SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

                 ANNUAL REPORT UNDER SECTION 13 OR 15(d) OF THE
                         SECURITIES EXCHANGE ACT OF 1934

                   For the fiscal year ended December 31, 2003

                         Commission file number 0-25905

                         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)

                                 (434) 970-1100
                (Issuer's Telephone Number, Including Area Code)

         Securities registered under Section 12(b) of the Exchange Act:

                                               Name of Each Exchange
                 Title of Each Class           on Which Registered
                 -------------------           ---------------------
                       None                            n/a

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

                     Common Stock, par value $1.25 per share
                                (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
$14,089,633.

         The aggregate  market value of the voting stock held by  non-affiliates
computed by  reference  to the closing  sales price of such stock as of March 1,
2004 was  approximately  $42,526,000.  (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  outstanding  shares of Common  Stock as of March 1, 2004
was 2,000,659.



<PAGE>




                                TABLE OF CONTENTS

                                     PART I

                                                                           Page

ITEM 1.  DESCRIPTION OF BUSINESS............................................. 3

ITEM 2.  DESCRIPTION OF PROPERTY.............................................12

ITEM 3.  LEGAL PROCEEDINGS...................................................13

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
                      OF SECURITY HOLDERS....................................13

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
                       STOCKHOLDER MATTERS...................................13

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATIONS....................14

ITEM 7.  FINANCIAL STATEMENTS................................................36

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                      ON ACCOUNTING AND FINANCIAL DISCLOSURE.................36

ITEM 8A. CONTROLS AND PROCEDURES.............................................36

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                      CONTROL PERSONS; COMPLIANCE WITH SECTION
                      16(a) OF THE EXCHANGE ACT..............................36

ITEM 10. EXECUTIVE COMPENSATION..............................................36

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                      OWNERS AND MANAGEMENT..................................36

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS......................37

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K..............................37

ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES..............................37




                                       2
<PAGE>






                                     PART I

Item 1.           Description of Business.

General

         Guaranty Financial  Corporation  ("Guaranty") is a Virginia corporation
which was  organized in 1995 for the purpose of becoming the holding  company of
Guaranty  Bank (the  "Bank").  The Bank began  business  in  February  1981 as a
federal savings  association,  converted to a Virginia chartered Federal Reserve
member bank in 1997, and is  headquartered  in  Charlottesville,  Virginia.  The
consolidated  financial  statements of Guaranty include the accounts of Guaranty
and its  wholly-owned  subsidiaries,  Guaranty Capital Trust I and the Bank, and
the Bank's wholly-owned  subsidiaries,  GMSC, Inc. and Guaranty Investment Corp.
Guaranty  Capital Trust I issued trust preferred  securities in 1998, which have
been fully  redeemed as of December 31, 2003.  GMSC,  Inc. was organized in 1987
for the purpose of issuing  debt  securities  which are  principally  secured by
mortgage-backed  securities.  The debt  securities  have been  fully  paid as of
December 31, 2003.

         Guaranty's  principal  asset  is the  outstanding  stock  of the  Bank.
Guaranty  presently  has no  separate  operations  and  its  business  primarily
consists of the business of the Bank.  Guaranty's  Common Stock is quoted on The
Nasdaq National Market under the symbol "GSLC".

         The Bank is a community  bank that provides a broad range of commercial
and retail  banking  services.  Guaranty's  principal  business  activities  are
attracting  checking and savings  deposits from local businesses and the general
public  through its retail  banking  offices  and  originating,  servicing,  and
selling  loans.  Of  Guaranty's  $157.8  million of gross loans  outstanding  at
December  31,  2003,  24.1%  represented  construction  and  land  loans,  46.3%
represented  commercial  business and  commercial  real estate loans,  and 16.1%
represented  residential  first  mortgages.  Guaranty also lends funds to retail
banking  customers by means of home equity and  installment  loans. In addition,
Guaranty offers consumer loans and  government-insured  and  conventional  small
business loans.  Guaranty invests in certain United States government and agency
obligations and other investments permitted by applicable laws and regulations.

         On  December  18,  2003,  Guaranty  and  Union  Bankshares  Corporation
announced the signing of a definitive  merger  agreement,  which was unanimously
approved  by each board of  directors,  pursuant  to which  Union  will  acquire
Guaranty.  The merger is dependent on certain regulatory  approvals,  as well as
approval  by  Guaranty  shareholders,  and is  expected  to close in the  second
quarter of 2004.

         Guaranty's  main  office  is  located  at 1658  State  Farm  Boulevard,
Charlottesville, Virginia 22911 and the telephone number is (434) 970-1100.

Market Area

         Guaranty is headquartered in Charlottesville, Virginia. Charlottesville
and its surrounding area had a collective population of approximately 120,000 in
2001 according to census  figures.  It 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  seven  full  service  retail   branches,   which  serve  the  City  of
Charlottesville and the counties of Albemarle, Fluvanna and Nelson. According to
the June 30, 2003  market  share  report as  summarized  by the Federal  Deposit
Insurance Corporation (the "FDIC"),  Guaranty holds 7.68% of the deposits in the
Charlottesville, Virginia market.


                                       3
<PAGE>

Competition

         Guaranty faces strong  competition for loans and deposits.  Competition
for loans comes  primarily from commercial  banks and mortgage  bankers 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  for deposits from  commercial
banks,  money  market  and mutual  funds,  credit  unions  and other  investment
vehicles.  The ability of Guaranty to attract and retain deposits depends on its
ability to provide an investment  opportunity that satisfies the requirements of
depositors as to rate of return,  liquidity,  risk and other  factors.  Guaranty
competes  for these  deposits  by  offering  a variety of  deposit  products  at
competitive rates and convenient business hours.

         Many of our competitors have substantially  greater financial resources
than  those  available  to  Guaranty.   Certain  of  these   institutions   have
significantly higher lending limits than Guaranty. In addition,  there can be no
assurance  that  other  financial   institutions,   with  substantially  greater
resources than  Guaranty,  will not establish  operations in Guaranty's  service
area.

Credit Policies

         The principal risk  associated  with each of the categories of loans in
Guaranty's  portfolio  is the  creditworthiness  of its  borrowers.  Within each
category, such risk is increased or decreased,  depending on prevailing economic
conditions. In an effort to manage the risk, Guaranty's policy gives loan amount
approval limits to individual loan officers based on their position and level of
experience.  The risk associated with real estate mortgage loans, commercial and
consumer  loans  varies,  based  on  employment  levels,   consumer  confidence,
fluctuations  in the value of real estate and other  conditions  that affect the
ability of borrowers to repay indebtedness. The risk associated with real estate
construction  loans varies,  based on the supply and demand for the type of real
estate under construction.

         Guaranty has written  policies  and  procedures  to help manage  credit
risk.  Guaranty  utilizes a loan review  process that  includes  formulation  of
portfolio  management strategy,  guidelines for underwriting  standards and risk
assessment,  procedures  for ongoing  identification  and  management  of credit
deterioration,  and regular  portfolio reviews to establish loss exposure and to
ascertain compliance with Guaranty's policies.

         Guaranty  uses  a  Management  Loan  Committee  and  a  Directors  Loan
Committee to approve loans. The Management Loan Committee, which consists of the
President and three additional senior officers,  meets weekly to review all loan
applications  from borrowers  having total credit exposure to the Bank in excess
of $750,000 in the aggregate or in excess of $250,000 on an unsecured  basis.  A
Directors' Loan Committee,  which  currently  consists of five directors  (three
directors  constitute a quorum,  of whom any two may act),  approves  loans from
borrowers  having total credit  exposure to the Bank in excess of  $1,500,000 in
the  aggregate  or in excess of  $500,000 on an  unsecured  basis that have been
previously  approved by the Management Loan Committee.  Guaranty's  Chief Credit
Officer is responsible for reporting to the Directors Loan Committee  monthly on
the  activities of the  Management  Loan  Committee and on the status of various
delinquent and  non-performing  loans. The Directors Loan Committee also reviews
lending policies proposed by Management.

         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, 2003, commitments to extend credit totaled $60.1 million.


                                       4
<PAGE>

Construction Lending

         Guaranty makes local construction  loans,  primarily  residential,  and
land acquisition and development  loans.  The construction  loans are secured by
residential houses under construction and the underlying land for which the loan
was  obtained.  At December 31, 2003,  construction,  land and land  development
loans  outstanding were $38.0 million,  or 24.1%, of gross loans.  Approximately
95% of  these  loans  are  concentrated  in the  Richmond  and  Charlottesville,
Virginia markets.  The average life of a construction loan is approximately nine
months and they  reprice  monthly to meet the market,  typically  prime plus one
percent.  Because  the  interest  rate  charged on these  loans  floats with the
market,  they help  Guaranty in managing  its interest  rate risk.  Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single  borrowers  or groups of related  borrowers.  Another  risk  involved  in
construction  lending is  attributable  to the fact that loan funds are advanced
upon  the  security  of the  land or home  under  construction,  which  value is
estimated prior to the completion of construction. Thus, it is more difficult to
evaluate  accurately  the total loan funds  required  to  complete a project and
related loan-to-value ratios. To mitigate the risks associated with construction
lending,  Guaranty  generally  limits  loan  amounts to 75% to 80% of  appraised
value, in addition to analyzing the creditworthiness of its borrowers.  Guaranty
also obtains a first lien on the property as security for its construction loans
and typically requires personal guarantees from the borrower's principal owners.

Commercial Business Loans

         Commercial  business loans  generally have a higher degree of risk than
residential  mortgage  loans,  but have higher  yields.  To manage  these risks,
Guaranty generally obtains  appropriate  collateral and personal guarantees from
the  borrower's  principal  owners and monitors the  financial  condition of its
business borrowers.  Residential  mortgage loans generally are made on the basis
of the borrower's ability to make repayment from his employment and other income
and are secured by real estate whose value tends to be readily ascertainable. In
contrast,  commercial  business  loans  typically  are 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 is substantially dependent on the success
of the business  itself.  Furthermore,  the collateral  for commercial  business
loans may  depreciate  over time and generally  cannot be appraised with as much
precision as residential real estate.  Guaranty has a loan review and monitoring
process to regularly assess the repayment  ability of commercial  borrowers.  At
December 31, 2003,  commercial loans,  excluding commercial real estate loans as
discussed below, totaled $67.0 million, or 42.5% of the total loan portfolio.

Commercial Real Estate Lending

         Commercial real estate loans are secured by various types of commercial
real  estate in  Guaranty's  market  area,  including  multi-family  residential
buildings,   commercial  buildings  and  offices,  small  shopping  centers  and
churches.  At December 31, 2003,  commercial  real estate loans  aggregated $6.0
million or 3.8% of Guaranty's gross loans.


                                       5
<PAGE>

         In its underwriting of commercial real estate, Guaranty may lend, under
federal  regulation,  up to 85%  of  the  secured  property's  appraised  value,
although Guaranty's loan to original appraised value ratio on such properties is
80% or less in many cases.  Commercial real estate lending  entails  significant
additional risk,  compared with residential  mortgage  lending.  Commercial real
estate loans  typically  involve larger loan balances  concentrated  with single
borrowers or groups of related borrowers.  Additionally,  the payment experience
on loans secured by income  producing  properties is typically  dependent on the
successful  operation  of a business  or a real  estate  project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
in the economy  generally.  Guaranty'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 Guaranty typically
requires personal guarantees or endorsements of the borrowers' principal owners.
Guaranty also carefully evaluates the location of the security property.

One-to-Four-Family Residential Real Estate Lending

         Residential  lending  activity  may be  generated  by  Guaranty's  loan
originator solicitation, referrals by real estate professionals, and existing or
new bank customers.  Loan  applications are taken by a Bank loan originator.  As
part of the  application  process,  information is gathered  concerning  income,
employment and credit  history of the applicant.  Loan quality is analyzed based
on guidelines issued by the applicable  investor,  such as the Federal Home Loan
Mortgage  Corporation (FHLMC),  Veterans  Administration (VA), the Department of
Housing and Urban  Development  (HUD).  The  non-conforming  one-to-four  family
adjustable  rate  mortgage  (ARM) loans  originated by Guaranty do not generally
meet secondary market investor guidelines. However, these loans are underwritten
using  Guaranty's   underwriting   guidelines.   The  valuation  of  residential
collateral is provided by  independent  fee appraisers who have been approved by
the  Bank's  Board of  Directors.  Loan  applications  are  underwritten  either
manually or  automatically.  Automated  underwriting  may be used on those loans
with limited risk, based on assigned guidelines set forth by FHLMC.

         Security for the majority of Guaranty's  residential  lending is in the
form of owner occupied one-to-four family dwellings.  Conventional mortgages are
originated  up to allowable  loan-to-value  guidelines  issued by the  investor.
Maximum  allowable  loans  insured by the Veterans  Administration  (VA) and the
Department of Housing and Urban  Development  (HUD) are originated  according to
their applicable guidelines.  Loans are also underwritten,  funded, and serviced
by  the  Virginia  Housing  Development  Authority  specific  to  their  defined
guidelines.  The Loan  Prospector  automated  underwriting  system is capable of
rating conforming, VA, and FHA loans.

         Most fixed rate mortgage loans are originated  with the intent to sell.
The Bank also occasionally originates non-conforming fixed rate loans to hold in
the portfolio.  At December 31, 2003, $15.4 million, or 9.8%, of Guaranty's loan
portfolio consisted of fixed rate mortgage loans.

         Guaranty also originates a non-conforming  adjustable rate product with
a higher entry level rate and margin than that of the conforming adjustable rate
products.  This  non-conforming  loan provides yet another  outlet for loans not
meeting investor guidelines.  The Bank has no current investor  relationship for
selling this ARM product.  Interest rates on adjustable rate products offered by
the Bank are tied to One,  Three,  Five or Seven  Year  United  States  Treasury
bills.  Guaranty's ARM products contain interest rate caps at adjustment periods
and rate ceilings  based on a cap over and above the original  interest rate. At
December  31,  2003,  $10.0  million,  or 6.3%,  of the  Bank's  loan  portfolio
consisted of adjustable rate mortgages.

         All  residential  mortgage  loans  originated  by  Guaranty  contain  a
"due-on-sale"  clause  providing that Guaranty may declare the unpaid  principal
balance due and payable upon sale or transfer of the


                                       6
<PAGE>

mortgaged   premises,   unless  certain   investor   provisions   should  apply.
"Due-on-sale"  definitions  will vary from  investor to investor,  so Guaranty's
policy is to adhere to the mortgage loan investor's  guidelines,  or in the case
of our own loans, adhere to the defined terms in the security instruments.

         In connection with  residential  real estate loans,  Guaranty  requires
title  insurance,  hazard  insurance  and if required,  flood  insurance.  Flood
determination  letters with life of loan  tracking are obtained on all federally
related  transactions with improvements serving as security for the transaction.
Guaranty requires escrows for real estate taxes and insurance.

Consumer Lending

         Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit,  automobile loans, deposit account
loans,  installment  and demand loans,  credit  cards,  and home equity lines of
credit and loans.  At December  31, 2003,  Guaranty had consumer  loans of $21.2
million or 13.5% of gross loans. Such loans are generally made to customers with
whom Guaranty has a pre-existing relationship. Guaranty currently originates all
of its consumer loans in its geographic  market area. Most of the consumer loans
are tied to the prime lending rate and reprice monthly.

         Consumer loans may entail greater risk than 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
borrower  against an assignee of collateral  securing the loan such as Guaranty,
and a borrower may be able to assert  against such assignee  claims and defenses
which it has  against the seller of the  underlying  collateral.  Consumer  loan
delinquencies often increase over time as the loans age.

         The  underwriting  standards  employed by Guaranty 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 from primary  employment,  and additionally
from any verifiable secondary income. Although creditworthiness of the applicant
is of primary consideration,  the underwriting process also includes an analysis
of the value of the security in relation to the proposed loan amount.

Employees

         At  December  31,  2003,  Guaranty  had 91  full-time  and 4  part-time
employees.  None of  Guaranty's  employees  are  represented  by any  collective
bargaining unit.


                                       7
<PAGE>

Supervision and Regulation

         General.  As a bank holding company,  Guaranty is subject to regulation
under the Bank Holding  Company Act of 1956,  as amended (the  "BHCA"),  and the
examination and reporting  requirements of the Board of Governors of the Federal
Reserve  System (the "Federal  Reserve  Board").  Under the BHCA, a bank holding
company may not directly or indirectly acquire ownership or control of more than
5% of the voting shares or substantially  all of the assets of any bank or merge
or consolidate  with another bank holding  company without the prior approval of
the Federal  Reserve Board.  The BHCA also generally  limits the activities of a
bank holding company to that of banking,  managing or controlling  banks, or any
other  activity  which is determined  to be so closely  related to banking or to
managing or controlling banks that an exception is allowed for those activities.

         As  a   state-chartered   commercial  bank,  the  Bank  is  subject  to
regulation,  supervision  and  examination  by the  Virginia  State  Corporation
Commission's Bureau of Financial Institutions. It is also subject to regulation,
supervision and examination by the Federal Reserve Board.  State and federal law
also governs the activities in which the Bank engages,  the investments  that it
makes and the  aggregate  amount of loans that may be  granted to one  borrower.
Various  consumer and  compliance  laws and  regulations  also affect the Bank's
operations.

         The earnings of Guaranty's subsidiaries,  and therefore the earnings of
Guaranty,  are affected by general  economic  conditions,  management  policies,
changes in state and  federal  legislation  and  actions  of various  regulatory
authorities,  including  those  referred  to above.  The  following  description
summarizes  the  significant  state and federal and state laws to which Guaranty
and the Bank are subject. To the extent that statutory or regulatory  provisions
or proposals  are  described,  the  description  is qualified in its entirety by
reference to the particular statutory or regulatory provisions or proposals.

         Payment of  Dividends.  Guaranty  is a legal  entity  separate  and
distinct  from its banking and other  subsidiaries.  The majority of  Guaranty's
revenues will result from  dividends  paid to Guaranty by the Bank.  The Bank is
subject to laws and  regulations  that limit the amount of dividends that it can
pay. In addition,  both Guaranty and the Bank are subject to various  regulatory
restrictions  relating to the payment of dividends,  including  requirements  to
maintain  capital  at or above  regulatory  minimums.  Banking  regulators  have
indicated that banking  organizations should generally pay dividends only if the
organization's  net income available to common  shareholders  over the past year
has been  sufficient to fully fund the dividends,  and the  prospective  rate of
earnings  retention appears  consistent with the  organization's  capital needs,
asset quality and overall financial condition. Guaranty does not expect that any
of these laws, regulations or policies will materially affect the ability of the
Bank to pay  dividends.  During  the year  ended  December  31,  2003,  the Bank
declared $773,803 in dividends payable to Guaranty.

         In October 2000, Guaranty and the Bank entered into a Written Agreement
with the Federal Reserve Bank of Richmond (the "FRB-Richmond") and the Bureau of
Financial Institutions that provided for certain restrictions on the declaration
and payment of dividends by either  Guaranty or the Bank.  Guaranty and the Bank
were  released  from the  Written  Agreement  in  October  of  2002.  Additional
information  on this agreement is set forth in "Item 5. Market for Common Equity
and Related Stockholder Matters" below.

         Insurance of Accounts,  Assessments  and  Regulation  by the FDIC.  The
deposits  of the Bank are  insured by the FDIC up to the limits set forth  under
applicable  law. The  deposits of the Bank are subject to the deposit  insurance
assessments of the Bank Insurance Fund ("BIF") of the FDIC.

                                       8
<PAGE>

         The FDIC has  implemented  a risk-based  deposit  insurance  assessment
system  under  which the  assessment  rate for an insured  institution  may vary
according to  regulatory  capital  levels of the  institution  and other factors
(including supervisory evaluations).  Depository institutions insured by the BIF
that are "well capitalized" and that present few or no supervisory concerns, are
required to pay only the statutory  minimum  assessment  of $2,000  annually for
deposit  insurance,  while all other banks are required to pay premiums  ranging
from .03% to .27% of domestic deposits.  The Bank's deposit insurance assessment
decreased  from .030% to .017% and then to .015% of deposits  in calendar  years
2001,  2002 and 2003,  respectively.  These rate schedules are subject to future
adjustments  by the FDIC. In addition,  the FDIC has authority to impose special
assessments from time to time. However,  because the legislation enacted in 1997
requires that both Savings  Association  Insurance Fund insured and  BIF-insured
deposits pay a pro rata portion of the interest due on the obligations issued by
the  Financing  Corporation,  the  FDIC is  assessing  BIF-insured  deposits  an
additional 1.30 basis points per $100 of deposits to cover those obligations.

         The FDIC is authorized  to prohibit any  BIF-insured  institution  from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective  insurance fund.  Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's  primary
regulatory  authority an opportunity to take such action. The FDIC may terminate
the deposit  insurance of any depository  institution if it determines,  after a
hearing,  that the  institution  has engaged or is engaging in unsafe or unsound
practices,  is in an unsafe or unsound condition to continue operations,  or has
violated any  applicable  law,  regulation,  order or any  condition  imposed in
writing by the FDIC. It also may suspend deposit  insurance  temporarily  during
the  hearing  process  for  the  permanent  termination  of  insurance,  if  the
institution has no tangible  capital.  If deposit  insurance is terminated,  the
deposits  at the  institution  at  the  time  of  termination,  less  subsequent
withdrawals,  shall  continue  to be insured for a period from six months to two
years,  as  determined  by the FDIC.  Management  is not  aware of any  existing
circumstances that could result in termination of any Bank's deposit insurance.

         Capital.  The Federal Reserve Board has issued  risk-based and leverage
capital guidelines applicable to banking organizations that it supervises. Under
the risk-based  capital  requirements,  Guaranty and the Bank are each generally
required to maintain a minimum  ratio of total capital to  risk-weighted  assets
(including  certain  off-balance  sheet  activities,  such as standby letters of
credit) of 8%. At least half of the total  capital  must be  composed  of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles   ("Tier  1  capital").   The   remainder  may  consist  of  certain
subordinated  debt,  certain hybrid  capital  instruments  and other  qualifying
preferred  stock  and a  limited  amount  of the loan  loss  allowance  ("Tier 2
capital," which, together with Tier 1 capital, composes "total capital").

