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 June 30, 1996

                         Commission file number 0-18265

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

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

           1700 Seminole Trail,                          22901
        Charlottesville, Virginia                     (Zip Code)
 (Address of Principal Executive Offices)

                                 (804) 974-1100
                (Issuer's Telephone Number, Including Area Code)

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

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

         Check whether the issuer: (1) filed all reports required to be filed by
Section 13 or 15(d) of the  Exchange  Act during the past 12 months (or for such
shorter period that the  registrant was required to file such reports),  and (2)
has been subject to such filing requirements for past 90 days.
                                                        Yes __X__    No _____

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

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

         The aggregate  market value of the voting stock held by  non-affiliates
computed by reference to the average of the closing bid and asked prices of such
stock as of June 30, 1996 was aproximately $4,382,985.  (The exclusion from such
amount of the market value of the shares owned by any person shall not be deemed
an  admission  by  the  registrant  that  such  person  is an  affiliate  of the
registrant.)

         The number of shares  outstanding of Common Stock  as of June 30, 1996
was 919,168.

                       DOCUMENTS INCORPORATED BY REFERENCE

             PART III of Form 10-KSB - Proxy Statement for the 1996
                        Annual Meeting of Stockholders.
<PAGE>

                                     PART I

Item 1.  Description of Business

General

         Guaranty Financial  Corporation  ("Guaranty" or the "Corporation") is a
Virginia  corporation  which was organized in 1995 by Guaranty Savings and Loan,
F.A. (the "Bank") for the purpose of becoming a unitary savings and loan holding
company.  The Bank is a  federally  chartered  savings  association  which began
business in February 1981 and is headquartered in Charlottesville, Virginia. The
Bank is a member of the Federal Home Loan Bank System ("FHLBS") and its deposits
are insured by the Savings  Associations  Insurance Fund ("SAIF") of the Federal
Deposit  Insurance  Corporation  ("FDIC").  The  Office  of  Thrift  Supervision
("OTS"),  created by the Financial Institutions Reform, Recovery and Enforcement
Act of 1989 ("FIRREA"),  serves as the primary regulator for thrifts such as the
Bank.

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

         Guaranty's  principal business  activities are attracting  checking and
savings  deposits from the general public through its retail banking offices and
originating, servicing, investing in and selling loans secured by first mortgage
liens on single-family dwellings, including condominium units. Of Guaranty's $85
million of mortgages  outstanding at June 30, 1996, 80% represented  residential
first mortgages.  Guaranty also lends funds to retail banking customers by means
of home equity,  installment  loans,  and, to a lesser extent,  originates loans
secured by commercial property and multi-family  dwellings.  Guaranty invests in
certain United States  government and agency  obligations and other  investments
permitted by applicable laws and regulations.

         Guaranty's   main   office  is   located   at  1700   Seminole   Trail,
Charlottesville, Virginia 22906 and the telephone number is (804) 974-1100.

Market Area

         Guaranty  is the only  independent  community  bank or savings and loan
association  headquartered  in, or even with an office  in,  Charlottesville  or
Albemarle  County,   Virginia.   This  area  had  a  collective   population  of
approximately 108,000 in 1990 according to census figures, is located in central
Virginia 110 miles southwest of Washington,  D.C. and 70 miles west of Richmond,
Virginia,  and includes the University of Virginia, the area's largest employer.
Guaranty   operates   three  full   service   retail   branches,   which   serve
Charlottesville  and Albemarle County. In October 1995,  construction began on a
combined  headquarters  and  fourth  retail  branch  located on the east side of
Charlottesville  in the Pantops  area of Albemarle  County.  The new facility is
expected to be opened in November 1996. Guaranty also purchased land in the city
of Harrisonburg to construct a fifth retail branch. An application was filed and
approved by regulatory authorities. It is anticipated that the branch will begin
construction in early 1997.

Competition

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

         Guaranty  faces  substantial  competition  in attracting  deposits from
commercial  banks,  money  market  and  mutual  funds,  credit  unions and other
investments vehicles. There are no other thrift institutions in Charlottesville.
The ability of Guaranty to attract and retain deposits depends on its ability to
provide an investment  opportunity  that satisfies the requirements of investors
as to rate of return,  liquidity,  risk and other factors. Guaranty competes for
these deposits by offering a variety of deposit  accounts at competitive  rates,
convenient   business  hours,  and  being  the  only  locally  based  thrift  in
Charlottesville.

         As a result of negative publicity regarding the thrift industry,  there
have been  significant  deposit outflows from savings  institutions  nationwide.
Such  publicity  had made it more  difficult  for Guaranty to attract and retain
deposits.  However,  in the year  ended  June  30,  1996,  Guaranty  was able to
increase its deposits  significantly.  Deposits grew 42% over the previous year.
This deposit growth is a reflection of aggressive  pricing,  increased marketing
and competitive products and services.

         Within  Charlottesville  and Albemarle  County there are four statewide
and two  regional  commercial  banks and  financial  institutions  with a larger
deposit base than Guaranty  that compete with  Guaranty.  Accordingly,  Guaranty
operates in a highly competitive  environment,  competing for deposits and loans
with commercial banks, and other financial  institutions,  including non-savings
and loan  competitors,  many of which possess  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.

Lending Activities

General

         Guaranty's loan portfolio  consists  primarily of mortgage  loans,  the
majority of which are residential first mortgage loans.

         Residential loan  originations  come primarily from walk-in  customers,
real estate brokers and builders.  Commercial real estate loan  originations are
obtained  through  broker  referrals,  direct  solicitation  of  developers  and
continued business from customers.  All completed loan applications are reviewed
by  Guaranty's  salaried  loan  officers.  As part of the  application  process,
information is obtained concerning the income,  financial condition,  employment
and credit  history of the  applicant.  If  commercial  real estate is involved,
information  is also  obtained  concerning  cash flow after debt  service.  Loan
quality is analyzed based on the Bank's  experience and guidelines  with respect
to credit underwriting as well as the guidelines issued by the Federal Home Loan
Mortgage Corporation  ("FHLMC"),  Federal National Mortgage Association ("FNMA")
and other  purchasers  of loans,  depending  on the type of loan  involved.  The
non-conforming one- to four-family  adjustable-rate mortgage loans originated by
Guaranty,  however,  are not readily saleable in the secondary market due to the
fact that they do not typically meet all of the secondary marketing  guidelines.
These loans are evaluated by the loan committee for "overall" merit and will not
exceed an 80% LTV. Real estate is appraised by  independent  fee  appraisers who
have been  pre-approved  by the Board of  Directors.  Loans are submitted to the
underwriting  department within loan  administration  for review. All conforming
loans including HUD/FHA, VA and applicable VHDA loans are underwritten and acted
upon within loan  administration  requiring  two  signatures  of  approval.  All
non-conforming  loans and loans which have been  denied or even  denied/canceled
within the branches are to be reconsidered and evaluated by a panel comprised of
the underwriting  staff and Guaranty's  President and Vice President of Mortgage
Lending.  Loans of  $350,000.00  or more must also be  approved  by the Board of
Directors.

         Guaranty is the primary  provider of residential  mortgage loans in the
markets  it  serves.  For  conventional  loans in  excess  of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value.  In addition to fixed  mortgage  loans,  Guaranty makes  adjustable  rate
mortgages with the primary loan indexed to the one year treasury.  Generally, if
the loans are not made to credit  standards of FHLMC,  additional  fees and rate
are charged and the loans are maintained in Guaranty's portfolio.

         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
June 30, 1996,  commitments to extend credit totaled $9.6 million. (See footnote
15 of the financial statements.)

One- to Four-Family Residential Real Estate Lending

         Guaranty's  primary lending program is the origination of loans secured
by one- to four-family residences,  all of which have been located in its market
area.  Guaranty  evaluates  both the  borrower's  ability to make  principal and
interest  payments  and the value of the  property  that will  secure  the loan.
Federal  law  permits  Guaranty  to make  loans in  amounts of up to 100% of the
appraised  value of the  underlying  real estate.  Loans are made with a loan to
value  up to 95%  for  conventional  mortgage  loans  and up to 100%  for  loans
guaranteed  by either the  Federal  Housing  Authority  ("FHA") or the  Veterans
Administration  ("VA").  For conventional  loans in excess of 80% loan to value,
private mortgage insurance is secured insuring the mortgage loans to 75% loan to
value. In addition to fixed rate mortgage loans,  Guaranty makes adjustable rate
mortgages with the primary loan indexed to the one year  treasury.  Generally if
the loans are not made to credit  standards of FHLMC,  additional  fees and rate
are charged and the loans are maintained in Guaranty's portfolio. If the loan to
value exceeds 80%, private mortgage insurance is generally secured.

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

         In order to reduce its exposure to changes in interest rates,  Guaranty
has  de-emphasized  the  origination of 30-year  fixed-rate  one- to four-family
residential  mortgage  loans for  retention in its own  portfolio.  For the year
ended  June  30,  1996,  30.5%  of all  one- to  four-family  residential  loans
originated  by  Guaranty  had  adjustable  interest  rates.   Although,  due  to
competitive market pressures, the Bank does originate fixed-rate mortgage loans,
it currently  underwrites  and  documents all such loans to permit their sale in
the secondary  mortgage market.  At June 30, 1996,  $28.9 million,  or 43.7%, of
Guaranty's one- to four-family  residential mortgage loan portfolio consisted of
fixed-rate mortgage loans.

         Guaranty's  current  one- to  four-family  residential  adjustable-rate
mortgage  ("ARMs")  have  interest  rates that adjust  every year,  generally in
accordance  with the rates on one-year  U.S.  Treasury  Bills.  Guaranty's  ARMs
generally  limit interest rate increases to 2% each rate  adjustment  period and
have an established ceiling rate at the time the loans are made of up to 6% over
the original  interest rate.  Borrowers are qualified at the first year interest
rate plus 2%. To compete with other lenders in its market area,  Guaranty  makes
one-year ARMs at interest  rates which,  for the first year, are below the index
rate  which  would  otherwise  apply to these  loans.  At June 30,  1996,  $37.2
million, or 56.3%, of Guaranty's one- to four-family  residential  mortgage loan
portfolio  consisted of ARMs.  There are  unquantifiable  risks  resulting  from
potential  increased  costs to the  borrower  as a result  of  repricing.  It is
possible,  therefore,  that during periods of rising interest rates, the risk of
defaults on ARMs may increase due to the upward  adjustment of interest costs to
borrowers.

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

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

Construction Lending

         As part of its community involvement, Guaranty makes local construction
loans,  primarily  residential and lot loans. The construction loans are secured
by the property for which the loan was obtained. At June 30, 1996,  construction
and  land  loans  outstanding  were  $8.8  million,   or  10%,  of  total  loans
outstanding.  The average  life of a  construction  loan is  approximately  nine
months  and they  reprice  daily to meet the  market,  normally  prime  plus two
percent.  Because the interest charged on these loans float with the market they
help Guaranty in managing its interest rate sensitivity.

Commercial Real Estate Lending

         Guaranty has  originated,  to a small  degree,  commercial  real estate
loans.  These  loans are secured by various  types of  commercial  real  estate,
including multi-family residential buildings,  commercial buildings and offices,
small shopping  centers and churches.  At June 30, 1996,  commercial real estate
aggregated $7.7 million or 8.7% of Guaranty's total loans receivable. Guaranty's
commercial  real estate loans are generally  made at interest  rates that adjust
based on yields for one-year U.S. Treasury  securities,  with a 2% annual cap on
rate  adjustments  and a 6% cap on  interest  rates  over the life of the  loan.
Typically,  Guaranty  charges fees ranging from 1% to 2% on these loans. At June
30,  1996,   Guaranty's  commercial  real  estate  loans  were  all  adjustable.
Commercial real estate loans made by Guaranty  generally  amortize over 20 to 30
years and may have a call provision of 3 or 5 years.  Guaranty's commercial real
estate loans are secured by properties in the Bank's market area.

         In its underwriting of commercial real estate, Guaranty may lend, under
federal  regulation,  up to 100% of the  security  property's  appraised  value,
although Guaranty's loan to original appraised value ratio on such properties is
80% or less.  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 generally
requires  personal  guarantees  or  endorsements  of  borrowers.  Guaranty  also
carefully considers the location of the security property.

Consumer Lending

         Federal  thrift  institutions  are  permitted  to make both secured and
unsecured consumer loans reasonably  incident to personal or household purposes.
In  general,  loans made under these  investment  powers may not exceed 30% of a
federally-chartered thrift institution's total assets.

         Guaranty offers various secured and unsecured consumer loans, including
unsecured  personal loans and lines of credit,  share loans,  automobile  loans,
deposit account loans, installment and demand loans, letters of credit, and home
equity loans.  At June 30, 1996,  Guaranty had consumer loans of $5.4 million or
6% of total loans.  During  fiscal year 1996,  Guaranty  increased  its level of
consumer loans.  Such loans were generally made to customers with which Guaranty
had an  pre-existing  relationships  and  were  generally  in  amounts  of under
$75,000.  Guaranty  originates  all of its consumer loans in its market area and
intends to continue its consumer lending in this geographic area.

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

         The  underwriting  standards  employed by 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 for 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.

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

Regulation

General

         As a federally  chartered savings  association,  the Bank is subject to
regulation,  supervision  and periodic  examination by the OTS and the FDIC. The
regulations  of these  agencies  govern most aspects of Guaranty's  business and
operations. The Bank's deposits are insured by the SAIF administered by the FDIC
to the maximum amount by law, which is currently  $100,000 per depositor in most
cases.

         The primary regulator for federal and state savings institutions is now
the  Office of Thrift  Supervision  ("OTS"),  an  office  in the  United  States
Department  of the  Treasury.  The  Director of the OTS is  responsible  for the
examination and supervision of all savings institutions.

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

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

The Federal Home Loan Bank System

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

         The Bank is  authorized to apply for advances from the FHLB of Atlanta,
provided certain standards related to  creditworthiness  have been met. Advances
are made pursuant to several  different credit  programs,  each of which has its
own interest rate and range of  maturities.  The FHLB  prescribes the acceptable
uses for  advances as well as  limitations  on the size of  advances.  Long-term
advances  may only be made by FHLBs  for the  purpose  of  providing  funds  for
residential housing finance. Additionally, at the time of origination or renewal
of a loan or advance, FHLBs must obtain a security interest in collateral in the
form of the following low-risk assets:  whole loans, United States Government or
mortgage-backed  securities, FHLB deposits, and certain real estate. At June 30,
1996, the Bank had $17.5 million in advances from the FHLB of Atlanta.

Federal Reserve System

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

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

Capital Requirements

         OTS regulations set the minimum risk-based  capital  requirements at 8%
of risk-weighted  assets,  the minimum  leverage  capital  requirements at 3% of
adjusted total assets and the minimum tangible  capital  requirements at 1.5% of
adjusted total assets.

