------------------------------------------------------------------------------------------------------------


Other income
  Loan fees and servicing income                            266,505                   610,020        651,852       400,133
  Net gain (loss) on sale of loans
    and securities                                           72,547                   242,866            206      (490,706)
  Service charges on checking                                52,058                    90,156         77,542        78,429
  Other                                                      70,977                   164,090        142,034       138,244
-----------------------------------------------------------------------------------------------------------------------------


Total other income                                          462,087                 1,107,132        871,634       126,100
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                    continued...

                                        5

<PAGE>





                                             Guaranty Financial Corporation
                                                             and Subsidiary

                                      Consolidated Statements of Operations
                                                                (continued)

<TABLE>
<CAPTION>

                                                   Six Months Ended
                                                       December 31,                            Year Ended June 30,
                                                          1996                       1996           1995           1994
-----------------------------------------------------------------------------------------------------------------------------


<S>                                                    <C>                         <C>            <C>           <C>       
Other expenses
  Personnel (Notes 14 and 15)                          $  748,083                  $1,013,674     $1,194,410    $  941,866
  Occupancy (Note 12)                                     131,593                     302,139        310,114       321,456
  Data processing (Note 12)                               165,548                     257,038        210,110       199,922
  BIF/SAIF premium disparity
    assessments (Note 12)                                 346,851                         -              -             -
  Deposit insurance premiums                              100,908                     190,263        195,818       172,894
  Other                                                   223,553                     724,321        619,373       545,515
-----------------------------------------------------------------------------------------------------------------------------


Total other expenses                                    1,716,536                   2,487,435      2,529,825     2,181,653
-----------------------------------------------------------------------------------------------------------------------------


Income (loss) before income
  taxes and cumulative effect of
  change in accounting principle                           (9,882)                    987,588        476,753      (518,899)

Provision for income taxes (Note 10)                       (3,500)                    344,338        100,508      (234,986)
-----------------------------------------------------------------------------------------------------------------------------


Income (loss) before cumulative
  effect of change in accounting
  principle                                                (6,382)                    643,250        376,245      (283,913)

Cumulative effect of change in
  accounting for income taxes                                  -                          -               -       (196,000)
-----------------------------------------------------------------------------------------------------------------------------


Net income (loss)                                        $ (6,382)                 $  643,250     $  376,245    $ (479,913)
-----------------------------------------------------------------------------------------------------------------------------



Earnings per common share
  Income (loss) before cumulative
    effect of change in accounting
    principle                                            $      (.01)            $        .70   $        .70  $       (.53)
  Cumulative effect of change in
    accounting for income taxes                                -                          -              -            (.37)
-----------------------------------------------------------------------------------------------------------------------------


                                                         $      (.01)            $        .70   $        .70  $       (.90)
-----------------------------------------------------------------------------------------------------------------------------

</TABLE>


See  accompanying  summary of accounting  policies and notes to consolidated 
financial statements.



                                       6
<PAGE>





                                             Guaranty Financial Corporation
                                                             and Subsidiary

                            Consolidated Statements of Stockholders' Equity


<TABLE>
<CAPTION>

                                                                              Unrealized
                                                             Additional         Loss on                            Total
                                                Common         Paid-in       Available for       Retained      Stockholders'
                                                 Stock         Capital      Sale Securities      Earnings         Equity
-----------------------------------------------------------------------------------------------------------------------------

<S>                                           <C>            <C>              <C>               <C>              <C>       
Balance, June 30, 1993                        $  671,460     $  335,730       $        -        $3,004,002       $4,011,192

Net loss                                             -              -                  -          (479,913)        (479,913)
-----------------------------------------------------------------------------------------------------------------------------


Balance, June 30, 1994                           671,460        335,730                -         2,524,089        3,531,279

Stock options exercised
  (Note 14)                                       23,000         57,200                -               -             80,200
Issuance of common stock
  (Note 13)                                      450,000      1,578,015                -               -          2,028,015
Net income                                           -              -                  -           376,245          376,245
-----------------------------------------------------------------------------------------------------------------------------


Balance, June 30, 1995                         1,144,460      1,970,945                -         2,900,334        6,015,739

Stock options exercised
  (Note 14)                                        4,500         10,800                -               -             15,300
Cash dividend                                        -              -                  -           (45,958)         (45,958)
Unrealized loss on available for
  sale securities (Note 1)                           -              -             (279,182)            -           (279,182)
Net income                                           -              -                  -           643,250          643,250
-----------------------------------------------------------------------------------------------------------------------------


Balance, June 30, 1996                         1,148,960      1,981,745           (279,182)      3,497,626        6,349,149

Cash dividend                                        -              -                  -           (46,200)         (46,200)
Realized loss on available
  for sale securities (Note 1)                       -              -              279,182             -            279,182
Stock options exercised (Note 14)                 12,500         32,000                -               -             44,500
Repurchase of common stock                        (6,450)       (38,050)               -               -            (44,500)
Net loss                                              -              -                 -            (6,382)          (6,382)
-----------------------------------------------------------------------------------------------------------------------------


Balance, December 31, 1996                    $1,155,010     $1,975,695         $      -        $3,445,044       $6,575,749
-----------------------------------------------------------------------------------------------------------------------------

</TABLE>


See  accompanying  summary of accounting  policies and notes to consolidated 
financial statements.


                                        7

<PAGE>





                                             Guaranty Financial Corporation
                                                             and Subsidiary

                                      Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>


                                                     Six Months Ended
                                                       December 31,                          Year Ended June 30,
                                                          1996                       1996           1995           1994
-----------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                   <C>             <C>            <C>        
Operating activities
  Net income (loss)                                      $(6,382)              $    643,250    $   376,245    $ (479,913)
  Adjustments to reconcile net
    income (loss) to net cash
    provided (absorbed) by
    operating activities
      Provision (credit) for loan losses                  91,850                     56,665         (9,443)       74,047
      Depreciation and amortization                       76,160                     95,511         93,775       109,250
      Amortization of deferred loan fees                  63,841                   (136,086)      (123,528)     (148,992)
      Net amortization of premiums
        and accretion of discounts                        84,606                    199,060         54,822       662,379
      Loss (gain) on sale of loans                      (216,537)                  (204,901)        60,367      (152,931)
      Originations of loans held
        for sale                                     (11,773,561)                (7,203,819)   (11,765,459)  (23,211,491)
      Proceeds from sale of loans                     11,822,300                  7,160,241     11,825,826    23,364,422
      Loss (gain) on sale of
        mortgage-backed securities                      (111,039)                       -          (36,418)      214,800
      Originations of loans securitized                      -                          -       (5,596,082)   (4,992,057)
      Purchase of mortgage backed
        securities                                   (23,980,081)                       -              -             -
      Proceeds from sale of
        mortgage-backed securities                    17,844,790                        -        5,415,983     6,574,500
      (Gain) loss on sale of securities
        available for sale                                   -                     (101,685)           -         155,100
      (Gain) loss on disposal of office
        properties and equipment                             -                       (1,341)        (1,806)          -
      Federal Home Loan Bank stock
        dividends                                            -                          -              -         (53,600)
      Loss on sale of held to
        maturity securities                                  -                          -              -         105,300
      (Gain) loss on sale of trading
        account securities                               255,030                     63,720        (24,155)      168,437
      Purchases of trading account
        securities                                   (36,330,973)              (107,346,227)   (43,113,114)  (73,546,348)
      Sales of trading account
        securities                                    35,305,544                107,282,507     43,137,269    73,377,911

</TABLE>

                                                                    continued...

                                       8

<PAGE>

                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                          Consolidated Statements of Cash Flows
                                                                    (continued)

<TABLE>
<CAPTION>

                                                   Six Months Ended
                                                       December 31,                          Year Ended June 30,
                                                          1996                       1996           1995           1994
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>                    <C>            <C>           <C>        

Operating activities (cont'd)
      Changes in
        Accrued interest receivable                      $40,631                $  (127,600)   $   (27,424)  $    44,109
        Other assets                                     (24,917)                  (442,298)      (192,025)     (310,844)
        Accrued interest payable                         (38,308)                    13,018        (21,951)      (82,399)
        Deferred income taxes                             (3,000)                       -          (87,000)     (307,277)
        Prepayments by borrowers
          for taxes and insurance                        (39,829)                  (160,616)       181,671      (156,412)
        Other liabilities                             (1,141,898)                   689,882       (592,864)     (531,024)
-----------------------------------------------------------------------------------------------------------------------------


Net cash provided (absorbed)
  by operating activities                             (8,081,773)                   479,281       (445,311)      876,967
-----------------------------------------------------------------------------------------------------------------------------


Investing activities
  Proceeds from sales of held
    to maturity securities                                   -                          -              -       2,890,700
  Net (increase) decrease in
    loans                                              2,752,812                 (8,486,970)     2,484,824    (7,331,860)
  Principal repayments on held
    to maturity securities                               776,007                    998,457      1,260,076     6,128,157
  Purchase of securities
    available for sale                                       -                  (28,399,062)            -     (7,000,000)
  Proceeds from sales of
    securities available for sale                            -                   18,507,960             -      6,838,750
  Purchases of FHLB stock                                    -                          -               -        (77,300)
  Sale of FHLB stock                                         -                          -           77,300           -
  Proceeds from sale of office
    properties and equipment                                 -                        4,522         15,389           -
  Purchases of office properties
    and equipment                                     (1,515,180)                (3,186,982)      (152,668)     (115,878)
-----------------------------------------------------------------------------------------------------------------------------


Net cash provided (absorbed)
  by investing activities                              2,013,639                (20,562,075)     3,684,921     1,332,569
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                                                    continued...