         In  addition,  each of the  federal  banking  regulatory  agencies  has
established  minimum  leverage capital  requirements for banking  organizations.
Under these requirements, banking organizations must maintain a minimum ratio of
Tier 1 capital to adjusted  average  quarterly assets equal to 3% to 5%, subject
to federal bank regulatory  evaluation of an  organization's  overall safety and
soundness.

         The  risk-based   capital   standards  of  the  Federal  Reserve  Board
explicitly  identify  concentrations  of credit risk and the risk  arising  from
non-traditional  activities, as well as an institution's ability to manage these
risks, as important  factors to be taken into account by the agency in assessing
an institution's  overall capital adequacy.  The capital guidelines also provide
that an institution's exposure to a decline in the economic value of its capital
due to  changes in  interest  rates be  considered  by the agency as a factor in
evaluating a banking organization's capital adequacy.

                                       9
<PAGE>

         Other  Safety  and  Soundness  Regulations.   There  are  a  number  of
obligations  and  restrictions  imposed  on bank  holding  companies  and  their
depository  institution  subsidiaries by federal law and regulatory  policy that
are  designed  to reduce  potential  loss  exposure  to the  depositors  of such
depository  institutions  and to the FDIC insurance  funds in the event that the
depository  institution is insolvent or is in danger of becoming insolvent.  For
example,  under the  requirements  of the Federal  Reserve Board with respect to
bank holding company operations,  a bank holding company is required to serve as
a source of financial strength to its subsidiary depository  institutions and to
commit resources to support such  institutions in  circumstances  where it might
not do so otherwise.  In addition,  the "cross-guarantee"  provisions of federal
law require insured  depository  institutions  under common control to reimburse
the FDIC for any loss suffered or reasonably anticipated by the FDIC as a result
of the insolvency of commonly controlled insured depository  institutions or for
any assistance  provided by the FDIC to commonly  controlled  insured depository
institutions  in  danger  of  failure.  The  FDIC may  decline  to  enforce  the
cross-guarantee  provision  if it  determines  that  a  waiver  is in  the  best
interests of the deposit  insurance  funds.  The FDIC's claim for  reimbursement
under the cross  guarantee  provisions is superior to claims of  shareholders of
the insured depository  institution or its holding company but is subordinate to
claims  of  depositors,   secured   creditors  and   nonaffiliated   holders  of
subordinated debt of the commonly controlled insured depository institutions.

         The federal  banking  agencies  also have broad  powers  under  current
federal  law to take  prompt  corrective  action to resolve  problems of insured
depository  institutions.  The extent of these  powers  depends upon whether the
institution   in  question   is  well   capitalized,   adequately   capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law.  As of  December  31,  2003,  Guaranty  and the Bank were
classified as well capitalized.

         State banking  regulators also have broad  enforcement  powers over the
Bank,  including  the  power to  impose  fines  and  other  civil  and  criminal
penalties, and to appoint a conservator.

         Interstate  Banking  and  Branching.  Current  federal  law  authorizes
interstate  acquisitions of banks and bank holding companies without  geographic
limitation.  Effective  June 1,  1997,  a bank  headquartered  in one  state was
authorized  to merge  with a bank  headquartered  in another  state,  as long as
neither of the states had opted out of such interstate merger authority prior to
such  date.  After  a bank  has  established  branches  in a  state  through  an
interstate  merger  transaction,  the bank may establish and acquire  additional
branches at any location in the state where a bank  headquartered  in that state
could have established or acquired  branches under  applicable  federal or state
law.

         Gramm-Leach-Bliley Act of 1999. The Gramm-Leach-Bliley Act of 1999 (the
"Act") was signed into law on November 12, 1999. The Act covers a broad range of
issues,  including a repeal of most of the  restrictions on  affiliations  among
depository institutions,  securities firms and insurance companies.  Most of the
Act's  provisions  require  the  federal  bank  regulatory  agencies  and  other
regulatory bodies to adopt regulations to implement the Act, and for that reason
an assessment of the full impact on Guaranty of the Act must await completion of
that regulatory process.

         The Act  repeals  sections  20 and 32 of the  Glass-Stegall  Act,  thus
permitting unrestricted affiliations between banks and securities firms. The Act
also  permits  bank  holding  companies  to elect to  become  financial  holding
companies.  A financial  holding company may engage in or acquire companies that
engage in a broad range of financial services,  including securities  activities
such as underwriting,  dealing, brokerage,  investment and merchant banking; and
insurance  underwriting,  sales and brokerage  activities.  In order to become a
financial  holding  company,  the bank holding company and all of its affiliated
depository  institutions  must be  well-capitalized,  well-managed,  and have at
least a satisfactory Community Reinvestment Act rating.

                                       10
<PAGE>

         The Act  provides  that the states  continue to have the  authority  to
regulate insurance  activities,  but prohibits the states in most instances from
preventing or significantly  interfering with the ability of a bank, directly or
through   an   affiliate,   to  engage   insurance   sales,   solicitations   or
cross-marketing  activities.  Although the states  generally  must regulate bank
insurance  activities in a nondiscriminatory  manner, the states may continue to
adopt and enforce rules that specifically  regulate bank insurance activities in
certain areas identified in the Act. The Act directs the federal bank regulatory
agencies to adopt insurance consumer protection  regulations that apply to sales
practices, solicitations, advertising and disclosures.

         The Act  adopts a system  of  functional  regulation  under  which  the
Federal  Reserve  Board is  confirmed as the umbrella  regulator  for  financial
holding   companies,   but  financial  holding  company  affiliates  are  to  be
principally  regulated  by  functional  regulators  such as the FDIC  for  state
nonmember bank affiliates, the Securities and Exchange Commission for securities
affiliates  and state  insurance  regulators for insurance  affiliates.  The Act
repeals  the broad  exemption  of banks from the  definitions  of  "broker"  and
"dealer" for purposes of the  Securities  Exchange Act of 1934, as amended,  but
identifies a set of specific  activities,  including  traditional bank trust and
fiduciary  activities,  in  which a bank  may  engage  without  being  deemed  a
"broker",  and a set of  activities  in which a bank may  engage  without  being
deemed a "dealer".  The Act also makes conforming  changes in the definitions of
"broker" and "dealer" for  purposes of the  Investment  Company Act of 1940,  as
amended, and the Investment Advisers Act of 1940, as amended.

         The Act contains  extensive  customer  privacy  protection  provisions.
Under these provisions,  a financial  institution must provide to its customers,
at the  inception of the customer  relationship  and  annually  thereafter,  the
institution's  policies and  procedures  regarding  the  handling of  customers'
nonpublic  personal  financial  information.  The Act provides that,  except for
certain  limited  exceptions,  an  institution  may not  provide  such  personal
information to unaffiliated  third parties unless the  institution  discloses to
the customer that such  information may be so provided and the customer is given
the opportunity to opt out of such  disclosure.  An institution may not disclose
to a  non-affiliated  third party,  other than to a consumer  reporting  agency,
customer  account  numbers or other similar  account  identifiers  for marketing
purposes.  The Act also  provides  that the  states may adopt  customer  privacy
protections  that are more strict than those  contained in the Act. The Act also
makes  a  criminal  offense,  except  in  limited  circumstances,  obtaining  or
attempting to obtain customer information of a financial nature by fraudulent or
deceptive means.




                                       11
<PAGE>

Item 2.           Description of Property.

         As of March 1, 2004,  Guaranty  conducted  its  business  from its main
office in  Charlottesville,  Virginia and seven branch  offices.  The  following
table provides certain information with respect to these properties:

<TABLE>
<CAPTION>
Location                                         Date Facility Opened          Lease Arrangements
--------                                         --------------------          ------------------
<S>                                                     <C>                   <C>
Main Office:

1658 State Farm Boulevard                                1996                  Owned by Guaranty
Charlottesville, Virginia

Branch Offices:

Downtown Mall                                            2002                  Lease  expires  in 2012,  subject to
400 East Main Street                                                           Guaranty's  right to  renew  for two
Charlottesville, Virginia                                                      additional five-year terms

Barracks Road                                            1994                  Lease expires in 2004
1924 Arlington Boulevard
Charlottesville, Virginia

Route 29 North & Rio Road                                1985                  Lease  expires  in 2012,  subject to
1700 Seminole Trail                                                            Guaranty's  right to  renew  for two
Charlottesville, Virginia                                                      additional five-year terms

Lake Monticello                                          1998                  Owned by Guaranty
Route 53 & Turkey Sag Road
Lake Monticello, Virginia

Forest Lakes                                             2001                  Owned by Guaranty
3290 Worth Crossing
Charlottesville, Virginia

Lovingston                                               2003                  Owned by Guaranty
124 Main Street
Lovingston, Virginia
</TABLE>


         Guaranty  believes that all of its  properties  are  maintained in good
operating condition and are suitable and adequate for its operational needs.


Item 3.           Legal Proceedings.

         In the course of its  operations,  Guaranty is a party to various legal
proceedings.  There  are no  material  pending  legal  proceedings  to which the
Company is a party or of which the property of the Company is subject.

                                       12
<PAGE>

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

         No matters were submitted  during the fourth quarter of the fiscal year
covered by this report to a vote of security holders of Guaranty.


                                     PART II

Item 5.           Market for Common Equity and Related Stockholder Matters.

         Guaranty's  Common Stock has been listed on the Nasdaq  National Market
under the symbol "GSLC" since June 1997. The following table sets forth, for the
quarters  indicated,  the high and low sales prices for Guaranty's  Common Stock
and per share dividends for the periods indicated.

                           Market Price and Dividends
<TABLE>
<CAPTION>

                                                     Sales Price ($)
                                                     ---------------

                                                     High              Low              Dividends ($)
                                                     ----              ---              -------------
<S>                                                <C>               <C>                   <C>

Fiscal Year Ended December 31, 2003:
         1st quarter                                $14.00            12.83                 $0.075
         2nd quarter                                 15.36            13.01                  0.075
         3rd quarter                                 16.20            14.18                  0.075
         4th quarter                                 26.24            15.90                  0.075

Fiscal Year Ended December 31, 2002:
         1st quarter                                 10.95             8.00                   --
         2nd quarter                                 13.75            10.20                   --
         3rd quarter                                 14.12            12.20                   --
         4th quarter                                 14.60            12.50                   --
</TABLE>


         In October  2000,  both  Guaranty  and the Bank  entered into a written
agreement with the FRB-Richmond and the Bureau of Financial Institutions.  Among
the  restrictions  included in the Written  Agreement was a requirement that any
dividends  paid or declared  by either  Guaranty or the Bank be approved by both
the  FRB-Richmond  and the  Bureau  of  Financial  Institutions.  Following  the
initiation of the written  agreement,  Guaranty's Board of Directors  decided to
suspend dividend payments on Guaranty's Common Stock. Guaranty and the Bank were
released  from the Written  Agreement in October  2002.  The timing,  amount and
payment of future  dividends on Guaranty's  Common Stock is at the discretion of
Guaranty's  Board of Directors and will depend upon the earnings of Guaranty and
its subsidiaries,  principally the Bank, the financial condition of Guaranty and
other factors, including general economic conditions and applicable governmental
regulations and policies.

         Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank.

         As of March 1, 2004,  Guaranty had  approximately  330  shareholders of
record.  This number of shareholders  does not reflect the number of individuals
or  institutional  investors  holding  stock  in  nominee  name  through  banks,
brokerage firms and others.

                                       13
<PAGE>
Item 6.           Management's Discussion and Analysis of Financial Condition
                  and Results of Operation.

         The following  commentary discusses major components of the business of
Guaranty  Financial  Corporation  (Guaranty)  and  presents  an  overview of its
consolidated  financial  position and results of operations at December 31, 2003
and  2002,  and for the years  ended  December  31,  2003,  2002 and 2001.  This
discussion  should be reviewed in conjunction  with the  consolidated  financial
statements,  the summary of accounting policies and accompanying notes and other
statistical information presented elsewhere in this annual report.

Overview

         Guaranty is  headquartered  in  Charlottesville,  Virginia and conducts
almost all of its operations  through its  subsidiary,  Guaranty Bank.  Guaranty
Bank is a community bank serving the markets of the City of Charlottesville  and
the  counties of  Albemarle,  Fluvanna  and Nelson.  Guaranty  Bank (the "Bank")
operated seven branch locations throughout the year 2003.

         Guaranty maintained solid earnings during calendar year 2003, which was
the  third  and  final  year of its  strategic  repositioning  to  become a high
performing  banking company.  Management  continued to focus on initiatives that
were established in 2001 to improve earnings.  Guaranty  maintained a high level
of asset  quality,  ending the year with no  non-performing  assets and past-due
loans  balances  at the lowest  level in five years.  As a result of  Guaranty's
focused effort on attracting low-cost deposits,  the net interest margin widened
from 3.51% for calendar year 2001 to 4.75% for calendar year 2003.

         From December 31, 2001 to December 31, 2003, Guaranty reduced its total
assets from $225.2 million to $199.0  million.  This planned  reduction in total
assets is indicative of Guaranty's  emphasis  changing from aggressive growth to
profitability management.

Net Income

         Net income for the year ended December 31, 2003,  was $1,946,000  ($.97
per diluted share), which represented a $183,000, or 10.4% increase over the net
income for the prior year.  Factors that contributed to the increased net income
were the gain  that was  realized  on the sale of the  Harrisonburg  branch  and
increased  mortgage  banking income.  These  favorable  variances were offset by
lower net interest  income,  an increased  loan loss  provision,  resulting from
fraudulent activity on the part of one large commercial borrower,  and decreased
investment commissions.

         Net income for the year ended December 31, 2002,  was $1,763,000  ($.89
per diluted share),  which  represented a $1,245,000,  or 240% increase over the
net income for the prior year.  Factors that  significantly  contributed  to the
increased net income were higher net interest income, lower loan loss provision,
and decreased personnel and occupancy expenses, offset by lower mortgage banking
fees, investment commissions and an increased provision for income taxes.

         Net income for the year ended  December 31, 2001,  was $518,000 or $.26
per diluted  share,  an $89,000  decrease  from the net income  reported for the
prior year.  Decreased net income was due to a reduction in net interest  income
caused by the impact of declining interest rates on a short-term asset sensitive
balance sheet.  Increases in operating  expenses  primarily related to severance
expenses arising from management changes also negatively impacted net income for
2001.  These changes more than offset  increased  mortgage  banking income and a
reduction in the provision for possible loan losses.


                                       14
<PAGE>

Net Interest Income

         Net interest income is the major  component of Guaranty's  earnings and
is equal to the  amount  by which  interest  income  exceeds  interest  expense.
Earning assets  consist  primarily of loans and  securities,  while deposits and
borrowings represent the major portion of interest bearing liabilities.  Changes
in the  volume  and mix of assets  and  liabilities,  as well as  changes in the
yields  and rates  paid,  determine  changes  in net  interest  income.  The net
interest margin is calculated by dividing net interest income by average earning
assets.

         Net interest  income was $8.3  million for the year ended  December 31,
2003, a 4.8%  decrease  from $8.7  million in net  interest  income for the year
ended  December  31,  2002.  The yield on loans fell 75 basis  points from 6.99%
during 2002 to 6.24%  during 2003.  The yield on  securities  was  substantially
impacted by the low rate environment, as Guaranty replaced higher risk long-term
corporate bonds yielding an average of 6.30% in 2002 with securities yielding an
average of 3.73% in 2003. The cost of interest  bearing  deposits fell 115 basis
points to 1.09%  during 2003 from 2.24%  during 2002,  as  Guaranty's  continued
focus regarding  deposits  remained  centered  around  low-cost  deposit growth.
During 2003,  Guaranty redeemed its Trust Preferred  Securities,  which had a 7%
coupon  rate,  saving over  $260,000 in  interest  expense in 2003.  Unamortized
expenses were recognized in full at the time of the  redemption,  resulting in a
negative  impact to the yield of $185,000.  Guaranty also redeemed  GMSC's REMIC
bond during 2003, at which time $52,000 in unamortized  premium was  recognized,
also negatively impacting Guaranty's net interest income.

         Net interest  income was $8.7  million for the year ended  December 31,
2002, a 10.3%  increase  from $7.9  million in net interest  income for the year
ended  December 31, 2001.  The net interest  margin was 4.58% for the year ended
December 31, 2002, a 107 basis point  increase  over net interest  margin of the
prior year. Interest on deposits decreased year-over-year by 61.2%, falling from
$8.9 million to $3.5 million.  This decrease was the result of a focused  effort
to attract and retain low-cost  deposits,  coupled with lower market rates.  The
average cost of deposits  decreased 233 basis  points,  from 4.57% to 2.24% from
December  31, 2001 to December  31,  2002.  The impact of lower  interest  rates
offered by the Bank to deposit customers was offset to a certain extent by lower
interest earned on interest  earning assets.  Interest income generated by loans
fell from $15.5 million to $11.6 million, a 24.6% decrease. The average yield on
loans fell by 118 basis points,  to 6.99% for the year ended  December 31, 2002,
from 8.17% for the prior  year.  Interest  earned on  investments  decreased  by
$984,000, predominantly due to lower balances in the investment portfolio.

         Net interest  income was $7.9  million for the year ended  December 31,
2001, a 19.4%  decrease  from $9.8 million in net interest  income for the prior
year. The net interest margin for the year ended December 31, 2001, was 3.51%, a
48 basis point decline from 3.99% in the prior year. The net interest margin was
compressed  throughout 2001 as interest rates on earning assets fell faster than
the corresponding decrease in interest rates paid on deposits.  During 2001, the
yield on the loan  portfolio fell by 125 basis points while the cost of interest
bearing  deposits  declined by 62 basis points.  This  difference was due to the
impact of loans with interest rates tied to the prime rate repricing immediately
with each rate  reduction.  In contrast,  certificates  of deposit are generally
issued with  maturities of twelve months and the interest rate paid usually does
not adjust until maturity. Net interest income was also negatively impacted by a
reduction in average  loans  outstanding  to $189.1  million in 2001 from $213.4
million during the prior year.


                                       15
<PAGE>

         The  following  table sets forth  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.

<TABLE>
<CAPTION>
                                                                       Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                2003                          2002                         2001
------------------------------------------------------------------------------------------------------------------------------------
                                              Interest   Average            Interest   Average           Interest    Average
                                     Average   Income/   Yield/    Average   Income/   Yield/    Average  Income/    Yield/
(Dollars in thousands)               Balance   Expense    Rate     Balance   Expense    Rate     Balance  Expense     Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                               <C>         <C>        <C>     <C>         <C>       <C>     <C>        <C>         <C>
Assets
Interest earning assets:
  Securities                        $  7,114    $   265    3.73%   $ 17,226   $ 1,086    6.30%  $ 28,303   $ 1,855     6.55%
  Loans                              158,992      9,916    6.24%    166,634    11,649    6.99%   189,135    15,451     8.17%
  Interest bearing deposits
   in other banks                      8,159        101    1.25%      6,078       120    1.97%     7,381       336     4.55%
------------------------------------------------------------------------------------------------------------------------------------
  Total interest-earning assets/
   total interest income             174,265     10,282    5.90%    189,938    12,855    6.77%   224,819    17,642     7.85%
------------------------------------------------------------------------------------------------------------------------------------
  Non-interest earning assets:
   Cash and due from banks             8,715                          8,551                        8,134
   Premises and equipment              6,467                          8,185                        9,245
   Other assets                        4,742                          4,975                        4,504
   Less allowance for loan losses     (2,193)                        (2,531)                      (2,523)
   Total non-interest earning assets  17,731                         19,180                       19,360
------------------------------------------------------------------------------------------------------------------------------------
   Total Assets                     $191,996                       $209,118                     $244,179
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
  Interest bearing deposits:
  Demand accounts                  $  30,347         54    0.18%   $ 27,057        87    0.32%   $23,344       243     1.04%
  MMDA accounts                       40,164        368    0.92%     24,864       381    1.53%    21,170       674     3.18%
  Savings                             12,833         27    0.21%     13,103        63    0.48%    11,643       195     1.67%
  Certificates of deposit             58,309      1,094    1.88%     89,635     2,933    3.27%   139,438     7,821     5.61%
------------------------------------------------------------------------------------------------------------------------------------
  Total interest bearing
   deposits                          141,653      1,543    1.09%    154,659     3,464    2.24%   195,595     8,933     4.57%
------------------------------------------------------------------------------------------------------------------------------------
  FHLB advances and other
   borrowings                            760         10    1.32%      6,136       120    1.96%     4,608       237     5.14%
  Trust preferred bonds                2,718        364   13.39%      6,013       481    8.00%     6,013       481     8.00%
  Bonds payable (3)                      189         84   44.44%        486        90   18.52%       739       105    14.21%
------------------------------------------------------------------------------------------------------------------------------------
  Total interest bearing
   liabilities/total interest
   expense                           145,320      2,001    1.38%    154,659     4,155    2.48%   206,955     9,756     4.71%
------------------------------------------------------------------------------------------------------------------------------------
  Non-interest bearing liabilities:
  Demand deposits                     26,306                         22,879                       18,755
  Other liabilities                    1,123                          1,397                        2,259
------------------------------------------------------------------------------------------------------------------------------------
   Total Liabilities                 172,749                        191,570                      227,969
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity                  19,247                         17,548                       16,210
------------------------------------------------------------------------------------------------------------------------------------
  Total liabilities and
   Stockholders' equity             $191,996                       $209,118                     $244,179
------------------------------------------------------------------------------------------------------------------------------------
Interest spread (1)                                        4.52%                         4.29%                         3.13%
Net interest income/net interest
  margin (2)                                     $8,281    4.75%              $ 8,700    4.58%              $7,886     3.51%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Interest spread is the average yield earned on earning assets, less the
    average rate incurred on interest bearing liabilities.

(2) Net interest margin is net interest income, expressed as a percentage of
    average earning assets.

(3) The yield associated with bonds payable for the year ended December 31, 2003
    includes $52,000 of premium associated with the time of redemption of the
    bonds.