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

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

         In  August  1993,  the  OTS  adopted  a  final  rule  incorporating  an
interest-rate risk component into the risk-based capital  regulation.  Under the
rule, an  institution  with a greater than "normal"  level of interest rate risk
will be subject to a deduction of its interest  rate risk  component  from total
capital for purposes of calculating  the risk-based  capital  requirement.  As a
result,  such an institution will be required to maintain  additional capital in
order to comply with the risk-based capital  requirement.  An institution with a
greater than "normal" interest rate risk is defined as an institution that would
suffer a loss of net portfolio  value  exceeding  2.0% of the  estimated  market
value of its assets in the event of a 200 basis point increase or decrease (with
certain minor  exceptions) in interest  rates.  The interest rate risk component
will be calculated on a quarterly  basis, as one-half of the difference  between
an institution's  measured interest rate risk and 2.0%, multiplied by the market
value of its assets.  The rule also  authorizes  the Director of the OTS, or his
designee,  to waive or defer an institution's  interest rate risk component on a
case-by-case  basis.  The final rule was  originally  effective as of January 1,
1994, subject to a two quarter "lag" time between the reporting date of the data
used to calculate an institution's  interest rate risk and the effective date of
each quarter's interest rate risk component.  However, in October 1994 and March
1995,  the  Director  of the OTS  indicated  that it  would  waive  the  capital
deductions  for  institutions  with a greater that  "normal"  risk until the OTS
publishes an appeals process,  which the OTS expects will occur shortly. The OTS
indicated  in the  final  rule that it  intended  to lower  the  leverage  ratio
requirement to be "adequately  capitalized" (as defined in its prompt corrective
action  regulation)  to 3.0%  from the  current  level of 4.0% on July 1,  1994.
Management  of Guaranty  does not believe that the OTS'  adoption of an interest
rate risk component to the risk-based  capital  requirement will have an adverse
affect on Guaranty if it becomes effective in its current form.

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

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

Failure to Meet Capital Requirements

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

         Well-Capitalized  means a financial institution with a total risk-based
ratio of 10% or more,  a Tier 1  risk-based  ratio of 6% or more and a  leverage
ratio of 5% or more,  so long as the  institution  is not  subject  to an order,
written  agreement,  capital  directive or prompt corrective action directive to
meet and maintain a specific capital level for any capital  measure.  Adequately
Capitalized  means a total  risk-base  ratio of 8% or more,  a Tier 1 risk-based
ratio  of 4% or more  and a  leverage  ratio  of 4% or  more  (3% or more if the
institution has received the highest  corporate rating in its most recent report
of  examination)  and  does  not  meet  the  definition  of  a  Well-Capitalized
institution.  Undercapitalized  means  a  financial  institution  with  a  total
risk-based ratio of less than 8%, a Tier 1 risk-based ratio of less than 4% or a
leverage ratio of less than 4%. Significantly Undercapitalized means a financial
institution  with a total  risk-based ratio of less than 6%, a Tier 1 risk-based
ratio  of  less  than  3% or a  leverage  ratio  of  less  than  3%.  Critically
Undercapitalized  means a financial  institution with a ratio of tangible equity
to total assets that is equal to or less than 2%. At June 30, 1996, Guaranty was
Well Capitalized.

         Undercapitalized  institutions  are subject to the following  mandatory
supervisory  actions:  (1)  increase  monitoring  and  periodic  review  of  the
institution's   efforts  to  restore  its  capital;   (2)requirements  that  the
institution submit a capital  restoration plan, which must include (a) the steps
the institution will take to become  adequately  capitalized,  (b) the levels of
capital to be attained during each year in which the plan will be in effect, (c)
how the institution will comply with restrictions or requirements imposed on its
activities,  and (d) the types and levels of activities in which the institution
will engage;  (3) restrictions on growth of the institution's  total assets; and
(4) limitations on the institution's  ability to make any acquisition,  open any
new branch offices or engage in any new line of business.

         Significantly   Undercapitalized   institutions  and   Undercapitalized
institutions  that fail to submit and  implement  adequate  capital  restoration
plans   and   subject   to  the  four   mandatory   provisions   applicable   to
Undercapitalized institutions and, in addition, will be required to do or comply
with one or more of the following: (1) sell enough additional capital, including
voting shares, to bring the institution to an Adequately  Capitalized level; (2)
restrict  transactions  with  affiliates;  (3) restrict  interest  rates paid on
deposits to the prevailing rates in the region where the institution is located;
(4) restrict asset growth or reduce total assets; (5) terminate, reduce or alter
any  activity   (including  any  activity  conducted  by  a  subsidiary  of  the
institution)  determined by banking  regulatory agency to pose an excessive risk
to the  institution;  (6) hold a new  election  for the  institution's  board of
directors;  (7) dismiss directors or senior officers and/or employ new officers,
subject to agency  approval;  (8) cease  accepting  deposits from  correspondent
depository  institutions;  (9) divest or  liquidate  any  subsidiary  that is in
danger of becoming insolvent and poses a significant risk to the institutions or
that is likely to cause significant  dissipation of the institution's  assets or
earnings;  or (10) any Bank that  controls  the  institution  may be required to
divest itself of any affiliate of the institution (other than another depository
institution)  if the federal banking agency for the holding Bank determines that
the affiliate is in danger of becoming insolvent and poses a significant risk to
the  institution  or  is  likely  to  cause   significant   dissipation  of  the
institution's assets or earnings.

         In addition, Significantly Undercapitalized institutions are prohibited
from  paying  any bonus or raise to a senior  executive  officer  without  prior
agency  approval.  No such approval will be granted to an  institution  which is
required to but has failed to submit an acceptable restoration plan.

         A  Critically  Undercapitalized  institution  faces  even  more  severe
restrictions.  In  addition  to those  steps that can be taken  with  respect to
Significantly   Undercapitalized  institutions,  a  Critically  Undercapitalized
institution must be placed in conservatorship or receivership  within 90 days of
becoming  Critically  Undercapitalized,  unless the appropriate  federal banking
agency  determines,  with FDIC  concurrence,  that  other  action  would be more
appropriate.   In  addition,   Critically   Undercapitalized   institutions  are
prohibited  from  taking a number  of  actions,  including  making  payments  on
subordinated debt, financing highly leveraged transactions,  adopting charter or
by-laws amendments,  materially changing accounting methods, or paying excessive
compensation or bonuses, without obtaining prior written regulatory approval.

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

         Failure  to meet OTS  capital  requirements  can  serve as a basis  for
placing an institution in conservatorship or in receivership. Failure to satisfy
an individual  capital ratio  constitutes a legal basis for a capital  directive
against an  institution,  which may  contain  those  restrictions  the OTS deems
appropriate.  A  savings  institution  may  apply  for  an  exemption  from  the
provisions of a capital  directive,  which must be accompanied by a capital plan
acceptable  to the OTS.  The OTS District  Director  will treat as an unsafe and
unsound  practice any material  failure by a savings  association to comply with
any plan,  regulation  or  written  agreement  undertaken  to comply  with these
requirements.

Restrictions on Capital Distributions

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

Liquidity Requirements

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

         For the month ending June 30, 1996, the Bank's average  liquidity ratio
was 8.46%.

Investment and Lending Restrictions

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

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

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

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

Qualified Thrift Lender Test

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

         Any savings association that fails to meet the QTL test must convert to
a national bank charter, unless it requalifies as a QTL and thereafter remains a
QTL. If an  association  does not  requalify  and  converts  to a national  bank
charter,  it must remain  SAIF-insured  until the FDIC permits it to transfer to
the Bank  Insurance  Fund.  If an  association  that  fails the test has not yet
requalified  and has not converted to a national bank, its new  investments  and
activities are limited to those permissible for both a savings association and a
national bank,  and it is limited to national bank branching  rights in its home
state. In addition, the association is immediately ineligible to receive any new
FHLB borrowings and is subject to national bank limits for payment of dividends.
If such  association  has not requalified or converted to a national bank within
three years after the failure,  it must divest of all  investments and cease all
activities  not  permissible  for a national  bank.  In addition,  it must repay
promptly  any  outstanding  FHLB  borrowings,  which may  result  in  prepayment
penalties. If any association that fails the QTL test is controlled by a holding
company,  then  within one year after the  failure,  the  holding  company  must
register as a bank holding  company,  and become subject to all  restrictions on
bank holding  companies.  At June 30, 1996, the Bank met the test and has always
met the test since its effectiveness. See - "Holding Company Regulation".

Transactions with Affiliates

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

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

Deposit Insurance

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

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

         The  Administration  and Congress have resolved the premium  difference
through  a  one-time   special   assessment  to   recapitalize   the  SAIF.  The
recapitalization  of SAIF  will  result  in an  assessment  against  the Bank of
approximately  $235,000 on an after tax basis, based upon deposit balances as of
March 31, 1995 and will be charged to earnings  in the quarter  ended  September
30,  1996.  The Bank expects its deposit  insurance  premiums to be reduced from
current levels.

Holding Company Regulation

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

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

         The  Corporation  must obtain  approval  from the OTS before  acquiring
control of any other  SAIF-insured  association.  Such acquisition are generally
prohibited  if they  result  in a  multiple  savings  and loan  holding  company
controlling  savings  associations  in  more  than  one  state.   However,  such
interstate  acquisitions are permitted based on specific state  authorization or
in a supervisory acquisition of a failing savings association.

         In March 1995, the FASB issued its  Statements of Financial  Accounting
Standards  No. 121 (SFAS 121),  "Accounting  for the  Impairment  of  Long-Lives
Assets  and for And if  Assets  to Be  disposed  Of."  SFAS  121  requires  that
long-lived  assets and certain  intangibles  to be held and used by an entity be
reviewed for impairment  when events or changes in  circumstances  indicate that
the carrying  amount may not be  recoverable.  In addition,  SFAS 121 long-lived
assets and certain  intangibles to be disposed of to be reported at the lower of
carrying  amount or fair  value  less cost to sell.  SFAS 121 is  effective  for
fiscal years beginning  after December 15, 1995.  Management does not expect the
application  of this  pronouncement  to have a material  effect on the financial
statements of the Bank.

         In May 1995,  the FASB issued its  Statement  of  Financial  Accounting
Standards  No. 122 (SFAS 122),  "Accounting  for  Mortgage  Servicing  Rights an
Amendment  of FASB  Statement  No.  65." SFAS  requires  entities  that  acquire
mortgage servicing rights through either the purchase or origination of mortgage
loans and sells or securitizes  those loans with the servicing  rights  retained
should  allocate the total cost of the mortgage loans to the mortgage  servicing
rights and the loans  (without the  mortgage  servicing  rights)  based on their
relative fair values.  In addition,  SFAS 122 requires  entities to assess their
capitilized  mortgage servicing rights for impairment based on the fair value of
those rights.  SFAS 122 is effective for fiscal years  beginning  after December
15,  1995.  The Bank elected  early  adoption and recorded a gain of $161,000 in
fiscal year 1996 on the sale of $12.2 million mortgage loans.

         In  October   1995,   SFAS  No.  123,   "Accounting   for   Stock-based
Compensation," was issued. The statement is effective for fiscal years beginning
after  December  15,  1995.  The  statement  encourages,  but does not  require,
companies to expense the fair value of employee stock options, based on the fair
value on the date of the  grant.  Companies  that  elect to  continue  to follow
existing  accounting rules (the intrinsic value method which often results in no
compensation  expense)  must  provide  pro forma  disclosures  of net income and
earnings  per share  which  would have been had the new fair value  method  been
used. In addition,  SFAS 123 requires all companies to make  significantly  more
disclosures  regarding  employee stock options than is currently  required.  The
Corporation  plans  to  adopt  the  disclosure  requirements  only,  of SFAS 123
effective July 1, 1997.

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

Personnel

         At June 30,  1996,  Guaranty had a total of 40  employees,  including 3
part-time  employees.  None of the Corporation's  employees are represented by a
collective  bargaining  group.  Guaranty believes that its relationship with its
employees is good.


Item 2.  Description of Property

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

Executive Offices and Main Branch
1700 Seminole Trail
Charlottesville, Virginia                  Owned

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

Arlington Boulevard Branch                                          Three
1924 Arlington Blvd.                                                five-year
Charlottesville, Virginia                  September 30, 1999       options

Warehouse
1110 East Market Street
Charlottesville, Virginia                  February 28, 1997

Future Headquarters and Branch
1658 State Farm Blvd.
Charlottesville, Virginia                  Owned

Land for Future Branch
Neff Ave. & Reservoir St.
Harrinsonburg, Virginia                    Owned



         At June 30, 1996, the net book value of the Corporation's investment in
premises and equipment was approximately $3.5 million.

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

         See Notes 3 and 11 of Notes to  Consolidated  Financial  Statements  on
pages 21 and 29 of the Annual Report.


Item 3. Legal Proceedings

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


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

         No matters  were submitted  to a vote of security  holders  through the
solicitation  of proxies or  otherwise  during the fourth  quarter of the fiscal
year covered by this report.


                                     PART II

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

         The Common  Stock has been listed on the NASDAQ  SmallCap  Market under
the symbol "GSLC" since June 29, 1995. Prior to listing on NASDAQ,  there was no
established  trading market. At June 30, 1996, the Corporation had approximately
628 shareholders of record.

         The following  table lists the high and low prices for the common stock
for the four quarters ended June 30, 1996.  Prices have been adjusted to reflect
the two for one stock split paid in January 1996.

    1996           HIGH               LOW
1st Quarter       $7.38              $6.38
2nd Quarter       $7.75              $7.13
3rd Quarter       $8.50              $7.75
4th Quarter       $8.50              $7.50


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


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

Introduction

         At the 1995 Annual Meeting,  stockholders approved a plan providing for
the  formation of a holding  company with Guaranty  Savings and Loan,  F.A. (the
"Bank") as the subsidiary.

         Pursuant to the approved plan,  which was consummated in December 1995,
each  existing  share of  Guaranty  Savings  and  Loan,  F.A.  common  stock was
converted  into one share of common  stock in the new holding  company  known as
Guaranty   Financial   Corporation  (the   "Corporation").   As  result  of  the
reorganization,  the Bank's  stockholders  became the owners of the newly formed
holding company,  which in turn owns all the outstanding  stock of the Bank. The
Corporation's  only direct  subsidiary  is the Bank and the  Corporation  has no
material assets or liabilities other than the stock of the Bank.

         Following consummation of the holding company reorganization, the Board
of  Directors  declared a two (2) for one (1) stock  split,  paid on January 31,
1996 to holders of record January 15, 1996. Following the stock split, the Board
of  Directors  declared  a $0.05 per share  dividend,  paid on June 26,  1996 to
holders of record June 12, 1996.