                                        9

<PAGE>





                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                        Consolidated Statements of Cash Flows
                                                                  (continued)

<TABLE>
<CAPTION>

                                                     Six Months Ended
                                                        December 31,                          Year Ended June 30,
                                                          1996                       1996           1995           1994
-----------------------------------------------------------------------------------------------------------------------------


<S>                                                  <C>                     <C>              <C>            <C>         
Financing activities
  Net increase (decrease)
    in deposits                                       $6,713,625             $22,226,807      $(1,006,244)   $ 3,446,397
  Repayment of Federal Home
    Loan Bank advances                               (10,000,000)            (31,510,000)     (15,200,000)   (15,800,000)
  Proceeds from Federal Home
    Loan Bank advances                                10,000,000              23,960,000       16,300,000     14,000,000
  Principal payments on bonds
    payable, including
    unapplied payments                                  (531,459)               (988,607)        (968,556)    (5,475,702)
  Increase (decrease) in
    securities sold under
    agreements to repurchase                             577,000               6,104,000              -              -
  Proceeds from issuance of
    common stock                                             -                    15,300        2,108,215            -
  Dividends paid                                         (46,200)                (45,958)             -              -
-----------------------------------------------------------------------------------------------------------------------------


Net cash provided (absorbed)
  by financing activities                              6,712,966              19,761,542        1,233,415     (3,829,305)
-----------------------------------------------------------------------------------------------------------------------------


Increase (decrease) in cash
  and cash equivalents                                   644,832                (321,252)       4,473,025     (1,619,769)

Cash and cash equivalents,
  beginning of period                                  5,431,483               5,752,735        1,279,710      2,899,479
-----------------------------------------------------------------------------------------------------------------------------


Cash and cash equivalents,
  end of period                                       $6,076,315             $ 5,431,483      $ 5,752,735    $ 1,279,710
-----------------------------------------------------------------------------------------------------------------------------

</TABLE>


See  accompanying  summary of accounting  policies and notes to consolidated 
financial statements.


                                       10

<PAGE>





                                          Guaranty Financial Corporation
                                                          and Subsidiary

                                          Summary of Accounting Policies



Nature of Business
and Regulatory
Environment

Guaranty  Financial  Corporation  (the  "Parent  Company")  is a unitary  thrift
holding company whose principal asset is its wholly-owned  subsidiary,  Guaranty
Bank (the  "Bank").  The Bank  provides  a full  range of  banking  services  to
individual  and  corporate  customers.   In  these  financial  statements,   the
consolidated group is referred to collectively as the "Corporation".

As of December 31, 1996, the Bank has filed  applications  with the  appropriate
federal  and  state  regulatory  agencies  to  convert  from a  federal  savings
association to a Virginia  Chartered  Federal  Reserve member bank. As a result,
the Corporation has changed their year end from June 30, to December 31.

The Office of Thrift Supervision ("OTS"), is the primary regulator for federally
chartered savings associations, as well as savings and loan holding companies.

The Federal  Deposit  Insurance  Corporation  ("FDIC")  is the  federal  deposit
insurance  administrator for both banks and savings  associations.  The FDIC has
specific  authority to prescribe  and enforce  such  regulations  and issue such
orders  as it deems  necessary  to  prevent  actions  or  practices  by  savings
associations  that pose a serious  threat to the Savings  Association  Insurance
Fund.

The Federal Deposit Insurance Corporation Improvement Act of 1991 ("FDICIA") was
effective January 1, 1993. FDICIA contained provisions which allow regulators to
impose prompt corrective action on  undercapitalized  institutions in accordance
with a categorized capital-based system.

Pursuant to the Economic Growth and Paperwork Reduction Act of 1996 (the "Act"),
the FDIC imposed a special  assessment on SAIF members to capitalize the SAIF at
the  designated  reserve level of 1.25% as of September  30, 1996.  Based on the
Company's  deposits as of March 31, 1995,  the date for  measuring the amount of
special  assessments  pursuant to the Act, the Company paid a special assessment
of approximately $347,000 to capitalize the SAIF.

Principles of
Consolidation

The consolidated financial statements include the accounts of Guaranty Financial
Corporation and Guaranty Bank, (a wholly-owned  subsidiary),  and GMSC, Inc. and
Guaranty Investment Corp.,  wholly-owned  subsidiaries of the Bank. All material
intercompany   accounts   and   transactions   have  been   eliminated   in  the
consolidation.

Reorganization

On  December  29,  1995,  the  Bank  and  the  Parent  Company  consummated  the
reorganization  of the Bank  into a  unitary-thrift  holding  company  structure
whereby the Bank became the wholly-owned  subsidiary of the Parent Company. Each
outstanding share of the common stock of the Bank became one share of the common
stock of the Parent Company.  This transaction was accounted for as a pooling of
interests.

                                       11

<PAGE>


                                          Guaranty Financial Corporation
                                                          and Subsidiary

                                          Summary of Accounting Policies
                                                             (continued)


Estimates

The preparation of financial  statements in conformity  with generally  accepted
accounting principles requires management to make estimates and assumptions that
affect  the  reported  amounts  of  assets  and  liabilities  at the date of the
financial  statements and the reported  amounts of revenues and expenses  during
the reporting period. Actual results could differ from those estimates.

Investment Securities

In May 1993,  the  Financial  Accounting  Standards  Board  issued  Statement of
Financial  Accounting  Standards  No. 115 (SFAS  115),  "Accounting  for Certain
Investments  in  Debt  and  Equity  Securities".  The  Corporation  adopted  the
provisions of SFAS 115 during the year ended June 30, 1995. The adoption of this
Statement had no effect on the operations of the Corporation. SFAS 115 addresses
the  accounting  and reporting of  investments  in equity  securities  that have
readily  determinable  fair values and for all  investments in debt  securities.
Investments  in  securities  are to be  classified  as either  held-to-maturity,
trading, or available for sale.

Investments  in debt  securities  classified as  held-to-maturity  are stated at
cost, adjusted for amortization of premiums and accretion of discounts using the
level yield method.  Management has a positive  intent and ability to hold these
securities to maturity and, accordingly,  adjustments are not made for temporary
declines in their market value below amortized cost.  Investment in Federal Home
Loan Bank stock is stated at cost.

Investments in debt and equity securities classified as  available-for-sale  are
stated at market value with  unrealized  holding gains and losses  excluded from
earnings and reported as a separate  component of stockholders'  equity,  net of
tax effect, until realized.

Investments  in debt and equity  securities  classified as trading are stated at
market value.  Unrealized  holding gains and losses for trading  securities  are
included in the statement of operations.

Gains and losses on the sale of  securities  are  determined  using the specific
identification method.

Options

Premiums  received  for writing put and call options are recorded as a liability
and are taken into income if the option is closed  prior to maturity or expires.
Upon  exercise of the option,  the  premium is treated as an  adjustment  to the
basis of the underlying security.

Loans Held for
Sale

Mortgage  loans  originated  and intended for sale in the  secondary  market are
carried at the lower of cost or  estimated  market value in the  aggregate.  Net
unrealized  losses are  recognized  through a valuation  allowance by charges to
income.


                                       12

<PAGE>


                                              Guaranty Financial Corporation
                                                              and Subsidiary

                                              Summary of Accounting Policies
                                                                 (continued)



Loans Receivable

Loans  receivable  that  management  has the intent and  ability to hold for the
foreseeable   future  or  until  maturity  or  pay-off  are  reported  at  their
outstanding  principal  adjusted for any  charge-offs,  the  allowance  for loan
losses,  and any  deferred  fees or costs on  originated  loans and  unamortized
premiums or discounts on purchased loans.

Loans  receivable  consists  primarily of long-term real estate loans secured by
first deeds of trust on single family  residences,  other residential  property,
commercial  property  and land  located  primarily  in the  state  of  Virginia.
Interest  income on  mortgage  loans is recorded  when earned and is  recognized
based on the level yield  method.  The  Corporation  provides an  allowance  for
accrued  interest  deemed to be  uncollectible,  which is netted against accrued
interest receivable in the consolidated balance sheets.

The  Corporation  defers loan  origination  and commitment  fees, net of certain
direct loan  origination  costs,  and the net deferred fees are  amortized  into
interest  income over the lives of the related loans as yield  adjustments.  Any
unamortized  net fees on loans fully repaid or sold are  recognized as income in
the year of repayment or sale.