                                       16
<PAGE>

         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>
                                                           Year Ended December 31, 2003         Year Ended December 31, 2002
                                                                    compared to                    compared to
                                                           Year Ended December 31, 2002         Year Ended December 31, 2001
                                                                  Change Due To:               Change Due To:
------------------------------------------------------------------------------------------------------------------------------------
                                                                               Increase                            Increase
(Dollars in thousands)                                     Rate      Volume   (Decrease)        Rate    Volume    (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>          <C>        <C>            <C>      <C>        <C>
Interest income:
  Securities                                          $     (444)   $  (377)  $   (821)        $ (71) $   (698)  $   (769)
  Loans                                                   (1,256)      (477)    (1,733)       (2,229)   (1,573)    (3,802)
  Interest bearing deposits
   in other banks                                            (44)        26        (18)         (190)      (26)      (216)
------------------------------------------------------------------------------------------------------------------------------------
     Total interest income                                (1,744)      (828)    (2,572)       (2,490)   (2,297)    (4,787)
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest bearing deposits:
   Demand accounts                                           (39)         6        (33)         (168)       12       (156)
   MMDA accounts                                            (153)       140        (13)         (350)       57       (293)
   Savings                                                   (35)        (1)       (36)         (139)        7       (132)
   Certificates of deposit                                (1,251)      (588)    (1,839)       (3,258)   (1,630)    (4,888)
------------------------------------------------------------------------------------------------------------------------------------
     Total interest bearing deposits                      (1,478)      (443)    (1,921)       (3,915)   (1,554)    (5,469)
   FHLB advances and other                                   (39)       (71)      (110)         (147)       30       (117)
   Trust preferred bonds                                     324       (441)      (117)           --        --         --
   Bonds payable                                             126       (132)        (6)           32       (47)       (15)
------------------------------------------------------------------------------------------------------------------------------------
   Total interest expense                                 (1,067)    (1,087)    (2,154)       (4,030)   (1,571)    (5,601)
------------------------------------------------------------------------------------------------------------------------------------
   Net interest income                                   $  (677)    $  259  $    (418)      $ 1,540    $ (726)   $   814
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Interest Sensitivity

         An important element of both earnings  performance and liquidity is the
management of the interest  sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive  liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing assets or liabilities,  by selling investments,  by replacing an asset
or liability  prior to maturity,  or by adjusting  the interest  rate during the
life of an asset or  liability.  Matching the amounts of assets and  liabilities
repricing  in the same time  interval  helps to hedge the risk and  minimize the
impact on net income of changes in market interest rates.

         Guaranty  has  an  Asset/Liability   Committee  ("ALCO"),  which  meets
regularly to discuss  deposit  pricing,  changes in borrowed  money,  investment
activity,  loan  sale  activity,  liquidity  levels  and  the  overall  interest
sensitivity.  The  actions  of this  committee  are  reported  to the  Board  of
Directors  monthly.  The daily monitoring of interest rate risk,  investment and
trading activity,  along with any other significant  transactions are managed by
the President with input from other ALCO members.  Guaranty's  ALCO has assigned
an "effective  maturity" to non-maturing  demand  accounts,  ranging from two to
three years, depending on the nature of the account, and this effective maturity
reduces the risk of the liability sensitive position.

         At December 31, 2003,  Guaranty had $46.7 million more liabilities than
assets  that  re-price   within  one  year  and  therefore  was  in  a  one-year
liability-sensitive  position. A liability-sensitive  position or a negative gap
will tend to  positively  impact net  earnings  in a period of falling  interest
rates and negatively  impact net earnings in a period of rising  interest rates.
This   liability-sensitive   position  is  primarily   the  result  of  a  large
concentration of non-maturing interest-bearing demand deposit accounts and fixed
rate certificates of deposit reaching maturity in one year or less.

                                       17
<PAGE>

         Because  gap  analysis  shows  only the  dollar  volume of  assets  and
liabilities  that  will  mature or  re-price,  Guaranty's  ALCO uses  simulation
modeling to measure the actual effects the re-pricing  will have on net interest
margin  and net  income.  The  typical  simulation  model  involves  a  12-month
projection  with a level rate  scenario  and rising and falling  rate  scenarios
deemed  appropriate given the current rate environment.  The acceptable level of
interest rate  sensitivity  is plus or minus 15% of net interest  income from an
immediate 200 basis point increase or decrease in interest rates. The acceptable
change in net  income is plus or minus 40% from a 200 basis  point  increase  or
decrease  in  interest  rates.  ALCO  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.

         ALCO also  measures  the  economic  value at risk.  The purpose of this
measure is to determine the long-term  effect interest rate changes will have on
the economic  value of the balance sheet.  This  measurement is obtained using a
discounted  cash flow technique,  at current,  level and rising and falling rate
scenarios. ALCO has established risk parameters for economic value of equity and
monitors periodic projections against such parameters.


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

                                                                                   December 31, 2003
                                                                                Maturing or Repricing In:
------------------------------------------------------------------------------------------------------------------------------------
                                                        3 Months              4-12                    1-5             Over 5
(Dollars in thousands)                                   or less             Months                  Years             Years
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                 <C>                   <C>               <C>

Interest-sensitive assets:
  Loans                                                $ 68,932             $ 17,349             $ 41,139          $ 30,360
  Investments and mortgage-backed securities (1)              3                    9                9,669             9,012
  Deposits at other institutions                          4,667                    -                    -                 -
------------------------------------------------------------------------------------------------------------------------------------
  Total interest-sensitive assets                        73,602               17,358               50,808            39,372
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets                     73,602               90,960              141,768           181,140
------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
  NOW accounts                                           32,073                    -                    -                 -
  Money market deposit accounts                          45,225                    -                    -                 -
  Savings accounts                                       13,404                    -                    -                 -
  Certificates of deposit                                16,991               29,971                7,413                 9
------------------------------------------------------------------------------------------------------------------------------------
   Total interest-sensitive liabilities                 107,693               29,971                7,413                 9
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive liabilities             $ 107,693             $137,664             $145,077          $145,086
------------------------------------------------------------------------------------------------------------------------------------
Period gap                                             $(34,091)            $(12,613)            $ 43,395          $ 39,363
Cumulative gap                                          (34,091)             (46,704)              (3,309)           36,054
Ratio of cumulative interest-sensitive
  assets to interest-sensitive liabilities               68.34%               66.07%               97.72%           124.85%
Ratio of cumulative gap to total assets                 (17.13%)             (23.47%)              (1.66%)           18.12%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Amounts include Federal Home Loan Bank stock.

         Of Guaranty's commercial and construction loans with a maturity of more
than one year,  approximately  $2.2 million have fixed  interest  rates and $1.9
million have variable interest rates.

                                       18
<PAGE>
Investments

         Total investment securities increased 267% to $19.9 million at December
31, 2003,  from $5.4 million at December 31, 2002.  During 2002,  Guaranty  took
advantage of the sustained low interest rate  environment  and liquidated  $10.4
million of the corporate bonds in the available for sale  classification,  in an
effort to improve liquidity without incurring investment losses.  Guaranty began
to  re-build  the  investment  portfolio  in 2003 to meet future  liquidity  and
profitability objectives.

         The following  table shows the amortized  cost and fair market value of
investment securities at the dates indicated.
<TABLE>
<CAPTION>

                                                                                December 31,
                                                         2003                       2002                       2001
------------------------------------------------------------------------------------------------------------------------------------
                                                  Cost         Market         Cost        Market         Cost        Market
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>         <C>            <C>           <C>           <C>

(Dollars in thousands)
Held-to-maturity
  Mortgage-backed securities                     $ 3,321      $ 3,349      $    433       $   471       $  720        $  768
  U.S. Government Agency Obligations               8,138        8,122           403           403          250           250
------------------------------------------------------------------------------------------------------------------------------------
  Total held-to-maturity                          11,459       11,471           836           874          970         1,018
------------------------------------------------------------------------------------------------------------------------------------

Available for sale
   Mortgage-backed securities                      5,882        5,868             -             -            -             -
  Corporate bonds                                      -            -         3,247         3,212       13,620        12,597
  U.S. Government Agency Obligations               1,497        1,477             -             -        8,000         7,970
  Federal Reserve Bank & Other Stocks                557          557           422           422          422           422
------------------------------------------------------------------------------------------------------------------------------------
  Total available for sale                         7,936        7,902         3,669         3,634       22,042        20,989
------------------------------------------------------------------------------------------------------------------------------------

Other
  Federal Home Loan Bank Stock                       532          532           947           947        1,550         1,550
------------------------------------------------------------------------------------------------------------------------------------
  Total                                          $19,927      $19,905        $5,452        $5,455      $24,562       $23,557
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

                                                                                December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                         2003                       2002                       2001
------------------------------------------------------------------------------------------------------------------------------------
                                                   Book         % of          Book         % of          Book          % of
(Dollars in thousands)                             Value        Total         Value        Total         Value         Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>          <C>          <C>            <C>            <C>          <C>

  Investment securities:
   Mortgage-backed securities                    $ 9,189      46.19%       $    431        7.96%         $  720       3.06%
   Corporate bonds                                     -          -           3,212       59.29          12,597      53.58
   Treasury and agency notes                       9,615      48.33               -           -           8,220      34.97
   FHLB stock                                        532       2.68             947       17.48           1,550       6.59
   Other                                             557       2.80             827       15.27             422       1.80
------------------------------------------------------------------------------------------------------------------------------------
Total Investment securities                      $19,893      100.00%        $5,417       100.00%       $23,509      100.00%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       19
<PAGE>

The following table indicates the maturity distribution and yields of investment
securities, held as of December 31, 2003.
<TABLE>
<CAPTION>

                                   Due in 1 year    Due after 1 year   Due after 5 years
                                      or less        through 5 years   through 10 years   Due after 10 years        Total
------------------------------------------------------------------------------------------------------------------------------------
                                  Amount   Yield     Amount   Yield      Amount  Yield      Amount   Yield      Amount  Yield
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>               <C>       <C>        <C>        <C>   <C>        <C>     <C>       <C>
(Dollars in thousands)

Securities held for investment:
  U.S. Government securities      $   -     -        $8,138    2.77%      $   -       -    $     -      -     $8,138     2.77%
  Mortgage-backed securities          -     -             -        -          -       -      3,321    4.86%    3,321      4.86

------------------------------------------------------------------------------------------------------------------------------------
  Total                           $   -     -        $8,138    2.77%      $   -       -   $  3,321    4.86%  $11,459     3.38%

Securities available for sale (1):
  U.S. Government securities      $   -     -        $1,477    3.50%      $   -       - $        -      -     $1,477     3.50%
  Mortgage-backed securities          -     -             -        -          -       -      5,868    2.68%    5,868     2.68%
  Total                           $   -     -        $1,477    3.50%      $   -       -   $  5,868    2.68%   $7,345     3.50%


Total securities                  $   -     -        $9,615    2.88%      $   -       -   $  9,189    3.47%  $18,804     3.17%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Excludes Federal Reserve stock of $352,250, Federal Home Loan Bank stock of
    $532,000, Community Bankers Bank stock of $70,000 and BI Investments stock
    of $135,000.

Loans

         Net loans consist of total loans minus undisbursed loan funds, deferred
loan fees and the  allowance for loan losses.  Net loans were $156.0  million at
December 31, 2003, a 4.4% decline from December 31, 2002. During 2003,  Guaranty
continued  to  reposition  the  loan  portfolio  with  highly  focused   lending
strategies  and an  emphasis  on credit  quality.  Net loans  declined to $163.2
million at December 31,  2002,  from $177.6  million at December  31,  2001,  as
Guaranty controlled its growth to increase its regulatory capital ratios.

         The  following  table sets forth the  composition  of  Guaranty's  loan
portfolio in dollars at the dates indicated.
<TABLE>
<CAPTION>

                                                                                     December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                          2003           2002           2001            2000           1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>             <C>            <C>            <C>
(Dollars in thousands)
Mortgage Loans:
  Residential                                           $25,461       $ 20,119        $ 39,864       $ 54,911       $ 62,796
  Commercial                                              5,975          7,894          16,277          3,434          1,179
  Construction and land loans                            38,013         38,480          36,307         59,363         70,009
------------------------------------------------------------------------------------------------------------------------------------
  Total real estate                                      69,449         66,493          92,448        117,708        133,984
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans                                67,090         76,651          66,603         59,120         55,698
Consumer loans                                           21,241         22,238          20,973         27,190         16,960
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable                                157,780        165,382         180,024        204,018        206,642
------------------------------------------------------------------------------------------------------------------------------------
Adjustments:
  Deferred fees (costs)                                    (240)          (110)           (67)           (27)             40
  Allowance for losses                                    2,011          2,242           2,512          2,396          1,203
------------------------------------------------------------------------------------------------------------------------------------
  Total net items                                         1,771          2,132           2,445          2,369          1,243
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable, net                          $156,009       $163,250        $177,579       $201,649       $205,399
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       20
<PAGE>

         The  changes  in  Guaranty's  loan  portfolio  over the past five years
represent the evolution from a savings  association to a full service commercial
bank.  Commercial  business  lending began in 1998 and now comprises over 42% of
total loans  outstanding.  During this same time  period,  residential  mortgage
loans outstanding have decreased from $62.8 million to $25.5 million. Presently,
the  majority  of the  residential  mortgage  loans  originated  are  sold  on a
servicing released basis.

         The following  tables show the composition of Guaranty's loan portfolio
by fixed and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>

                                                                           December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                          2003           2002           2001           2000            1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>           <C>             <C>            <C>            <C>

(Dollars in thousands)
Fixed-Rate Loans:
  Real Estate
   Residential                                          $15,417        $ 8,921        $ 27,200       $ 20,403       $ 18,277
   Commercial                                                 -              -               -              -          1,179
   Construction and land loans                                -              -               -              -              -
------------------------------------------------------------------------------------------------------------------------------------
  Total real estate                                      15,417          8,921          27,200         20,403         19,456
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans                                13,380         15,745          15,427         12,891         13,678
Consumer Loans                                            4,412          3,606           3,429          3,832          2,825
------------------------------------------------------------------------------------------------------------------------------------
  Total fixed-rate loans                                 33,209         28,272          46,056         37,126         35,959
------------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
  Real Estate
   Residential                                           10,045         11,198          12,664         34,508         44,519
   Commercial                                             5,975          7,894          16,277          3,434         11,140
   Construction and land loans                           38,013         38,480          36,307         59,363         70,009
------------------------------------------------------------------------------------------------------------------------------------
  Total real estate                                      54,033         57,572          65,248         97,305        125,668
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans                                53,650         60,906          51,176         46,229         30,880
Consumer loans                                           16,888         18,632          17,544         23,358         14,135
------------------------------------------------------------------------------------------------------------------------------------
  Total adjustable-rate loans                           124,571        137,110         133,968        166,892        170,683
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable                                157,780        165,382         180,024        204,018        206,642
------------------------------------------------------------------------------------------------------------------------------------
Less:
  Deferred fees (costs)                                    (240)          (110)           (67)           (27)             40
  Allowances for losses                                   2,011          2,242           2,512          2,396          1,203
------------------------------------------------------------------------------------------------------------------------------------
  Total net items                                         1,771          2,132           2,445          2,369          1,243
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable, net                          $156,009       $163,250        $177,579       $201,649       $205,399
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

         The  following  table  presents the  remaining  maturities  of selected
categories of Guaranty's loan portfolio at December 31, 2003.


                              Commercial, Financial            Real Estate
                                 and Agricultural              Construction
   ---------------------------------------------------------------------------
    (Dollars in thousands)
    Within 1 year                       $12,735                  $23,848
   ---------------------------------------------------------------------------
    Variable Rate:
      1 to 5 years                       16,800                    5,450
      After 5 years                      32,822                    2,235
   ---------------------------------------------------------------------------
    Total                                49,622                    7,685
    Fixed Rate:
      1 to 5 years                        5,920                       -
      After 5 years                       4,738                       -
    ---------------------------------------------------------------------------
    Total                                10,658                       -
    ---------------------------------------------------------------------------
    Total                               $73,015                  $31,533
    ---------------------------------------------------------------------------

                                       21
<PAGE>

         Contractual  principal  repayments of loans do not necessarily  reflect
the actual term of Guaranty's loan portfolio. The average life of mortgage loans
is substantially  less than their  contractual terms because of loan prepayments
and  enforcement  of  due-on-sale  clauses,  which gives  Guaranty  the right to
declare a loan immediately due and payable in the event, among other things, the
borrower  sells the real  property  subject to the  mortgage and the loan is not
repaid.  In addition,  certain  borrowers  increase their equity in the security
property by making  payments in excess of those  required under the terms of the
mortgage.

Asset Quality

General

         Asset quality is an important  factor in the successful  operation of a
financial  institution.  Banking  regulations  require  insured  institutions to
classify their own assets and to establish prudent general allowances for losses
for assets  classified as "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 that do not  currently  expose  Guaranty 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.  On the basis of management's  review of its assets, at December 31,
2003, Guaranty had classified $3.7 million of its loans as substandard. No loans
were  classified  as doubtful or loss at December 31, 2003.  Most of  Guaranty's
assets that have been classified are not included in the table of non-performing
assets set forth below because many loans are classified as substandard based on
certain  criteria or previous credit  problems but are currently  performing and
management believes that they are fully collectible and secured.

         Unless well secured and in the process of collection,  Guaranty  places
loans on a non-accrual  status after being  delinquent  greater than 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 ceases,  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
principal and interest under the contractual terms of the loan.  Guaranty had no
loans that were considered in the non-accrual status as of December 31, 2003.

         The following table reflects the composition of  non-performing  assets
at the dates indicated.
<TABLE>
<CAPTION>

                                                                                     December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                           2003           2002            2001           2000           1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>           <C>             <C>            <C>            <C>
(Dollars in thousands)
Non-accrual loans                                          $  -         $2,363          $  187         $  238         $1,310
Restructured loans                                            -              -               -              -              -
------------------------------------------------------------------------------------------------------------------------------------
   Total non-performing loans                                 -          2,363             187            238          1,310
------------------------------------------------------------------------------------------------------------------------------------
Foreclosed assets                                             -            397             764          1,301            843
------------------------------------------------------------------------------------------------------------------------------------
   Total non-performing assets                            $   -         $2,760           $ 951         $1,539         $2,153
------------------------------------------------------------------------------------------------------------------------------------
Loans past due 90 or more days and
   accruing interest                                      $  92         $  156           $ 103         $1,587         $   93
Non-performing loans to total loans, at
   period end                                                 -           1.43%           0.10%          0.12%          0.62%
Non-performing assets to period end
   total loans and foreclosed assets                          -           1.67%           0.53%          0.76%          1.02%
</TABLE>


                                       22
<PAGE>

Delinquent and problem loans

         When a borrower  fails to make a required  payment on a loan,  Guaranty
attempts to cure the delinquency by contacting the borrower.  A notice is mailed
to the  borrower  after a payment is 15 days past due and again when the loan is
30 days past due.  For most loans,  if the  delinquency  is not cured  within 60
days, Guaranty issues a notice of intent to foreclose on the property and if the
delinquency  is not cured  within 90 days,  Guaranty may  institute  foreclosure
action. In most cases, deficiencies are cured promptly.

Allowance for losses on loans

         Guaranty provides valuation  allowances for anticipated losses on loans
when its management  determines  that full repayment by the borrower is unlikely
and 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,
Guaranty also provides reserves based on the dollar amount, risk rating and type
of loan. A loss  experience  percentage is established  for each risk rating and
loan type and is reviewed quarterly. Each quarter the loss percentage is applied
to the portfolio,  by risk rating and loan type, to determine the minimum amount
of reserves  required.  Percentages  are applied to the  various  categories  of
loans,  from 0.12% - 1% of  satisfactory  loans,  and from 2% - 10% of loans for
less than satisfactory  loans.  Mortgage loans that are HUD or VA guaranteed are
excluded  from the  allowance  for loan loss  calculation.  Although  management
believes   that  it  uses  the  best   information   available   to  make   such
determinations,  future adjustments to reserves may be necessary, and net income
could be significantly  affected,  if circumstances  differ  substantially  from
assumptions used in making the initial determinations.

         During 2003,  Guaranty  charged-off $1.03 million as the consequence of
substantial  fraudulent  activity by one  commercial  borrower and increased the
provision for loan loss due to concern regarding the ability to collect a second
large commercial credit that was currently in the workout stage. The combination
of these two factors  resulted in an increased  provision to the  allowance  for
loan  losses in the amount of  $949,000  during the  second  quarter of 2003.  A
recovery of a portion of the  previously  charged-off  loan was  recorded in the
third quarter of 2003.

         An analysis of the  allowance  for loan  losses,  including  charge-off
activity, is presented below for the periods indicated.
<TABLE>
<CAPTION>

                                                                                Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                           2003           2002            2001           2000          1999
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>            <C>             <C>            <C>           <C>

(Dollars in thousands)
Balance at beginning of period                           $2,242         $2,512          $2,396         $1,203        $1,002
Provision charged to operations                             841            100             333          1,505           486
Charge-offs:
  Real estate                                                 -              -              66            229           122
  Consumer                                                   19             14              15             72             -
  Commercial                                              1,288            359             145             34           165
Recoveries:
  Real estate                                                 -              -               1             20             -
  Consumer                                                    7              3               -              2             2
  Commercial                                                228              -               8              1             -
------------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs                                           1,072            370             217            312           285
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period                                   $2,011         $2,242          $2,512         $2,396        $1,203
------------------------------------------------------------------------------------------------------------------------------------

Allowance for loan losses to period
  end total loans                                           1.27%          1.36%           1.40%          1.17%       0.57%
Allowance for loan losses to nonaccrual
  loans                                                         -          94.9%       1,343.32%      1,006.72%      91.83%
Net charge-offs to average loans                            1.70%          0.22%           0.12%          0.15%       0.15%
</TABLE>

                                       23
<PAGE>

Provision for loan losses

         For the years ended December 31, 2003, 2002 and 2001, the provision for
loan losses was approximately $841,000, $100,000 and $333,000, respectively. The
provision for loan losses  increased for the year ended December 31, 2003 due to
fraudulent  activity on the part of one large  commercial  borrower  and concern
regarding  the  ability to collect a second  large  commercial  credit  that was
currently in the workout stage.  The provision for loan losses decreased for the
year ended  December 31, 2002, as Guaranty's  loan  portfolio  decreased and its
allowance  for  possible  losses  as  a  percentage  of  loans  outstanding  was
determined by management to be adequate to cover future  potential  losses based
on the assessed level of risk in the portfolio.