         For the fiscal year ended June 30, 1996, the Corporation  experienced a
71% improvement in earnings over 1995. During 1996, the Corporation's net income
was  $643,250  compared to earnings of $376,248  for 1995.  The  increase in net
earnings was primarily the result of growth in average earning assets which were
generated  from growth in core  deposits.  The  increase in net earnings in 1995
from 1994 was primarily the result of both an increased net interest  margin and
other non interest income from the sale of loans and other securities.

         In October  1995,  construction  began on a combined  headquarters  and
retail branch located on the east side of Charlottesville in the Pantops area of
Albemarle  County.  At June 30,  1996,  approximately  $1.4  million of the $2.1
million project had been disbursed. The new facility will contain 20,000 sq. ft.
of which  Guaranty  will occupy 15,500 sq. ft., with the remainder to be leased.
The new  facility is expected to open in  November  1996.  In addition  Guaranty
purchased  its Rio Road office which had  previously  been  leased.  This office
contains $36.8 million in deposits and has been the headquarters of Guaranty for
the past twelve years.  The building  contains  11,000 sq. ft. of which Guaranty
will  maintain a 2,500 sq. ft.  retail  branch with the  remainder  to be leased
after the move to the new facility.  Renovations of approximately  $150,000 will
begin in October  1996 to  modernize  the site and make it more  attractive  and
accessible for tenants and customers.  In addition to the new  headquarters  and
Rio Road purchase,  Guaranty  purchased land at the  intersection of Neff Avenue
and  Reservoir  Street in the city of  Harrisonburg  to  construct  a new retail
branch.  A branch  application  was filed with  regulatory  authorities  and was
approved  in June 1996.  It is  anticipated  that the branch  will open in April
1997.

         During the fourth  quarter of fiscal year 1995,  Guaranty  successfully
completed a common stock offering of 180,000 shares resulting in net proceeds of
$2.0 million.  The net proceeds have enhanced the Bank's regulatory  capital and
supported the growth of deposits and assets.

Financial Condition

         Guaranty  experienced  significant  growth in fiscal  year 1996.  Total
assets increased 23% or approximately  $20.1 million at June 30, 1996 from 1995.
Securities and loans increased $8.562 million and $8.860 million,  respectively.
On the liabilities side of the balance sheet,  deposits  increased $22.2 million
or 42% while bonds payable  decreased by $988,000.  Borrowings  from the Federal
Home Loan Bank  decreased  approximately  $7.6  million  with  other  borrowings
increasing $6.1 million.

Results of Operations

Comparison of Years Ended June 30, 1996 and 1995

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

Interest Income

         Interest  income was $7.6 million for the year ended June 30, 1996,  up
$800,000,  or 12% from $6.8 million for fiscal 1995.  Volume  increases in loans
and  investment  securities,  and an  increase  in the  average  rate  earned on
interest  earning  assets were the primary  reasons for the  increase in income.
Average loans increased 3.7% to $79.2 million and average investment  securities
increased  56% from $6.7 million in fiscal 1995 to $10.4 million in fiscal 1996.
Total average interest  earning assets  increased 9% to $93.8 million.  Interest
rates  were  higher on  average  in fiscal  1996 than in fiscal  1995.  Guaranty
experienced  significant growth in deposits in fiscal year 1996. This growth was
invested in loans and supplemented with mortgaged-backed securities. The average
yield on loans increased 48 basis points to 8.20% in fiscal year 1996 from 7.72%
in 1995.  The average  yield on  securities  decreased 103 basis points to 7.90%
from 8.93%. The yields on interest earning assets, due to the increase in volume
in loans and investment securities, coupled with the increase in rates on loans,
increased 27 basis points to 8.18% from 7.91%.

Interest Expense

         Management's shift in emphasis beginning in 1995 from FHLB advances and
borrowings to interest bearing deposits,  particularly certificates of deposits,
resulted in the  average  rate paid on interest  bearing  liabilities  remaining
stable from fiscal year 1995 through  1996.  The average  interest  rate paid on
interest  bearing  liabilities was 5.63% in fiscal year 1995 and 5.64% in fiscal
year 1996.  Average  interest  bearing  deposits  rose 20% from $52.3 million in
fiscal year 1995 to $62.8  million in 1996.  The average  rates paid on deposits
increased  32 basis  points  to 4.99% in fiscal  year  1996 from  4.67% in 1995.
Average FHLB advances and other borrowings decreased slightly from 1995 to 1996.
More significant was the decrease in the average rate paid on those  borrowings.
The average rate paid on borrowings in 1995 was 6.46% compared to 6.03% in 1996.

Provision for Loan Losses

         The  provision  increased to $56,700 for the fiscal year ended June 30,
1996 from a credit of $9,000 for the fiscal year ended June 30,  1995.  Guaranty
monitors  its loan loss  reserve  monthly and makes  allocations  as  necessary.
Management  believes that the level of its loan loss reserve is adequate.  As of
June 30, 1996 the total  allowance for loan losses amounted to $788,000 of which
$631,000 was not specifically allocated to identified problem loans.

Net Interest Income

         Net  interest  income was $2.4  million for fiscal year 1996 versus the
$2.1 million  reported  for fiscal year 1995.  The  improvement  in net interest
income  was  primarily  due to the  volume  increase  in  loans  and  investment
securities,  and the shift from higher interest  bearing FHLB advances and other
borrowings to certificates of deposit as a funding source.

Non-Interest Income

         Non-interest  income for fiscal year ended June 30, 1996,  increased by
$235,000 or 27% over fiscal year 1995.  Included in non-interest income are fees
for mortgage loans serviced for others,  a significant  business for Guaranty as
discussed below, and a by-product of its residential lending.  Also included are
gains and losses on the sale of loans and securities. Gains increase $250,000 in
fiscal 1996 over 1995.  The majority of this gain was due to the early  adoption
of SFAS 122,  Accounting  for  Mortgage  Servicing  Rights an  Amendment of FASB
Statement  No. 65.  Income of $161,000 was  recognized on $12.2 million of loans
sold in fiscal year 1996.

         Guaranty derives fees from originated and purchased  mortgage servicing
rights ("MSRs"). Loan servicing includes collecting and remitting loan payments,
accounting for principal and interest, holding escrow funds for payment of taxes
and insurance, making required inspections of the mortgaged premises, contacting
delinquent  mortgagors,  supervising  foreclosures  in the  event of  unremitted
defaults and  generally  administering  the loans for the investors to whom they
have been sold. MSRs are intangible  assets that represent the rights to service
mortgage loans and in turn to receive the service fee income associated with the
mortgage  loans.  MSRs are volatile  assets if the loans being  serviced  prepay
faster than the  intangible  asset is  amortized.  See  "Financial  Statements -
Summary of Accounting  Policies." Guaranty serviced loans for others aggregating
approximately  $168.4 million, of which 70% was originated  locally,  and $169.6
million,  of  which  67% was  originated  locally  at June 30,  1996  and  1995,
respectively. Revenues recognized from these activities amounted to $515,654 and
$549,790 at June 30, 1996 and 1995, respectively.

Non-Interest Expenses

         Non-interest  expenses  were $2.49  million for the year ended June 30,
1996, compared to $2.53 million for fiscal year 1995, a 2% decrease. This slight
decrease is the result of  management  closely  monitoring  expenses in order to
increase profitability.

Income Taxes

         Reported  income tax  expense  for the year ended  June 30,  1996,  was
$344,000  compared to a $100,000 for 1995.  The increase was  attributed  to the
Corporation's increased earnings in 1996 compared to 1995.

Comparison of Years Ended June 30, 1995 and 1994

Interest Income

         Interest  income was $6.8 million for the year ended June 30, 1995,  up
$100,000,  or 1.5% from $6.7 million for fiscal 1994. Volume increases in loans,
and an increase in the average rate earned on interest  earning  assets were the
primary  reasons for the increase.  Average loans  increased 3% to $76.4 million
while investment securities on average declined 47% from $12.6 million in fiscal
1994 to $6.7 million in fiscal 1995.  Total interest  earning assets declined 3%
to $85.8  million.  Interest rates were higher on average in fiscal 1995 than in
fiscal 1994. Management  deliberately shifted earning assets from lower yielding
securities,   particularly   federal  agency   securities  and  mortgage  backed
securities,  to higher  yielding  mortgage  loans.  The  average  yield on loans
actually  increased  64 basis  points to 7.72% in fiscal year 1995 from 7.08% in
1994.  The average yield on securities  decreased 151 basis points to 8.93% from
10.44%.  The yields on interest earning assets, due to the increase in volume in
loans and the  decrease in volume in  securities,  coupled  with the increase in
rates on loans, increased 34 basis points to 7.91% from 7.57%.

Interest Expense

         The  average  interest  rate  paid  on  interest  bearing   liabilities
increased  in fiscal  1995 from  fiscal  1994,  due to the sharp  decline in the
average  rates paid on REMIC  bonds  payable,  which fell 929 basis  points from
21.43% in 1994 to 12.14% in 1995.  This decline in rates  reflects the reduction
in the discount  amortization  on the REMIC bonds which,  under rising  interest
rates reduces  repayments of mortgages  supporting the REMIC bonds,  declined to
$535,000 in fiscal 1995 from $1.535  million in fiscal 1994, or 69%. The average
balance of REMIC bonds, net of amortization,  declined 38.5% from $7.367 million
in 1994 to $4.408 million in 1995. This decline in REMIC bonds was the result of
rapid repayments of mortgages  supporting the REMIC bonds under falling interest
rates in 1992 and 1993. During the second half of fiscal 1995, there was a shift
in emphasis by management from FHLB advances and borrowings to interest  bearing
deposits, particularly certificates of deposits. The average rates paid on total
interest  bearing  deposits  increased  89 basis points in 1995 to 4.67% up from
3.78%  in  1994,  while  the  average  rates  paid  on  total  interest  bearing
liabilities,  due to the  significant  reduction  in rates paid on REMIC  bonds,
actually declined 31 basis points to 5.63% in 1995, from 5.94% in 1994.

Net Interest Income

         Net  interest  income was $2.1  million for fiscal year 1995 versus the
$1.6 million  reported  for fiscal year 1994.  The  improvement  in net interest
income was  primarily due to a volume  increase in loans,  reduction in reliance
upon  higher  interest  bearing  FHLB  advances  and a shift  by  management  to
certificates of deposit as a funding source, and a significant  reduction in the
rapid repayment of mortgages supporting the REMIC bonds from 1994 to 1995.

Non-Interest Income

         Non-interest  income for fiscal year ended June 30, 1995,  increased by
$745,000 or 591% over fiscal year 1994. Included in non-interest income are fees
for mortgage loans serviced for others,  a significant  business for the Bank as
discussed below, and a by-product of its residential  lending.  In addition,  in
1994,  the Bank  lost  $491,000  on the  sale of  mortgage  loan and  investment
securities and broke even in 1995.

         The Bank serviced  loans for others  aggregating  approximately  $169.6
million, of which 67% was originated  locally,  $158.8 million, of which 62% was
originated  locally and $113.0 million,  of which 82% was originated  locally at
June 30,  1995,  1994 and 1993,  respectively.  Revenues  recognized  from these
activities  amounted to $549,790,  $400,132 and $368,574 at June 30, 1995, 1994,
and 1993 respectively.

Non-Interest Expenses

         Non-interest  expenses  were $2.5  million  for the year ended June 30,
1995,  compared to $2.2 million for fiscal year 1994, an increase of 13.6%. This
increase is  primarily a result of the full impact of costs  incurred  this year
with  respect  to  Guaranty's  Richmond  mortgage   origination  office,   which
management closed because of unprofitability.

Provision for Loan Losses

         The provision decreased to a credit of $9,000 for the fiscal year ended
June 30, 1995 from $74,000 for the fiscal year ended June 30,  1994.  As of June
30,  1995 the total  allowance  for loan  losses  amounted  to $747,000 of which
$650,000 was not specifically allocated to identified problem loans.

         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>

                                              1996 compared to 1995        1995 compared to 1994       1994 compared to 1993
                                            Increase   Change Due To:   Increase   Change Due To:    Increase     Change Due To:
(Dollars in thousands)                     (Decrease)   Rate  Volume   (Decrease)   Rate   Volume    (Decrease)    Rate   Volume

<S>                                            <C>      <C>    <C>        <C>       <C>      <C>    <C>         <C>        <C> 
Interest income:
   Securities:
      U.S treasury securities                    $0      $0      $0         $0        $0      $0          0           0       0
      Federal agency securities                   0       0       0       (418)     (209)   (209)       242         274     (32)
      Federal Home Loan Bank stock                3       6      (3)        24        23       1          1           5      (4)
      Mortgage-backed securities                223     (62)    285       (328)      110    (438)      (667)       (176)   (491)
        Total Securities                        226     (56)    282       (722)      (76)   (646)      (424)        103    (527)

   Loans:
      Residential real estate                   519     391     128        383       278     105       (646)       (806)    160
      Commercial real estate                     87      (5)     92         85        92      (7)       (53)        (46)     (7)
      Construction & land                        (7)   (100)     93        215        99     116         88          85       3
      Consumer                                   (1)     (2)      1        (40)      (22)    (18)        (4)       (551)    547
        Total Loans                             598     284     314        643       447     196       (615)     (1,318)    703
   Interest bearing deposits in other banks      57     (41)     98        184        47     137          6          16     (10)
        Total interest income                   881     188     693        105       418    (313)    (1,033)     (1,199)    166

Interest expense:
   Interest bearing deposits:
      Demand/MMDA accounts                      (35)     (7)    (28)       (51)      (18)    (33)       (85)        (46)    (39)
      Savings                                   (41)      8     (49)       (24)      (17)     (7)        34         (26)     60
      Certificates of deposit                   768      47     721        576       353     223       (298)       (192)   (106)
        Total interest bearing deposits         692      48     644        501       318     183       (349)       (264)    (85)
      FHLB advances and other                  (135)   (112)    (23)        90       167     (77)       290         240      50
      Bonds payable                             (28)    252    (280)    (1,001)     (547)   (454)        38         102     (64)
      Total interest expense                    529     188     341       (410)      (62)   (348)       (21)         78     (99)
      Net interest income                      $352     ($0)   $352       $515      $480     $35    ($1,012)    ($1,277)   $265
      </TABLE>


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




<TABLE>
<CAPTION>
                                                                               Years ended June 30

  (Dollars in thousands)                              1996                         1995                         1994

                                                    Interest  Average            Interest  Average            Interest  Average
                                           Average   income/  yield/   Average    income/  yield/    Average  income/   yield/
                                           balance   expense    rate   balance    expense    rate    balance  expense     rate

<S>                                          <C>      <C>      <C>      <C>         <C>      <C>     <C>       <C>       <C>  
Assets
Interest earning assets:
   Securities:
      U.S Treasury                               $0      $0    0.00%        $0         $0    0.00%       $0       $0     0.00%
      Federal agency                              0       0    0.00%         0          0    0.00%    1,498      418    27.91%
      Federal Home Loan Bank stock            1,360     101    7.43%     1,399         98    7.01%    1,373       74     5.39%
      Mortgage-backed                         9,014     719    7.98%     5,255        496    9.44%    9,738      824     8.46%
        Total Securities                     10,374     820    7.90%     6,654        594    8.93%   12,609    1,316    10.44%
   Loans:
      Residential real estate                59,298   4,802    8.10%    60,390      4,460    7.39%   60,191    4,301     7.15%
      Commercial real estate                  6,089     480    7.88%     4,493        393    8.75%    4,603      308     6.69%
      Construction and land                   8,850     629    7.11%     7,353        527    7.17%    5,360      312     5.82%
      Consumer                                4,983     531   10.66%     4,133        517   12.51%    4,074      333     8.17%
        Total Loans                          79,220   6,442    8.13%    76,368      5,897    7.72%   74,226    5,254     7.08%
   Interest bearing deposits
      in other banks                          4,187     355    8.48%     2,756        298   10.81%    1,403      114     8.13%
   Total interest-earning
          assets/total interest income       93,780   7,617    8.12%    85,778      6,789    7.91%   88,238    6,684     7.57%
   Noninterest earning assets:
      Cash and due from banks                 1,634                      1,202                        1,222
      Non accrued loans                       1,339                      1,222                          911
      Purchased mortgage servicing              833                        803                          562
      Other assets                            1,070                        540                          384
      Less: Allowance for loan losses          (768)                      (751)                        (750)
      Less: Deferred loan fees                 (319)                      (353)                        (413)
      Fixed Assets                            1,981                        415                          389
          Total noninterest earning assets    5,770                      3,078                        2,304
             Total Assets                    99,550                     88,855                       90,542

</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.