Sale of Loans
and Participation
in Loans

The Corporation is able to generate funds by selling loans and participations in
loans to the  Federal  Home Loan  Mortgage  Corporation  ("FHLMC")  and to other
insured investors.  Under participation  servicing  agreements,  the Corporation
continues  to  service  the  loans  and the  participant  is paid  its  share of
principal and interest collections.

Effective  July  1,  1995,  the  Corporation   adopted  Statement  of  Financial
Accounting  Standards  No. 122 (SFAS 122),  "Accounting  for Mortgage  Servicing
Rights an Amendment of FASB  Statement  No. 65".  SFAS 122 requires  entities to
allocate  the cost of  acquiring  or  originating  mortgage  loans  between  the
mortgage servicing rights and the loans, based on their relative fair values, if
the bank sells or  securitizes  the loans and  retains  the  mortgage  servicing
rights.  In  addition,  SFAS 122  requires  entities  to assess its  capitalized
mortgage  servicing  rights  for  impairment  based on the  fair  value of those
rights.




                                       13

<PAGE>


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)



Sale of Loans
and Participation
in Loans
(continued)

The cost of mortgage  servicing  rights is amortized in proportion  to, and over
the  period  of,  estimated  net  servicing  revenues.  Impairment  of  mortgage
servicing  rights is  assessed  based on the fair  value of those  rights.  Fair
values are  estimated  using  discounted  cash flows  based on a current  market
interest rate. For purposes of measuring  impairment,  the rights are stratified
based on the  predominant  risk  characteristics  of the underlying  loans.  The
amount of impairment  recognized is the amount by which the capitalized mortgage
servicing rights for a stratum exceed their fair value.

Allowance for
Possible Loan
Losses

The allowance for loan losses is maintained at a level  considered by management
to be adequate  to absorb  future  loan  losses  currently  inherent in the loan
portfolio.  Management's  assessment  of the adequacy of the  allowance is based
upon type and volume of the loan portfolio, past loan loss experience,  existing
and  anticipated  economic  conditions,  and other factors which deserve current
recognition  in  estimating  future loan losses.  Additions to the allowance are
charged to  operations.  Loans are  charged-off  partially or wholly at the time
management determines collectibility is not probable. Management's assessment of
the adequacy of the  allowance is subject to  evaluation  and  adjustment by the
Corporation's regulators.

Loans are generally placed on nonaccrual status when the collection of principal
or interest is 90 days or more past due, or earlier if  collection  is uncertain
based  upon an  evaluation  of the value of the  underlying  collateral  and the
financial  strength of the borrower.  Loans may be reinstated to accrual  status
when all  payments  are  brought  current  and,  in the  opinion of  management,
collection of the remaining  balance can be reasonably  expected.  Loans greater
than 90 days past due may remain on accrual  status if management  determines it
has adequate collateral to cover the principal and interest.

Effective  July  1,  1995,  the  Corporation   adopted  Statement  of  Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment
of a Loan (as amended by SFAS No. 118,  "Accounting  by Creditors for Impairment
of a Loan-Income Recognition and Disclosures"). The effect of adopting these new
accounting   standards  were   immaterial  to  the  operating   results  of  the
Corporation.


                                       14

<PAGE>
                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)



Allowance for
Possible Loan
Losses
(continued)


Under the new accounting  standard,  a loan is considered to be impaired when it
is probable  that the  Corporation  will be unable to collect all  principal and
interest  amounts  according to the contractual  terms of the loan agreement.  A
performing  loan may be  considered  impaired.  The  allowance  for loan  losses
related to loans  identified as impaired is primarily based on the excess of the
loan's  current  outstanding  principal  balance over the estimated  fair market
value of the related  collateral.  For a loan that is not  collateral-dependent,
the  allowance  is  recorded  at the amount by which the  outstanding  principal
balance  exceeds the current best  estimate of the future cash flows on the loan
discounted at the loan's original  effective  interest rate.  Prior to 1995, the
allowance  for loan losses for all loans which would have  qualified as impaired
under the new accounting  standards was primarily  based upon the estimated fair
market value of the related collateral.

For impaired  loans that are on nonaccrual  status,  cash payments  received are
generally applied to reduce the outstanding principal balance. However, all or a
portion of a cash payment  received on a nonaccrual  loan may be  recognized  as
interest income to the extent allowed by the loan contract,  assuming management
expects to fully collect the remaining principal balance on the loan.

Real Estate
Owned

Real estate acquired through  foreclosure is initially  recorded at the lower of
fair value,  less selling  costs,  or the balance of the loan on the property at
date of  foreclosure.  Costs  relating to the  development  and  improvement  of
property are  capitalized,  whereas  those  relating to holding the property are
charged to expense.

Valuations are periodically performed by management, and an allowance for losses
is  established  by a charge to operations  if the carrying  value of a property
exceeds its estimated fair value.


                                       15

<PAGE>


                                            Guaranty Financial Corporation
                                                            and Subsidiary

                                            Summary of Accounting Policies
                                                               (continued)



Securities Sold
Under Agreements to
Repurchase

The Corporation  enters into sales of securities  under agreements to repurchase
(reverse repurchase agreements).  Fixed-coupon reverse repurchase agreements are
treated as financings,  and the  obligations to repurchase  securities  sold are
reflected as a liability in the consolidated statements of condition. The dollar
amount of securities underlying the agreements remain in the asset accounts.

Office Properties
and Equipment

Office properties and equipment are stated at cost less accumulated depreciation
and  amortization.  Provisions for  depreciation  and  amortization are computed
using the straight-line method over the estimated useful lives of the individual
assets  or  the  terms  of  the  related  leases,  if  shorter,   for  leasehold
improvements.  Expenditures  for  betterments and major renewals are capitalized
and ordinary maintenance and repairs are charged to expense as incurred.

Income Taxes

During  the year ended June 30,  1994,  the  Corporation  adopted  Statement  of
Financial  Accounting  Standards No. 109,  "Accounting for Income Taxes",  which
required a change from the deferred method to the asset and  liabilities  method
of accounting for income taxes.

Deferred tax assets and  liabilities  are reflected at currently  enacted income
tax  rates  applicable  to the  period  in which  the  deferred  tax  assets  or
liabilities  are  expected to be realized or settled.  As changes in tax laws or
rates are enacted,  deferred tax assets and liabilities are adjusted through the
provision for income taxes.

The  Corporation  has reported the cumulative  effect of change in the method of
accounting  for income taxes as of the  beginning of the 1994 fiscal year in the
consolidated statement of operations.

For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions  prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable  income"  method.  The cumulative bad
debt reserve,  upon which no taxes have been paid, was approximately  $1,086,000
at June 30, 1996.


                                       16

<PAGE>



                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)



Income Taxes
(continued)

Section  1616 of the Small  Business  Job  Protection  Act of 1996  (the  "Act")
repealed the  percentage of taxable income method of computing bad debt reserve,
and  requires  the  recapture  into taxable  income of "excess  reserves",  on a
ratable basis over the next six years.  Excess reserves are defined, in general,
as the excess of the balance of the tax bad debt reserve  (using the  percentage
of taxable income method) as of the close of the last tax year beginning  before
January 1, 1996 over the  balance of the reserve as of the close of the last tax
year beginning before January 1, 1988. The recapture of the reserves is deferred
if the Corporation meets the "residential loan  requirement"  exception,  during
either or both of the first two years  beginning  after  December 31, 1995.  The
residential  loan  requirement  is met, in general,  if the principal  amount of
residential  loans made by the Corporation  during the year is not less than the
Corporation's  "base  amount".  The base amount is defined as the average of the
principal amounts of residential loans made during the six most recent tax years
beginning before January 1, 1996.

As a result of the Act, the  Corporation  must  recapture  into  taxable  income
approximately  $387,000 ratably over the next six years, beginning with the year
ending June 30, 1997. If the residential loan  requirement  exception is met, as
discussed  above,  the income will be includable  over the 3rd through 8th years
following the year ended June 30, 1996.

Earnings Per Share

Earnings per share is computed based on the weighted average number of shares of
common stock  outstanding  during each period  including the assumed exercise of
dilutive stock options,  and is  retroactively  adjusted for stock dividends and
stock splits.  The weighted average number of shares of common stock outstanding
were  920,681 for the six month period  ended  December  31, 1996,  and 917,668,
541,768  and  537,168  for the  years  ended  June  30,  1996,  1995  and  1994,
respectively.

Statement of Cash
Flows

Cash and cash equivalents include Federal funds sold with original maturities of
three months or less.  Interest paid was  approximately  $2,978,000  for the six
month period ended December 31, 1996, and $5,179,000,  $4,685,000 and $5,156,000
for the years ended June 30, 1996,  1995 and 1994,  respectively.  Cash paid for
income taxes was approximately  $277,000 for the six month period ended December
31, 1996, and $180,000,  $42,000 and $159,000 for the years ended June 30, 1996,
1995 and 1994, respectively.  There was no real estate acquired in settlement of
loans for the six month  period  ended  December  31,  1996,  and  approximately
$33,000 and $122,000 for the years ended June 30, 1996 and 1995, respectively.