         Guaranty   monitors  its  loan  loss  allowance   quarterly  and  makes
provisions as necessary.  Management  believes that the level of Guaranty's loan
loss allowance is adequate for its loan portfolio size and mix.

         A comparison  of the  allocation  of the  allowance  for loan losses in
dollars by loan category to the percentage of the loan portfolio  represented by
each category is provided in the following  table.  Because all of these factors
are subject to change,  the allocation is not  necessarily  predictive of future
loan losses in the indicated categories.
<TABLE>
<CAPTION>

                                                                           December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                           2003                               2002                                 2001
------------------------------------------------------------------------------------------------------------------------------------
                                                 Ratio of                           Ratio of                      Ratio of
                                                 Loans to                           Loans to                      Loans to
                                                Total Gross                        Total Gross                   Total Gross
                                  Allowance        Loans              Allowance       Loans           Allowance     Loans
------------------------------------------------------------------------------------------------------------------------------------
<S>                              <C>                <C>            <C>               <C>              <C>         <C>

(Dollars in thousands)
Residential real estate            $   32             16.1%          $    27           12.2%             $ 50       22.1%
Construction and land                 512             24.1                48           23.3               611       20.2
Commercial                            951             46.3             1,434           51.1             1,165       46.0
Consumer and other loans              106             13.5                10           13.4               105       11.7
Unallocated                           410                -                23              -               581          -
------------------------------------------------------------------------------------------------------------------------------------
  Total                            $2,011             100.0%          $2,242           100.0%          $2,512       100.0%
------------------------------------------------------------------------------------------------------------------------------------

                                                                       December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                          2000                            1999
------------------------------------------------------------------------------------------------------------------------------------
                                                              Ratio of                          Ratio of
                                                              Loans to                          Loans to
                             Total Gross Total Gross
                         Allowance Loans Allowance Loans
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
Residential real estate                        $   109            26.9%            $   78           29.8%
Construction and land                            1,056           29.1                 383          31.4
Commercial                                         861           30.7                 575          30.7
Consumer and other loans                           137           13.3                 167           8.1
Unallocated                                        233              -                   -             -
------------------------------------------------------------------------------------------------------------------------------------
  Total                                         $2,396           100.0%            $1,203          100.0%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                       24
<PAGE>

Non-Interest Income

         Guaranty's  non-interest  income consists primarily of mortgage banking
income, loan and deposit fees and servicing income,  gains and losses on sale of
investment securities, and investment sales commissions. In the first quarter of
2002,  Guaranty  invested in bank-owned life insurance  ("BOLI").  The BOLI will
increase in value over the life of the  policies,  and this increase will have a
positive impact on non-interest income.

         The following table presents  information on the sources and amounts of
non-interest income.
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income                                               2003                     2002                  2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                    <C>                     <C>
(Dollars in thousands)
Mortgage banking income                                          $1,419                  $  999                 $1,093
Loan and deposit fees and servicing income                          917                     907                    831
Net gain on sale of branches                                        939                       -                      -
Increase in cash surrender value of life insurance                  217                     183                      -
Investment sales commissions                                         10                     104                    254
Net gain (loss) on sale of securities                                12                      20                      3
Other                                                               293                     273                    325
------------------------------------------------------------------------------------------------------------------------------------
Total                                                            $3,807                 $ 2,486                 $2,506
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

         Non-interest  income  increased for the year ended December 31, 2003 by
$1.3 million, primarily as the result of the sale of the Harrisonburg branch and
the increase in mortgage banking income. In January 2003, Guaranty closed on the
sale  of  it  Harrisonburg  branch,  as  part  of  its  focus  on  profitability
management.  The Bank also thrived in the refinancing  boom of 2003,  increasing
mortgage banking income from $1.0 million for calendar year 2002 to $1.4 million
for calendar year 2003, a 42% increase.  The mortgage banking  department closed
over $70  million  loans  during  2003,  of which $54  million  were sold on the
secondary  market;  fees realized on the sale of loans averaged 220 basis points
throughout the year. Guaranty does not anticipate that earnings realized in 2003
in the mortgage  banking area will be  indicative  of future  results.  Loan and
deposit fees increased by $10,000 from 2002 to 2003, due to increased commercial
and real estate loan fees,  and a continued  increased in the volume of checking
accounts.  Investment  sales  commissions  were  minimal  during  2003,  as  the
re-configuration  of  the  investments  sales  function,  realigned  with  a new
broker/dealer, was still in progress during 2003.

         Non-interest  income decreased for the year ended December 31, 2002, by
$20,000  from the  same  period  in the  prior  year.  Mortgage  banking  income
decreased  approximately $94,000, as the result of a combination of two factors.
First,  residential mortgage loan originations  decreased from $70.7 million for
the year ended  December 31, 2001, to $45.7 million for the year ended  December
31, 2002, which was partially due to the closing of the mortgage loan production
office in Harrisonburg.  The second factor affecting mortgage banking income was
the increase in fees  realized  upon the sale of the loans,  which  averaged 218
basis points  compared to 155 basis  points in the prior year.  Loan and deposit
fees and servicing income  increased  $76,000 from December 31, 2001 to December
31, 2002, due to a continued increased volume of checking accounts. In the first
quarter of 2002,  the Board of Directors  approved the purchase of $3 million of
bank-owned life insurance ("BOLI").  The increase in the cash surrender value of
the BOLI amounted to $183,000 for the year ended  December 31, 2002.  Investment
sales  commissions  decreased by $150,000 for the year ended  December 31, 2002,
compared to the prior year, due to the departure of key personnel.

         As part of its revised mortgage  banking business model,  Guaranty sold
its  residential  mortgage  loan  servicing  for  others  portfolio  in 2001 for
approximately $900,000. The transfer of the loan servicing,  which was completed
in October 2001,  resulted in a gain of approximately  $9,000.  With the present

                                       25
<PAGE>

practice of selling  most  residential  mortgage  loans on a servicing  released
basis,  Guaranty  will  not  accumulate  mortgage  loan  servicing  rights  as a
by-product of its mortgage lending business.  Generally,  the value of servicing
rights moves inversely with the value of interest  bearing  securities as market
interest rates change.  Guaranty has found that the value of servicing rights is
extremely  sensitive  to changes  in market  interest  rates,  but tends to fall
faster as interest rates decline creating volatility in net earnings.  Increases
and decreases in the value of servicing rights are treated as income or expense.
Because  Guaranty  cannot  control or predict  changes in the value of servicing
rights or the rate of  amortization  as loans  prepay,  it  decided  to exit the
mortgage loan servicing business.

Non-Interest Expenses

         Non-interest  expenses decreased $98,000 from $8.5 million for the year
ended  December 31, 2002 to $8.4  million for the year ended  December 31, 2003.
Occupancy  expenses  decreased  $75,000,  due to the net effect of  closing  two
branches  early in the year and opening only one,  more  efficient  use of third
party vendors who provide grounds maintenance  services,  and lower depreciation
expense. This favorable variances was offset by professional fees, for increased
legal fees relating to commercial  loan  workouts,  including  substantial  fees
associated with the fraudulent activity of one commercial borrower. .

         Non-interest  expenses  decreased  by 8.3% to $8.5 million for the year
ended December 31, 2002, compared to $9.3 million for the prior year.  Personnel
expenses decreased by $250,000,  due partially to the strategic  re-alignment of
several departments,  which lowered overall headcount,  coupled with the lack of
severance costs and recruiting  expenses that were incurred in the prior year as
the result of turnover in management.  Occupancy costs decreased by $244,000, as
certain  assets  became fully  depreciated  ($171,000  decrease in  depreciation
expense), and rental expense decreased by approximately $40,000.

         Non-interest  expenses  increased  by 4.7% to $9.3 million for the year
ended  December 31, 2001.  The majority of the increase was related to severance
and recruiting expenses resulting from management changes in 2001. For the first
seven months of 2001, Guaranty operated nine retail-banking  branches due to the
opening  of  the  Forest  Lakes  branch  in  northern   Albemarle  County.   The
retail-banking  branch in  suburban  Richmond  was sold in July  2001.  Guaranty
incurred approximately  $152,000 in expenses,  consisting primarily of personnel
and occupancy expenses prior to its sale.

         The following  table  summarizes  the main  components of  non-interest
expense.
<TABLE>
<CAPTION>

                                                                                  Year Ended December 31,
----------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense                                              2003                     2002                  2001
----------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                      <C>                   <C>
 (Dollars in thousands)
Personnel                                                        $4,545                   $4,561                $4,811
Occupancy                                                         1,093                    1,168                 1,412
Data Processing                                                   1,124                    1,158                 1,153
Marketing                                                           161                      159                   211
Professional fees                                                   338                      294                   385
Other                                                             1,148                    1,168                 1,301
----------------------------------------------------------------------------------------------------------------------------
Total                                                            $8,409                   $8,508                $9,273
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

Income Taxes

         Income tax expense  for the years ended  December  31,  2003,  2002 and
2001,  was $892,000,  $814,000 and $267,000,  respectively.  The increases are a
direct result of earnings  levels for the  respective  year-ends.  The effective
income tax rate was 31.4% and 31.6% for the years  ended  December  31, 2003 and
2002,  respectively,  as the  increase  in  cash  surrender  value  of BOLI is a
non-taxable item and therefore  reduces  Guaranty's  overall effective tax rate.
The effective tax rate was 34.0% for the year ended December 31, 2001.

                                       26
<PAGE>

Sources of Funds

Deposits

         Deposits have  traditionally  been the  principal  source of Guaranty's
funds for use in lending and for other general business purposes. In addition to
deposits, Guaranty derives funds from loan repayments, cash flows generated from
operations, repurchase agreements entered into with commercial banks and Federal
Home Loan Bank  ("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.  Borrowings  may be used to
compensate for reductions in deposits or  deposit-inflows at less than projected
levels and have been used on a  longer-term  basis to support  expanded  lending
activities.

         Guaranty  attracts  both  short-term  and  long-term  deposits from the
general  public by offering a wide  assortment  of accounts and rates.  Guaranty
offers statement  savings  accounts,  various checking  accounts,  various money
market accounts,  fixed-rate  certificates with varying  maturities,  individual
retirement  accounts and has expanded to provide products and services for small
businesses  and brokered  deposits.  Guaranty's  principal use of deposits is to
originate loans and fund purchases of investment securities.

         At December 31, 2003,  deposits totaled $175.2 million, a $3.9 million,
or 2.3% increase over the same date in the prior year. In its continuing  effort
to reduce reliance on high cost sources of funds,  Guaranty  continues to direct
efforts towards attracting lower cost transaction accounts. Low cost transaction
and savings  accounts  comprise 69.0% of total deposits as of December 31, 2003,
compared to $58.7% as of December 31, 2002 and 41.1% as of December 31, 2001.

         At December 31, 2002,  deposits  were $171.3  million,  a 14.6% decline
from $200.6 million at December 31, 2001.

         The  following  table sets forth the dollar  amount of  deposits in the
various types of deposit programs offered by Guaranty at the dates indicated.
<TABLE>
<CAPTION>

December 31,                                                      2003                     2002                   2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                      <C>                    <C>

(Dollars in thousands)

Demand deposit accounts                                        $ 62,170                 $ 53,498               $ 47,570
Statement savings account                                        13,404                   12,812                 12,992
Money market accounts                                            45,226                   34,445                 22,394
30-to-180-day certificates                                        5,172                    3,326                  1,427
Seven to eleven month certificates                                  441                      856                  6,404
One-to-five year fixed-rate certificates                         42,229                   62,857                105,608
Eighteen-month prime rate certificates                            6,542                    3,465                  4,237
------------------------------------------------------------------------------------------------------------------------------------
Total                                                          $175,184                 $171,259               $200,632
------------------------------------------------------------------------------------------------------------------------------------
</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.
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                    2003                         2002                   2001
                                                              Average                      Average                   Average
                                                Average        Rate         Average         Rate         Average      Rate
(Dollars in thousands)                          Balance        Paid         Balance         Paid         Balance      Paid
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>               <C>        <C>              <C>         <C>          <C>

Non-interest bearing demand deposits          $ 26,306           0.00%     $ 22,879          0.00%      $ 18,755      0.00%
Interest bearing demand deposits                70,511           0.60        51,921          0.90%        44,514      2.06%
Savings deposits                                12,833           0.21        13,103          0.53%        11,643      1.67%
Time deposits                                   58,309           1.88        89,635          3.27%       139,438      5.61%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits                                $167,959            0.92%    $177,538          1.95%      $214,350      4.17%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       27
<PAGE>

         The variety of deposit  accounts  offered by Guaranty has allowed it to
be competitive in obtaining funds and has allowed it to respond with flexibility
to,  although not to  eliminate,  the threat of  disintermediation  (the flow of
funds away from depository institutions such as banking institutions into direct
investment vehicles such as government and corporate securities). The ability of
Guaranty to attract and maintain  deposits,  has been,  and will continue to be,
significantly affected by market conditions.

         The following table sets forth the deposit flows of Guaranty during the
periods indicated.
<TABLE>
<CAPTION>

Year Ended December 31,                                           2003                     2002                   2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                     <C>                    <C>

(Dollars in thousands)
Opening balance                                                 $171,259                $200,632               $217,044
Net deposits                                                       2,383                 (32,838)               (25,345)
Interest credited                                                  1,542                   3,465                  8,933
------------------------------------------------------------------------------------------------------------------------------------
Ending balance                                                  $175,184                $171,259               $200,632
------------------------------------------------------------------------------------------------------------------------------------

Net increase (decrease)                                           $3,925               $ (29,373)             $ (16,412)
Percent increase (decrease)                                         2.29%                (14.64%)                (7.56%)
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

         The following table indicates the amount of Guaranty's  certificates of
deposit by time remaining until maturity as of December 31, 2003.
<TABLE>
<CAPTION>

                                                                                  Maturity
------------------------------------------------------------------------------------------------------------------------------------
                                                3 Months        Over 3 to         Over 6 to           Over
                                                 or less        6 months          12 months         12 months           Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>              <C>              <C>               <C>              <C>

(Dollars in thousands)
Certificates of deposit less than $100,000     $ 11,753         $ 7,758          $ 17,558          $  5,537         $42,606
Certificates of deposit of $100,000 or more       5,239             894             3,760             1,885          11,778
------------------------------------------------------------------------------------------------------------------------------------
Total of certificates of deposits              $ 16,992         $ 8,652          $ 21,318          $  7,422         $54,384
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Borrowings

         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 the size of
the advances and  repayment  provisions.  The  advances  are  collateralized  by
Guaranty's investment in FHLB stock and certain mortgage loans. See the Notes to
Consolidated  Financial Statements for information  regarding the maturities and
rate structure of Guaranty's FHLB advances.  At December 31, 2003,  Guaranty had
$3 million  in  outstanding  borrowings  from the FHLB  compared  to zero and $1
million outstanding at the end of the prior two years, respectively.

         Guaranty has also used securities sold under  agreements to repurchase,
with mortgage-backed  securities or other securities pledged as collateral.  The
proceeds  have been used for general  corporate  purposes.  Guaranty did not use
securities sold under agreements to repurchase during the calendar years 2003 or
2002.

         Guaranty uses 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.

                                       28
<PAGE>




         The following table sets forth the maximum month-end balances,  average
balances and weighted  average rates of FHLB advances and securities  sold under
agreements to repurchase for the periods indicated.
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                  2003                      2002                        2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                       <C>                         <C>

(Dollars in thousands)
Maximum Balance:
  FHLB advances                                         $5,000                    $15,000                     $18,000
  Securities sold under
   agreements to repurchase                                  -                          -                           -
------------------------------------------------------------------------------------------------------------------------------------

                                                              Weighted                   Weighted                   Weighted
                                                  Average      Average       Average      Average       Average      Average
                                                  Balance       Rate         Balance       Rate         Balance       Rate
------------------------------------------------------------------------------------------------------------------------------------
  FHLB advances                                     $760        1.32%        $6,136         1.96%       $4,608         5.14%
  Securities sold under
   agreements to repurchase                            -            -             -             -            -             -
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


         The following  table sets forth the balances of  Guaranty's  short-term
borrowings at the dates indicated.
<TABLE>
<CAPTION>

 December 31,                                              2003                         2002                   2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                            <C>                   <C>
(Dollars in thousands)

FHLB advances                                            $3,000                         -                     $1,000

Weighted average interest rate of
   short-term FHLB advances                                1.24%                        -                       2.13%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


Liquidity and Capital Resources

         Liquidity  is  the  ability  to  meet  present  and  future   financial
obligations,  either through the sale of existing  assets or the  acquisition of
additional funds, through asset and liability management.  Cash flow projections
are  regularly  reviewed  and  updated  to assure  that  adequate  liquidity  is
provided.  As a result of Guaranty's management of liquid assets and the ability
to generate  liquidity through  increasing  deposits,  management  believes that
Guaranty   maintains  overall  liquidity  that  is  sufficient  to  satisfy  its
depositors' requirements and meet its customers' credit needs.

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

         At December  31, 2003,  cash and cash  equivalents  were  approximately
$11.8  million,  which was a  decrease  of $3.6  million  over the  prior  year.
Operating activities provided approximately $786,000, predominantly generated by
the sale of loans.  Investing activities absorbed approximately $15.2 million in
cash, primarily with the purchase of agency and mortgage-backed securities. Cash
generated  by  financing  activities  partially  offset  the  cash  absorbed  by
investing  activities by  approximately  $10.9  million,  which  represents  the
increase  in  deposits  that  occurred  due to a  continued  effort to  increase
low-cost  deposits,  offset  by the cash  paid to  redeem  the  Trust  Preferred
Securities.

                                       29
<PAGE>

         At December 31, 2002 cash and cash equivalents were approximately $15.4
million,  which was an increase of $3.0 million  over the prior year.  Operating
activities provided approximately $13.7 million,  predominantly generated by the
sale of loans.  Investing  activities  provided  approximately  $19.8 million in
cash,  primarily through the sale of corporate bonds, in an effort to reduce the
market risk of long-term bonds previously held. Cash absorbed through  financing
activities  offset the cash  generated by operating and investing  activities by
approximately  $30.6  million,  which  represents  the decrease in deposits that
occurred, largely due to decreased certificate of deposit rates.

         Cash and cash equivalents were approximately  $12.4 million at December
31,  2001.   Financing   activities   reduced  cash  and  cash   equivalents  by
approximately  $22.3  million in 2001 due to decreases in deposits and repayment
of advances from the FHLB.  Approximately $5.8 million was absorbed by operating
activities,  which was primarily a result of the origination of $70.7 million in
residential  mortgage  loans held for sale that were offset by proceeds from the
sale  of  residential  mortgage  loans  totaling  $63.5  million.  In  addition,
investing  activities provided  approximately $24.9 million that was primarily a
result of a net decrease in loans of $27.7  million that was slightly  offset by
the net purchase of $2.3 million in investments available for sale.

         Guaranty uses its sources of funds  primarily to meet operating  needs,
to pay deposit  withdrawals  and fund loan  commitments.  At December  31, 2003,
total approved loan commitments were $7.6 million. In addition,  at December 31,
2003, commitments under unused lines of credit were $52.5 million.  Certificates
of deposit  scheduled  to mature or re-price in one year or less at December 31,
2003 totaled $46.9 million.

         Management  intends to fund  anticipated  loan  closings and  operating
needs during 2004 through  cash on hand,  cash  generated  from  operations  and
anticipated  increases in deposits.  Current and anticipated  marketing programs
will be primarily targeted at the attraction of lower cost transaction accounts.

         The following  summarizes  Guaranty's  contractual cash obligations and
commercial  commitments,  including  maturing  certificates  of  deposit,  as of
December 31, 2003 and the effect such obligations may have on liquidity and cash
flows in future periods.
<TABLE>
<CAPTION>

                             Contractual Obligations
------------------------------------------------------------------------------------------------------------------------------------
                                                Less Than          2-3               4-5             Over 5
                                                One Year          Years             Years             Years           Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                          <C>              <C>               <C>              <C>              <C>
(Dollars in thousands)
Certificate of deposit maturities (1)         $  46,962        $  5,739          $  1,674         $       9        $ 54,384
Undisbursed credit lines                         52,550               -                 -                 -          52,550
Commitments to extend credit                      7,593               -                 -                 -           7,593
Standby letters of credit                         3,899               -                 -                 -           3,899
------------------------------------------------------------------------------------------------------------------------------------
Total obligations                              $111,004        $  5,739          $  1,674         $       9        $118,426
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Guaranty expects to retain maturing deposits or replace maturing amounts
     with comparable deposits based on current market interest rates.

         Capital  represents  funds,  earned or obtained,  over which  financial
institutions  can  exercise  greater  control in  comparison  with  deposits and
borrowed funds. The adequacy of Guaranty's  capital is reviewed by management on
an ongoing basis with reference to size,  composition  and quality of Guaranty's
resources and consistent with regulatory  requirements  and industry  standards.
Management seeks to maintain a capital  structure that will support  anticipated
asset growth and absorb any potential losses.