<TABLE>
<CAPTION>
                                                                                June 30, 1996
                                                                          Maturing or Repricing In:

                                                       3 Months              4-12                1-5               Over
(Dollars in thousands)                                 or less             Months              Years             5 Years

<S>                                                    <C>                <C>                  <C>               <C>    
Interest-sensitive assets:
  Loans                                                $11,692            $39,147              $3,936            $28,184
  Investments and mortgage-backed securities(1)          1,601                719               3,441              8,880
  Deposits at other institutions                         3,769                  0                   0                  0
     Total interest-sensitive assets                    17,062             39,866               7,377             37,064

   Cumulative interest-sensitive assets                 17,062             56,928              64,305            101,369

Interest-sensitive liabilities:
  NOW accounts (2)                                           0                  0                   0              5,097
  Money market deposit accounts                          3,213                  0                   0                  0
  Savings accounts (3)                                   1,164                652                 558              2,280
  Certificates of deposit                               11,796             39,326               9,155                  0
  Borrowed money                                         6,104             12,500               5,000                  0
  Bonds payable                                             63                189                 820              2,072
     Total interest-sensitive liabilities               22,339             52,666              15,534              4,353

   Cumulative interest-sensitive liabilities           $22,339            $75,005             $90,539            $94,891

  Period gap                                           (5,278)           (12,800)             (8,157)             32,711

   Cumulative gap                                       (5,278)           (18,077)            (26,234)             6,477

   Ratio of cumulative interest-sensitive
    assets to interest-sensitive liabilities            76.38%             75.90%              71.02%            106.83%

   Ratio of cumulative gap to total assets              -5.90%            -20.21%             -29.32%              7.24%
   </TABLE>

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



Interest Sensitivity

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

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

         At June 30, 1996,  Guaranty had $5.3 million more in  liabilities  than
assets  that  reprice  within  three  months  or less  and  therefore  was in an
liability-sensitive   position.  A  negative  gap  generally  adversely  impacts
earnings in a period of rising  interest  rates.  This negative  position is the
result of fixed rate borrowings and  certificates of deposit  reaching  maturity
and short term  borrowings  used to fund  mortgage-backed  securities.  As these
fixed  rate  borrowings  mature,  they  will be  extended  to match  the  assets
maturities.  Guaranty will also increase its prime based lending  products going
forward which will also improve this negative position.

         Guaranty's primary business is to provide residential  mortgages.  Such
mortgages  have fixed or  adjustable  rates and while it is in the  interest  of
Guaranty to maintain  adjustable  loans on its books,  it also from time to time
holds some fixed rate mortgages.

         Guaranty  has an  Asset/Liability  Committee  ("ALCO").  The ALCO meets
weekly to discuss deposit  pricing,  changes in borrowed  money,  investment and
trading  activity,  loan  sale  activities,  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 CEO with  input  from other ALCO  members.  The CFO is  responsible  for the
recording  and  settlement  of all activity  with the broker or third party on a
daily basis.

         In the past,  Guaranty has engaged in trading  securities in an attempt
to take advantage of price movements. Both long and short trading positions have
been maintained with the securities  being  designated as trading at the time of
purchase.  To the extent short positions were maintained,  Guaranty  temporarily
reduced its overall  interest rate risk exposure.  Losses were incurred in 1994,
1995 and 1996. Also,  reducing this loss for the periods was the interest earned
on the long positions offset by the interest paid on the short positions.

Investments

         As of July 1, 1995, Guaranty adopted Statement of Financial  Accounting
Standards ("SFAS) No. 115, Accounting for Certain Investments in Debt and Equity
Securities,  which  requires  investments  to be classified as held to maturity,
trading or available for sale. Upon adoption of SFAS 115,  existing  investments
were  classified  based  on  Guaranty's  intent.  Guaranty  held no  investments
classified as "trading" at June 30, 1996 or 1995. Since  implementation  of SFAS
115,  no  transfers  between  portfolios  has  occurred.  Investment  securities
classified  as available  for sale are reported on a fair value basis,  with any
unrealized  gains or losses  excluded from earnings,  but reported as a separate
component of  stockholders'  equity,  net of any related  deferred income taxes.
Management believes,  in general,  that the available for sale classification is
the most appropriate as it provides the greatest flexibility in meeting interest
rate  risk   management   and   liquidity   needs.   Guaranty   does  have  some
mortgage-backed  securities  classified  as  held  to  maturity  which  are  the
securities collateralizing the bonds issued in 1987.

         Mortgage-backed  securities available for sale increased in fiscal 1996
due to the rapid growth in deposits. Since loan growth was not increasing at the
rate of deposit  growth,  the  excess  funds were  invested  in  mortgage-backed
securities.

         The following  table shows the carrying value of investment  securities
and mortgage-backed securities at June 30, 1996, 1995 and 1994.



(Dollars in thousands)                            1996    1995     1994

Held-to-maturity
   Mortgage-backed securities                    3,731   4,733    5,776
                                                 3,731   4,733    5,776
Available for sale
   Federal National Mortgage Assoc. stock            3       3        3
   Mortgage-backed securities                    9,564       -        -
                                                 9,567       3        3
Restricted
   Federal Home Loan Bank stock                  1,360   1,360    1,438
        Total                                   14,658   6,096    7,217
                             

Investment Activities

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

         Historically,  Guaranty  has  maintained  its liquid  assets  above the
minimum  requirements  imposed by federal  regulations  and at a level  believed
adequate to meet requirements of normal daily activities,  repayment of maturing
debt and  potential  deposit  outflows.  Cash  flow  projections  are  regularly
reviewed and updated to assure that adequate  liquidity is provided.  As of June
30, 1996,  Guaranty's  liquidity  ratio  (liquid  assets as a percentage  of net
withdrawable  savings and  current  borrowings)  was 8.46%.  See  "Regulation  -
Federal Home Loan Bank System."

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


<TABLE>
<CAPTION>
                                                   Years ended June 30,
                                     1996                  1995                1994
                               Book        % of       Book       % of      Book     % of
(Dollars in thousands)        Value       Total       Value      Total     Value    Total

Interest-bearing
<S>                           <C>       <C>          <C>        <C>        <C>      <C>  
  deposits with banks         $3,779    100.00%      $4,022     100.00%         0     0.00%

Investment securities:
 FHLMC mortage-backed
  securities                   7,459     50.90%       4,733      77.68%     5,776    80.07%
 GNMA mortage-backed
  securities                   5,836     39.82%           0       0.00%         0     0.00%
    Subtotal                  13,295     90.72%       4,733      77.68%     5,776    80.07%

FHLB stock                     1,360      9.28%       1,360      22.32%     1,438    19.93%
    Total investment and
      securities and stock   $14,655    100.00%      $6,093     100.00%    $7,214   100.00%
</TABLE>                                   


Lending

         Guaranty's loan portfolio  consists  primarily of mortgage  loans,  the
majority of which are residential  first mortgage loans. Of the $85.1 million of
mortgages  outstanding  at  June  30,  1996,  80%  represent  residential  first
mortgages.  The primary lending market  consists of the City of  Charlottesville
and  Albemarle  County,  and to a lesser  extent,  the  surrounding  counties of
Greene, Fluvanna,  Louisa, and Orange. Management closed loan production offices
in  Richmond  and  the  Waynesboro-Staunton  area  due  to  unprofitability  and
management's decision to concentrate on full service retail branches.

         Net loans  consist  of total  loans  minus  deferred  loan fees and the
allowance for loan losses.  Net loans were $84.1  million at June 30, 1996,  12%
increase in net loans of $75.2  million at June 30,  1995.  Net loans  decreased
3.3% in the fiscal year ended June 1995 from a balance of $77.8  million at June
30, 1994.  The average  balance of total loans as a percentage of average assets
was 79.58% at June 30,  1996,  down from  85.95% at June 30,  1995,  and up from
81.98% at June 30, 1994.


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


<TABLE>
<CAPTION>
                                                                                    Years ended June 30,
                                          1996             1995                 1994                 1993              1992
(Dollars in thousands)             Amount   Percent   Amount  Percent      Amount   Percent    Amount    Percent   Amount  Percent

<S>                                <C>       <C>      <C>       <C>       <C>        <C>      <C>         <C>      <C>      <C>   
Mortgage Loans:
  Residential                      $66,136   75.15%   $62,175   77.57%    $67,385    83.05%   $59,845     81.57%   $62,502  81.94%
  Commercial                         7,670    8.72%     4,508    5.62%      4,251     5.24%     4,155      5.66%     4,617   6.05%
  Construction and land loans        8,813   10.01%     8,887   11.09%      5,819     7.17%     4,900      6.68%     4,422   5.80%
    Total real estate               82,619   93.88%    75,570   94.29%     77,455    95.46%    68,900     93.92%    71,541  93.79%

Consumer Loans                       5,386    6.12%     4,580    5.71%      3,685     4.54%     4,462      6.08%     4,733   6.21%
    Total loans receivable          88,005  100.00%    80,150  100.00%     81,140   100.00%    73,362    100.00%    76,274 100.00%
Less:
Undisbursed loans in process         2,824              3,858               2,249               1,978                  949
Deferred fees and unearned
   discounts                           314                323                 382                 442                  601
Allowance for losses                   786                747                 754                 746                  689
  Total net items                    3,924              4,928               3,385               3,166                2,239
  Total loans receivable, net      $84,081            $75,222             $77,755             $70,196              $74,035

</TABLE>



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

<TABLE>
<CAPTION>
                                                       Years ended June 30,
                                             1996               1995           1994              1993             1992
(Dollars in thousands)               Amount   Percent   Amount  Percent   Amount  Percent  Amount  Percent  Amount   Percent

<S>                                  <C>       <C>     <C>       <C>     <C>       <C>     <C>      <C>     <C>       <C>
Fixed - Rate Loans:
 Real Estate
  Residential                        $28,907   32.85%  $23,577   29.42%  $27,796   34.26%  $22,105  30.13%  $26,455    34.68%
  Commercial                               0    0.00%        0    0.00%        0    0.00%        0   0.00%      203     0.27%
  Construction and land loans            339    0.39%       69    0.09%        0    0.00%        0   0.00%        0     0.00%
    Total real estate                 29,246   33.23%   23,646   29.50%   27,796   34.26%   22,105  30.13%   26,658    34.95%
Consumer Loans                           597    0.68%      736    0.92%      691    0.85%    1,547   2.11%    1,227     1.61%
    Total fixed-rate loans            29,843   33.91%   24,382   30.42%   28,487   35.11%   23,652  32.24%   27,885    36.56%

Adjustable-Rate Loans:
 Real Estate
  Residential                         37,229   42.30%   38,598   48.16%   39,590   48.79%   37,740  51.44%   36,046    47.26%
  Commercial                           7,670    8.72%    4,508    5.62%    4,251    5.24%    4,155   5.66%    4,414     5.79%
  Construction and land loans          8,474    9.63%    8,818   11.00%    5,819    7.17%    4,900   6.68%    4,422     5.80%
    Total real estate                 53,373   60.65%   51,924   64.78%   49,660   61.20%   46,795  63.79%   44,882    58.84%
Consumer Loans                         4,789    5.44%    3,844    4.80%    2,993    3.69%    2,915   3.97%    3,507     4.60%
    Total adjustable-rate loans       58,162   66.09%   55,768   69.58%   52,653   64.89%   49,710  67.76%   48,389    63.44%
    Total loans receivable            88,005  100.00%   80,150  100.00%   81,140  100.00%   73,362 100.00%   76,274   100.00%
Less:
Undisbursed loans in process           2,824             3,858             2,249             1,978              949
Deferred fees and unearned
  discounts                              314               323               382               442              601
Allowance for losses                     786               747               754               746              689
    Total net items                    3,924             4,928             3,385             3,166            2,239
    Total loans receivable, net      $84,081           $75,222           $77,755           $70,196          $74,035
</TABLE>

         Asset quality is an important  factor in the successful  operation of a
financial institution. The loss of interest income and principal that may result
from nonperforming assets has an adverse effect on earnings,  and the resolution
of those assets requires the use of capital and management  resources.  Guaranty
maintains a conservative  philosophy regarding its underwriting  guidelines.  It
also  maintains  loan  monitoring  policies and systems  that  require  detailed
monthly analysis of  delinquencies,  nonperforming  loans,  nonaccrual loans and
repossessed  assets.  Reports of such loan and asset  categories are reviewed by
management and the Board of Directors.

         Guaranty  places  loans on a nonaccrual  status after being  delinquent
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 is stopped,  previously  accrued
but uncollected interest income is reversed. Thereafter,  interest is recognized
only as cash is received.  The loan is  reinstated  to an accrual basis after it
has been brought  current as to principal  and  interest  under the  contractual
terms of the loan.

         The following  table reflects the composition of  nonperforming  assets
for the past five years.