                                       17

<PAGE>


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                                Summary of Accounting Policies
                                                                   (continued)



Reclassifications

Certain  reclassifications  have  been  made  in  the  prior  year  consolidated
financial statements and notes to conform to the December 31, 1996 presentation.

New Accounting
Pronouncements

Effective  July  1,  1996,  the  Corporation   adopted  Statement  of  Financial
Accounting  Standards  No. 121 (SFAS 121),  "Accounting  for the  Impairment  of
Long-Lived  Assets  and for  Long-Lived  Assets  to Be  Disposed  Of".  SFAS 121
requires that long-lived  assets and certain  intangibles to be held and used by
an entity be reviewed  for  impairment  when events or changes in  circumstances
indicate that the carrying amount may not be recoverable.  In addition, SFAS 121
requires  long-lived  assets and  certain  intangibles  to be  disposed of to be
reported at the lower of carrying  amount or fair value less costs to sell.  The
application  of  this  pronouncement  did  not  have a  material  effect  on the
financial statements of the Corporation.

Effective  July  1,  1996,  the  Corporation   adopted  Statement  of  Financial
Accounting   Standards  No.  123  (SFAS  123),   "Accounting   for   Stock-Based
Compensation."  SFAS No. 123 allows  companies  to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new  accounting  method based on the estimated fair value of employee stock
options.  Companies  electing  not to follow the new fair value based method are
required  to provide  expanded  footnote  disclosures,  including  pro forma net
income and earnings per share,  determined as if the company had applied the new
method.  The application of this pronouncement did not have a material effect on
the financial statements of the Corporation.



                                       18

<PAGE>


                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                               Summary of Accounting Policies
                                                                  (continued)



New Accounting
Pronouncements
(continued)

In June 1996, the Financial  Accounting  Standards Board issued its Statement of
Financial Accounting  Standards No. 125 ("SFAS 125"),  "Accounting for Transfers
and Servicing of Financial  Assets and  Extinguishments  of  Liabilities".  This
Statement  provides   accounting  and  reporting  standards  for  transfers  and
servicing  of  financial  assets and  extinguishments  of  liabilities.  After a
transfer of financial  assets,  an entity recognizes the financial and servicing
assets it controls and the liabilities it has incurred,  derecognizes  financial
assets when control has been  surrendered,  and  derecognizes  liabilities  when
extinguished.  In  addition,  a  transfer  of  financial  assets  in  which  the
transferor  surrenders  control over those assets is accounted  for as a sale to
the extent that consideration other than beneficial interests in the transferred
assets  is  received  in  exchange.  Except  for  certain  provisions  affecting
repurchase  agreements,  SFAS 125 is effective  for  transfers  and servicing of
financial assets and extinguishments of liabilities occurring after December 31,
1996, and is to be applied  prospectively.  The effective date of the provisions
affecting  repurchase  agreements and similar  transactions,  including  related
transfers  of  collateral,  is  delayed  for one  year,  to allow  more time for
accounting  systems to be put in place to properly  reflect the requirements and
guidance of SFAS No. 125.  Management  does not expect the  application  of this
pronouncement  to have a  material  effect on the  financial  statements  of the
Corporation.

The  Financial   Accounting   Standards  Board  issued  Statement  of  Financial
Accounting  Standards No. 128,  "Earnings  per Share ("SFAS  128").  SFAS 128 is
effective  for  financial  statements,  including  interim  periods,  issued for
periods ending after December 15, 1997. SFAS 128 provides a different method for
calculating earnings per share than is currently used in accordance with APB 15,
"Earnings per Share." SFAS 128 provides for the calculation of Basic and Diluted
earnings  per share.  Basic  earnings  per share  includes  no  dilution  and is
computed by dividing  income  available to common  shareholders  by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities that could share in earnings
of an entity,  similar to fully diluted earnings per share.  Management does not
expect the  application of this  pronouncement  to have a material effect on the
financial statements of the Corporation.



                                       19

<PAGE>


                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements



1.   Investment
     Securities

A summary of the carrying  value and estimated  market value of  mortgage-backed
securities is as follows:

December 31, 1996
-------------------------------------------------------------------------


                                   Gross         Gross        Estimated
                     Amortized   Unrealized    Unrealized       Market
                       Cost         Gains        Losses          Value
-------------------------------------------------------------------------


Held to Maturity

  Mortgage-backed
    securities      $ 3,156,857   $   191,817    $    -       $ 3,348,674
-------------------------------------------------------------------------


                      3,156,857       191,817    $    -         3,348,674
-------------------------------------------------------------------------


Trading

  Mortgage-backed
    securities       16,936,529           -         200,234    16,736,295
-------------------------------------------------------------------------


                     16,936,529           -         200,234    16,736,295
-------------------------------------------------------------------------


                    $20,093,386   $   191,817   $   200,234   $20,084,969
=========================================================================





                                       20

<PAGE>


                                            Guaranty Financial Corporation
                                                            and Subsidiary

                                Notes to Consolidated Financial Statements
                                                               (continued)




1.    Investment
      Securities
      (continued)

June 30, 1996
-------------------------------------------------------------------------------


                                        Gross         Gross      Estimated
                     Amortized        Unrealized    Unrealized    Market
                       Cost             Gains         Losses      Value
-------------------------------------------------------------------------------


Held to Maturity

  Mortgage-backed
    securities       $ 3,730,589         $148,301    $     -     $ 3,878,890
-------------------------------------------------------------------------------


                       3,730,589          148,301          -       3,878,890
-------------------------------------------------------------------------------


Available for Sale

  Mortgage-backed
    securities         9,992,516              -        428,911     9,563,605
-------------------------------------------------------------------------------


                       9,992,516              -        428,911     9,563,605
-------------------------------------------------------------------------------


                     $13,723,105         $148,301     $428,911   $13,442,495
-------------------------------------------------------------------------------



June 30, 1995
-------------------------------------------------------------------------------


                                        Gross         Gross      Estimated
                     Carrying         Unrealized    Unrealized    Market
                      Value             Gains         Losses      Value
-------------------------------------------------------------------------------


Held to Maturity

  Mortgage-backed
    securities        $4,732,638         $154,750      $   -      $4,887,388
-------------------------------------------------------------------------------





                                       21

<PAGE>


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)




1.    Investment
      Securities
      (continued)

Proceeds  from  sales  of  securities   available  for  sale  was  approximately
$18,508,000  and  $6,839,000  for the  years  ended  June  30,  1996  and  1994,
respectively.  The  Corporation  had no sales of available  for sale  securities
during the period ending December 31, 1996 and year ending June 30, 1995.  Gross
gains of approximately  $101,700 and gross losses of approximately $155,100 were
realized  on  those  sales  during  the  years  ended  June 30,  1996 and  1994,
respectively.

Proceeds from the sale of trading  securities was approximately  $35,306,000 for
the six months ended  December  31,  1996,  and  $107,283,000,  $43,137,000  and
$73,378,000  for the years  ended June 30,  1996,  1995 and 1994,  respectively.
Gross gains of approximately  $265,000 and gross losses of approximately  $9,900
were realized on those sales for the six months ended  December 31, 1996.  Gross
gains of  approximately  $209,000,  $142,600  and  $389,100  and gross losses of
approximately  $272,700,  $118,400  and  $557,500  were  realized on those sales
during the years ended June 30, 1996, 1995, and 1994, respectively.

Proceeds  from  the  sale  of  mortgage  backed   securities  was  approximately
$17,845,000,  $5,416,000  and  $6,575,000  for the six months ended December 31,
1996 and the years  ended June 30, 1995 and 1994,  respectively.  Gross gains of
approximately  $111,000,  $41,000 and $142,000  were realized on those sales for
the six months  ended  December  31,  1996 and the years ended June 30, 1995 and
1994, respectively. Gross losses on the sales of mortgage-backed securities were
$0, $4,000 and $357,000 for the six months ended December 31, 1996 and the years
ended June 30,  1995 and 1994,  respectively.  The  Corporation  had no sales of
mortgage backed securities during the year ended June 30, 1996.

At  December  31,  1996  and  June  30,  1996,   mortgage-backed  securities  of
approximately  $3,157,000 and $3,731,000,  respectively,  were pledged for bonds
payable  (Note 7). At  December  31,  1996 and June 30,  1996,  mortgage  backed
securities with a market value of $7,349,000 and $6,633,000,  respectively, were
pledged as collateral under repurchase agreements (Note 8).