                                       30
<PAGE>

         Guaranty and the Bank are subject to regulatory capital requirements of
the Federal  Reserve.  At December 31, 2003,  Guaranty and the Bank exceeded all
such regulatory capital requirements as shown in the following table.
<TABLE>
<CAPTION>

                                                                                           December 31, 2003
----------------------------------------------------------------------------------------------------------------------------
                                                                          Guaranty Financial                Guaranty
                                                                              Corporation                     Bank
----------------------------------------------------------------------------------------------------------------------------
<S>                                                                           <C>                            <C>
(Dollars in thousands)
Tier 1 Capital:
   Common stock                                                                 $ 2,491                       $ 2,000
   Capital surplus                                                                9,238                         3,729

   Retained earnings                                                              8,484                        14,201
----------------------------------------------------------------------------------------------------------------------------
     Total Tier 1 Capital                                                        20,213                        19,930
----------------------------------------------------------------------------------------------------------------------------

Tier 2 Capital:
   Allowance for loan losses (1)                                                  1,993                         1,993

----------------------------------------------------------------------------------------------------------------------------
     Total Tier 2 Capital                                                         1,993                         1,993
----------------------------------------------------------------------------------------------------------------------------
       Total Risk Based Capital                                                $ 22,206                      $ 21,923
----------------------------------------------------------------------------------------------------------------------------

Risk Weighted Assets                                                           $159,470                      $159,470

Capital Ratios:
   Tier 1 Risk-based                                                             12.68%                        13.75%
   Total Risk-based                                                              13.93%                        12.50%
   Tier 1 Capital to average adjusted total assets                               10.27%                        10.12%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Limited to 1.25% of risk weighted assets.


                                       31
<PAGE>

Impact of Inflation, 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.

         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.

Recent Accounting Pronouncements

         In October  2002,  the FASB issued SFAS 147,  "Acquisitions  of Certain
Financial Institutions - an amendment of FASB Statements No. 72 and 144 and FASB
Interpretation   No.  9.  This  statement  removes   acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires  that those  transactions  be  accounted  for in  accordance  with FASB
Statements No. 141,  "Business  Combinations",  and No. 142, "Goodwill and Other
Intangible  Assets".  Thus,  the  requirement  in paragraph 5 of Statement 72 to
recognize  (and  subsequently   amortize)  any  excess  of  the  fair  value  of
liabilities assumed over the fair value of tangible and identifiable  intangible
assets  required  as an  unidentifiable  intangible  asset no longer  applies to
acquisitions  within the scope of this  Statement.  In addition,  this Statement
amends FASB  Statement No. 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived  Assets",  to  include in its scope  long-term  customer-relationship
intangible   assets  of   financial   institutions   such  as  depositor  -  and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently,  those intangible assets are subject to the same undiscounted cash
flow  recoverability  test  and  impairment  loss  recognition  and  measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used.  The  adoption  of SFAS 147 did not have an  effect  on the  financial
statements.

         SFAS No. 149, "Amendment of Statement No. 133 on Derivative Instruments
and Hedging  Activities",  issued in April 2003,  amends  Statement  No. 133 for
decisions  made by the  Derivatives  Implementation  Group,  in  particular  the
meaning  of an  initial  net  investment,  the  meaning  of  underlying  and the
characteristics of a derivative that contains financing  components.  Presently,
the Bank has no derivative financial instruments and, consequently, the adoption
of the Statement had no effect on its financial statements.

         SFAS No.  150,  "Accounting  for  Certain  Financial  Instruments  with
Characteristics  of Both Liabilities and Equity",  was issued in May 2003. Under
this  Statement,   certain  freestanding   financial   instruments  that  embody
obligations  for the  issuer  and that are now  classified  in  equity,  must be
classified as liabilities (or as assets in some circumstances).  Generally, SFAS
No. 150 is effective for financial  instruments  entered into or modified  after
May 31, 2003. However, the effective date of the Statement's  provisions related
to  the   classification   and  measurement  of  certain  mandatory   redeemable
non-controlling  interests has been deferred  indefinitely by the FASB,  pending
further Board action. Presently, the Bank has no financial instruments that come
under the scope of the Statement and,  therefore,  believes that adoption of the
new Statement will have no impact on its financial statements.

         In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable
Interest  Entities",  to provide  guidance  on the  identification  of  entities
controlled  through means other than voting  rights.  FIN No. 46 specifies how a
business  enterprise should evaluate its interests in a variable interest entity
to determine whether to consolidate that entity. A variable interest entity must
be  consolidated  by its primary

                                       32
<PAGE>

beneficiary if the entity does not effectively  disperse risks among the parties
involved.  The  adoption  of FIN No. 46 is not  expected  to have a  significant
effect on the Bank's financial statements.

         In December 2002, the FASB issued SFAS 148,  Accounting for Stock-Based
Compensation  - Transition  and  Disclosure - an amendment of FASB Statement No.
123. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  this  Statement  amends the  disclosure  requirements  of SFAS 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported results.  We do not expect the adoption of
SFAS 148 to have an effect on our financial statements.

         In  December  2003,  the  FASB  issued   Statement  of  Position  03-3,
Accounting  for Certain Loans or Debt  Securities  Acquired in a Transfer.  This
SOP, among other things,  no longer allows  financial  institutions to record an
allowance for loan losses,  related to credit quality, when they purchase loans,
including through a purchase business  acquisition.  The SOP is effective,  on a
prospective  basis,  for loans acquired in fiscal years beginning after December
31,  2004.  We do not expect the  adoption  of SOP 03-3 to have an effect on our
financial statements.


Subsidiary Activities

         Guaranty has two  subsidiaries,  the Bank and Guaranty  Capital Trust I
(the "Trust").  The Trust was formed on April 29, 1999 and was the holder of the
trust preferred securities,  which were sold for $6,900,000 in 1999 and redeemed
in  full in  2003.  See  Notes  to the  Consolidated  Financial  Statements  for
information  regarding the terms and redemption of the securities.  The Bank has
two wholly owned  subsidiaries,  GMSC,  Inc.  ("GMSC") and Guaranty  Investments
Corporation  ("GICO").  GMSC is a financing  subsidiary  through which  Guaranty
formed a Real Estate  Mortgage  Investment  Conduit  ("REMIC").  Guaranty  sells
non-deposit  investment  products  through GICO. GICO had a net income (loss) of
$73,000,  $560 and $53,000 for the years ended December 31, 2003, 2002 and 2001,
respectively.

         In 1987,  Guaranty  formed  GMSC and  entered  into a REMIC in order to
create  liquidity.  Guaranty  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 bonds'
discount and issuance costs are amortized against income as mortgages underlying
the bonds  repay.  During  2003,  Guaranty  prepaid the bonds,  eliminating  the
liability associated with the REMIC. For the years ended December 31, 2003, 2002
and 2001, amortization expense was $66,000,  $44,000 and $36,000,  respectively.
The amortization of the REMIC expenses is treated as interest expense.

                                       33
<PAGE>

Critical Accounting Policies, Estimates and Judgments

         Guaranty's   financial  statements  are  prepared  in  accordance  with
accounting  principles  generally accepted in the United States. The preparation
of  these  financial  statements  requires  management  to  make  estimates  and
judgments that affect the reported amounts of assets,  liabilities,  revenue and
expenses,  as well  as the  disclosure  of  contingent  liabilities.  Management
continually  evaluates its estimates and judgments,  including  those related to
the allowance for loan losses and income taxes.  Management  bases its estimates
and judgments on historical experience and other factors that are believed to be
reasonable  under the  circumstances.  Actual  results  may  differ  from  these
estimates under different  assumptions or conditions.  Management believes that,
of its significant accounting policies, the most critical accounting policies we
apply are those related to the valuation of the loan portfolio.

         A variety  of  factors  impact  carrying  value of the loan  portfolio,
including  the  calculation  of the  allowance  for loan  losses,  valuation  of
amortization  of loan fees, and deferred  origination  costs.  The allowance for
loan losses is the most  difficult  and  subjective  judgment.  The allowance is
established  and maintained at a level that  management  believes is adequate to
cover losses resulting from the inability of borrowers to make required payments
on loans.  Estimates for loan losses  determined by analyzing  risks  associated
with specific loans and the loan portfolio,  current trends in delinquencies and
charge-offs,  the views of  regulators,  changes in the size and  composition of
loan portfolio and peer comparisons. The analysis also requires consideration of
the economic climate and directions,  changes in the interest rate  environment,
which may impact a borrower's ability to pay, legislation  impacting the banking
industry  and  economic  conditions  specific to our service  area.  Because the
calculation  of the  allowance for loan losses relies on estimates and judgments
relating to inherently uncertain events, results may differ from our estimates.

Caution About Forward Looking Statements

         We make  forward  looking  statements  in this  annual  report that are
subject to risks and  uncertainties.  These forward looking  statements  include
statements  regarding our profitability,  liquidity,  allowance for loan losses,
interest rate sensitivity, market risk, growth strategy, and financial and other
goals. The words "believes,"  "expects,"  "may," "will,"  "should,"  "projects,"
"contemplates," "anticipates," "forecasts," "intends," or other similar words or
terms are intended to identify forward looking statements.

         These   forward   looking   statements   are  subject  to   significant
uncertainties because they are based upon or are affected by factors including:

o        changes in general economic and business conditions in our market area;

o        changes in interest rates and interest rate policies;

o        risks inherent in making loans such as repayment  risks and fluctuating
         collateral values;

o        competition with other banks and financial institutions,  and companies
         outside of the banking  industry,  including  those companies that have
         substantially greater access to capital and other resources;

o        the ability to  successfully  manage our growth or implement our growth
         strategies if we are unable to identify attractive  markets,  locations
         or opportunities to expand in the future;

o        maintaining capital levels adequate to support our growth;

o        maintaining cost controls and asset qualities as we open or acquire new
         branches and/or merger with another entity;

o        reliance on our management  team,  including our ability to attract and
         retain key personnel;

o        the successfulmanagement of interest rate risk;

o        problems with technology utilized by us, and

o        changes in banking and other laws and regulations applicable to us.

                                       34
<PAGE>

         Because  of these  uncertainties,  our  actual  future  results  may be
materially  different  from  the  results  indicated  by these  forward  looking
statements.  In addition,  our past  results of  operations  do not  necessarily
indicate our future results.



Item 7.           Financial Statements.

         The following financial statements are filed as a part of this report
following Item 14 below:

         Report of Independent Certified Public Accountants
         Consolidated Balance Sheets as of December 31, 2003 and 2002
         Consolidated Statements of Operations for the years ended December 31,
         2003, 2002 and 2001
         Consolidated Statements of Comprehensive Income for the years ended
         December 31, 2003, 2002 and 2001
         Consolidated Statements of Stockholders' Equity for the years ended
         December 31, 2003, 2002 and 2001
         Consolidated Statements of Cash Flows for the years ended December 31,
         2003, 2002 and 2001
         Summary of Accounting Policies
         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.


Item 8A. Controls and Procedures.

         Guaranty maintains disclosure controls and procedures that are designed
to ensure that information required to be disclosed by it in the reports that it
files or submits  under the  Securities  Exchange  Act of 1934,  as amended,  is
recorded, processed, summarized and reported within the time periods required by
the Securities and Exchange  Commission,  including,  without limitation,  those
controls and procedures  designed to ensure that such information is accumulated
and communicated to Guaranty's  management to allow timely  decisions  regarding
required disclosures.

         An  evaluation  of the  effectiveness  of the design and  operation  of
Guaranty's  disclosure  controls  and  procedures,  as of the end of the  period
covered by this  report,  was  carried  out under the  supervision  and with the
participation of Guaranty's  management,  including the chief executive  officer
and chief  financial  officer.  Based on and as of the date of such  evaluation,
these officers concluded that Guaranty's disclosure controls and procedures were
effective.

         Guaranty also maintains a system of internal  accounting  controls that
is  designed  to  provide   assurance  that  assets  are  safeguarded  and  that
transactions  are executed in accordance  with  management's  authorization  and
properly  recorded.  This system is  continually  reviewed  and is  augmented by
written policies and procedures, the careful selection and training of qualified
personnel and an internal audit program to monitor its effectiveness. There were
no changes in Guaranty's internal control over financial reporting identified in
connection with the evaluation of it that occurred during Guaranty's last fiscal
quarter that materially affected, or are reasonably likely to materially affect,
internal control over financial reporting.


                                       35
<PAGE>

                                    PART III

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

Directors

         Henry J. Browne,  71, has been a director  since 1981. Mr. Browne is an
architect in private practice with a studio in Boca Grande, Florida.

         Douglas  E.  Caton,  61,  has been a  director  since 1981 and has been
Chairman  of  Guaranty's  Board of  Directors  since  1989.  Mr.  Caton is Chief
Executive Officer of Management Services Corporation, a regional commercial real
estate management, construction and development company. A combat veteran of the
Vietnam  War,  Mr. Caton  retired as a Major  General in the United  States Army
Reserve.  He is a member of the Board of Governors of both St. Margaret's School
in Tappahannock, Virginia, and The Miller School of Albemarle, Virginia.

         William E. Doyle,  Jr., 51, has been a director  since 2001.  Mr. Doyle
has been Guaranty's  President and Chief Executive  Officer since May 2001. From
November  1997 to May 2001,  he was Senior Vice  President,  Mortgage and Retail
Services,  of The  Middleburg  Bank.  Mr.  Doyle  is a  member  of the  Board of
Directors of the United Way - Thomas Jefferson Area,  Martha  Jefferson  Medical
Enterprises, VBA Management Services Corporation and VBA Benefits Corporation.

         Jason I. Eckford,  Jr., 74, has been a director since 1999. Mr. Eckford
is President of Eckford Financial Services,  a financial  consulting business in
Charlottesville,  Virginia.  He had a  36-year  career in  commercial  and trust
banking in the  Charlottesville  area and currently  serves on the boards of the
Martha Jefferson House, the  Charlottesville  and University Symphony Orchestra,
and the Coastal Lumber Company.

         W. Bradford Eure, 47, was appointed a director in 2003. Mr. Eure is the
President  and  General  Manager of Eure  Communications,  Inc.,  which owns and
operates  WINA,  WQMZ and  WWWV.  He serves  as a board  member of the  National
Association of Broadcasters and is past president of the Virginia Association of
Broadcasters.

         Harry N.  Lewis,  76, has been a  director  since  1981,  has served as
Chairman of the Board of Directors,  and currently  serves as Vice  Chairman,  a
position  he has held  since  1989.  Mr.  Lewis  retired as  President  of Lewis
Insurance Agency,  an insurance sales company,  and as owner of O'Neill Mortgage
Corp, a mortgage company, both in Charlottesville, Virginia.

         Patrick J. McCann,  47, was appointed a director in 2003. Mr. McCann is
a principal in Virginia CFO  Services,  LLC, a financial  management  consulting
firm.  From January 1998 through  January 2000, Mr. McCann was Senior  Financial
Officer for  NationsBank-Florida.  He has been involved in the banking  industry
for over 20  years,  where he  served  in a  variety  of  financial  capacities,
including  Chief  Financial  Officer,  Director of Finance and  Controller.  His
background and experience  qualify him as an audit committee  financial  expert,
according to the standards promulgated by Sarbanes-Oxley Act of 2002.

         John R. Metz, 66, has been a director since 1981. Mr. Metz is a retired
pharmacist  and also retired  from the United  States Air Force and Air National
Guard in 1995  with  the  rank of  Brigadier  General.  He is a member  and past
president  of the Board of Directors  of the  Virginia  Pharmacists

                                       36
<PAGE>
Association  Research and Education  Foundation  and is a member of the Board of
Directors of the Northwestern Virginia Health Systems Agency.

         James R. Sipe,  Jr., 48, has been a director since 1996. Mr. Sipe is an
Associate  Broker with Coldwell Banker  Funkhouser  Realtors and Coldwell Banker
Commercial  Funkhouser  Realtors,  real estate sales companies in  Harrisonburg,
Virginia.  Mr. Sipe is a member of the Board of Directors  of the James  Madison
University Duke Club, a member of the Emmanuel Episcopal Church Construction and
Renovation  Committee  and  currently  serves as president  of the  Harrisonburg
Rockingham Association of Realtors.

         Oscar W. Smith,  Jr., 73, has been a director  since 1981. Mr. Smith is
President  of  K-B  Management  Co.,  a  real  estate  investment   company,  in
Charlottesville, Virginia.

Executive Officers Who Are Not Directors

         Tara Y.  Harrison,  35,  has been Vice  President  and Chief  Financial
Officer since January 2003. From December 2000 to January 2003, she was Director
of  Internal  Audit for  Guaranty.  Ms.  Harrison  was  Director  of Finance and
Controller for Comdial Corporation from February 1999 through December 2000 and,
prior to that,  was with Deloitte & Touche LLP in their Richmond  office,  where
she most recently held the position of Senior Manager.

         Richard L.  Saunders,  50, has been  Senior  Vice  President  and Chief
Credit Officer since February 2000. From June 1998 to February 2000, he was Vice
President and a commercial banker of Guaranty and, from April 1996 to June 1998,
he was Vice President and a business banker with Jefferson National Bank and its
successor,  Wachovia Bank. Mr. Saunders also acted as Guaranty's chief executive
officer from March 2001 to May 2001.

Section 16(a) Beneficial Ownership Reporting Compliance

         Section 16(a) of the  Securities  Exchange Act of 1934, as amended (the
"Exchange Act"),  requires Guaranty's directors and executive officers,  and any
persons who own more than 10% of the outstanding shares of Common Stock, to file
with the SEC reports of  ownership  and changes in  ownership  of Common  Stock.
Directors  and  executive  officers  are required by SEC  regulation  to furnish
Guaranty with copies of all Section 16(a) forms that they file.  Based solely on
review  of  the  copies  of  such  reports  furnished  to  Guaranty  or  written
representation  that no other reports were  required,  Guaranty  believes  that,
during fiscal year 2003, its executive officers and directors were in compliance
with the applicable regulations.

Audit Committee Financial Expert

         The Board of Directors has determined that Patrick J. McCann  qualifies
as an audit  committee  financial  expert as defined by the  regulations  of the
Securities and Exchange Commission.

Code of Ethics

         The Board of Directors has not approved a Code of Ethics for Guaranty's
senior  officers  who have  financial  responsibilities  that  covers  all items
contemplated  by the  disclosure  requirements  of the  Securities  and Exchange
Commission. Guaranty expects that such a Code will be adopted if the merger with
Union Bankshares Corporation is not completed.  The Bank, however, has a code of
ethics for all of its officers and employees that promotes the highest standards
of ethical conduct.

                                       37
<PAGE>

Item 10. Executive Compensation

Summary of Cash and Certain Other Compensation

         The  following  table shows,  for the fiscal  years ended  December 31,
2003, 2002 and 2001, the cash compensation paid by Guaranty,  as well as certain
other  compensation  paid or accrued  for those  years,  to the named  Executive
Officers in all capacities in which they served.
<TABLE>
<CAPTION>

                           Summary Compensation Table

                                                 Annual Compensation                   Long-Term Compensation
                                                 -------------------                   ----------------------

                                                                                  Securities
           Name and                                             Other Annual      Underlying        All Other
      Principal Position       Year   Salary ($)  Bonus ($)   Compensation ($)     Options     Compensation ($)(1)
      ------------------       ----   ----------  ---------   ----------------     -------     -------------------
<S>                           <C>      <C>        <C>            <C>               <C>              <C>

  William E. Doyle, Jr.        2003     $218,244   $10,000           *              10,000           $7,000
  President and Chief          2002      205,274     --            $60,243 (3)      15,000            5,500
    Executive Officer (2)      2001      118,310     --             47,201 (4)       5,100              --

  Tara Y. Harrison             2003       97,854    5,869             *               --              2,936
  Vice President and Chief
  Financial Officer (5)

  Richard L. Saunders          2003      136,794    8,961             *              2,500            3,681
  Senior Vice President and    2002      118,750    3,563             *             10,000            3,563
    Chief Credit Officer       2001      122,969     --               *                100            3,689
</TABLE>
________________

*    All benefits that might be considered of a personal  nature did not exceed
     the lesser of $50,000 or 10% of total annual salary and bonus.
(1)  Amounts reflect Guaranty's matching contribution under its Section 401(k)
     retirement plan.
(2)  Mr. Doyle's employment with Guaranty commenced in May 2001.
(3)  Amount includes $46,296 in benefits relating to initiation fees and dues
     for a country club membership, including an allowance for the payment of
     taxes resulting from the club membership benefit.
(4)  Amount includes $33,758 in relocation expenses in connection with the
     commencement of Mr. Doyle's employment.
(5)  Ms. Harrison became an executive officer of Guaranty in January 2003.



                                       38
<PAGE>

Stock Option Grants

         The  following  table sets forth for the year ended  December 31, 2003,
the grants of stock options to the named  Executive  Officers.  Guaranty did not
grant any stock options to Ms. Harrison in 2003.

<TABLE>
<CAPTION>
                        Option Grants In Last Fiscal Year

                                                     Percent of Total
                            Number of Securities    Options Granted to
                             Underlying Options    Employees in Fiscal      Exercise or Base
Name                          Granted (#) (1)          Year (%) (2)         Price ($/Share)       Expiration Date
----                          ---------------          ------------         ---------------       ---------------
<S>                               <C>                    <C>                    <C>                 <C>
William E. Doyle, Jr.              10,000                 57.14%                 $13.84              2/27/2013

Richard L. Saunders                 2,500                 14.29%                 $13.45              4/15/2013
__________________
</TABLE>

(1)  Stock options were granted at or above the fair market value of the shares
     of Common Stock at the date of grant. Each grant is immediately
     exercisable.
(2)  Options to purchase 17,500 shares of Common Stock were granted to employees
     during the year ended December 31, 2003.

Option Exercises and Holdings

         The following table sets forth information as to stock option exercises
during  2003  and the  amount  and  value  of stock  options  held by the  named
Executive Officers as of December 31, 2003.
<TABLE>
<CAPTION>

                 Aggregate Option Exercises in Last Fiscal Year
                        and Fiscal Year-End Option Values

                                                                             Number of
                                                                             Securities             Value of
                                                                             Underlying           Unexercised
                                                                        Unexercised Options       In-the-Money
                                                                         at Fiscal Year End    Options at Fiscal
                                                                              (#) (1)           Year End ($) (2)
                                                                        --------------------- ---------------------
                             Shares Acquired on                            Exercisable /         Exercisable/
            Name                  Exercise          Value Realized         Unexercisable         Unexercisable
            ----                  --------          --------------         -------------         -------------
<S>                               <C>                  <C>                 <C>                  <C>
  William E. Doyle, Jr.              --                    --               30,100 / --           $472,710/ --

  Tara Y. Harrison                   --                    --                 50 / --               873 / --

  Richard L. Saunders              5,000                $14,400              12,500/ --           207,000/ --
</TABLE>


   (1) Each of these options relates to shares of Common Stock.
   (2) The value of unexercised in-the-money options at fiscal year end was
       calculated by determining the difference between (i) the fair market
       value of common stock underlying the options at December 31, 2003
       ($25.75) and (ii) the exercise price of the options. All options
       disclosed in the table were in-the-money as of December 31, 2003.