<TABLE>
<CAPTION>
                                                                                Years ended June 30,
(Dollars in thousands)                                         1996         1995        1994       1993       1992

<S>                                                          <C>          <C>          <C>        <C>        <C> 
Nonaccrual loans                                             $1,458       $1,556        $887       $934       $513
Restructured loans                                               11           12         415      1,143      1,143
   Total non-performing loans                                 1,469        1,568       1,302      2,077      1,656
Foreclosed assets                                                41          122           0          0          0
   Total non-performing assets                                1,510        1,690       1,302      2,077      1,656
Loans past due 90 or more days and accruing interest            $19           $1        $288       $190       $434
Non-performing loans to total loans, at period end             1.67%        2.06%       1.65%      2.91%      2.20%
Non-performing loans to period
   end total loans and foreclosed assets                       1.67%        2.05%       1.65%      2.91%      2.20%
</TABLE>



         Reserves are  established  based on historical  loss  experience  and a
review  of  significant  larger  credits.   A  loss  experience   percentage  is
established for each loan type and is reviewed  annually.  Each quarter the loss
percentage  is applied to the  portfolio,  by product  type,  to  determine  the
minimum amount of reserves required.  After the minimum reserve  requirement has
been met,  the Bank  targets  1.25% of  risk-weighted  assets to be the goal for
reserves.  The long term goal is to maintain reserves at 1% of total loans. This
methodology  for reserves was  implemented  in 1990 by management  when reserves
were found to be  inadequate.  With the growth in loans in fiscal  year 1994 and
1996, the provision for loan losses charged  against  operations was $74,000 and
$80,000,  respectively,  to increase the reserves to  approximately  1% of total
loans.  In fiscal  year 1995,  reserves  were not  increased  because  they were
considered adequate based on the concentration of low risk residential loans.

         The  following  table  provides an analysis of the  allowance  for loan
losses for the past five years.


<TABLE>
<CAPTION>

(Dollars in thousands)                                           1996          1995          1994          1993            1992

<S>                                                              <C>           <C>           <C>           <C>             <C> 
Balance at beginning of period                                   $747          $754          $746          $689            $712
Provision (credit) charged to operations                           57           (10)           74            37               0
Charge-offs:
  Real estate                                                      39             0            66             0               5
  Consumer                                                          0             1             0             0              18

Recoveries:
  Real Estate                                                      19
  Consumer                                                          4             4             0            20               0
Net Charge-offs                                                    16            (3)           66           (20)             23
Balance, end of period                                           $788          $747          $754          $746            $689

Allowance for loan losses to period end total loans             0.94%         0.98%         0.96%         1.05%           0.91%

Allowance for loan losses to nonaccrual loans                  54.05%        48.01%        85.01%        79.87%         134.31%

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


Loan Maturity and Repricing

         The following  schedule  illustrates  the interest rate  sensitivity of
Guaranty's  loan  portfolio at June 30, 1996.  Mortgages  which have  adjustable
interest rates are shown as maturing  based on  contractual  maturity and demand
loans are shown as maturing in one year or less.  This schedule does not reflect
the effects of possible prepayments or enforcement of due-on-sale clauses.


<TABLE>
<CAPTION>
                            RESIDENTIAL                COMMERCIAL          CONSTRUCTION            CONSUMER            TOTAL

(Dollars in Thousands)
<S>                            <C>                      <C>                  <C>                  <C>                <C>   
Due During Years Ended
7/1/96-6/30/97                   $105                     $647                 $4,673               $1,151             $6,576
7/1/97-6/30/98                     85                      466                    693                  873              2,117
7/1/98-6/30/99                     71                      $64                    420                  877              1,432
7/1/99-6/30/01                    901                      317                    207                2,255              3,680
7/1/01-6/30/06                  2,592                    1,494                      0                  226              4,312
7/1/06-6/30/11                  7,017                      305                      0                    0              7,322
7/1/11 and following           55,365                    4,377                      0                    0             59,742
Total                         $66,136                   $7,670                 $5,993               $5,382            $85,181

</TABLE>


         The  total  amount  of  loans  due  after  June  30,  1997  which  have
predetermined  interest rates is $29.8 million,  while the total amount of loans
due after such date which have  floating or adjustable  interest  rates is $51.7
million.

Loan Originations, Purchases and Sales

         Federal  regulations  authorize  Guaranty  to make  real  estate  loans
anywhere in the United States.  However,  at June 30, 1996, all Guaranty's  real
estate loans were secured by real estate located in Guaranty's market area.

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

         For the year ended June 30, 1996,  Guaranty originated $23.9 million in
first mortgage loans.

Income From Lending Activities

         Guaranty  realizes  interest  and loan  fee  income  from  its  lending
activities.  Guaranty  receives  loan  fees on  both  construction  and  one- to
four-family  residential loans.  Guaranty receives loan fees and charges related
to existing  loans,  which  include late  charges.  Interest on loans,  loan and
servicing income together comprise 81% of Guaranty's total revenues for the year
ended June 30, 1996.  Income from loan fees and other fees is a volatile  source
of income,  varying with the volume and type of loans and  commitments  made and
with competitive and economic conditions.

         Generally accepted  accounting  principles ("GAAP") allow the inclusion
of  loan  fees in  current  income  to an  amount  limited  to the  Bank's  loan
underwriting and closing costs.  The remaining  deferred fees are amortized into
income over the  estimated  remaining  lives of the loans to which they  relate,
using a method which approximates level yield. Guaranty had deferred fees net of
direct underwriting costs of $313,669 at June 30, 1996.

         An ancillary function of lending is the mortgage  servicing  operation.
When mortgage loans are sold Guaranty generally retains the right to service the
loans for a servicing fee. A typical  servicing  agreement  requires Guaranty to
carry out the servicing function, including billing and collection of borrower's
payments,   remittance  of  payments  to  the  investor,  insurers,  and  taxing
authorities,  maintenance of custodial bank accounts; and related activities. In
addition to loans  originated  by Guaranty  it has also  acquired  the rights to
service  other  mortgage  loans.  At June 30, 1996 Guaranty  serviced  loans for
others  aggregating  approximately  $168.4  million  and  generated  net fees of
$515,654 for the year ended June 30, 1996.

Delinquent and Problem Loans

         When a borrower  fails to make a required  payment on a loan,  Guaranty
attempts to cause the  deficiency  to be cured by  contacting  the  borrower.  A
notice is mailed to the  borrower  after a payment is 16 days past due and again
when the loan is 28 days past due.  For most loans,  if the  delinquency  is not
cured  within 30 days,  Guaranty  issues a notice of intent to  foreclose on the
property  and if the  delinquency  is not  cured  within 60 days,  Guaranty  may
institute  foreclosure  action.  If  foreclosed  on, real  property is sold at a
public sale and may be purchased by Guaranty.  In most cases,  deficiencies  are
cured promptly.

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

         The  following  table  sets  forth  information  concerning  delinquent
mortgage and other loans at June 30, 1996. The amounts  presented  represent the
total remaining  principal balances of the related loans, rather that the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>
                               Residential            Commercial                     Construction
                               Real Estate            Real Estate                      and Land                 Consumer
(Dollars in thousands)           Number      Amount    Number        Amount    Number    Amount      Number      Amount

<S>                               <C>        <C>           <C>        <C>          <C>    <C>            <C>       <C>
Loans delinquent for:
31-59 days                         0             $0        0            $0         1      $105           0         $0
60-89 days                        13          1,201        2           242         1        82           4          4
90 days and over                  10            637        0             0         1        19           0          0

     Total delinquent loans       23         $1,838        2          $242         3      $206           4         $4

</TABLE>
                                    


         Federal  regulations  provide for the  classification  of loans,  debt,
equity  securities  and  other  assets  considered  to be of lesser  quality  as
"substandard,"  "doubtful" or "loss" assets.  The  regulations  require  insured
institutions  to  classify  their own assets and to  establish  prudent  general
allowances for losses for assets classified "substandard" or "doubtful." For the
portion of assets  classified  as "loss," an  institution  is required to either
establish  specific  allowances of 100% of the amount  classified or charge such
amounts  off its  books.  Assets  which  do not  currently  expose  the  insured
institution  to  sufficient  risk  to  warrant  classification  in  one  of  the
aforementioned  categories but possess  potential  weaknesses are required to be
designated "special mention" by management. In addition, the OTS may require the
establishment  of a general  allowance for losses based on assets  classified as
"substandard"  and  "doubtful"  or based on the  general  quality  of the  asset
portfolio  of an  institution.  In  connection  with the filing of its  periodic
reports with the OTS and in accordance with its classification of assets policy,
Guaranty  regularly  reviews the loans in its portfolio to determine whether any
loans require classification in accordance with applicable  regulations.  On the
basis of  management's  review of its assets,  at June 30,  1996,  Guaranty  had
classified $2,157,019 of its assets as substandard, $165,296 as loss and none as
doubtful. Not all of Guaranty's assets that have been classified are included in
the table below of non-performing  assets. Several of these loans are classified
because of previous credit problems but are  performing.  In addition,  Guaranty
had $947,000 in special mention assets. See - "Non-Performing Assets."

Non-Performing Assets

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

<TABLE>
<CAPTION>
(Dollars in thousands)                                    1996             1995              1994             1993           1992

<S>                                                     <C>              <C>                <C>             <C>            <C> 
Nonaccrual loans                                        $1,458           $1,556              $887             $934           $513
Restructured loans                                          11               12               415            1,143          1,143
   Total non-performing loans                            1,469            1,568             1,302            2,077          1,656
Foreclosed assets                                           41              122                 0                0              0
   Total non-performing assets                           1,510            1,690             1,302            2,077          1,656
Loans past due 90 or more days and accruing interest       $19               $1              $288             $190           $434
Non-performing loans to total loans, at period end        1.67%            2.06%             1.65%            2.91%          2.20%
Non-performing loans to period
   end total loans and foreclosed assets                  1.67%            2.05%             1.65%            2.91%          2.20%

</TABLE>                                    


         At June 30, 1996,  Guaranty's  non-accrual loans were comprised of: one
(1)  home-equity  loan,  fifteen (15)  single-family  mortgage loans and two (2)
commercial  real estate loans.  Based on current market values of the properties
securing these loans, management anticipates no significant losses.

         As of June 30, 1996, there were $947,000 in loans with respect to which
known  information  about the possible  credit  problems of the borrowers or the
cash flows of the security  properties have caused  management to have doubts as
to the ability of the borrowers to comply with present loan repayment  terms and
which may result in the  future  inclusion  of such items in the  non-performing
asset categories. These loans have been classified as special mention.

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

Allowance for Losses on Loans and Real Estate

         Guaranty provides  valuation  reserves for anticipated  losses on loans
and real estate when its management determines that a significant decline in the
value of the  collateral  has  occurred,  as a result  of which the value of the
collateral  is less than the amount of the unpaid  principal of the related loan
plus  estimated  costs of  acquisition  and sale.  In  addition,  Guaranty  also
provides reserves based on the dollar amount and type of collateral securing its
loans, in order to protect against  unanticipated  losses.  Although  management
believes   that  it  uses  the  best   information   available   to  make   such
determinations,  future adjustments to reserves may be necessary, and net income
could be significantly  affected, if circumstances differ substantially from the
assumptions used in making the initial determinations. In recent years, Guaranty
had  increased  its  allowance  for  losses  on loans  due to  general  economic
downturns in the real estate market. At June 30, 1996, Guaranty had an allowance
for loan losses of $788,146, which is predominantly a general allowance.

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


<TABLE>
<CAPTION>
                                                                        Year ended June 30,
(Dollars in thousands)                                 1996          1995          1994          1993            1992

<S>                                                    <C>          <C>           <C>          <C>            <C> 
Balance at beginning of period                         $747          $754          $746          $689            $712
Provision (credit) charged to operations                 57           (10)           74            37               0
Charge-offs:
  Real estate                                            39             0            66             0               5
  Consumer                                                0             1             0             0              18

Recoveries:
  Real Estate                                            19
  Consumer                                                4             4             0            20               0
Net Charge-offs                                          16            (3)           66           (20)             23
Balance, end of period                                 $788          $747          $754          $746            $689

Allowance for loan losses to period end total loans    0.94%         0.98%         0.96%         1.05%           0.91%

Allowance for loan losses to nonaccrual loans         54.05%        48.01%        85.01%        79.87%         134.31%

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


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



<TABLE>
<CAPTION>
                                                                Years ended June 30,
(Dollars in thousands)                1996               1995               1994                1993               1992

<S>                                   <C>                <C>                <C>                 <C>                <C> 
Residential real estate               $675               $620               $625                $617               $568
Non-residential real estate            113                127                129                 129                121
   Total allowance for loan losses    $788               $747               $754                $746               $689
<CAPTION>
                                                               Years ended June 30,
                                      1996               1995               1994                1993               1992

<S>                                     <C>                <C>                <C>                 <C>                <C>  
Residential real estate                 85.7%              83.0%              82.9%               82.7%              82.4%
Non-residential real estate             14.3%              17.0%              17.1%               17.3%              17.6%
   Total allowance for loan losses     100.0%             100.0%             100.0%              100.0%             100.0%
</TABLE>

      


Subsidiary Activities

         The Bank has two wholly owned  subsidiaries,  GMSC,  Inc.  ("GMSC") and
Guaranty  Investments  Corporation  ("GICO").  GMSC  is a  financing  subsidiary
through  which  Guaranty  formed  a  Real  Estate  Mortgage  Investment  Conduit
("REMIC").  See "Management's Discussion and Analysis of Financial Condition and
Results of Operations."  Guaranty sells insurance  annuities  through GICO. GICO
had a net income of $1,004 for the year ended June 30, 1996.

         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 bond
discount and issuance costs are amortized against income as mortgage  underlying
the bonds repay.  In the fiscal years ended June 30, 1996,  1995, and 1994, with
rapidly falling interest rates,  Guaranty experienced  significant  repayment of
mortgages,  resulting  in an  amortization  expense of $160,000,  $124,000,  and
$968,000,  respectively.  The  amortization  of the REMIC expenses is treated as
interest expense.

Income Taxes

         Reported  income tax  expense  for the year ended  June 30,  1995,  was
$100,000  compared to a credit of $235,000 for 1994. The increase was attributed
to Guaranty's increased earnings in 1995 compared to a loss in 1994.

         In  addition,  in 1994  Guaranty  took a  charge  of  $196,000  for the
cumulative  effect of change in  accounting  for income  taxes.  This change was
adopted at June 1994. As required by the Financial  Accounting Standards Board's
Statement of Financial  Account  Standards No. 109 ("SFAS 109")  accounting  for
income taxes which  required a change from the deferred  method to the asset and
liability method of accounting for income taxes.

Source of Funds

         General.  Deposit accounts have traditionally been the principal source
of the Bank's funds for use in lending and for other general business  purposes.
In addition to deposits, Guaranty derives funds from loan repayments, cash flows
generated from operations, which includes interest credited to deposit accounts,
repurchase  agreements  entered into with  commercial  banks and FHLB of Atlanta
advances.  Contractual  loan  payments are a relatively  stable source of funds,
while  deposit  inflows and  outflows  and the  related  cost of such funds have
varied widely.  Borrowings  may be used on a short-term  basis to compensate for
reductions in deposits or  deposit-inflows at less than projected levels and has
been used on a longer-term basis to support expanded lending activities.