                                       22

<PAGE>



                                              Guaranty Financial Corporation
                                                              and Subsidiary

                                  Notes to Consolidated Financial Statements
                                                                 (continued)




2.    Loans Receivable

Loans receivable are summarized as follows:

                                December 31,                  June 30,
                                    1996              1996              1995
-------------------------------------------------------------------------------


Residential real estate          $62,602,132       $66,137,277      $62,174,694
Commercial real estate             7,961,867         7,670,148        4,507,978
Construction and land              7,368,767         8,813,170        8,886,956
Consumer                           6,963,897         5,386,104        4,579,977
-------------------------------------------------------------------------------


                                  84,896,663        88,006,699       80,149,605
-------------------------------------------------------------------------------


Less
  Undisbursed loan funds           2,466,623         2,823,774        3,858,164
  Deferred loan fees                 290,016           313,669          323,282
  Allowance for loan losses          869,851           788,146          747,486
-------------------------------------------------------------------------------


                                   3,626,490         3,925,589        4,928,932
-------------------------------------------------------------------------------


                                 $81,270,173       $84,081,110      $75,220,673
===============================================================================



The allowance for loan losses is summarized as follows:

Balance at June 30, 1993                                               $745,797
Provision charged to expense                                             74,047
Net charge-offs or reductions                                           (66,258)
-------------------------------------------------------------------------------


Balance at June 30, 1994                                                753,586
Credit to operations                                                     (9,443)
Net recoveries                                                            3,343
-------------------------------------------------------------------------------


Balance at June 30, 1995                                                747,486
Provision charged to expense                                             56,665
Net charge-offs or reductions                                           (16,005)
-------------------------------------------------------------------------------


Balance at June 30, 1996                                                788,146
Provision charged to expense                                             91,850
Net charge-offs or reductions                                           (10,145)
-------------------------------------------------------------------------------


Balance at December 31, 1996                                           $869,851
===============================================================================





                                       23

<PAGE>


                                              Guaranty Financial Corporation
                                                              and Subsidiary

                                  Notes to Consolidated Financial Statements
                                                                 (continued)




2.    Loans Receivable
      (continued)

The Corporation serviced loans for others aggregating approximately $172,771,000
at December 31, 1996, and  $168,437,000  and  $169,621,000  at June 30, 1996 and
1995,  respectively.  Mortgage  servicing rights,  included in other assets, was
approximately  $974,000 at December 31, 1996,  and $787,000 and $721,000 at June
30, 1996 and 1995,  respectively.  Mortgage  servicing  rights of  approximately
$226,000 and $160,000 were capitalized during six months ended December 31, 1996
and the year ended June 30, 1996,  respectively.  No mortgage  servicing  rights
were capitalized during the year ended June 30, 1995.

Gross  gains  and  gross  losses  on the sale of loans  totalling  approximately
$283,000 and $67,000  were  realized  during the six months  ended  December 31,
1996, and $205,000 and $0,  $51,000 and $112,000 and $203,000 and $50,000,  were
realized for the years ended June 30, 1996, 1995 and 1994,  respectively.  There
were no loans classified as held for sale at December 31, 1996 and June 30, 1996
and 1995.

At December 31,  1996,  the  Corporation  had no loans that were  considered  as
impaired.

The following  information  relates to the  Corporation's  impaired  loans which
includes troubled debt restructurings that meet the definition of impaired loans
as of and for the year ended June 30, 1996:

-------------------------------------------------------------------------------
                                                              
                                                              
Impaired loans with a specific allowance                               $493,000
Impaired loans with no specific allowance                                   -
-------------------------------------------------------------------------------
                                                              
                                                              
Total impaired loans                                                   $493,000
===============================================================================
                                                              
                                                              
Total allowance related to impaired loans                              $123,000
Average balance of impaired loans for the period                        496,000
Interest income on impaired loans for the period              
  recorded on a cash basis                                                  -
                                                              
                                                      
                                       24

<PAGE>



                                             Guaranty Financial Corporation
                                                             and Subsidiary

                                 Notes to Consolidated Financial Statements
                                                                (continued)




3.    Office Properties
      and Equipment

Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>

                                            December 31,                  June 30,
                                               1996              1996               1995
------------------------------------------------------------------------------------------

<S>                                          <C>               <C>             <C>       
Land                                         $1,880,950        $1,873,386      $        -
Building and leasehold improvements           2,407,983         1,388,741          305,574
Furniture and fixtures                          599,367           288,575          365,773
Equipment                                       821,606           661,020          637,998
------------------------------------------------------------------------------------------


                                              5,709,906         4,211,722        1,309,345
Less accumulated depreciation
  and amortization                              763,753           686,523          872,436
------------------------------------------------------------------------------------------


Net office properties and equipment          $4,946,153        $3,525,199       $  436,909
==========================================================================================
</TABLE>



4.    Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>

December 31, 1996
------------------------------------------------------------------------------------------


                                                                Amount             Percent
------------------------------------------------------------------------------------------

<S>                                                           <C>                    <C> 
Passbook, statement savings and interest
  checking accounts
    Non-interest bearing                                      $ 1,505,640             1.9%
    2.00 to 3.00%                                               5,400,365             6.6
    3.01 to 4.00%                                               8,170,916            10.0
------------------------------------------------------------------------------------------


                                                               15,076,921            18.5
------------------------------------------------------------------------------------------


Certificates:
     0 to 4.00%                                                    61,423              .1
  4.01 to 5.00%                                                   198,405              .2
  5.01 to 6.00%                                                66,064,322            81.2
------------------------------------------------------------------------------------------


                                                               66,324,150            81.5
------------------------------------------------------------------------------------------


                                                              $81,401,071           100.0%
==========================================================================================
</TABLE>



                                       25
<PAGE>


                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements
                                                                  (continued)





4.    Deposits
      (continued)
<TABLE>
<CAPTION>

June 30,                                          1996                             1995
-----------------------------------------------------------------------------------------------


                                          Amount         Percent         Amount         Percent
-----------------------------------------------------------------------------------------------

<S>                                      <C>               <C>        <C>                <C> 
Passbook, statement savings
  and interest checking
  accounts
    Non-interest bearing                 $ 1,349,508        1.8%       $   805,902         1.5%
    2.00 to 3.00%                          5,094,991        6.8          5,011,503         9.6
    3.01 to 4.00%                          7,862,504       10.5          8,819,035        16.8
-----------------------------------------------------------------------------------------------


                                          14,307,003       19.1         14,636,440        27.9
-----------------------------------------------------------------------------------------------


Certificates:
     0 to 4.00%                              135,997         .2             53,341          .1
  4.01 to 5.00%                              192,804         .3          7,076,118        13.5
  5.01 to 6.00%                           55,491,113       74.3         18,868,053        36.0
  6.01 to 7.00%                            4,560,529        6.1         11,826,687        22.5
-----------------------------------------------------------------------------------------------


                                          60,380,443       80.9         37,824,199        72.1
-----------------------------------------------------------------------------------------------


                                         $74,687,446      100.0%       $52,460,639       100.0%
-----------------------------------------------------------------------------------------------
</TABLE>



The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000 was  approximately  $9,663,000 at December 31, 1996, and $4,606,000 and
$1,432,000 at June 30, 1996 and 1995, respectively.

Scheduled maturities of certificates are as follows:

                                December 31,               June 30,
                                   1996             1996              1995
------------------------------------------------------------------------------


Within one year                 $57,305,347       $51,209,732      $27,682,073
One to two years                  5,095,223         5,191,895        8,189,909
Two to three years                1,381,536         1,129,936          957,106
Three to four years               1,178,064         1,212,076          419,047
Five years and thereafter         1,363,980         1,636,804          576,064
------------------------------------------------------------------------------


                                $66,324,150       $60,380,443      $37,824,199
==============================================================================




                                       26

<PAGE>


                                              Guaranty Financial Corporation
                                                              and Subsidiary

                                  Notes to Consolidated Financial Statements
                                                                 (continued)




5.    Fair Value of
      Financial
      Instruments

The estimated  fair values of the  Corporation's  financial  instruments  are as
follows:

<TABLE>
<CAPTION>

                                      December 31, 1996                 June 30, 1996
                                 Carrying           Fair         Carrying          Fair
                                  Amount            Value         Amount           Value
---------------------------------------------------------------------------------------------
<S>                             <C>             <C>              <C>               <C>       
Financial assets
  Cash and short-term
    investments                 $ 6,076,315     $ 6,076,000      $ 5,431,483       $5,431,000
  Securities                     19,872,610      20,085,000       13,294,194       13,442,000
  Loans, net of allowance
    for loan losses              81,270,173      80,858,000       84,081,110       82,710,000

Financial liabilities
  Deposits                       81,401,071      81,345,000       74,687,446       74,590,000
  Advances from Federal
    Home Loan Bank               17,500,000      17,500,000       17,500,000       17,500,000
  Securities sold under
    agreement to
    repurchase                    6,681,000       6,681,000        6,104,000        6,104,000
  Bonds payable                   2,705,813             N/A        3,143,844              N/A
</TABLE>

<TABLE>
<CAPTION>

                                    Notional          Fair            Notional         Fair
                                    Amount            Value            Amount          Value
---------------------------------------------------------------------------------------------

<S>                              <C>             <C>              <C>              <C>       
Unrecognized financial
  instruments
    Commitments to
      extend credit              $9,356,000      $9,356,000       $9,300,000       $9,300,000
    Forward commitments
      to purchase
      mortgage-backed
      securities                  6,054,000       6,041,000        5,795,000        5,822,000
</TABLE>



                                       27
<PAGE>


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)




5.    Fair Value of
      Financial
      Instruments
      (continued)

The following  methods and  assumptions  were used to estimate the fair value of
each class of financial instruments for which it is practicable to estimate that
value.