                                       39
<PAGE>
Directors' Fees

         Directors,  excluding  directors who are officers of Guaranty,  receive
fees of $550 for each  meeting of the Board of  Directors  attended and $300 for
each Audit, ALCO, Executive and Loan Committee meeting attended.  Mr. Caton, who
is an ex  officio  member  of all  committees  and  devotes  additional  time to
Guaranty's  affairs as  Chairman  of the Board of  Directors,  received a fee of
$32,500 in the fiscal  year ended  December  31,  2003,  in lieu of any fees for
attending Board of Directors and committee meetings.

         Beginning in 2002,  Guaranty annually issues 150 shares of Common Stock
to each of its active non-employee  directors  (pro-rated in the first year as a
director).  Such shares are not issued under any plan of Guaranty,  and they are
in addition to the cash  compensation  that the  directors  receive.

Employment Agreements

         Guaranty  and  William  E.  Doyle,  Jr. are  parties  to an  employment
agreement  dated as of May 10, 2001.  The  agreement  provides  for Mr.  Doyle's
service as President and Chief  Executive  Officer of both Guaranty and Guaranty
Bank and provides for a base salary of $195,300, beginning in 2001. In addition,
the agreement  provides for, at the  beginning of his  employment,  the grant of
options to purchase  5,000 shares of Common Stock and, in each of February 2002,
2003 and 2004,  the grant of options to purchase  10,000 shares of Common Stock.
Each option, which Guaranty grants under the 1991 Incentive Plan, is immediately
exercisable, has an exercise price of the fair market value at the date of grant
and has a 10-year  term.  The  options are  intended to be treated as  incentive
stock options.

         Under  the  agreement,  if Mr.  Doyle's  employment  is  terminated  by
Guaranty  for  reasons  other than cause or by Mr.  Doyle for "good  reason" (as
defined in the agreement), he will be entitled to receive severance pay equal to
one-twelfth of his annual base salary in effect at the time for 36 months or for
the remainder of the term of the agreement, whichever is less. If his employment
terminates  for reasons other than cause or for good reason within one year of a
change in  control  of  Guaranty,  he will be  entitled  to  severance  payments
approximately  equal to 299% of his annualized cash  compensation for the period
that  precedes the change in control as  determined  under the Internal  Revenue
Code of 1986,  as  amended.  If  termination  of  employment  due to a change in
control had occurred in the year ended  December 31, 2003,  Mr. Doyle would have
been entitled to severance payments amounting to approximately $695,000.

         The agreement also contains a covenant not to compete that is in effect
while Mr. Doyle is an officer and employee of Guaranty and for a 12-month period
after the  termination of  employment.  The agreement is for a period ending May
31, 2006.

Change of Control Agreements

         Tara Y. Harrison and Richard L. Saunders are each parties with Guaranty
to change of control  agreements,  dated  January  16, 2003 and January 2, 2002,
respectively.  The agreements provide for severance payments approximately equal
to one times their annualized cash compensation for the period that precedes the
change in control as  determined  under the Internal  Revenue  Code of 1986,  as
amended. If termination of employment due to a change in control had occurred in
the year ended  December 31, 2003,  Ms.  Harrison  would have been entitled to a
severance payment amounting to approximately $60,000 and Mr. Saunders would have
been entitled to a severance payment amounting to approximately $102,000.

                                       40
<PAGE>
Item 11. Security Ownership of Certain Beneficial Owners and Management

Security Ownership of Management

         The  following  table  sets  forth  information  as of March  1,  2004,
regarding  the  number  of shares of  Common  Stock  beneficially  owned by each
director,  each individual named in the Summary Compensation Table below and all
current  directors  and  executive  officers  as a group.  Beneficial  ownership
includes shares, if any, held in the name of the spouse, minor children or other
relatives of the individual  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.  The address for each of the  following  individuals  is 1658 State
Farm Boulevard, Charlottesville, Virginia 22911.
<TABLE>
<CAPTION>

                                                    Common Stock
Name                                           Beneficially Owned (1)                    Percentage of Class
----                                           ----------------------                    -------------------
<S>                                                   <C>                                    <C>
Henry J. Browne                                         38,587                                  1.93%
Douglas E. Caton                                       325,183                                 16.25%
William E. Doyle, Jr.                                   42,039                                  2.06%
Jason I. Eckford, Jr.                                    2,800                                    *
W. Bradford Eure                                           438                                    *
Tara Y. Harrison                                           436                                    *
Harry N. Lewis                                           5,988                                    *
Patrick J. McCann                                          444                                    *
John R. Metz                                            14,782                                    *
Richard L. Saunders                                     12,500                                    *
James R. Sipe, Jr.                                       3,200                                    *
Oscar W. Smith, Jr.                                     20,874                                  1.04%

All current executive officers and
   directors as a group (12 Persons)                   467,271                                 22.75%
-----------------
</TABLE>

* Percentage of ownership is less than one percent of the outstanding shares of
  Common Stock.
(1)  Amounts disclosed include shares of Common Stock that certain individuals
     have the right to acquire upon the exercise of stock options exercisable
     within 60 days of March 1, 2004, as follows: Mr. Browne, 800; Mr. Doyle,
     40,100; Mr. Saunders, 12,500; and all current executive officers as a
     group, 53,400.


                                       41
<PAGE>

Security Ownership of Certain Beneficial Owners

         The  following  table sets forth  information  as of February 28, 2004,
regarding the number of shares of Common Stock beneficially owned by all persons
who own five percent or more of the outstanding shares of Common Stock.
<TABLE>
<CAPTION>

                                                    Common Stock
             Name and Address                     Beneficially Owned                    Percentage of Class
             ----------------                     ------------------                    -------------------
<S>                                                   <C>                                     <C>
Douglas E. Caton                                       325,183                                 16.25%
4 Deer Park
Earlysville, Virginia

J. Sheldon Clark (1)                                   193,737                                  9.68%
1633 Broadway, 30th Floor
New York, New York

Banc Fund V L.P. and (2)                               159,848                                  7.99%
Banc Fund VI L.P.
208 S. LaSalle Street
Chicago, Illinois
-------------------------
</TABLE>

(1)  In a Schedule 13D/A filed with the Securities and Exchange Commission (the
     "SEC") on January 24, 2003, John Sheldon Clark reported beneficial
     ownership of, including sole voting and dispositive power with respect to,
     193,737 shares of Common Stock as of that date.
(2)  In a Schedule 13G/A filed with the SEC on February 12, 2004, Banc Fund V
     L.P. reported beneficial ownership of, including sole voting and
     dispositive power with respect to, 85,909 shares of Guaranty common stock
     and Banc Fund VI L.P. reported similar beneficial ownership of 73,939
     shares of Guaranty common stock, as of December 31, 2003. Banc Fund V L.P.
     and Banc Fund VI L.P. are under common control and are affiliated with The
     Bank Funds Company, L.L.C., according to the Schedule 13G/A. The total
     amount with respect to which these entities have sole voting and
     dispositive power was 159,848 shares of Guaranty common stock as of
     December 31, 2003, according to the Schedule 13G/A.


                                       42
<PAGE>

Equity Compensation Plan Information

         The  following  table sets forth  information  as of December 31, 2003,
with respect to  compensation  plans under which shares of the Company's  Common
Stock are authorized for issuance.
<TABLE>
<CAPTION>

                                                                                               Number of Securities
                                                                                               Remaining Available
                                  Number of Securities to Be        Weighted Average           for Future Issuance
         Plan Category             Issued upon Exercise of         Exercise Price of               Under Equity
         -------------             -----------------------         -----------------               ------------
                                     Outstanding Options          Outstanding Options          Compensation Plans 1
                                     -------------------          -------------------          --------------------
<S>                                       <C>                          <C>                           <C>

Equity Compensation Plans
   Approved by Shareholders
    1991 Amended Incentive                  66,750                       $10.67                       119,250
        Stock Option Plan

Equity Compensation Plans Not
   Approved by Shareholders 2                   --                           --                            --

Total                                       66,750                       $10.67                       119,250
-------------------
</TABLE>

1 Amounts exclude any securities to be issued upon exercise of outstanding
  options.

2 The Company does not have any equity compensation plans that have not been
  approved by shareholders.


Item 12. Certain Relationships and Related Transactions

         Some of the  directors  and officers of Guaranty are at present,  as in
the past,  customers of  Guaranty,  and Guaranty has had, and expects to have in
the future,  banking  transactions  in the ordinary  course of its business with
directors,   officers,   principal   shareholders  and  their   associates,   on
substantially the same terms,  including interest rates and collateral on loans,
as those  prevailing at the same time for comparable  transactions  with others.
These transactions do not involve more than the normal risk of collectibility or
present other unfavorable features.

         There  are no legal  proceedings  to which  any  director,  officer  or
principal  shareholder,  or any  affiliate  thereof,  is a party  that  would be
material and adverse to Guaranty.


Item 13. Exhibits and Reports on Form 8-K

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

         (a)      Exhibits

                  2        Agreement and Plan of Reorganization,  dated December
                           18, 2003, by and between Union Bankshares Corporation
                           ("Union") and Guaranty, and a related Plan of Merger,
                           filed as Appendix I to the Proxy Statement/Prospectus
                           included in (and referred to as Exhibit 2 of) Union's
                           Registration  Statement on Form S-4, Registration No.
                           333-112416,  filed  with the  Commission  on March 5,
                           2004, incorporated herein by reference.

                                       43
<PAGE>

                  3.1      Amended and Restated Articles of Incorporation of
                           Guaranty (restated in electronic format), attached as
                           Exhibit 3.1 to Guaranty's Annual Report on Form
                           10-KSB for the year ended December 31, 1997,
                           incorporated herein by reference.

                  3.2      Bylaws of Guaranty, attached as Exhibit 3.1 to
                           Guaranty's Annual Report on Form 10-KSB for the year
                           ended December 31, 1997, incorporated herein by
                           reference.

                  10.1     Guaranty Financial Corporation 1991 Incentive Plan
                           (as amended), attached as Exhibit A to Guaranty's
                           definitive Proxy Statement for the 1998 Annual
                           Meeting of Shareholders, incorporated herein by
                           reference.

                  10.2     Employment Agreement, dated as of May 10, 2001, by
                           and between Guaranty and William E. Doyle, Jr.,
                           attached as Exhibit 10.1 to Guaranty's Quarterly
                           Report on Form 10-QSB for the period ended June 30,
                           2001, incorporated herein by reference.

                  10.3     Form of Change of Control Agreement for Executive
                           Officers.

                  21       Subsidiaries of Guaranty.

                  31.1     Rule 13a-14(a) Certification of Chief  Executive
                           Officer.

                  31.2     Rule 13a-14(a) Certification of Chief  Financial
                           Officer.

                  32       Certification of Chief Executive Officer and Chief
                           Financial  Officer  Pursuant to  18 U.S.C. Section
                           1350.


         (b) Reports on Form 8-K

                  The Company furnished a Current Report on Form 8-K with the
                  Securities and Exchange Commission on October 23, 2003. The
                  Form 8-K reported Item 12 and attached as an exhibit and
                  incorporated by reference a press release that reported the
                  Company's financial results for the quarter ended September
                  30, 2003.


Item 14. Principal Accountant Fees and Services

Fees of Independent Public Accountants

Audit Fees

         The aggregate fees billed by BDO Seidman, LLP for professional services
rendered for the audit of Guaranty's annual financial  statements for the fiscal
years  ended  December  31, 2003 and 2002,  and for the review of the  financial
statements included in Guaranty's Quarterly Reports on Form 10-QSB, and services
that are normally  provided in connection with statutory and regulatory  filings
and  engagements,  for those  fiscal years were $84,000 for 2003 and $74,000 for
2002.

Audit Related Fees

         The aggregate fees billed by BDO Seidman, LLP for professional services
for  assurance  and  related  services  that  are  reasonably   related  to  the
performance  of the audit or review of Guaranty's

                                       44
<PAGE>
financial  statements  and not reported under the heading "Audit Fees" above for
the fiscal  year ended  December  31, 2003 were  $21,000,  which  included  fees
related to filing of an S-4, review of the audit committee  charter and internal
audit plan and audit and report of FHLB  collateral  verification.  During 2002,
the  Company  incurred  no audit  related  fees other  than  those  noted in the
preceding paragraph.

Tax Fees

         The aggregate fees billed by BDO Seidman, LLP for professional services
for tax  compliance,  tax advice and tax  planning  for the fiscal  years  ended
December 31, 2003 and  December 31, 2002 were $9,000 and $12,000,  respectively.
During 2003 and 2002, these services generally included preparing  corporate tax
returns and estimating quarterly payments.


Pre-Approved Services

         The Audit  Committee  pre-approves  all audit,  audit-related,  tax and
other services to be performed by the independent  auditors.  All such services,
as described above,  were  pre-approved by the Audit Committee,  which concluded
that the provision of such services by BDO Seidman,  LLP was compatible with the
maintenance  of  that  firm's  independence  in  the  conduct  of  its  auditing
functions.



                                       45
<PAGE>

                         Guaranty Financial Corporation
                                       and Subsidiaries














                                               Consolidated Financial Statements
                                            As of December 31, 2003 and 2002 and
                            For the Years Ended December 31, 2003, 2002 and 2001












<PAGE>





GUARANTY FINANCIAL CORPORATION
Contents




     Report of Independent Certified Public Accountants                      3

     Consolidated Financial Statements

       Balance Sheets                                                        4

       Statements of Operations                                              5

       Statements of Comprehensive Income                                    6

       Statements of Stockholders' Equity                                    7

       Statements of Cash Flows                                          8 - 9

     Summary of Accounting Policies                                    10 - 15

     Notes to Consolidated Financial Statements                        16 - 28






                                                                               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 subsidiaries as of December 31, 2003 and 2002, and the related
consolidated statements of operations, stockholders' equity, comprehensive
income, and cash flows for each of the three years in the period ended December
31, 2003. These financial statements are the responsibility of the Corporation's
management. Our responsibility is to express an opinion on these financial
statements based on our audits.

We conducted our audits in accordance with auditing standards generally accepted
in the United States of America. 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 subsidiaries as of December 31, 2003 and
2002, and the results of their operations and their cash flows for each of the
three years in the period ended December 31, 2003 in conformity with accounting
principles generally accepted in the United States of America.





                                                  BDO Seidman, LLP

Richmond, Virginia
January 9, 2004





                                                                               3
<PAGE>

<TABLE>
<CAPTION>

GUARANTY FINANCIAL CORPORATION
Consolidated Balance Sheets

December 31,                                                                     2003                          2002
--------------------------------------------------------------------------------------------------------------------------------
<S>                                                                    <C>                          <C>
Assets
Cash and cash equivalents (including interest bearing deposits
   of approximately $5,398,000 and $6,979,000)                          $  11,813,766                 $  15,391,874
Investment securities (Note 1)
   Held-to-maturity                                                        11,459,062                       836,114
   Available for sale                                                       7,901,967                     3,634,150
Investment in Federal Home Loan Bank stock, at cost                           532,000                       947,100
Loans receivable, net (Notes 2 and 9)                                     156,009,221                   163,249,885
Accrued interest receivable                                                   788,374                       909,767
Real estate owned                                                                   -                       397,155
Office properties and equipment, net (Note 3)                               6,371,287                     7,442,935
Other assets (Note 8)                                                       4,101,749                     4,335,896
---------------------------------------------------------------------------------------------------------------------------------
                                                                         $198,977,426                  $197,144,876
---------------------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
Liabilities
   Deposits (Note 4)                                                     $175,184,224                  $171,259,105
   Advances from Federal Home Loan Bank (Note 7)                            3,000,000                             -
   Convertible preferred securities (Notes 11 and 12)                               -                     6,012,500
   Bonds payable (Notes 1 and 6)                                                    -                       359,847
   Accrued interest payable                                                     9,504                        57,801
   Prepayments by borrowers for taxes and insurance                            72,896                       126,802
   Other liabilities                                                          519,901                       721,368
---------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                         178,786,525                   172,524,923
---------------------------------------------------------------------------------------------------------------------------------

Commitments and Contingencies (Notes 10, 11, 13 and 15)
---------------------------------------------------------------------------------------------------------------------------------

Stockholders' Equity (Notes 12 and 13) 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, 1,992,909 and 1,970,677 shares issued
      and outstanding                                                       2,491,136                     2,463,346
   Additional paid-in capital                                               9,238,003                     9,034,207
   Accumulated other comprehensive loss                                       (22,165)                     (23,007)
   Retained earnings - substantially restricted                             8,483,927                     7,132,907
---------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                 20,190,901                    18,607,453
---------------------------------------------------------------------------------------------------------------------------------
                                                                         $198,977,426                  $197,144,876
---------------------------------------------------------------------------------------------------------------------------------
</table>
See accompanying summary of accounting policies and notes to consolidated
financial statements.



                                                                               4
<PAGE>

<TABLE>
<CAPTION>

GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Operations

Year Ended December 31,                                                2003                   2002                   2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                    <C>                  <C>
Interest income
   Loans                                                            $9,915,739           $11,648,714           $15,451,066
   Investment securities                                               366,218             1,206,296             2,190,541
------------------------------------------------------------------------------------------------------------------------------------
Total interest income                                               10,281,957            12,855,010            17,641,607
-----------------------------------------------------------------------------------------------------------------------------------=

Interest expense
   Deposits                                                          1,542,462             3,464,836             8,932,880
   Borrowings                                                          458,517               691,049               822,993
------------------------------------------------------------------------------------------------------------------------------------

Total interest expense                                               2,000,979             4,155,885             9,755,873
------------------------------------------------------------------------------------------------------------------------------------

Net interest income                                                  8,280,978             8,699,125             7,885,734
Provision for loan losses (Note 2)                                     840,991                99,998               333,467

------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
   provision for loan losses                                         7,439,987             8,599,127             7,552,267
------------------------------------------------------------------------------------------------------------------------------------

Other income
   Mortgage banking income                                           1,419,062               999,168             1,093,393
   Loan and deposit fees and servicing income                          917,191               906,785               830,704
   Net gain on sale of branches                                        939,231                     -                     -
   Increase in cash surrender value of life insurance                  217,164               182,825                     -
   Investment sales commissions                                         10,215               104,298               254,433
   Net gain on sale of securities                                       11,843                20,125                 3,046
   Other                                                               292,970               272,875               324,679
------------------------------------------------------------------------------------------------------------------------------------

Total other income                                                   3,807,676             2,486,076             2,506,255
------------------------------------------------------------------------------------------------------------------------------------

Other expenses
   Personnel                                                         4,544,878             4,560,540             4,810,577
   Occupancy (Note 10)                                               1,093,235             1,167,544             1,411,567
   Data processing (Note 10)                                         1,124,337             1,158,381             1,153,186
   Other                                                             1,646,948             1,621,038             1,897,717
------------------------------------------------------------------------------------------------------------------------------------

Total other expenses                                                 8,409,398             8,507,503             9,273,047
------------------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                           2,838,265             2,577,700               785,475

Provision for income taxes (Note 8)                                    891,956               814,258               267,100
------------------------------------------------------------------------------------------------------------------------------------

Net income                                                         $ 1,946,309           $ 1,763,442            $  518,375
------------------------------------------------------------------------------------------------------------------------------------

Basic Earnings Per Share                                              $    .98               $   .89               $   .26
------------------------------------------------------------------------------------------------------------------------------------
Diluted Earnings Per Share                                                 .97               $   .89               $   .26
------------------------------------------------------------------------------------------------------------------------------------
</table>
See accompanying summary of accounting policies and notes to consolidated
financial statements.



                                                                               5
<PAGE>

<TABLE>
<CAPTION>

GUARANTY FINANCIAL CORPORATION
Consolidated StatementS of comprehensive income


Year Ended December 31,                                           2003                    2002                      2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                     <C>                        <C>
------------------------------------------------------------------------------------------------------------------------------------
Net income                                                     $1,946,309              $1,763,442                 $518,375

Other comprehensive income
      Unrealized gains on securities
        arising during period                                      13,118               1,038,806                  795,429
      Reclassification adjustment for (gains)
        losses included in net income                             (11,843)                (20,125)                 (3,046)
------------------------------------------------------------------------------------------------------------------------------------

    Other comprehensive income,
      before tax                                                    1,275               1,018,681                  792,383

    Income tax expense related to
      items of other comprehensive
      income                                                         (433)               (346,352)                (269,410)
------------------------------------------------------------------------------------------------------------------------------------

    Other comprehensive income,
      net of tax                                                      842                 672,329                  522,973
------------------------------------------------------------------------------------------------------------------------------------

Comprehensive income                                           $1,947,151              $2,435,771               $1,041,348
------------------------------------------------------------------------------------------------------------------------------------
See accompanying summary of accounting policies and notes to consolidated
financial statements.