         Deposits. 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,  $100,000 or
above certificates of deposit and individual retirement accounts.  Guaranty does
not solicit brokered deposits.

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


                                         Years ended June 30,
(Dollars in thousands)            1996                1995               1994
Statement savings accounts      $4,654              $4,688             $7,610
Now accounts                     6,440               5,818              6,005
Money market accounts            3,213               4,131              5,392
30- to 180-day certificates        227                 324                528
One- to five-year
   fixed-rate certificates      52,698              29,987             33,932
Eighteen-month prime rate
   certificate                   7,455               7,513                  0
     Total                     $74,687             $52,461            $53,467

                                    


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


                                           Years ended June 30,
(Dollars in thousands)            1996                 1995              1994
Statement savings accounts        ($34)             ($2,922)           $1,549
Now accounts                       622                 (187)              281
Money market accounts             (918)              (1,261)           (2,014)
30- to 180-day certificates        (97)                (204)             (291)
One- to five-year
   fixed-rate certificates      22,711               (3,945)            3,921
Eighteen-month prime rate
   certificate                     (58)               7,513                 0
     Total                     $22,226              ($1,006)           $3,446






         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>
                                      Years Ended June 30,
                              1996               1995                1994
                                  Average           Average               Average
                       Average     Rate    Average   Rate      Average      Rate
                       Balance     Paid    Balance   Paid      Balance      Paid

<S>                       <C>      <C>        <C>    <C>         <C>        <C>  
Noninterest bearing
  demand deposits         $621     0.00%      $744   0.00%       $554       0.00%
Interest bearing
  demand deposits        8,975     2.73%     9,924   2.77%     11,709       2.81%
Savings deposits         4,677     3.25%     6,155   3.39%      6,836       3.05%
Time deposits           49,102     5.57%    36,142   5.71%     32,646       4.54%
    Total deposits     $63,375     4.99%   $52,965   4.90%    $51,745       3.92%
</TABLE>



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

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

<TABLE>
<CAPTION>
                                                       Years ended June 30,
(Dollars in thousands)                   1996                 1995                 1994

<S>                                   <C>                  <C>                  <C>    
Opening balance                       $52,461              $53,467              $50,021
Net deposits (withdrawals)             19,093               (3,446)               1,507
Interest credited                       3,133                2,440                1,939
Ending balance                         74,687               52,461               53,467

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



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

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

<TABLE>
<CAPTION>
                            0.00-     4.01-      5.01-     6.01-      7.01-      8.01-
(Dollars in thousands)      4.00%     5.00%       6.00%     7.00%     8.00%     10.00%     Total

<S>                          <C>       <C>      <C>        <C>           <C>        <C>   <C>    
June 30, 1996                $136      $193     $55,491    $4,560        $0         $0    $60,380
June 30, 1995                  53     7,076      18,868    11,827         0          0     37,824
June 30, 1994               8,565    16,738       7,580     1,577         0          0     34,460
</TABLE>



         The following table shows rate and maturity  information for Guaranty's
certificates of deposits as of June 30, 1996.


<TABLE>
<CAPTION>
                             0.00-        4.00-             6.00-            8.00-                             Percent
(Dollars in thousands)       3.99%        5.99%             7.99%            9.99%             Total           of Total

    Certificate Accounts
       Maturing in
     Quarter Ending
<S>                          <C>           <C>               <C>                  <C>          <C>             <C>   
September 30, 1996           $0            $7,243            $4,688               $0           $11,931         19.76%
December 31, 1996             0            11,198             1,923                0            13,121         21.73%
March 31, 1997               23            12,514               952                0            13,489         22.34%
June 30, 1997                 0            11,976               693                0            12,669         20.98%
September 30, 1997            0               330             1,265                0             1,595          2.64%
December 31, 1997             0             1,075               709                0             1,784          2.95%
March 31, 1998                0             1,098               116                0             1,214          2.01%
June 30, 1998                 0               599                 0                0               599          0.99%
September 30, 1998            0                38               137                0               175          0.29%
December 31, 1998             0               235                 0                0               235          0.39%
March 31, 1999                0               527                21                0               548          0.91%
June 30, 1999                 0               167                 8                0               175          0.29%
Thereafter                    0               192             2,653                0             2,845          4.71%
                            $23           $47,192           $13,165               $0           $60,380        100.00%
</TABLE>




         The following table indicates the amount of Guaranty's  certificates of
deposits by time remaining until maturity as of June 30, 1996.


<TABLE>
<CAPTION>
                                         Maturity
                                         3 Months       Over 3 to         Over 6 to         Over 12
(Dollars in thousands)                    or less        6 months         12 months          months            Total

<S>                                     <C>              <C>               <C>               <C>              <C>    
Certificates of deposit
     less than $100,000                 $11,607          $12,338           $24,640           $7,208           $55,793

Certificates of deposit
     of $100,000 or more                    317              742             1,566            1,962             4,587

     Total of certificates of deposits  $11,924          $13,080           $26,206           $9,170           $60,380
</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 limitations
on the  size  of  the  advances  and  repayment  provisions.  The  advances  are
collateralized  by the  investment  in Federal  Home Loan Bank stock and certain
mortgage loans. See Note 8 of the Notes to Consolidated Financial Statements for
information  regarding the  maturities  and rate  structure of  Guaranty's  FHLB
advances.

         Guaranty's borrowings,  from time to time, also include securities sold
under  agreements to  repurchase,  with  mortgage-backed  securities or Treasury
securities  pledged as  collateral.  The  proceeds  are utilized by Guaranty for
general  corporate  purposes.  At June  30,  1996,  Guaranty  had  $6.1  million
outstanding in securities sold under agreement to repurchase.

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

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


    <TABLE>
<CAPTION>
                                                           Years Ended June 30,
(Dollars in thousands)                1996                           1995                            1994

<S>                                <C>                            <C>                             <C>    
Maximum Balance:
FHLB                               $28,050                        $28,250                         $28,750
Securities sold under
 agreements to
 repurchase                          9,930                          4,230                          11,630


<CAPTION>
                                    Amount          Rate            Amount          Rate           Amount          Rate

<S>                                <C>               <C>          <C>                <C>          <C>               <C>  
Average Balance:
FHLB                               $22,829           6.21%        $26,208            6.67%        $26,017           6.63%
Securities sold under
 agreements to
 repurchase                          3,112           5.65%            783            7.98%          7,201           3.85%

</TABLE>



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

<TABLE>
<CAPTION>
                                                          Years Ended June 30,
(Dollars in thousands)                      1996                   1995                   1994

<S>                                      <C>                    <C>                    <C>    
FHLB advances                            $12,500                $19,550                $13,950
Securities sold under agreements
  to repurchase                            6,104                      0                      0
     Total short-term borrowings         $18,604                $19,550                $13,950

Weighted average interest rate of
  short-term FHLB advances                  6.02%                  4.52%                  3.24%

Weighted average interest rate of
  securities sold under agreements to
  repurchase                                5.65%                  0.00%                  0.00%

</TABLE>




Deposits

         The  Corporation's  principal use of deposits is to originate loans and
fund investment securities.  Guaranty experienced  significant deposit growth in
fiscal year 1996. Net deposits increased 42% to $74.7 million from $52.5 million
at June 30, 1995 and  decreased 2% in fiscal year 1995 from $53.5 in fiscal year
1994.  The deposit  growth is a  reflection  of  aggressive  pricing,  increased
marketing,  and the need for a local bank to provide  competitive  products  and
services to the  community.  Guaranty  offers  individuals  a variety of deposit
accounts,  including  checking,  savings,  money  market,  and  certificates  of
deposit, and is expanding to provide products and services for small businesses.

         The following table details the average amount of, and the average rate
paid on, the primary deposit categories for the past three years.


<TABLE>
<CAPTION>
                                                            Years ended June 30,

(Dollars in thousands)                      1996                    1995                   1994
                                      Balance    Rate        Balance    Rate         Balance   Rate

<S>                                    <C>       <C>          <C>       <C>          <C>       <C>  
Interest bearing deposits:
  NOW/MMDA accounts                    $8,975    2.74%        $9,986    2.98%        $11,772   2.81%
  Savings                               4,677    3.39%         6,167    3.13%          6,849   3.17%
  Certificates of deposit              49,102    5.75%        36,142    5.44%         32,646   4.26%
Total interest bearing deposits        62,754    5.14%        52,295    4.70%         51,267   3.78%
Noninterest bearing                       621                    669                     477
     Total deposits                    63,375                 52,964                  51,744
</TABLE>                                   


Borrowings

         Guaranty  also  uses  non-deposit  borrowings  to fund its  residential
lending business  primarily through its membership in the Federal Home Loan Bank
("FHLB"). The FHLB was established to provide funds to savings institutions that
originate  residential  loans. At June 30, 1996,  Guaranty owed $17.5 million to
the FHLB and $25.05 million at June 30, 1995.  The $17.5 million  outstanding at
June 30, 1996 were fixed rates ranging from 5.41% to 7.10%,  with  maturities in
1996 and 1997.

         Guaranty  may from time to time also  borrow  against  U.S.  government
agency  and  mortgage  backed  securities  using  repurchase  agreements.   Such
borrowings are normally short in duration.  At June 30, 1996,  Guaranty has $6.1
million  outstanding with a variable rate of 5.6% and the option to repay at any
time without penalty.

         Included in borrowings  are the REMIC bonds.  In 1987, the Bank entered
into a financing transaction known as a REMIC for liquidity purposes. In lieu of
selling  mortgages for cash,  $19.9 million in fixed rate below market mortgages
were put in mortgage backed  securities,  which were then used as collateral for
mortgage  backed bonds to private  investors.  The bonds bore a coupon of 8% and
were sold at a substantial  discount of approximately $3 million. In addition to
the  discount,  approximately  $300,000 of expenses  were incurred in connection
with the transaction. Both the discount and associated expenses were deferred by
the  Bank in 1987 and are  being  amortized  against  income  as the  underlying
mortgages in the  mortgage  backed bonds  repay.  The  mortgages  had an average
interest  rate of 8.875%.  At the time the  transaction  was entered into it was
assumed  that the  mortgages  would  repay  over a normal  repayment  period  of
approximately  12 - 15  years.  The  total  costs  charged  against  net  income
associated  with the REMIC in fiscal  years 1996,  1995 and 1994 were  $160,000,
$124,000 and  $968,000  respectively.  At June 30,  1996,  $3.7 million of bonds
remain outstanding versus $4.7 million at June 30, 1995.

         See notes 6, 7 and 8 to the Consolidated Financial Statements.


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.   By  regulatory
definition,  liquid assets include cash,  interest  bearing deposits with banks,
federal funds sold, and government  agency and high rated  corporate  securities
with  maturities of five years or less.  Guaranty is required to maintain liquid
assets on an average  monthly basis equal to at least 5% of its liquidity  base.
Liquidity  base is  further  defined  as  total  deposits  plus all  short  term
borrowings. At June 30, 1996, Guaranty's liquidity ratio was 8.46%.

         Guaranty's  primary  sources  of funds are  deposits,  borrowings,  and
amortization,    prepayments   and   maturities   of   outstanding   loans   and
mortgaged-backed  securities.  While scheduled payments from the amortization of
loans and  mortgaged-backed  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.

         Guaranty  uses  its  sources  of funds  primarily  to meet its on going
commitments,  to pay deposit withdrawals and fund loan commitments.  At June 30,
1996, the total approved loan commitments  outstanding amounted to $3.9 million.
At the same date,  commitments  under  unused  lines of credit  amounted to $5.4
million. Certificate of deposits scheduled to mature in one year or less at June
30, 1996 totaled $51.2 million.  Management  believes that a significant portion
of maturing deposits will remain with Guaranty.

         The Bank is subject to OTS regulations  requiring savings  institutions
to meet the following minimum levels of regulatory  capital (1) tangible capital
of at least  1.5% of total  adjusted  assets,  (2) core  capital  of 3% of total
adjusted assets and (3) risk-based capital of 8% of total risk-weighted  assets.
At June 30, 1996, the Bank exceeded all such regulatory capital  requirements as
shown in the following table.



                                            Percent of
(Dollars in thousands)          Amount    Adjusted Assets

Tangible Capital:
Regulatory capital              $6,628         6.01%
Minimum capital requirement      1,655         1.50%
Excess regulatory capital       $4,973         4.51%

Core Capital:
Regulatory capital              $6,628         6.01%
Minimum capital requirement      3,309         3.00%
Excess regulatory capital       $3,319         3.01%

Risk-based Capital:
Regulatory capital              $7,171        13.12%
Minimum capital requirement      4,372         8.00%
Excess regulatory capital       $2,799         5.12%




Impact of Inflation and Changing Prices and Seasonality

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

         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.


Item 7. Financial Statements

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

         Report of Independent Certified Public Accountants

         Consolidated Balance Sheets as of June 30, 1996 and 1995

         Consolidated Statements of Income for the Years Ended June 30, 1996,
         1995 and 1994 

         Consolidated Statements of Stockholders' Equity for the Years Ended 
         June 30, 1996, 1995 and 1994  

         Consolidated Statements of Cash Flows for the Years Ended June 30, 
         1996, 1995 and 1994 

         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.


                                    PART III

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

         Information set forth under the caption  "Election of Directors" in the
definitive 1996 Proxy  Statements of the  Corporation to be  subsequently  filed
with the SEC and furnished to shareholders in connection with its Annual Meeting
of  Stockholders  (the  "1996  Proxy  Statement")  is  hereby   incorporated  by
reference.

Executive Officers

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

         Thomas P. Baker.  Mr. Baker, age 50, is Guaranty's President and Chief
Executive  Officer and  Director,  a position  he has held since 1990.  Prior to
joining Guaranty, Mr. Baker served as the President of Investors Savings Bank.

         Kathleen M. Focht.  Ms. Focht, age 35, is Guaranty's Chief Financial 
Officer.  She was  elected  in April  1995.  Ms.  Focht has been  Secretary  and
Treasurer of Guaranty  since 1990.  Ms. Focht served as Assistant Vice President
and  Controller of Guaranty from 1988 until 1991,  when she was promoted to Vice
President and retained her position as Controller.

         Rita J. Lynch.  Ms. Lynch, age 41, is Guaranty's Vice President of 
Retail  Operations.  She was elected in May 1995. Ms. Lynch has been employed by
Guaranty  since October 1989 and prior to her promotion to Vice  President,  was
the  Manager  of Retail  Services.  Prior to  joining  Guaranty,  Ms.  Lynch was
employed by First Union National Bank of N.C.

         Donna W. Richards.  Ms. Richards, age 34, is Guaranty's Vice President
of Mortgage Lending. She was elected in May 1995. Ms. Richards has been employed
by Guaranty since April 1993 and prior to her promotion to Vice  President,  was
the Manager of Loan  Originations and Loan Officer.  Prior to joining  Guaranty,
Ms. Richards was employed by Virginia Federal.