Cash and short-term investments

For those short-term  investments,  the carrying amount is a reasonable estimate
of fair value.

Securities

Fair  values are based on quoted  market  prices or dealer  quotes.  If a quoted
market  price is not  available,  fair value is estimated  using  quoted  market
prices for similar securities.

Loan receivables

The fair value of loans is estimated by discounting  the future cash flows using
the current rates at which similar loans would be made to borrowers with similar
remaining  maturities.  This  calculation  ignores loan fees and certain factors
affecting the interest  rates  charged on various  loans such as the  borrower's
creditworthiness  and compensating  balances and dissimilar types of real estate
held as collateral.

Deposit liabilities

The fair value of demand deposits,  savings  accounts,  and certain money market
deposits  is the amount  payable on demand at the balance  sheet date.  The fair
value of  fixed-maturity  certificates  of deposit is estimated  using the rates
currently offered for deposits of similar remaining maturities.

Advances from Federal Home Loan Bank

For advances  that mature  within one year of the balance  sheet date,  carrying
value is considered a reasonable estimate of fair value.

The fair values of all other advances are estimated  using  discounted cash flow
analysis  based on the  Corporation's  current  incremental  borrowing  rate for
similar types of advances.


                                       28

<PAGE>


                                            Guaranty Financial Corporation
                                                            and Subsidiary

                                Notes to Consolidated Financial Statements
                                                               (continued)




5.    Fair Value of
      Financial
      Instruments
      (continued)

Securities sold under agreement to repurchase

Fixed-coupon reverse repurchase agreements are treated as short-term financings.
The carrying value is considered a reasonable estimate of fair value.

Bonds payable

Due to the nature and terms (Note 7) of the bonds payable held by GMSC,  Inc. at
December 31, 1996 and June 30, 1996, it was not deemed  practicable  to estimate
the fair value.

Commitments to extend credit

The fair value of commitments is estimated  using the fees currently  charged to
enter into similar  agreements,  taking into account the remaining  terms of the
agreements and the present  creditworthiness  of the  borrowers.  For fixed-rate
loan  commitments,  fair value also  considers the  difference  between  current
levels of interest  rates and the committed  rates.  Because of the  competitive
nature of the  marketplace  loan fees vary  greatly with no fees charged in many
cases.

Forward Commitments to purchase mortgage-backed securities

Fair values are based on quoted market prices or dealer quotes.


                                       29
<PAGE>


                                           Guaranty Financial Corporation
                                                           and Subsidiary

                               Notes to Consolidated Financial Statements
                                                              (continued)



6.    Results of
      Operations for
      the Six Months
      Ended December
      31, 1995

Unaudited  results of  operations  of the  Corporation  for the six months ended
December 31, 1995 (unaudited) are as follows:

Six month period ended December 31, 1995
--------------------------------------------------------------------------------


Net interest income                                 $1,161,197
Income before income taxes                             456,659
Provision for income taxes                             157,838
Net income                                             298,821


7.    Bonds Payable

In October 1987, GMSC, Inc. issued serial bonds (the "Bonds")  collateralized by
mortgage-backed   securities  which  are  treated  as  a  real  estate  mortgage
investment conduit ("REMIC") under the Internal Revenue Code of 1986 for federal
tax purposes.  The Bonds are secured by an indenture  between GMSC, Inc. and the
Bank  of New  York,  acting  as  trustee  for the  bondholders.  The  Bonds  are
summarized as follows:
<TABLE>
<CAPTION>

                                     December 31,                  June 30,
                                         1996               1996             1995
-------------------------------------------------------------------------------------

<S>                                     <C>               <C>              <C>       
Serial Bonds
  Class A-2, maturing January 20,
    2012, at 8.0%                       $1,066,586        $1,556,846       $2,778,641
  Class A-3, maturing January 20,
    2019, at 8.0%                        2,444,544         2,352,811        2,173,634
  Unapplied payments                      (326,479)         (200,337)        (254,348)
-------------------------------------------------------------------------------------


                                         3,184,651         3,709,320        4,697,927
  Less unamortized discount               (478,838)         (565,476)        (717,365)
-------------------------------------------------------------------------------------


                                        $2,705,813        $3,143,844       $3,980,562
=====================================================================================
</TABLE>


The  Bonds  are  repaid  in  conjunction   with  the  net  cash  flow  from  the
mortgage-backed  securities  together with the reinvestment income thereon. As a
result,  the  actual  life of the Bonds is less than  their  stated  maturities.
Interest  is paid as incurred on the Class A-2 Bonds and is accrued and added to
the principal amount due on the Class A-3 Bonds. The indenture also provides for
the  establishment  of two  trust  accounts  to insure  the  timely  payment  of
interest,  debt maturities,  trustee and accounting fees and other expenses. The
account  established  for payment of trustee and accounting  fees is included in
cash on the  statement  of  condition.  The account  established  for payment of
interest  and debt  maturities  is netted  with cash and  bonds  payable  on the
statement of condition.



                                       30

<PAGE>


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)



8.    Securities Sold
      Under Agreements
      to Repurchase

The  following  is  a  summary  of  certain  information  regarding  the  Bank's
repurchase agreements:

                              Six Months Ended            Year Ended
                               December 31,                June 30,
                                   1996             1996              1995
------------------------------------------------------------------------------


Balance at end of period         $6,681,000        $6,104,000       $      -
Weighted average interest rate
  at end of period                    6.50%             5.65%              -
Average amount outstanding
  during the period              $6,321,040        $3,111,583       $  782,500
Maximum amount outstanding
  at any month end during the
  period                         $9,957,000        $9,930,000       $4,230,000

9.    Advances From
      Federal Home
      Loan Bank

Advances from the Federal Home Loan Bank are summarized as follows:

                              Due in Year Ending
                                  December 31,
                  ---------------------------------------------------

                   1997                                $ 7,500,000
                   1998                                  5,000,000
                   1999                                  5,000,000
                  ---------------------------------------------------


                                                       $17,500,000
                  ---------------------------------------------------



The weighted  average  interest rate of advances was 6.35% at December 31, 1996,
and 5.93% and 6.67% at June 30, 1996 and 1995,  respectively.  The  advances are
collateralized  by  investment  in  Federal  Home  Loan Bank  stock and  certain
mortgage  loans  with  an  unpaid  balance  of  approximately   $31,557,000  and
$35,097,000 at December 31, 1996 and June 30, 1996, respectively.


                                       31

<PAGE>



                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements
                                                                  (continued)



9.    Advances From
      Federal Home
      Loan Bank
      (continued)

Information  related to borrowing activity from the Federal Home Loan Bank is as
follows:
<TABLE>
<CAPTION>

                         Six Months Ended
                           December 31,                        Year Ended June 30,
                               1996                1996              1995             1994
----------------------------------------------------------------------------------------------

<S>                         <C>                  <C>              <C>              <C>        
Maximum amount
  outstanding
  during the
  period                    $22,500,000          $28,050,000      $28,250,000      $28,750,000
----------------------------------------------------------------------------------------------


Average amount
  outstanding
  during the period         $19,550,000          $22,829,000      $26,208,000      $26,017,000
----------------------------------------------------------------------------------------------


Average interest
  rate during the
  period                          5.79%                6.21%            6.67%            6.63%
----------------------------------------------------------------------------------------------
</TABLE>



10.   Income Taxes

The  provision for income taxes as presented in the  consolidated  statements of
operations are as follows:

Six Months Ended December 31,                          1996
--------------------------------------------------------------


Currently payable (benefit)                           $(3,500)
Deferred income tax expense (benefit)                     -
--------------------------------------------------------------


                                                      $(3,500)
--------------------------------------------------------------





                                       32

<PAGE>


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)



10.   Income Taxes
      (continued)

Year Ended June 30,                      1996            1995           1994
-------------------------------------------------------------------------------


Currently payable                      $344,338        $187,885      $  16,200
Deferred income tax expense (benefit)       -           (87,377)      (251,186)
-------------------------------------------------------------------------------


                                       $344,338        $100,508      $(234,986)
-------------------------------------------------------------------------------



Reconciliations  of the  provision  for income  taxes  computed  at the  federal
statutory income tax rate to the effective rate follows:

Six Months Ended December 31,                                     1996
-----------------------------------------------------------------------