                                                                               6
<PAGE>



GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Stockholders' Equity

                                                                              Accumulated
                                                           Additional            Other                            Total
                                            Common           Paid-in        Comprehensive      Retained       Stockholders'
                                             Stock           Capital        Income (Loss)      Earnings          Equity
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2000                $2,452,159       $8,953,230       $(1,218,309)      $4,851,090       $15,038,170
Other comprehensive income                         -                -           522,973                -           522,973
Net income                                         -                -                 -          518,375           518,375
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2001                 2,452,159        8,953,230          (695,336)       5,369,465        16,079,518
Other comprehensive income                         -                -           672,329                -           672,329
Issuance of Common Stock (Note 13)            11,187           80,977                 -                -            92,164
------------------------------------------------------------------------------------------------------------------------------------
Net income                                         -                -                 -        1,763,442         1,763,442
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2002                 2,463,346        9,034,207          (23,007)        7,132,907        18,607,453
Cash dividend                                      -                -                 -        (595,289)         (595,289)
Other comprehensive income                         -                -               842                -               842
Issuance of Common Stock (Note 13)            27,790          203,796                 -                -           231,586
------------------------------------------------------------------------------------------------------------------------------------
Net income                                         -                -                 -        1,946,309         1,946,309
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 2003                $2,491,136       $9,238,003         $(22,165)       $8,483,927       $20,190,901
------------------------------------------------------------------------------------------------------------------------------------

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



                                                                               7
<PAGE>



GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Cash Flows


------------------------------------------------------------------------------------------------------------------------------------

Year Ended December 31,                                          2003                     2002                    2001
Operating activities
  Net income                                                $  1,946,309             $  1,763,442           $      518,375
  Adjustments to reconcile net income to net cash
   provided (absorbed) by operating activities:
   Provision for loan losses                                     840,991                   99,998                  333,467
   Provision for loss on sale of other real estate owned               -                   86,701-
   Depreciation and amortization                                 455,317                  585,810                1,122,468
   Deferred loan fees                                           (255,957)                (109,386)                 (72,009)
   Net amortization of premiums and accretion of
     discounts                                                    63,211                  134,398                  160,696
   Gain on sale of loans                                      (1,419,062)                (999,168)              (1,249,393)
   Originations of loans held for sale                       (73,952,163)             (45,748,750)             (70,683,960)
   Proceeds from sale of loans                                73,882,883               57,437,524               63,478,428
   Loss (gain) on sale of held to maturity and securities
     available for sale                                          (11,843)                 (20,125)                  (3,046)
   Loss (gain) on disposal of office properties
     and equipment                                               (27,604)                  (7,481)                  (3,036)
   Loss (gain) on sale of real estate owned                       (2,374)                  22,416                        -
   Gain on sale of branch                                       (986,305)                       -                  (79,289)
   Changes in:
     Accrued interest receivable                                 121,393                  335,499                  833,425
     Other assets                                                434,679                  167,924                   87,544
     Accrued interest payable                                    (48,297)                 (79,690)                (256,296)
     Income taxes                                                      -                 (120,548)                 156,510
     Prepayments by borrowers for taxes and insurance            (53,906)                 (37,860)                 (99,311)
     Other liabilities                                          (201,467)                 176,255                     (212)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities             785,805               13,686,959               (5,755,639)
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
  Net decrease in loans                                        2,504,748                3,392,299               27,695,518
  Repayments on held to maturity securities                      297,687                  286,302                  229,620
  Purchase of held to maturity securities                    (12,110,000)                (812,434)                (250,000)
  Proceeds from retirement of held to maturity securities      1,400,000                  650,000                  250,000
  Purchase of securities available for sale                   (7,493,337)                       -              (26,000,000)
  Proceeds from sales of securities available for sale         3,200,000               18,378,584               23,683,500
  Sale of FHLB stock                                             415,000                  602,900                        -
  Proceeds from sales of real estate owned                       399,528                  514,451                  830,293
  Improvements to real estate owned                                    -                  (66,337)                       -
  Purchase of bank owned life insurance                                -               (3,000,000)                       -
  Increase in bank owned life insurance                         (217,164)                (213,694)                       -
  Net decrease in cash from sale of branch:
   Proceeds from sale of loans                                 5,446,001                        -                4,358,781
   Sale of deposits                                           (9,983,988)                       -               (7,143,692)
   Proceeds from sale of office properties,
     equipment and land                                        1,652,999                        -                1,057,608
  Origination of mortgage servicing rights                             -                        -                 (331,307)
  Proceeds from sales of mortgage servicing rights, net                -                        -                  825,938
  Purchase of office properties and equipment                   (808,826)              (1,194,301)                (374,986)
  Proceeds from sales of office properties and equipment          57,298                1,289,408                  109,883
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities         (15,239,954)              19,827,178               24,941,156
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                                        (continued)



                                                                               8
<PAGE>



GUARANTY FINANCIAL CORPORATION
Consolidated Statements of Cash Flows (CONTINUED)


------------------------------------------------------------------------------------------------------------------------------------

Year Ended December 31,                                          2003                     2002                    2001
Financing activities
  Net increase (decrease) in deposits                        $14,677,672             $(29,372,598)            $ (9,101,991)
  Repayment of Federal Home Loan Bank advances               (27,000,000)             (49,000,000)             (62,000,000)
  Proceeds from Federal Home Loan Bank advances               30,000,000               48,000,000               49,000,000
  Payments on bonds payable, including unapplied
   payments                                                     (425,428)                (279,122)                (196,445)
  Redemption of trust preferred securities                    (6,012,500)                       -                        -
  Proceeds from issuance of common stock, net                    231,586                   92,164                        -
  Dividends paid                                                (595,289)                       -                        -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities          10,876,041              (30,559,556)             (22,298,436)
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents             (3,578,108)                2,954,581               (3,112,919)
Cash and cash equivalents, beginning of year                  15,391,874               12,437,293               15,550,212
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                       $11,813,766            $  15,391,874              $12,437,293
------------------------------------------------------------------------------------------------------------------------------------
</table>
See accompanying summary of accounting policies and notes to consolidated
financial statements.


                                                                               9
<PAGE>



GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies

Nature of Business and Regulatory Environment

Guaranty Financial Corporation  ("Guaranty") is a bank holding corporation whose
principal assets are its wholly-owned  subsidiaries,  Guaranty Bank ("the Bank")
and Guaranty  Capital Trust I. Bank provides a full range of banking services to
individual and corporate customers.

The Federal  Deposit  Insurance  Corporation  ("FDIC")  is the  federal  deposit
insurance  administrator  for  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  financial
institutions that pose a serious threat to the Bank Insurance Fund.

On December 18, 2003,  Guaranty and Union Bankshares  Corporation  announced the
signing of a definitive merger agreement, which was unanimously approved by each
board of directors, pursuant to which Union will acquire Guaranty. The merger is
dependent  on certain  regulatory  approvals,  as well as  approval  by Guaranty
shareholders, and is expected to close in the second quarter of 2004.


Principles of Consolidation

The  consolidated  financial  statements  include the accounts of Guaranty,  its
wholly-owned subsidiaries, Guaranty Capital Trust I and the Bank, and the Bank's
wholly-owned subsidiaries, GMSC, Inc. and Guaranty Investment Corp. All material
intercompany   accounts   and   transactions   have  been   eliminated   in  the
consolidation.

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.

Reclassifications

Certain  reclassifications  have  been  made  in  the  prior  year  consolidated
financial statements and notes to conform to the December 31, 2003 presentation.

Investment Securities

Investments in securities are classified as either  held-to-maturity,  available
for sale, or trading, according to management's intent and ability.

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.

A decline  in the market  value of any  available-for-sale  or  held-to-maturity
security below cost that is deemed other than  temporary  results in a charge to
earnings  and  the  corresponding  establishment  of a new  cost  basis  for the
security. No such declines have occurred.

If any, investments in debt and equity securities classified as trading would be
stated  at  market  value.  Unrealized  holding  gains and  losses  for  trading
securities  would be included in the statement of  operations.  Guaranty held no
securities that were classified as trading as of December 31, 2003 or 2002.

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




                                                                              10
<PAGE>



GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)

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.

Guaranty had  approximately  $1,451,000,  $332,000 and $14,279,000 of loans held
for sale at December 31, 2003, 2002 and 2001, respectively. The estimated market
value of these loans exceeded their carrying cost.

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,  construction  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.

Guaranty 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

Guaranty  generates  funds by selling  loans to the Federal  Home Loan  Mortgage
Corporation  and other  investors.  In mid-2001,  Guaranty  changed its mortgage
banking  business model to sell all residential  mortgage loans  originated on a
servicing released basis. As part of this revised business model,  Guaranty sold
its  residential  mortgage loan  servicing for others  portfolio for $918,000 in
2001. Under prior servicing agreements,  Guaranty continued to service the loans
and the participant is paid its share of principal and interest collections.

Historically,  Guaranty allocated 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 sold or securitized the loans and retained the
mortgage servicing rights.  Guaranty assessed its capitalized mortgage servicing
rights for impairment based on the fair value of those rights.

The cost of mortgage  servicing  rights was amortized in proportion to, and over
the  period  of,  estimated  net  servicing  revenues.  Impairment  of  mortgage
servicing  rights was  assessed  based on the fair value of those  rights.  Fair
values were  estimated  using  discounted  cash flows based on a current  market
interest rate. For purposes of measuring impairment,  the rights were 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
Guaranty's regulators.




                                                                              11
<PAGE>



GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)

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.

A loan is  considered  to be impaired  when it is probable that Guaranty 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.

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.

At  December  31,  2003 and 2002  Guaranty  had no loans  that  were  considered
impaired.

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, less selling costs.

Securities Sold Under Agreements to Repurchase

Guaranty 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  balance  sheets.  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

Deferred  income taxes are  recognized  for the tax  consequences  of "temporary
differences" by applying enacted  statutory tax rates applicable to future years
to  differences  between the financial  statement  carrying  amounts and the tax
bases of existing assets and liabilities.

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  $236,000 at
December 31, 1998.




                                                                              12
<PAGE>



GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)

Section  1616 of the  Small  Business  Job  Protection  Act (the  "Act") of 1996
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 Guaranty 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  Guaranty  during  the year is not  less  than  Guaranty'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,   Guaranty  must   recapture  into  taxable  income
approximately  $354,000  ratably over six years,  which began December 31, 1998,
since Guaranty met the  residential  loan  requirement  exemption for the period
ended December 31, 1997.

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 the earnings of an entity.  The basic
and diluted weighted  average number of shares of common stock  outstanding were
1,985,897  and  2,007,399,  for 2003 and  1,963,415  for the year ended 2002 and
1,961,727 for the year ended 2001.

Guaranty  applies  Accounting  Principals Board Opinion No. 25 in accounting for
stock options  granted to employees.  Had  compensation  expense been determined
based upon the fair value of the  awards at the grant date and  consistent  with
the method under Statement of Financial Accounting Standards 123, Guaranty's net
earnings and net  earnings per share would have been  decreased to the pro forma
amounts indicated in the following table:

<TABLE>
<CAPTION>
Year Ended December 31,                                       2003                2002                2001
-------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                  <C>                   <C>
Net income
  As reported                                           $1,946,309          $1,763,442             $518,375
  Pro forma                                              1,906,132           1,677,417              498,434

Net income per share (diluted)
  As reported                                              $  0.97             $  0.89               $ 0.26
  Pro forma                                                   0.95                0.85                 0.25

</table>

The  weighted  average  fair  value of  options  granted  during  the year ended
December 31, 2003 and 2002 was $3.48 and $2.74, respectively.

The fair value of each option  granted is  estimated  on the date of grant using
the  Black-Sholes  option pricing model with the following  assumptions used for
grants for the year ended  December 31, 2003: a risk free interest rate range of
2.69% - 2.95%,  depending on the date of grant,  dividend yield of 2%,  expected
weighted average term of 5.0 years, and a volatility of 30%.


Statements of Cash Flows

Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $1,812,000, $4,236,000 and
$10,012,000 for the years ended December 31, 2003, 2002 and 2001,  respectively.
Cash paid for income taxes was approximately $822,000, $811,000 and $380,000 for
the years ended  December 31,  2003,  2002 and 2001,  respectively.  Real estate
acquired in the settlement of loans was approximately  $191,000 and $305,000 for
the years ended  December  31, 2002 and 2001,  respectively.  No real estate was
acquired in the settlement of loans during the year ended December 31, 2003.




                                                                              13
<PAGE>



GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)

Accounting Pronouncements

In October 2002, the FASB issued SFAS 147,  "Acquisitions  of Certain  Financial
Institutions  - an  amendment  of  FASB  Statements  No.  72 and  144  and  FASB
Interpretation   No.  9.  This  statement  removes   acquisitions  of  financial
institutions  from  the  scope of both  Statement  72 and  Interpretation  9 and
requires  that those  transactions  be  accounted  for in  accordance  with FASB
Statements No. 141,  "Business  Combinations",  and No. 142, "Goodwill and Other
Intangible  Assets".  Thus,  the  requirement  in paragraph 5 of Statement 72 to
recognize  (and  subsequently   amortize)  any  excess  of  the  fair  value  of
liabilities assumed over the fair value of tangible and identifiable  intangible
assets  required  as an  unidentifiable  intangible  asset no longer  applies to
acquisitions  within the scope of this  Statement.  In addition,  this Statement
amends FASB  Statement No. 144,  "Accounting  for the  Impairment or Disposal of
Long-Lived  Assets",  to  include in its scope  long-term  customer-relationship
intangible   assets  of   financial   institutions   such  as  depositor  -  and
borrower-relationship intangible assets and credit cardholder intangible assets.
Consequently,  those intangible assets are subject to the same undiscounted cash
flow  recoverability  test  and  impairment  loss  recognition  and  measurement
provisions that Statement 144 requires for other long-lived assets that are held
and used.  The  adoption  of SFAS 147 did not have an  effect  on the  financial
statements.

SFAS No. 149,  "Amendment  of Statement No. 133 on  Derivative  Instruments  and
Hedging  Activities",  issued  in  April  2003,  amends  Statement  No.  133 for
decisions  made by the  Derivatives  Implementation  Group,  in  particular  the
meaning  of an  initial  net  investment,  the  meaning  of  underlying  and the
characteristics of a derivative that contains financing  components.  Presently,
the Bank has no derivative financial instruments and, consequently, the adoption
of the Statement had no effect on its financial statements.

SFAS No. 150, "Accounting for Certain Financial Instruments with Characteristics
of Both  Liabilities and Equity",  was issued in May 2003. Under this Statement,
certain  freestanding  financial  instruments  that embody  obligations  for the
issuer and that are now classified in equity,  must be classified as liabilities
(or as assets in some circumstances).  Generally,  SFAS No. 150 is effective for
financial  instruments entered into or modified after May 31, 2003. However, the
effective date of the Statement's  provisions  related to the classification and
measurement of certain mandatory redeemable  non-controlling  interests has been
deferred  indefinitely by the FASB,  pending further Board action.  As a result,
the  convertible  trust  preferred  securities  at  December  31, 2002 have been
reclassed into the liability section on the balance sheet.

In January 2003, the FASB issued FIN No. 46, "Consolidation of Variable Interest
Entities",  to provide  guidance on the  identification  of entities  controlled
through  means other than voting  rights.  FIN No. 46  specifies  how a business
enterprise  should  evaluate  its  interests  in a variable  interest  entity to
determine whether to consolidate that entity. A variable interest entity must be
consolidated  by its  primary  beneficiary  if the entity  does not  effectively
disperse  risks among the parties  involved.  The  adoption of FIN No. 46 is not
expected to have a significant effect on the Bank's financial statements.

In  December  2002,  the  FASB  issued  SFAS  148,  Accounting  for  Stock-Based
Compensation  - Transition  and  Disclosure - an amendment of FASB Statement No.
123. This Statement amends SFAS 123, Accounting for Stock-Based Compensation, to
provide  alternative  methods of transition  for a voluntary  change to the fair
value based method of  accounting  for  stock-based  employee  compensation.  In
addition,  this  Statement  amends the  disclosure  requirements  of SFAS 123 to
require prominent  disclosures in both annual and interim  financial  statements
about the method of accounting for  stock-based  employee  compensation  and the
effect of the method used on reported results.  We do not expect the adoption of
SFAS 148 to have an effect on our financial statements.



                                                                              14
<PAGE>



GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies (continued)

In December  2003, the FASB issued  Statement of Position  03-3,  Accounting for
Certain Loans or Debt Securities  Acquired in a Transfer.  This SOP, among other
things, no longer allows financial  institutions to record an allowance for loan
losses, related to credit quality, when they purchase loans, including through a
purchase business acquisition. The SOP is effective, on a prospective basis, for
loans  acquired in fiscal years  beginning  after  December 31, 2004.  We do not
expect the adoption of SOP 03-3 to have an effect on our financial statements.






                                                                              15
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

1. Investment Securities
A summary of the carrying value and estimated market value of investment
securities is as follows:
<table>
<caption>
                                                                                  Gross                Gross        Estimated
                                                            Amortized          Unrealized           Unrealized      Market
                                                              Cost              Gains                   Losses        Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                   <C>            <C>              <C>
December 31, 2003
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
  Mortgage-backed securities                              $ 3,320,829           $ 28,169        $          -    $ 3,348,998
  U.S. Government Agency Bonds                              8,138,233              3,340             (19,689)     8,121,884
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity                                     11,459,062             31,509             (19,689)    11,470,882
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
  Mortgage-backed securities                                5,881,589              2,938            (16,202)      5,868,325
  U.S. Government Agency Bonds                              1,496,712                  -            (20,320)      1,476,392
  Other                                                       557,250                -                     -        557,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale                                    7,935,551              2,938            (36,522)      7,901,967
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities                               $19,394,613           $ 34,447           $(56,211)    $19,372,849
------------------------------------------------------------------------------------------------------------------------------------

December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
  Mortgage-backed securities                               $  432,656            $38,152       $           -    $   470,808
  U.S. Treasury Bonds                                         403,458                -                    -         403,458
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity                                        836,114             38,152                   -        874,266
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
  Corporate bonds                                           3,246,760                  -            (34,860)      3,211,900
  Other                                                       422,250                  -                   -        422,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale                                    3,669,010                  -            (34,860)      3,634,150
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities                                $4,505,124            $38,152           $(34,860)     $4,508,416
------------------------------------------------------------------------------------------------------------------------------------
</table>
The amortized cost and estimated market value of available for sale and held to
maturity securities at December 31, 2003 by maturity is as follows:
<table>
<caption>
                                                                              Estimated
                                                           Amortized           Market
                                                            Cost               Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                      <C>                <C>
Held to Maturity
  Mortgage-backed securities                              $ 3,320,829        $ 3,348,996
  U.S. Government Agency Bonds                              8,138,233          8,121,884
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity                                     11,459,062         11,470,882
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
    Mortgage-backed securities                              5,881,589          5,868,325
    U.S. Government Agency Bonds                            1,496,712          1,476,392
    Other                                                     557,250            557,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale                                    7,935,551          7,901,967
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities                               $19,394,613        $19,372,849
------------------------------------------------------------------------------------------------------------------------------------
</table>


                                                                              16
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

1. Investment Securities (continued)

Gross gains and losses from the sale of securities during the years ended
December 31, 2003, 2002 and 2001 were as follows:
<TABLE>
<CAPTION>
                                                      2003                         2002                          2001
                                               Gains        Losses          Gains       Losses            Gains        Losses
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                <C>       <C>                <C>        <C>          <C>

Held to Maturity                        $          -       $    -    $         -        $    -     $       -    $       -
Available for Sale                            11,843            -         20,125             -         3,046            -
------------------------------------------------------------------------------------------------------------------------------------
Totals                                      $ 11,843       $    -        $20,125        $    -        $3,046    $       -
------------------------------------------------------------------------------------------------------------------------------------
</table>

No mortgage backed securities were pledged for bonds payable as of December 31,
2003. Mortgage backed securities of approximately $433,000 as of December 31,
2002, were pledged for bonds payable (Note 6).

2. Loans Receivable
Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
December 31,                                                           2003                             2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                             <C>
Mortgage loans
  Residential                                                        $25,461,644                     $20,118,677
  Commercial                                                           5,974,792                       7,893,953
  Construction and land loans                                         38,012,937                      38,479,836
------------------------------------------------------------------------------------------------------------------------------------

Total real estate                                                     69,449,373                      66,492,466

Commercial business loans                                             67,090,002                      76,651,355
Consumer loans                                                        21,240,813                      22,238,245
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable                                               157,780,188                     165,382,066
------------------------------------------------------------------------------------------------------------------------------------
Less
  Deferred loan fees (costs), net                                      (240,166)                       (109,911)
  Allowance for loan losses                                            2,011,133                       2,242,092
------------------------------------------------------------------------------------------------------------------------------------
                                                                       1,770,967                       2,132,181
------------------------------------------------------------------------------------------------------------------------------------
                                                                    $156,009,221                    $163,249,885
------------------------------------------------------------------------------------------------------------------------------------



The allowance for loan losses is summarized as follows:                                                   Amount
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000                                                                         $ 2,396,512
Provision charged to expense                                                                             333,467
Net charge-offs                                                                                        (217,979)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                                                                           2,512,000
Provision charged to expense                                                                              99,998
Net charge-offs                                                                                        (369,906)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                                                                           2,242,092
Provision charged to expense                                                                             840,991
Net charge-offs                                                                                      (1,071,950)
------------------------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2003                                                                         $ 2,011,133
====================================================================================================================================
</table>



                                                                              17
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

2. Loans Receivable (continued)

Guaranty serviced loans for others aggregating  approximately $172,000 and $12.4
million at December 31, 2003 and 2002,  respectively.  The  servicing  rights to
approximately $189,000,000 in loans were sold and transferred during 2001.

Gains on the sale of loans  approximated  $1.4  million,  $1.0  million and $1.2
million during the years ended December 31, 2003, 2002 and 2001, respectively.

3. Office Properties and Equipment
Office properties and equipment are summarized as follows:
<TABLE>
<CAPTION>
December 31,                                                            2003                             2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                             <C>

Land                                                                  $1,942,371                      $2,817,101
Building and leasehold improvements                                    3,741,316                       4,062,185
Furniture and fixtures                                                 1,241,794                       1,335,238
Equipment                                                              2,837,055                       2,546,040
-----------------------------------------------------------------------------------------------------------------------------------
                                                                       9,762,536                      10,760,564
Less accumulated depreciation
  and amortization                                                     3,391,249                       3,317,629
------------------------------------------------------------------------------------------------------------------------------------
Net office properties and equipment                                   $6,371,287                      $7,442,935
------------------------------------------------------------------------------------------------------------------------------------
</table>

4. Deposits
Deposits are summarized as follows:
<TABLE>
<CAPTION>
December 31,                                                           2003                            2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                             <C>                             <C>
Statement savings accounts                                        $  13,404,288                   $  12,811,611
Demand deposit accounts                                              62,170,098                      53,498,243
Money market accounts                                                45,225,364                      34,444,896
------------------------------------------------------------------------------------------------------------------------------------

                                                                    120,799,750                     100,754,750
------------------------------------------------------------------------------------------------------------------------------------

Time deposits                                                        54,384,474                      70,504,355
------------------------------------------------------------------------------------------------------------------------------------

                                                                   $175,184,224                    $171,259,105
------------------------------------------------------------------------------------------------------------------------------------
</table>

The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000 was approximately  $11,778,000 and $11,390,000 at December 31, 2003 and
2002, respectively.