Item 10. Executive Compensation

         Information  set forth under the headings  "Summary of Cash and Certain
Other  Compensation,"  "Stock Option Grants,"  "Option  Exercises and Holdings,"
"Aggregated  Options/SAR  Exercises  in Last Fiscal Year and FY-End  Options/SAR
Value,"  "Directors'  Fees,"  and  "Employment  Agreements"  in the  1996  Proxy
Statement is hereby incorporated by reference.

Item 11. Security Ownership of Certain Beneficial Owners and Management

         Information  set  forth  under  the  heading  "Security   Ownership  of
Management" and "Security  Ownership of Certain  Beneficial  Owners" in the 1996
Proxy Statement, is incorporated by reference.

Item 12. Certain Relationships and Related Transactions

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

Item 13. Exhibits and Reports on Form 8-K

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

         (a) Exhibits

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

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

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


         (b) Reports on Form 8-K

         No  reports on Form 8-K were filed  during the  quarter  ended June 30,
1996.

<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary





                                               Consolidated Financial Statements
                                                As of June 30, 1996 and 1995 and
                                for the Years Ended June 30, 1996, 1995 and 1994


                                                                          <PAGE>


-------------------------------------------------------------------------------
                                                  Guaranty Financial Corporation

                                                                  and Subsidiary



                                                                        Contents






      Report of Independent Certified Public Accountants                    3

      Financial Statements

        Consolidated Balance Sheets                                         4

        Consolidated Statements of Operations                           5 - 6

        Consolidated Statements of Stockholders' Equity                     7

        Consolidated Statements of Cash Flows                           8 - 9

      Summary of Accounting Policies                                  10 - 18

      Notes to Consolidated Financial Statements                      19 - 37

                                        2

<PAGE>











Report of Independent Certified Public Accountants


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

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

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

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

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



August 22, 1996                              /s/ BDO Seidman, LLP


                                        3
<PAGE>


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






<TABLE>
<CAPTION>





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


   Assets

<S>                                                    <C>                   <C>        
Cash and cash equivalents                              $  5,431,483          $ 5,752,735
Investment securities (Notes 1 and 6)
  Held-to-maturity                                        3,730,589            4,732,638
  Available for sale                                      9,563,605                  -
Investment in Federal Home Loan Bank stock at
  cost (Note 8)                                           1,360,200            1,360,200
Loans receivable, net (Notes 2, 8 and 10)                84,081,110           75,220,673
Accrued interest receivable                                 711,842              584,242
Real estate owned                                            32,898              122,043
Deferred income taxes (Note 9)                               30,000                  -
Office properties and equipment, net (Note 3)             3,525,199              436,909
Other assets (Note 2)                                     1,693,840            1,251,543
----------------------------------------------------------------------------------------


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





<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                     Consolidated Balance Sheets
<TABLE>
<CAPTION>



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


   Liabilities and Stockholders' Equity


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

Total liabilities                                                                103,811,617           83,445,244
-------------------------------------------------------------------------------------------------------------------


Commitments and Contingencies (Notes 11, 14 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, 2,000,000
    shares authorized, 919,168 and 915,568 shares issued
    and outstanding                                                                1,148,960            1,144,460
  Additional paid-in capital                                                       1,981,745            1,970,945
  Unrealized loss on available for sale securities (Note 1)                         (279,182)                 -
  Retained earnings - substantially restricted                                     3,497,626            2,900,334
-------------------------------------------------------------------------------------------------------------------


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


                                                                                $110,160,766          $89,460,983
-------------------------------------------------------------------------------------------------------------------

</TABLE>


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



                                        4

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Operations

<TABLE>
<CAPTION>



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


Interest income
<S>                                                                  <C>              <C>              <C>       
  Loans                                                              $6,441,903       $5,897,002       $5,254,214
  Mortgage-backed securities                                            652,639          495,620          824,082
  Investment securities                                                 498,686          383,555          554,881
  Trading account assets                                                 23,390           12,176           50,695
-------------------------------------------------------------------------------------------------------------------


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


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


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


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

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


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


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


Total other income                                                    1,107,132          871,634          126,100
-------------------------------------------------------------------------------------------------------------------


</TABLE>










                                                                    continued...

                                        5

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Operations
                                                                     (continued)

<TABLE>
<CAPTION>

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


Other expenses
<S>                                                                  <C>              <C>              <C>       
  Personnel (Notes 13 and 14)                                        $1,013,674       $1,194,410       $  941,866
  Occupancy (Note 11)                                                   302,139          310,114          321,456
  Data processing (Note 11)                                             257,038          210,110          199,922
  Deposit insurance premiums                                            190,263          195,818          172,894
  Other                                                                 724,321          619,373          545,515
-------------------------------------------------------------------------------------------------------------------


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


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

Provision for income taxes (Note 9)                                     344,338          100,508         (234,986)
-------------------------------------------------------------------------------------------------------------------


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

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


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



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


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


</TABLE>

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


                                        6

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>


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


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

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


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

Stock options exercised
  (Note 13)                            23,000          57,200            -                   -            80,200

Issuance of common stock
  (Note 12)                           450,000       1,578,015            -                   -         2,028,015

Net income                                -               -              -               376,245         376,245
-------------------------------------------------------------------------------------------------------------------


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

Stock options exercised
  (Note 13)                             4,500          10,800            -                   -            15,300

Cash dividend                             -               -              -               (45,958)        (45,958)

Unrealized loss on
  available for sale
  securities (Note 1)                     -               -         (279,182)                -          (279,182)

Net income                                -               -              -               643,250         643,250
-------------------------------------------------------------------------------------------------------------------


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

</TABLE>


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


                                        7

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows


<TABLE>
<CAPTION>

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


Operating activities
<S>                                                                   <C>               <C>             <C>        
  Net income (loss)                                                   $  643,250      $   376,245     $   (479,913)
  Adjustments to reconcile net income (loss) to net
    cash provided (absorbed) by operating activities
      Provision (credit) for loan losses                                  56,665           (9,443)          74,047
      Depreciation and amortization                                       95,511           93,775          109,250
      Amortization of deferred loan fees                                (136,086)        (123,528)        (148,992)
      Net amortization of premiums and accretion
        of discounts                                                     199,060           54,822          662,379
      Loss (gain) on sale of loans                                      (204,901)          60,367         (152,931)
      Originations of loans held for sale                             (7,203,819)     (11,765,459)     (23,211,491)
      Proceeds from sale of loans                                      7,160,241       11,825,826       23,364,422
      Loss (gain) on sale of mortgage-backed
        securities                                                          -             (36,418)         214,800
      Originations of loans securitized                                     -          (5,596,082)      (4,992,057)
      Proceeds from sale of mortgage-backed securities                      -           5,415,983        6,574,500
      (Gain) loss on sale of securities available for sale              (101,685)            -             155,100
      (Gain) loss on disposal of office properties
        and equipment                                                     (1,341)          (1,806)             -
      Federal Home Loan Bank stock dividends                                -                -            (53,600)
      Loss on sale of held to maturity securities                           -                -            105,300
      (Gain) loss on sale of trading account securities                   63,720          (24,155)        168,437
      Purchases of trading account securities                       (107,346,227)     (43,113,114)    (73,546,348)
      Sales of trading account securities                            107,282,507       43,137,269      73,377,911
      Changes in
        Accrued interest receivable                                     (127,600)         (27,424)         44,109
        Other assets                                                    (442,298)        (192,025)       (310,844)
        Accrued interest payable                                          13,018          (21,951)        (82,399)
        Deferred income taxes                                               -             (87,000)       (307,277)
        Prepayments by borrowers for taxes and insurance               (160,616)          181,671        (156,412)
        Other liabilities                                                689,882         (592,864)       (531,024)
-------------------------------------------------------------------------------------------------------------------


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


</TABLE>



                                                                    continued...

                                        8

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                          Consolidated Statements of Cash Flows
                                                                    (continued)
<TABLE>
<CAPTION>


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


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


Net cash provided (absorbed) by investing activities                 (20,562,075)      3,684,921         1,332,569
-------------------------------------------------------------------------------------------------------------------


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


Net cash provided (abosrbed) by financing activities                  19,761,542       1,233,415        (3,829,305)
-------------------------------------------------------------------------------------------------------------------


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

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


Cash and cash equivalents, end of year                               $ 5,431,483     $ 5,752,735        $1,279,710
-------------------------------------------------------------------------------------------------------------------

</TABLE>


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


                                        9

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies





Nature of Business and Regulatory Environment

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

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

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

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

Principles of Consolidation

The consolidated financial statements include the accounts of Guaranty Financial
Corporation and Guaranty Savings & Loan, F.A., its wholly-owned subsidiary,  and
GMSC, Inc. and Guaranty Investment Corp., wholly-owned subsidiary of the Savings
Bank. All material  intercompany  accounts and transactions have been eliminated
in the  consolidation.  Prior year accounts are  reclassified  when necessary to
conform to current year classifications.

Reorganization

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

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.

                                       10

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)





Investment Securities

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

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

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

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

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

Options

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

Loans Held for Sale

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


                                       11

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)





Loans Receivable

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

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

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

Sale of Loans and Participation in Loans

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

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




                                       12

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)





Sale of Loans and Participation in Loans (continued)

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

Allowance for Possible Loan Losses

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

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

Effective  July  1,  1995,  the  Corporation   adopted  Statement  of  Financial
Accounting Standards No. 114 (SFAS 114), "Accounting by Creditors for Impairment
of a Loan (as amended by SFAS No. 118,  "Accounting  by Creditors for Impairment
of a Loan-Income Recognition and Disclosures"). The effect of adopting these new
accounting standards were immaterial to the operating results of the Corporation
for the year ended June 30, 1996.


                                       13

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                                Summary of Accounting Policies
                                                                   (continued)





Allowance for Possible Loan Losses (continued)

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

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

Real Estate Owned

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

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


                                       14

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)





Securities Sold Under Agreements to Repurchase

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

Office Properties and Equipment

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

Income Taxes

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

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

In computing Federal income taxes,  savings banks that meet certain definitional
tests and other conditions  prescribed by the Internal Revenue Code are allowed,
within  limitations,  to deduct from taxable  income an allowance  for bad debts
based on actual loss experience, a percentage of taxable income (8%) before such
deduction or an amount based on a percentage of eligible  loans.  The cumulative
bad debt  reserve,  upon  which no  taxes  have  been  paid,  was  approximately
$1,086,000 as of June 30, 1996.

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


                                       15

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)





Earnings Per Share

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

Statement of Cash Flows

Cash and cash equivalents include Federal funds sold with original maturities of
three months or less. Interest paid was approximately $5,179,000, $4,685,000 and
$5,156,000 for the years ended June 30, 1996, 1995 and 1994, respectively.  Cash
paid for income taxes was approximately  $180,000,  $42,000 and $159,000 for the
years ended June 30, 1996, 1995 and 1994, respectively.  Real estate acquired in
settlement  of  loans  during  the  years  ended  June  30,  1996  and  1995 was
approximately $33,000 and $122,000, respectively.

Reclassifications

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

New Accounting Pronouncements

In March 1995, the Financial  Accounting Standards Board issued its Statement of
Financial  Accounting  Standards  No.  121  (SFAS  121),   "Accounting  for  the
Impairment of Long-Lived  Assets and for  Long-Lived  Assets to Be Disposed Of".
SFAS 121 requires that long-lived assets and certain  intangibles to be held and
used by an  entity  be  reviewed  for  impairment  when  events  or  changes  in
circumstances  indicate  that the  carrying  amount may not be  recoverable.  In
addition,  SFAS 121 requires  long-lived  assets and certain  intangibles  to be
disposed of to be  reported  at the lower of carrying  amount or fair value less
costs to sell.  SFAS 121 is effective for fiscal years  beginning after December
15, 1995.  Management does not expect the application of this  pronouncement  to
have a material effect on the financial statements of the Corporation.


                                       16

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)





New Accounting Pronouncements (continued)

In October 1995, the Financial  Accounting  Standards Board issued its Statement
of Financial Accounting Standards No. 123 (SFAS 123), "Accounting for StockBased
Compensation."  SFAS No. 123 allows  companies  to continue to account for their
stock option plans in accordance with APB Opinion 25 but encourages the adoption
of a new  accounting  method based on the estimated fair value of employee stock
options.  Companies  electing  not to follow the new fair value based method are
required  to provide  expanded  footnote  disclosures,  including  pro forma net
income and earnings per share,  determined as if the company had applied the new
method. SFAS No. 123 is required to be adopted by the Corporation  prospectively
beginning  July 1, 1996.  Management  does not expect  the  application  of this
pronouncement  to have a  material  effect on the  financial  statements  of the
Corporation.

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

Regulatory Supervisory Agreement

During May 1995, the Savings Bank entered into a Supervisory  Agreement with the
OTS that required Savings Bank to take specific  actions and placed  limitations
on its growth.  Among the actions the  Savings  Bank agreed to  undertake  were:
revise its business plan to indicate how it will increase its capital levels and
review  and revise  its  policies  related  to  interest  rate risk,  investment
activities and liquidity maintenance. In addition, the Savings Bank was required
by the agreement to obtain OTS approval prior to making any  distribution to the
holders of its common stock.


                                       17

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                                 Summary of Accounting Policies
                                                                    (continued)





Regulatory Supervisory Agreement (continued)

On June 28, 1995, the Savings Bank  completed an initial public  offering of its
common stock resulting in the Corporation  being considered  "well  capitalized"
under the prompt corrective action framework of FDICIA (Note 11).

On August  11,  1995,  the  Savings  Bank was  granted  a waiver  of the  growth
limitations of the Supervisory  Agreement allowing growth in accordance with the
Corporation's approved business plan.

On May 14, 1996, the May 1995 Supervisory Agreement with the OTS was terminated.



                                       18

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements




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

<TABLE>
<CAPTION>

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


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


Held to Maturity

<S>                                           <C>              <C>         <C>            <C>        
  Mortgage-backed
    securities                                $ 3,730,589      $148,301    $      -       $ 3,878,890
------------------------------------------------------------------------------------------------------


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


Available for Sale

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


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


                                              $13,723,105      $111,979      $428,911     $13,442,495
------------------------------------------------------------------------------------------------------



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


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


Held to Maturity

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


                                               $4,732,638      $154,750       $   -        $4,887,388
------------------------------------------------------------------------------------------------------


</TABLE>



                                       19

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)







1.    Investment Securities (continued)

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

Proceeds from sales of trading  securities during the years ended June 30, 1996,
1995 and 1994 were  approximately  $107,283,000,  $43,137,000  and  $73,378,000,
respectively.  Gross gains of approximately $209,000,  $142,600 and $389,100 and
gross losses of approximately  $272,700,  $118,400 and $557,500 were realized on
those sales during the years ended June 30, 1996, 1995, and 1994, respectively.