Tax expense (benefit) at statutory rate                        $(3,360)
Adjustments
  Effect of state taxes                                           (395)
  Other                                                            255
-----------------------------------------------------------------------


                                                               $(3,500)
-----------------------------------------------------------------------


<TABLE>
<CAPTION>

Year Ended June 30,                              1996            1995           1994
-------------------------------------------------------------------------------------
<S>                                          <C>             <C>           <C>       
Tax expense (benefit) at statutory rate      $335,780        $162,096      $(176,426)
Adjustments
  Effect of state taxes                        39,504          18,880        (20,860)
  Other                                       (30,946)        (80,468)       (37,700)
-------------------------------------------------------------------------------------


                                             $344,338        $100,508      $(234,986)
-------------------------------------------------------------------------------------
</TABLE>





                                       33

<PAGE>



                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)



10.   Income Taxes
      (continued)

The components of deferred income taxes are as follows:
<TABLE>
<CAPTION>

                                             December 31,                June 30,
                                                 1996              1996            1995
                                    -------------------------------------------------------
<S>                                             <C>               <C>              <C>     
Deferred tax asset
  Bad debt reserves                             $164,000          $152,000         $169,000
  Deferred loan fees                              54,000            70,000          123,000
  Excess servicing                                38,000            48,000           68,000
  Available for sale securities                      -             150,000              -
  Trading securities                              90,000               -                -
  Other                                          136,000            65,000           18,000
                                    -------------------------------------------------------


Total deferred tax asset                         482,000           485,000          378,000
                                    -------------------------------------------------------


Deferred tax liability
  GMSC REMIC                                     204,000           230,000          277,000
  FHLB stock                                     187,000           187,000          187,000
  Other                                           58,000            38,000           34,000
                                    -------------------------------------------------------


Total deferred tax liability                     449,000           455,000          498,000
                                    -------------------------------------------------------


Net deferred tax liability (asset)              $(33,000)         $(30,000)        $120,000
                                    -------------------------------------------------------
</TABLE>



11.   Related Party
      Transactions

In the normal  course of business,  the  Corporation  makes loans to  directors,
officers and other related parties.  These loans are made on  substantially  the
same terms as those prevailing at the time for comparable  transactions with the
other  borrowers.  The loans with related  parties  outstanding  at December 31,
1996,  and June 30,  1996 and 1995  are  approximately  $163,000,  $227,000  and
$291,000, respectivly.




                                       34
<PAGE>


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)



12.   Commitments
      and
      Contingencies

The Corporation  leases office space under operating  leases expiring at various
dates  through 2002 and has a contract for the  performance  of data  processing
services whose initial term expires in May, 1999 and requires  minimum  payments
of $8,100 per month. Future minimum rental and data processing payments required
that have initial or remaining  noncancelable  terms in excess of one year as of
December 31, 1996, are as follows:
                                              Amount
                                                       Data
Year Ending December 31,             Leases         Processing
--------------------------------------------------------------


1997                                $ 47,400          $ 97,200
1998                                  42,400            97,200
1999                                  35,800            40,500
2000                                  18,500                 -
Thereafter                            30,900                 -
--------------------------------------------------------------


                                   $175,000           $234,900
==============================================================




Total rental expense amounted to approximately  $23,000 for the six months ended
December 31, 1996 and  $168,000,  $187,000 and $180,000 for the years ended June
30, 1996, 1995 and 1994, respectively. Total data processing expense amounted to
approximately  $165,000 for the six months ended December 31, 1996 and $257,000,
$210,000  and  $199,900  for the  years  ended  June 30,  1996,  1995 and  1994,
respectively.

The  Corporation  is defendant in various  lawsuits  incidental to its business.
Management is of the opinion that its financial  position will not be materially
affected by the ultimate resolution of any litigation pending or threatened.





                                       35

<PAGE>


                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements
                                                                  (continued)



13.   Stockholders'
      Equity

On June 28, 1995, the  Corporation  completed an initial public  offering of its
common  stock  through the sale of 180,000  shares of common stock at a price of
$13.00 per share. Proceeds to the Corporation from the offering (net of offering
expenses of approximately $312,000) were approximately $2,028,000.

On November 30, 1995, the Board of Directors  declared a two-for-one stock split
to be  distributed  on January 31,  1996,  to all  shareholders  of record as of
January 15, 1996.

On January 23,  1997,  the  Corporation  completed  a secondary  offering of its
common  stock  through the sale of 500,000  shares of common stock at a price of
$8.50 per share.  Proceeds to the Corporation from the offering (net of offering
expenses of approximately $280,000) were approximately $3,970,000.

Savings  institutions  must maintain specific capital standards that are no less
stringent  than the capital  standards  applicable  to national  banks.  The OTS
regulations  currently  have three  capital  standards  including (i) a tangible
capital  requirement,  (ii) a core capital  requirement,  and (iii) a risk-based
capital requirement. The tangible capital standard requires savings institutions
to maintain tangible capital of not less than 1.5% of adjusted total assets. The
core capital standard requires a savings institution to maintain core capital of
not less than 3.0% of adjusted  total assets.  The risk-based  capital  standard
requires risk-based capital of not less than 8.0% of risk-weighted assets.

At December 31, 1996,  the Bank met all three  regulatory  capital  requirements
applicable to it under Financial  Institutions Reform,  Recovery and Enforcement
Act ("FIRREA") and was considered "well capitalized" under the prompt corrective
action framework of FDICIA.


                                       36

<PAGE>

                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements
                                                                  (continued)



13.   Stockholders'
      Equity
      (continued)

The following  table presents the Bank's  regulatory  capital levels at December
31, 1996 and June 30, 1996, relative to the OTS requirements  applicable at that
date:
<TABLE>
<CAPTION>

                                                          Amount         Percent      Actual        Actual       Excess
December 31, 1996                                        Required       Required      Amount        Percent      Amount
--------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>             <C>         <C>              <C>       <C>       
Tangible capital                                         $1,743,000      1.50%       $6,639,000       5.70%     $4,896,000
Core capital                                              3,490,000      3.00         6,639,000       5.70       3,149,000
Risk-based capital                                        4,519,000      8.00         7,345,000      13.00       2,826,000
</TABLE>

<TABLE>
<CAPTION>

                                                          Amount         Percent      Actual        Actual       Excess
June 30, 1996                                            Required       Required      Amount        Percent      Amount
--------------------------------------------------------------------------------------------------------------------------

<S>                                                      <C>             <C>         <C>              <C>       <C>       
Tangible capital                                         $1,655,000      1.50%       $6,628,000       6.01%     $4,973,000
Core capital                                              3,309,000      3.00         6,628,000       6.01       3,319,000
Risk-based capital                                        4,372,000      8.00         7,259,000      13.28       2,887,000
</TABLE>

The Corporation may not declare or pay a cash dividend, or repurchase any of its
capital stock if the effect thereof would cause the net worth of the Corporation
to be reduced below the net worth requirement imposed by federal regulations.

14.   Stock Option
      Plan

The Corporation has a noncompensatory stock option plan (the "Plan") designed to
provide long-term incentives to key employees.

The Corporation  applies  Accounting  Principles  Board Opinion No. 25 (APB 25),
Accounting  for Stock  Issued  to  Employees,  and  related  interpretations  in
accounting for its plans. Accordingly,  no compensation cost has been recognized
for these plans  against  earnings.  For those  companies  applying APB 25, FASB
Statement No. 123,  Accounting for Stock-Based  Compensation,  requires  certain
proforma  disclosures  of net income  and  earnings  per  share.  Net income and
earnings  per share  computed  under FASB  Statement  No. 123 do not  materially
differ from the amounts reported in consolidated financial statements.

The following table summarizes vested options outstanding:

Six Months Ended December 31, 1996
-------------------------------------------------------------------


                                       Option Price
-------------------------------------------------------------------


Outstanding at beginning of
  period                               $4.25 - 4.88         14,000
Options vested during period                      -              -
Options exercised during period                            (10,000)
-------------------------------------------------------------------


Outstanding at end of period                  $4.88          4,000
-------------------------------------------------------------------


                                       37
<PAGE>

                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)




14.   Stock Option
      Plan
      (continued)
<TABLE>
<CAPTION>

Year Ended June 30,                                          1996       1995      1994
-----------------------------------------------------------------------------------------

                                        Option Price
-----------------------------------------------------------------------------------------

<S>                                     <C>                  <C>        <C>        <C>   
Outstanding at beginning of
  year                                      $4.25            13,600     24,000     16,000
Options vested during year               4.25 - 4.88          4,000      8,000      8,000
Options exercised during year            4.25 - 4.88         (3,600)   (18,400)       -
-----------------------------------------------------------------------------------------


Outstanding at end of year              $4.25 - 4.88         14,000     13,600     24,000
-----------------------------------------------------------------------------------------

</TABLE>


15.   Employee Benefit
      Plans

Effective  February 16, 1989, the  Corporation  adopted a 401(k)  profit-sharing
plan in which  all  employees  are  eligible  to  participate  after one year of
service  and are at least  twenty-one  years of age.  Participants  may elect to
contribute a percentage of their  compensation  to the plan. The Corporation may
make contributions to the plan at its discretion.  Corporation contributions are
allocated to employee  accounts using a systematic  formula based on participant
compensation.  The  Corporation  contributed  approximately  $4,600,  $5,800 and
$4,700  to the  plan  for  the  years  ended  June  30,  1996,  1995  and  1994,
respectively, and $5,500 for the six months ended December 31, 1996.