At December  31,  2003,  scheduled  maturities  of  certificates  are as follows
(rounded to the nearest thousand):
<TABLE>
<CAPTION>
Year Ending December 31,
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                <C>
   2004                                                                                              $46,962,000
   2005                                                                                                3,819,000
   2006                                                                                                2,569,000
   2007                                                                                                1,025,000
   2008 and thereafter                                                                                     9,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     $54,384,000
------------------------------------------------------------------------------------------------------------------------------------
</table>


                                                                              18
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Fair Value of Financial Instruments

The estimated fair values of Guaranty's financial instruments are as follows:
<TABLE>
<CAPTION>

December 31,                                                         2003                                  2002
------------------------------------------------------------------------------------------------------------------------------------
                                                        Carrying             Fair             Carrying            Fair
                                                         Amount              Value             Amount             Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                 <C>                <C>               <C>                <C>
Financial assets
  Cash and short-term investments                     $11,813,766        $11,814,000       $ 15,391,874       $ 15,392,000
  Securities                                           19,361,029         19,372,849          4,470,264          4,508,000
  Loans, net of allowance for loan losses             156,009,221        155,706,284        163,249,885        164,798,000
Financial liabilities
  Deposits                                            175,184,224        175,285,979        171,259,105        171,729,000
  Advances from Federal Home Loan Bank                  3,000,000          3,000,000                  -                  -
  Bonds payable                                                 -                  -            359,847                N/A


                                                         Notional               Fair         Notional              Fair
                                                          Amount                Value         Amount               Value
------------------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
  Commitments to
   extend credit                                      $60,142,000        $60,142,000        $52,356,000        $52,356,000
</table>

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.



                                                                              19
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

5. Fair Value of Financial Instruments (continued)

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

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 6) of the bonds payable held by GMSC,  Inc. at
December 31, 2002, 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.

6. 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 were secured by an indenture between GMSC, Inc. and the
Bank of New York, acting as trustee for the bondholders. The Bonds were redeemed
during 2003 and the balances are summarized as follows:

<TABLE>
<CAPTION>
December 31,                                                             2003                           2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                             <C>
Serial Bonds
  Class A-3, maturing January 20, 2019,
   at 8.0%                                                              $      -                        $455,428
  Unapplied payments                                                           -                         (30,000)
------------------------------------------------------------------------------------------------------------------------------------
                                                                               -                         425,428
  Less unamortized discount                                                    -                         (65,581)
------------------------------------------------------------------------------------------------------------------------------------
                                                                        $      -                        $359,847
------------------------------------------------------------------------------------------------------------------------------------
</table>

Prior to redemption, the Bonds were 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 was less than their  stated
maturities.  Interest was paid as incurred on the Class A-3 Bonds. The indenture
also provided 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 was
included  in cash on the  balance  sheet as of December  31,  2002.  The account
established for payment of interest and debt maturities was netted with cash and
bonds payable on the balance sheet as of December 31, 2002.



                                                                              20
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

7. Advances From Federal Home Loan Bank

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

Year Ended December 31,                                                 2003                            2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                           <C>
Maximum amount outstanding during the year                            $5,000,000                     $15,000,000
Average amount outstanding during the year                               760,000                     $ 6,136,000
Average interest rate during the year                                      1.32%                           1.96%
</table>

8. Income Taxes

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

<TABLE>
<CAPTION>
Year Ended December 31,                                                   2003                 2002                2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>                  <C>

Current income tax                                                     $ 683,956            $927,972            $285,743
Deferred income tax expense (benefit)                                    208,000            (113,714)            (18,643)
------------------------------------------------------------------------------------------------------------------------------------
                                                                       $ 891,956            $814,258            $267,100
------------------------------------------------------------------------------------------------------------------------------------
</table>

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

<TABLE>
<CAPTION>
Year Ended December 31,                                                     2003                2002                2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                  <C>                  <C>

Tax expense at statutory rate                                           $965,010            $876,418            $267,062
Adjustments
  Other                                                                   73,054              62,160                  38
------------------------------------------------------------------------------------------------------------------------------------
                                                                        $891,956            $814,258            $267,100
------------------------------------------------------------------------------------------------------------------------------------
</table>
The  components  of the net deferred  income  taxes,  which is included in other
assets in the balance sheet, are as follows:

<TABLE>
<CAPTION>
December 31,                                                                2003                            2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                  <C>                             <C>
Deferred tax asset
  Bad debt reserves                                                    $ 684,000                       $ 742,000
  REO reserves                                                                 -                          82,000
  Deferred loan fees                                                           -                           7,000
  Available for sale securities                                           11,000                          12,000
  Other                                                                    5,000                          23,000
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax asset                                                 700,000                         866,000
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability
  GMSC REMIC                                                              52,000                          63,000
  Fixed assets                                                           459,000                         405,000
  Other                                                                        -                               -
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liability                                             511,000                         468,000
------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset                                                 $ 189,000                        $398,000
------------------------------------------------------------------------------------------------------------------------------------
</table>


                                                                              21
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

9. Related Party Transactions

In the normal course of business,  Guaranty  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 following is a summary of loan  transactions  with  directors,  officers and
other related parties:

<TABLE>
<CAPTION>
December 31,                                                                2003                            2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                                <C>

Balance at the beginning of year                                      $2,069,000                        $2,044,000
Additional loans                                                         259,000                           171,000
Loan reductions                                                       (1,847,000)                         (146,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                               $   481,000                        $2,069,000
------------------------------------------------------------------------------------------------------------------------------------

10. Commitments and Contingencies

Guaranty  leases office space under  operating  leases expiring at various dates
through  2012.  Future  minimum  rental  payments  required that have initial or
remaining noncancelable terms in excess of one year as of December 31, 2003, are
as follows:

Year Ending December 31,
------------------------------------------------------------------------------------------------------------------------------------
2004                                                                   $ 162,056
2005                                                                     141,783
2006                                                                     144,169
2007                                                                     146,630
------------------------------------------------------------------------------------------------------------------------------------
2008 and thereafter                                                      731,206
                                                                      $1,325,844
------------------------------------------------------------------------------------------------------------------------------------
</table>

Total rental expense amounted to approximately  $197,000,  $140,000 and $179,000
for the years ended December 31, 2003, 2002 and 2001, respectively.

Guaranty 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 pending or threatened litigation.

11. Convertible Preferred Stock

On April 29, 1998,  Guaranty  formed Guaranty  Capital Trust I (the "Trust"),  a
wholly owned  subsidiary.  The Trust issued 276,000  shares of 7.0%  convertible
preferred securities maturing May 5, 2028 for $6,900,000, with an option to call
on or after April 29, 2003.  The Trust also issued  8,537 shares of  convertible
common stock for  $213,425.  Guaranty  purchased all shares of the common stock.
The proceeds from the sale of the preferred securities were utilized to purchase
from Guaranty junior  subordinated debt securities  (guaranteed by the Bank), of
$7,113,425  bearing  interest at 7.0% and maturing May 5, 2028. All intercompany
interest and equity was eliminated in consolidation.





                                                                              22
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

11. Convertible Preferred Stock (continued)

In January 2000, Guaranty  repurchased 2,500 shares of the cumulative  preferred
securities  at a price  of  $17.50  per  share  which  resulted  in a net  gain,
recognized  in the  statement of  stockholders'  equity,  on the  repurchase  of
$10,111. In December 1999, Guaranty  repurchased 33,000 shares of the cumulative
preferred securities at an average price of $17.97 per share which resulted in a
net gain, recognized in the statement of stockholders' equity, on the repurchase
of $101,000.  In May 2003,  Guaranty  redeemed 100% of the  remaining  preferred
securities  at which  time  $185,000  of  unamortized  issuances  expenses  were
written-off.

12.  Stockholders' Equity

The following table represents the Bank's regulatory capital levels.
<TABLE>
<CAPTION>

                                             Amount             Percent          Actual          Actual            Excess
December 31, 2003                           Required           Required          Amount          Percent           Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>                                     <C>                     <C>           <C>               <C>            <C>

Tier 1 risk based                         $ 6,376,000             4.00%         $20,213,000       12.68%         $13,387,000
Total risk based capital                   12,753,000             8.00%          22,206,000       13.93%           9,453,000

                                             Amount             Percent          Actual          Actual            Excess
December 31, 2002                           Required           Required          Amount          Percent           Amount
------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based                         $ 6,628,000             4.00%        $24,373,000        14.71%         $17,745,000
Total risk based capital                   13,255,000             8.00          26,447,000        15.96           13,192,000
</table>

The ratios which have been established for well-capitalized banks are 6% and 10%
for Tier 1 risk  based  capital  and total  risk  based  capital,  respectively.
Guaranty  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 Guaranty to be
reduced below the net worth requirement imposed by federal regulations.

Proceeds from the Trust Preferred  Securities were contributed to capital of the
Bank and are included,  to the extent allowed,  in the calculation of regulatory
capital for the year ended December 31, 2002. No Trust Preferred Securities were
outstanding as of December 31, 2003 and therefore,  were not included in capital
ratio calculations.

On October 26, 2000, Guaranty and the Bank entered into a Written Agreement with
the Federal Reserve Bank of Richmond and the Bureau of Financial Institutions of
the  Commonwealth  of Virginia  with respect to various  operating  policies and
procedures. The agreement restricted Guaranty from paying dividends or incurring
any debt at the holding  company  level without prior  regulatory  approval.  In
addition,  the Bank was also  prohibited from paying  intercompany  dividends to
Guaranty without prior regulatory approval.  Guaranty and the Bank gained formal
relief from the Written  Agreement in October 2002.  Guaranty paid  dividends of
$595,289 during 2003.




                                                                              23
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

13. Stock Option Plan

Guaranty  has a  non-compensatory  stock  option plan (the  "Plan")  designed to
provide long-term incentives to key employees.  All options are exercisable upon
date of vesting. The following table summarizes options outstanding:
<TABLE>
<CAPTION>

                                                        2003                        2002                       2001
------------------------------------------------------------------------------------------------------------------------------------
                                                              Weighted -                  Weighted -                 Weighted -
                                                               average                     average                    average
                                                              exercise                    exercise                   exercise
                                                 Shares         price        Shares         price      Shares          price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                            <C>           <C>          <C>           <C>          <C>            <C>

Options outstanding at
  beginning of period                             76,012       $10.01        57,912        $12.07      101,900        $14.16
Granted                                           17,500        13.47        47,500          8.59       16,512          8.74
Forfeited                                         (5,762)       14.69       (21,500)        12.45      (60,500)        12.10
Exercised                                        (21,000)        9.52        (7,900)        10.59             -            -
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end
  of period                                       66,750        10.67        76,012         10.01       57,912         12.07
------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end
  of period                                       66,750                     76,012                     48,900
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

14. Employee Benefit Plans

Effective February 16, 1989,  Guaranty 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. Guaranty may make contributions to
the plan at its discretion.  Guaranty's  contributions are allocated to employee
accounts using a systematic formula based on participant compensation.  Guaranty
contributed  approximately  $68,000,  $67,000  and  $60,000  for the years ended
December 31, 2003, 2002 and 2001, respectively.

15. Financial Instruments With Off-Balance-Sheet Risk

Guaranty 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 balance sheet. The
contract  or  notional  amounts  of these  instruments  reflect  the  extent  of
involvement Guaranty has in particular classes of financial instruments.

Guaranty'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.  Guaranty 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.




                                                                              24
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

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

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

<TABLE>
<CAPTION>

December 31,                                                                    2003                 2002
------------------------------------------------------------------------------------------------------------------
<S>                                                                         <C>                 <C>
Financial instruments whose contract
  amounts represent credit risk
   Commitments to extend credit                                              $60,142,000         $52,356,000
   Standby letters of credit written                                           3,899,000           5,054,000
</TABLE>


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.   Guaranty  evaluates  each
customer's creditworthiness on a case-by-case basis.

Standby letters of credit written are conditional commitments issued by Guaranty
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  Guaranty's  loan activity was with  customers  located in
Charlottesville and Richmond, Virginia and surrounding counties.

16.  Subsequent events

On December 18, 2003,  Guaranty and Union Bankshares  Corporation  announced the
signing of a definitive merger agreement, which was unanimously approved by each
board of directors, pursuant to which Union will acquire Guaranty. The merger is
dependent  on certain  regulatory  approvals,  as well as  approval  by Guaranty
shareholders, and is expected to close in the second quarter of 2004.













                                                                              25
<PAGE>



GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


17. Selected quarterly financial data (Unaudited)

Condensed quarterly financial data is shown as follows:

<TABLE>
<CAPTION>
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2003
                                                                First            Second               Third            Fourth
(Dollars in thousands except per share data)                   Quarter           Quarter             Quarter           Quarter
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                           <C>                <C>                 <C>            <C>

Total interest income                                          $2,641             $2,607              $2,498         $2,536
Total interest expense                                            598                479                 416            508
------------------------------------------------------------------------------------------------------------------------------------
Net interest income                                             2,043              2,128               2,082          2,028
Provision for (credit to) loan losses                              30                979               (198)             30
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
  for loan losses                                               2,013              1,149               2,280          1,998

Other income                                                    1,609                796                 910            493
Other expenses                                                  2,167              2,206               2,278          1,758
------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense                                1,455               (261)                912            733

Income tax expense (benefit)                                      476               (107)                292            231
------------------------------------------------------------------------------------------------------------------------------------
Net income (loss)                                              $  979            $  (154)             $  620         $  502
------------------------------------------------------------------------------------------------------------------------------------

Basic earnings (loss) per share                                 $0.50             ($0.08)              $0.31          $0.25
------------------------------------------------------------------------------------------------------------------------------------
Diluted earnings (loss) per share                                0.49             ( 0.08)               0.31           0.25
------------------------------------------------------------------------------------------------------------------------------------


------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2002
                                                                First            Second               Third            Fourth
(Dollars in thousands except per share data)                   Quarter           Quarter             Quarter           Quarter
------------------------------------------------------------------------------------------------------------------------------------
Total interest income                                          $3,472             $3,313              $3,151         $2,919
Total interest expense                                          1,388              1,121                 901            745
------------------------------------------------------------------------------------------------------------------------------------
Net interest income                                             2,084              2,192               2,250          2,174
Provision for loan losses                                          25                 25                  25             25
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
  for loan losses                                               2,059              2,167               2,225          2,149

Other income                                                      634                541                 606            666
Other expenses                                                  2,090              2,087               2,156          2,136
------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense                                  603                621                 675            679

Income tax expense                                                197                193                 212            212
------------------------------------------------------------------------------------------------------------------------------------
Net income                                                     $  406              $ 428              $  463         $  467
------------------------------------------------------------------------------------------------------------------------------------

Basic and diluted earnings per share                          $  0.21            $  0.22             $  0.23         $ 0.23
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



                                                                              26
<PAGE>

GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


18. Condensed Financial Information of the Parent Company Only

<TABLE>
<CAPTION>

                   Condensed Statements of Financial Condition
December 31,                                                                            2003                       2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                               <C>                       <C>

Assets
Investment in subsidiaries, at equity                                               $19,929,419               $24,324,165
Cash                                                                                    283,647                    83,784
Prepaid expenses and other assets                                                             -                   448,437
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    $20,213,066               $24,856,386
------------------------------------------------------------------------------------------------------------------------------------

Liabilities and Stockholders' Equity
  Other liabilities                                                           $               -         $               -
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                                             -                         -
------------------------------------------------------------------------------------------------------------------------------------
Subordinated debt                                                                             -                 6,225,925
------------------------------------------------------------------------------------------------------------------------------------

Stockholders' Equity
  Common stock                                                                        2,491,136                 2,463,346
  Additional paid-in capital                                                          9,238,003                 9,034,207
  Retained earnings                                                                   8,483,927                 7,132,908
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                           20,213,066                18,630,461
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    $20,213,066               $24,856,386
------------------------------------------------------------------------------------------------------------------------------------


                       Condensed Statements of Operations
Year Ended December 31,                                                                      2003                    2002
------------------------------------------------------------------------------------------------------------------------------------
Income
  Dividends received from bank                                                         $  773,803             $   420,875
------------------------------------------------------------------------------------------------------------------------------------
Total income                                                                              773,803                 420,875
------------------------------------------------------------------------------------------------------------------------------------

Interest expense                                                                         (164,187)               (420,875)
Non-interest expenses                                                                     (31,724)                 (8,531)
------------------------------------------------------------------------------------------------------------------------------------

Income before undistributed
   net income of the Bank                                                                 577,892                  (8,531)
Undistributed net income                                                                1,368,417               1,771,973
------------------------------------------------------------------------------------------------------------------------------------

Net income                                                                             $1,946,309              $1,763,442
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>


                                                                              27
<PAGE>


GUARANTY FINANCIAL CORPORATION
NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)


18. Condensed Financial Information of the Parent Company Only (continued)
<TABLE>
<CAPTION>

                       Condensed Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                                                      2003                    2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                              <C>                     <C>

Operating activities
  Net income                                                                           $1,946,309             $1,763,442
  Adjustments:
   Undistributed earnings of the Bank                                                  (1,368,417)            (1,771,973)
   Decrease in prepaid and other assets                                                   448,437                      -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities                                    1,026,329                 (8,531)
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
  Dividends received from Bank                                                          6,786,303                420,875
  Investment in the bank                                                               (1,831,855)              (420,875)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                                               4,954,448                      -
------------------------------------------------------------------------------------------------------------------------------------
Financing activities
  Issuance of common stock                                                                231,586                 92,163
  Redemption of trust preferred securities                                             (6,012,500)                     -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by financing activities                                   (5,780,914)                92,163
------------------------------------------------------------------------------------------------------------------------------------
Increase in cash                                                                          199,863                 83,632
Cash, beginning of year                                                                    83,784                    152
------------------------------------------------------------------------------------------------------------------------------------
Cash, end of year                                                                   $     283,647          $      83,784

</TABLE>


                                                                              28
<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:  April 13, 2004          By:   /s/ William E. Doyle, Jr.
                                     ----------------------------------------
                                     William E. Doyle, Jr.
                                     President and Chief Executive Officer


         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/ William E. Doyle, Jr.           President and Chief Executive Officer and           April 13, 2004
-------------------------------------
         William E. Doyle, Jr.                             Director
                                                 (Principal Executive Officer)

         /s/ Tara Y. Harrison                       Chief Financial Officer                    April 13, 2004
-------------------------------------
            Tara Y. Harrison                       (Principal Financial and
                                                      Accounting Officer)

         /s/ Douglas E. Caton                        Chairman of the Board                     April 13, 2004
-------------------------------------
            Douglas E. Caton


          /s/ Harry N. Lewis                      Vice Chairman of the Board                   April 13, 2004
-------------------------------------
             Harry N. Lewis


                                                           Director                            April   , 2004
-------------------------------------
            Henry J. Browne


                                                           Director                            April   , 2004
-------------------------------------
         Jason I. Eckford, Jr.


                                                           Director                            April   , 2004
-------------------------------------
            W. Bradford Eure


        /s/ Patrick J. McCann.                             Director                            April 13, 2004
-------------------------------------
           Patrick J. McCann


           /s/ John R. Metz                                Director                            April 13, 2004
-------------------------------------
              John R. Metz


                                                           Director                            April   , 2004
-------------------------------------
           James R. Sipe, Jr.


        /s/ Oscar W. Smith, Jr.                            Director                            April 13, 2004
-------------------------------------
          Oscar W. Smith, Jr.

</TABLE>




<PAGE>

                                  EXHIBIT INDEX

         Number                            Document
         ------                            --------

         2        Agreement and Plan of Reorganization, dated December 18, 2003,
                  by and between  Union  Bankshares  Corporation  ("Union")  and
                  Guaranty, and a related Plan of Merger, filed as Appendix I to
                  the Proxy Statement/Prospectus included in (and referred to as
                  Exhibit  2 of)  Union's  Registration  Statement  on Form S-4,
                  Registration  No.  333-112416,  filed with the  Commission  on
                  March 5, 2004, incorporated herein by reference.

         3.1      Amended and  Restated  Articles of  Incorporation  of Guaranty
                  (restated in  electronic  format),  attached as Exhibit 3.1 to
                  Guaranty's  Annual  Report on Form  10-KSB  for the year ended
                  December 31, 1997, incorporated herein by reference.

         3.2      Bylaws of  Guaranty,  attached  as Exhibit  3.1 to  Guaranty's
                  Annual  Report on Form 10-KSB for the year ended  December 31,
                  1997, incorporated herein by reference.

         10.1     Guaranty   Financial   Corporation  1991  Incentive  Plan  (as
                  amended), attached as Exhibit A to Guaranty's definitive Proxy
                  Statement  for  the  1998  Annual  Meeting  of   Shareholders,
                  incorporated herein by reference.

         10.2     Employment Agreement, dated as of May 10, 2001, by and between
                  Guaranty and William E. Doyle,  Jr.,  attached as Exhibit 10.1
                  to Guaranty's  Quarterly  Report on Form 10-QSB for the period
                  ended June 30, 2001, incorporated herein by reference.

         10.3     Form of Change of Control Agreement for Executive Officers.

         21       Subsidiaries of Guaranty.

         31.1     Rule 13a-14(a) Certification of Chief Executive Officer.

         31.2     Rule 13a-14(a) Certification of Chief Financial Officer.

         32       Certification  of Chief Executive  Officer and Chief Financial
                  Officer Pursuant to 18 U.S.C. Section 1350.