At June 30, 1996,  mortgage-backed  securities of approximately  $3,731,000 were
pledged for bonds payable (Note 6). At June 30, 1996, mortgage-backed securities
classified as available for sale with a market value of approximately $6,633,000
were pledged as collateral under repurchase agreements (Note 7).


                                       20

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)




<TABLE>
<CAPTION>

2.    Loans Receivable
Loans receivable are summarized as follows:

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


<S>                                                     <C>                   <C>        
Residential real estate                                 $66,137,277           $62,174,694
Commercial real estate                                    7,670,148             4,507,978
Construction and land                                     8,813,170             8,886,956
Consumer                                                  5,386,104             4,579,977
------------------------------------------------------------------------------------------


                                                         88,006,699            80,149,605
------------------------------------------------------------------------------------------


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


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


                                                        $84,081,110           $75,220,673
------------------------------------------------------------------------------------------



The allowance for loan losses is summarized 
as follows:

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


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


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


Balance at June 30, 1996                                                         $788,146
------------------------------------------------------------------------------------------

</TABLE>




                                       21

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)




2.    Loans Receivable (continued)

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

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

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

Impaired loans with a specific allowance                               $493,000
Impaired loans with no specific allowance                                     -
-------------------------------------------------------------------------------


Total impaired loans                                                   $493,000
-------------------------------------------------------------------------------


Total allowance related to impaired loans                              $123,000
Average balance of impaired loans for the period                        496,000
Interest income on impaired loans for the period
  recorded on a cash basis                                                   -

3.    Office Properties and Equipment

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

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


<S>                                                           <C>                 <C>       
Land                                                          $1,873,386          $        -
Building and leasehold improvements                            1,388,741               305,574
Furniture and fixtures                                           288,575               365,773
Equipment                                                        661,020               637,998
----------------------------------------------------------------------------------------------


                                                               4,211,722             1,309,345
Less accumulated depreciation and amortization                   686,523               872,436
----------------------------------------------------------------------------------------------


Net office properties and equipment                           $3,525,199          $    436,909
----------------------------------------------------------------------------------------------
</TABLE>


Commitments  for the  construction  of a new  operations  center and branch were
approximately $924,000 at June 30, 1996.


                                       22

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)




4.    Deposits

Deposits are summarized as follows:

<TABLE>
<CAPTION>

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


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

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


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


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


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


                                     $74,687,446      100.0%       $52,460,639       100.0%
-------------------------------------------------------------------------------------------

</TABLE>


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

Scheduled maturities of certificates are as follows:

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


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

     
                                    $60,380,443           $37,824,199
---------------------------------------------------------------------




                                       23

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)





5.    Fair Value of Financial Instruments

The estimated fair values of the Corporation's  financial instruments as of June
30, 1996, are as follows:
<TABLE>
<CAPTION>

                                                      Carrying               Fair
                                                        Amount              Value
---------------------------------------------------------------------------------------------------------


<S>                                                   <C>                <C>       
Financial assets
  Cash and short-term investments                     $ 5,431,483        $5,431,000
  Securities                                           13,294,194        13,442,000
  Loans, net of allowance for loan losses              84,081,110        82,710,000

Financial liabilities
  Deposits                                             74,687,446        74,590,000
  Advances from Federal Home Loan Bank                 17,500,000        17,500,000
  Securities sold under agreement to
    repurchase                                          6,104,000         6,104,000
  Bonds payable                                         3,143,844               N/A


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


Unrecognized financial instruments
  Commitments to extend credit                        $3,884,850         $3,885,000
  Forward commitments to purchase
    mortgage-backed securities                         5,795,000          5,822,000

</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.

                                       24

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)





5.    Fair Value of Financial Instruments (continued)

Loan receivables

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

Deposit liabilities

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

Advances from Federal Home Loan Bank

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

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

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 June 30, 1996, it was not deemed practicable to estimate the fair value.


                                       25

<PAGE>


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


                                               Guaranty Financial Corporation
                                                               and Subsidiary

                                   Notes to Consolidated Financial Statements
                                                                  (continued)





5.    Fair Value of Financial Instruments (continued)

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

<TABLE>
<CAPTION>

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

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


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


                                                             $3,143,844            $3,980,562
----------------------------------------------------------------------------------------------
</TABLE>





                                       26

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)





6.    Bonds Payable (continued)

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

7.    Securities Sold Under Agreements to Repurchase

The  following  is  a  summary  of  certain  information   regarding  Guaranty's
repurchase agreements:
<TABLE>
<CAPTION>


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


<S>                                                       <C>                 <C>       
Balance at end of year                                    $6,104,000          $        -
Weighted average interest rate at end of year                  5.65%                   -
Average amount outstanding during the year                $3,111,583            $  782,500
Maximum amount outstanding at any month
  end during the year                                     $9,930,000            $4,230,000

</TABLE>

8.    Advances From Federal Home  Loan Bank

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

Due in Year Ending
  June 30,
--------------------------------------------------------------------

      1997                                             $12,500,000
      1998                                               5,000,000
--------------------------------------------------------------------

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


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


                                       27

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)





8.    Advances From Federal Home Loan Bank (continued)

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

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

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


Average amount outstanding during
  the year                                  $22,829,000     $26,208,000    $26,017,000
--------------------------------------------------------------------------------------


Average interest rate during the year             6.21%           6.67%          6.63%
--------------------------------------------------------------------------------------

</TABLE>


9.    Income Taxes

The  provision for income taxes as presented in the  consolidated  statements of
operations for the years ended June 30, 1996, 1995 and 1994 is as follows:
<TABLE>
<CAPTION>

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


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


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

</TABLE>


A  reconciliation  of the  provision  for income  taxes  computed at the federal
statutory income tax rate to the effective rate follows:
<TABLE>
<CAPTION>

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


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


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

</TABLE>



                                       28

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)





9.    Income Taxes (continued)

The components of deferred income tax liability are as follows:

<TABLE>
<CAPTION>

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


Deferred tax asset
<S>                                                  <C>                   <C>     
  Bad debt reserves                                  $152,000              $169,000
  Deferred loan fees                                   70,000               123,000
  Excess servicing                                     48,000                68,000
  Available for sale securities                       150,000                   -
  Other                                                65,000                18,000
-----------------------------------------------------------------------------------


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


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


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


Net deferred tax liability (asset)                   $(30,000)             $120,000
-----------------------------------------------------------------------------------

</TABLE>




                                       29

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)





10.   Related Party Transactions

In the course of business,  the Corporation  makes loans to directors,  officers
and other related parties.  These loans are made on substantially the same terms
as those  prevailing  at the time for  comparable  transactions  with the  other
borrowers.

The following is a summary of loan  transactions  with  directors,  officers and
other related parties:
<TABLE>
<CAPTION>

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


<S>                                             <C>                   <C>     
Balance, at the beginning of year               $291,124              $615,267
Loans to former officers and other
  related parties                                    -                (233,270)
Additional loans                                 197,741                   -
Loan reductions                                  222,244               (90,873)
-------------------------------------------------------------------------------


Balance, at end of year                         $266,621              $291,124
-------------------------------------------------------------------------------
</TABLE>



11.   Commitments and Contingencies

Continuing  uncertainty  exists as to the  sufficiency  of the  Federal  Deposit
Insurance  Corporation's  ("FDIC") Savings Association  Insurance Fund ("SAIF").
Legislators  and  thrift  regulators  are  considering  alternative  methods  of
strengthening  this fund.  Virtually all of the existing  proposals will require
additional  funding from the thrifts whose  deposits are insured by the FDIC. At
June 30, 1996, possible future increases in FDIC insurance costs for the Savings
Bank cannot be estimated.


                                       30

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)





11.   Commitments and Contingencies (continued)

The Corporation  leases office space under operating  leases expiring at various
dates  through  December  1998 and has a contract  for the  performance  of data
processing  services whose initial term expires in May 1999 and requires minimum
payments of $8,100 per month. Future minimum rental and data processing payments
required  that have  initial or remaining  noncancelable  terms in excess of one
year as of June 30, 1996, are as follows:

                                         Amount
------------------------------------------------------------

                                                    Data
Year Ending June 30,            Leases            Processing
------------------------------------------------------------

1997                           $40,698            $ 97,200
1998                            25,655              97,200
1999                            22,956              89,100
2000                             5,763                  -
------------------------------------------------------------


                               $95,072            $283,500
------------------------------------------------------------



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

The  Corporation  is defendant in various  lawsuits  incidental to its business.
Management is of the opinion that its financial  position will not be materially
affected by the ultimate  resolution of any litigation  pending or threatened at
June 30, 1996.

12.   Stockholders' Equity

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

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


                                       31

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)





12.   Stockholders' Equity (continued)

Savings  institutions  must maintain specific capital standards that are no less
stringent  than the capital  standards  applicable  to national  banks.  The OTS
regulations  currently  have three  capital  standards  including (i) a tangible
capital  requirement,  (ii) a core capital  requirement,  and (iii) a risk-based
capital requirement. The tangible capital standard requires savings institutions
to maintain tangible capital of not less than 1.5% of adjusted total assets. The
core capital standard requires a savings institution to maintain core capital of
not less than 4.0% of adjusted  total assets.  The risk-based  capital  standard
requires risk-based capital of not less than 8.0% of risk-weighted assets.

At June 30, 1996, the Savings Bank met all three regulatory capital requirements
applicable to it under Financial  Institutions Reform,  Recovery and Enforcement
Act ("FIRREA") and was considered "well capitalized" under the prompt corrective
action framework of FDICIA.

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

                               Amount       Percent        Actual         Actual        Excess
                              Required     Required        Amount        Percent        Amount
-------------------------------------------------------------------------------------------------------------------


<S>                           <C>             <C>         <C>              <C>       <C>       
Tangible capital              $1,655,000      1.50%       $6,628,000       6.01%     $4,973,000
Core capital                   3,309,000      3.00         6,628,000       6.01       3,319,000
Risk-based capital             4,372,000      8.00         7,171,000      13.12       2,799,000
</TABLE>

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

13.   Stock Option Plan

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


                                       32

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)




13.   Stock Option Plan (continued)

The following table summarizes vested options outstanding:
<TABLE>
<CAPTION>


Year Ending June 30,                                         1996       1995       1994
------------------------------------------------------------------------------------------
                                        Option Price
------------------------------------------------------------------------------------------

<S>                                      <C>                 <C>        <C>        <C>   
Outstanding at beginning of
  year                                      $4.25            13,600     24,000     16,000
Options vested during year               4.25 - 4.75          4,000      8,000      8,000
Options exercised during year            4.25 - 4.75         (3,600)   (18,400)       -
------------------------------------------------------------------------------------------


Outstanding at end of year              $4.25 - 4.75         14,000     13,600     24,000
------------------------------------------------------------------------------------------

</TABLE>


14.   Employee Benefit Plans

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

15.   Financial Instruments With Off-Balance-Sheet Risk

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

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

                                       33

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)





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

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

                                                         Contract
                                                      Notional Amount
                                                     at June 30, 1996
----------------------------------------------------------------------


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

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

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

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

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


                                       34

<PAGE>


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


                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)





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

Condensed financial information is shown for the parent company only as follows:
<TABLE>
<CAPTION>

                   Condensed Statements of Financial Condition

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


   Assets

<S>                                                         <C>       
Investment in the Savings Bank, at equity                   $6,693,752
Cash                                                            10,000
Prepaid expenses and other assets                               68,979
-----------------------------------------------------------------------


                                                            $6,772,731
-----------------------------------------------------------------------



   Liabilities and Stockholders' Equity

Liabilities                                                 $  144,400
-----------------------------------------------------------------------


Stockholders' Equity
  Common stock                                               1,148,960
  Additional paid-in capital                                 1,981,745
  Retained earnings                                          3,497,626
-----------------------------------------------------------------------


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

 
                                                            $6,772,731
-----------------------------------------------------------------------

</TABLE>




                                       35

<PAGE>


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


                                                Guaranty Financial Corporation
                                                                and Subsidiary

                                    Notes to Consolidated Financial Statements
                                                                   (continued)





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

                         Condensed Statements of Income

Year Ended June 30,                                                        1996
--------------------------------------------------------------------------------

<S>                                                                    <C>     
Income
  Dividends received from Savings Bank                                 $ 10,000
--------------------------------------------------------------------------------


Total income                                                             10,000
--------------------------------------------------------------------------------


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


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


Loss before equity in undistributed net income
  of the Savings Bank                                                   (19,463)
Equity in undistributed net income of the
  Savings Bank                                                          662,713
--------------------------------------------------------------------------------


Net income                                                             $643,250
--------------------------------------------------------------------------------
</TABLE>





                                       36

<PAGE>


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

                                                 Guaranty Financial Corporation
                                                                 and Subsidiary

                                     Notes to Consolidated Financial Statements
                                                                    (continued)





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

<TABLE>
<CAPTION>

                       Condensed Statements of Cash Flows

Year Ended June 30,                                                     1996
------------------------------------------------------------------------------

<S>                                                                 <C>     
Operating activities
  Net income                                                        $643,250
  Adjustments
    Equity in income of the Savings Bank                            (672,713)
    (Increase) decrease in prepaid and other assets                  (68,979)
    Increase in other liabilities                                    144,400
------------------------------------------------------------------------------


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


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


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


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


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


Increase in cash                                                      10,000

Cash, beginning of year                                                  -
------------------------------------------------------------------------------


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

</TABLE>




                                       37

<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:  October 15, 1996            By:   /s/ Thomas P. Baker
                                        --------------------------------------
                                            Thomas P. Baker
                                            President, Chief Executive Officer
                                            and Director

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

               Signature                                      Title                                Date


<S>                                        <C>                                                <C> 
/s/ Thomas P. Baker                          President, Chief Executive Officer and           October 15, 1996
-------------------------------------
            Thomas P. Baker                                 Director
                                                 (Principal Executive Officer)
/s/ Kathleen M. Focht                      Chief Financial Officer, Vice President,          October 15, 1996
-------------------------------------
           Kathleen M. Focht                   and Secretary/Treasurer (Principal
                                               Financial and Accounting Officer)
                                                     Chairman of the Board                    
-------------------------------------
            Douglas E. Caton

/s/ Harry N. Lewis                               Vice Chairman of the Board                   October 15, 1996
-------------------------------------
             Harry N. Lewis

/s/ Charles Borchardt
-------------------------------------                       Director                          October 15, 1996
          Charles R. Borchardt

/s/ Henry J. Browne
-------------------------------------                       Director                          October 15, 1996
            Henry J. Browne

/s/ Robert P. Englander
-------------------------------------                       Director                          October 15, 1996
          Robert P. Englander


-------------------------------------                       Director                          
              John R. Metz


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

/s/ Oscar W. Smith, Jr.
-------------------------------------                       Director                          October 15, 1996
          Oscar W. Smith, Jr.


</TABLE>