16.   Financial
      Instruments With
      Off-Balance-Sheet
      Risk

The Corporation is a party to financial instruments with  off-balance-sheet risk
in the normal  course of business to meet the  financing  needs of its customers
and to  reduce  its own  exposure  to  fluctuations  in  interest  rates.  These
financial instruments include commitments to extend credit,  options written and
purchased,  forward  commitments  to  purchase  mortgage-backed  securities  and
standby  letters of  credit.  Those  instruments  involve,  to varying  degrees,
elements of credit and interest rate risk in excess of the amount  recognized in
the  statement  of  condition.   The  contract  or  notional  amounts  of  these
instruments  reflect the extent of involvement the Corporation has in particular
classes of financial instruments.

The Corporation's  exposure to credit loss in the event of nonperformance by the
other party to the financial  instrument  for  commitments  to extend credit and
standby  letters of credit written is represented  by the  contractual  notional
amount of those  instruments.  The Corporation  uses the same credit policies in
making commitments and conditional  obligations as it does for  on-balance-sheet
instruments.  For options  purchased,  the  contract or notional  amounts do not
represent exposure to credit loss.


                                       38

<PAGE>


                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements
                                                                  (continued)



16.   Financial
      Instruments With
      Off-Balance-Sheet
      Risk
      (continued)

Unless noted  otherwise,  the Corporation  does not require  collateral or other
security to support financial instruments with credit risk.

                                                           Contract
                                                        Notional Amount
                                            December 31, 1996    June 30, 1996
                                           -----------------------------------


Financial instruments whose contract
  amounts represent credit risk
    Commitments to extend credit                $9,356,000       $9,300,000
    Standby letters of credit written              463,000          218,000

Financial instruments whose contract
  amount represent interest rate risk
    Forward commitment to purchase
      mortgage-backed securities                $6,054,000       $5,795,000

Commitments  to extend  credit are  agreements  to lend to a customer as long as
there is no violation of any condition established in the contract.  Commitments
generally  have fixed  expiration  dates or other  termination  clauses  and may
require  payment of a fee. Since many of the  commitments are expected to expire
without  being  completely  drawn  upon,  the total  commitment  amounts  do not
necessarily  represent future cash requirements.  The Corporation evaluates each
customer's creditworthiness on a case-by-case basis.

Standby  letters of credit  written are  conditional  commitments  issued by the
Corporation  to guarantee the  performance  of a customer to a third party.  The
credit risk  involved in issuing  letters of credit is  essentially  the same as
that involved in extending loan facilities to customers.

Substantially all of the Corporation's  loan activity was with customers located
in Charlottesville, Virginia and surrounding counties, with approximately 81% of
the loans collateralized by one to four family residential properties.


                                       39

<PAGE>


                                             Guaranty Financial Corporation
                                                             and Subsidiary

                                 Notes to Consolidated Financial Statements
                                                                (continued)



17.   Condensed
      Financial
      Information of the
      Corporation
      (Parent Company
      Only)

Condensed financial information is shown for the Parent Company only as follows:

                   Condensed Statements of Financial Condition

                                             December 31,         June 30,
                                                1996                1996
----------------------------------------------------------------------------


   Assets

Investment in the Bank, at equity           $6,657,155            $6,693,752
Cash                                            10,000                10,000
Prepaid expenses and other assets               90,680                68,979
----------------------------------------------------------------------------


                                            $6,757,835            $6,772,731
----------------------------------------------------------------------------



   Liabilities and Stockholders' Equity

Liabilities                                 $  182,086            $  144,400
----------------------------------------------------------------------------


Stockholders' Equity
  Common stock                               1,155,010             1,148,960
  Additional paid-in capital                 1,975,695             1,981,745
  Retained earnings                          3,445,044             3,497,626
----------------------------------------------------------------------------


Total stockholders' equity                   6,575,749             6,628,331
----------------------------------------------------------------------------


                                            $6,757,835            $6,772,731
----------------------------------------------------------------------------





                                       40

<PAGE>

                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)



17.   Condensed
      Financial
      Information of the
      Corporation
      (Parent Company
      Only)
      (continued)
 
                      Condensed Statements of Operations
-------------------------------------------------------------------------------


                                               Six Months Ended    Year Ended
                                               December 31,         June 30,
                                                   1996               1996
-------------------------------------------------------------------------------


Income
  Dividends received from Bank                   $ 46,200             $ 10,000
-------------------------------------------------------------------------------


Total income                                       46,200               10,000
-------------------------------------------------------------------------------


Noninterest expenses                              (52,582)             (41,463)
-------------------------------------------------------------------------------


Loss before income tax benefit and
  equity in undistributed net income
  of the Bank                                      (6,382)             (31,463)
Income tax benefit                                     -                12,000
-------------------------------------------------------------------------------


(Income) loss before equity in undistributed
  net income of the Bank                           (6,382)             (19,463)
Equity in undistributed net income
  of the Bank                                          -               662,713
-------------------------------------------------------------------------------


Net income (loss)                                $ (6,382)            $643,250
-------------------------------------------------------------------------------





                                       41
<PAGE>


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)




17.   Condensed
      Financial
      Information of the
      Corporation
      (Parent Company
      Only)
      (continued)


                       Condensed Statements of Cash Flows
-------------------------------------------------------------------------------


                                        Six Months Ended             Year Ended
                                          December 31,                 June 30,
                                             1996                       1996
-------------------------------------------------------------------------------


Operating activities
  Net income (loss)                          $ (6,382)                 $643,250
  Adjustments
    Equity in income of the Savings Bank      (43,562)                 (672,713)
    (Increase) decrease in prepaid and
      other assets                            (21,701)                  (68,979)
    Increase in other liabilities              37,686                   144,400
    Other                                      33,959                       -
-------------------------------------------------------------------------------


Net cash provided by operating
  activities                                       -                     45,958
-------------------------------------------------------------------------------


Investing activities
  Dividends received from Savings Bank         46,200                    10,000
-------------------------------------------------------------------------------


Net cash provided by investing
  activities                                   46,200                    10,000
-------------------------------------------------------------------------------


Financing activities
  Cash dividends paid on common stock         (46,200)                  (45,958)
-------------------------------------------------------------------------------


Net cash absorbed by financing
  activities                                  (46,200)                  (45,958)
-------------------------------------------------------------------------------


Increase in cash                                   -                     10,000

Cash, beginning of period                      10,000                       -
-------------------------------------------------------------------------------


Cash, end of period                          $ 10,000                  $ 10,000
-------------------------------------------------------------------------------


                                       42
<PAGE>

                                   SIGNATURES

         In  accordance  with  Section  13 or 15(d)  of the  Exchange  Act,  the
registrant  caused  this  report to be signed on its behalf by the  undersigned,
thereunto duly authorized.

                                         GUARANTY FINANCIAL CORPORATION



Date:  June 30, 1997                     By: /s/ Thomas P. Baker
                                            --------------------
                                            Thomas P. Baker
                                            President, Chief Executive Officer
                                            and Director

         In accordance  with the Exchange Act, this report has been signed below
by the following  persons on behalf of the  registrant and in the capacities and
on the dates indicated.

<TABLE>
<CAPTION>

               Signature                                      Title                                 Date


<S>                                         <C>                                                 <C> 
          /s/ Thomas P. Baker               President, Chief Executive Officer                  July 09, 1997
-------------------------------------                  and Director
            Thomas P. Baker                     (Principal Executive Officer)

         /s/ Kathleen M. Focht             Chief Financial Officer, Vice President,             July 09, 1997
-------------------------------------         President and Secretary/Treasurer
           Kathleen M. Focht                     (Principal Financial and 
                                                    Accounting Officer)

         /s/ Douglas E. Caton                        Chairman of the Board                      July 09, 1997
-------------------------------------
            Douglas E. Caton


          /s/ Harry N. Lewis                      Vice Chairman of the Board                    July 09, 1997
-------------------------------------
             Harry N. Lewis


       /s/ Charles R. Borchardt                            Director
-------------------------------------
          Charles R. Borchardt


                                                           Director
-------------------------------------
            Henry J. Browne


        /s/ Robert P. Englander                            Director                             July 09, 1997
-------------------------------------
          Robert P. Englander


           /s/ John R. Metz                                Director                             July 09, 1997
-------------------------------------
              John R. Metz


                                                           Director
-------------------------------------
           James R. Sipe, Jr.



                                                           Director
-------------------------------------
          Oscar W. Smith, Jr.

</TABLE>