SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

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

                   For the fiscal year ended December 31, 1997

                         Commission file number 0-18265

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

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

       1658 State Farm Boulevard                              22911
       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
$11,393,000.

         The aggregate  market value of the voting stock held by  non-affiliates
computed by reference to the average of the closing bid and asked prices of such
stock as of December 31, 1997 was approximately $5,107,000.  (The exclusion from
such amount of the market  value of the shares  owned by any person shall not be
deemed an  admission by the  registrant  that such person is an affiliate of the
registrant.)

         The number of shares  outstanding  of Common  Stock as of December  31,
1997 was 1,501,383.

                       DOCUMENTS INCORPORATED BY REFERENCE

Part  III of Form  10-KSB  - Proxy  Statement  for the 1998  Annual  Meeting  of
Stockholders.


<PAGE>

                                TABLE OF CONTENTS

                                     PART I

                                                                            Page

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

ITEM 2.  DESCRIPTION OF PROPERTY............................................. 11

ITEM 3.  LEGAL PROCEEDINGS................................................... 11

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE
           OF SECURITY HOLDERS............................................... 11

                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED
           STOCKHOLDER MATTERS............................................... 12

ITEM 6.  MANAGEMENTS DISCUSSION AND ANALYSIS OF FINANCIAL
           CONDITION AND RESULTS OF OPERATION................................ 12

ITEM 7.  FINANCIAL STATEMENTS................................................ 38

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
           ON ACCOUNTING AND FINANCIAL DISCLOSURE............................ 38

                                    PART III

ITEM  9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
           CONTROL PERSONS; COMPLIANCE WITH SECTION
           16(a) OF THE EXCHANGE ACT......................................... 38

ITEM 10. EXECUTIVE COMPENSATION.............................................. 39

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
           OWNERS AND MANAGEMENT............................................. 39

ITEM 12  CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS...................... 39

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................. 39




<PAGE>



                                     PART I

Item 1.        Description of Business.

General

         Guaranty Financial  Corporation  ("Guaranty") is a Virginia corporation
which was  organized in 1995 for the purpose of becoming the holding  company of
the Bank.  The Bank is a Virginia  state  chartered bank which began business in
February 1981 and is headquartered in Charlottesville, Virginia.

         Effective  December 29, 1995,  Guaranty  acquired all of the issued and
outstanding  standing shares of Common Stock of the Bank. The principal asset of
Guaranty is the  outstanding  stock of the Bank,  its wholly  owned  subsidiary.
Guaranty 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.  Guaranty's Common Stock is quoted on The
Nasdaq National Market 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.  Of Guaranty's  $107.6
million of gross loans  outstanding  at December  31,  1997,  61.3%  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 has recently begun to offer consumer loans and  government-insured  and
conventional  small business  loans.  Guaranty  invests in certain United States
government and agency obligations and other investments  permitted by applicable
laws and regulations.

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

Market Area

         Guaranty  is  the  only  independent   community  banking  organization
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  five  full  service  retail  branches,  which  serve  Charlottesville,
Albemarle County, and Harrisonburg, Virginia.

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 and mortgage bankers 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
investment  vehicles.  The ability of  Guaranty  to attract



                                      -3-
<PAGE>

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 products at competitive rates and convenient business hours.

         Guaranty operates in a highly  competitive  environment,  competing for
deposits and loans with commercial banks and other financial institutions,  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.

Credit Policies

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

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

         Guaranty uses a Management  Loan Committee and Directors Loan Committee
to approve loans. The Management Loan Committee, which consists of the President
and two  additional  loan  underwriters,  meets as  necessary to review all loan
applications.  A  Directors  Loan  Committee,  which  currently  consists of all
directors,  approves  loans in excess  of  $500,000  that  have been  previously
approved by the Management Loan Committee.  Guaranty's  President is responsible
for reporting to the Directors Loan  Committee  monthly on the activities of the
Management  Loan  Committee  and  on  the  status  of  various   delinquent  and
non-performing loans. The Directors Loan Committee also reviews lending policies
proposed by Management.

         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 salable in the secondary  market because
they do not meet all of the  secondary  marketing  guidelines.  These  loans are
evaluated by the loan  committee for "overall"  merit and will not exceed an 80%
loan to value ratio.  Real estate is appraised by independent fee appraisers who
have been  pre-approved  by the



                                      -4-
<PAGE>

Board of  Directors.  Loans are  submitted to the  underwriting  department  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.

         In the normal course of business,  Guaranty  makes various  commitments
and incurs certain contingent  liabilities which are disclosed but not reflected
in its annual financial  statements,  including commitments to extend credit. At
December 31, 1997, commitments to extend credit totaled $16.6 million.

One- to Four-Family Residential Real Estate Lending

         Guaranty's  primary  lending  program has been 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.  If the loan to value exceeds 80%,  private  mortgage  insurance is
generally secured.

         Although, due to competitive market pressures,  the Bank does originate
fixed-rate mortgage loans, it currently underwrites and documents all such loans
to permit their sale in the  secondary  mortgage  market.  At December 31, 1997,
$26.5 million,  or 24.6%, of Guaranty's  loan portfolio  consisted of fixed-rate
mortgage loans.

         Guaranty's  current  one- to  four-family  residential  adjustable-rate
mortgage loans ("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 December 31, 1997,  $39.1
million,  or 36.3%,  of Guaranty's 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.



                                      -5-
<PAGE>

Construction Lending

         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 December 31, 1997,  construction  and land loans  outstanding were
$18.4 million, or 17.1%, of gross loans. 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 floats with
the market, they help Guaranty in managing its interest rate risk.  Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single  borrowers or groups of related  borrowers.  Construction  loans  involve
additional risks  attributable to the fact that loan funds are advanced upon the
security of the home under  construction,  which is of uncertain  value prior to
the  completion  of  construction.  Thus,  it  is  more  difficult  to  evaluate
accurately  the total loan funds  required  to  complete a project  and  related
loan-to-value  ratios.  To  minimize  the  risks  associated  with  construction
lending,  Guaranty limits loan amounts to 80.0% of appraised  value, in addition
to its usual credit  analysis of its  borrowers.  Guaranty  also obtains a first
lien on the security property as security for its construction loans.

Commercial Real Estate Lending

         Guaranty also originates  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 December 31, 1997,  commercial  real estate  aggregated  $16.6
million or 15.5% of Guaranty's  gross loans.  Guaranty's  commercial real estate
loans have been made at interest  rates that adjust based on yields for one-year
U.S. Treasury securities,  with a 2% annual cap on rate adjustments and a 6% cap
on interest  rates over the life of the loan.  Beginning in September  1996, the
interests rates on commercial  real estate loans, in most cases,  have been tied
to the prime lending rate.  Typically,  Guaranty charges fees ranging from 1% to
2% on these  loans.  Commercial  real estate  loans made by  Guaranty  generally
amortize  over 15 to 25  years  and may have a call  provision  of 3 or 5 years.
Guaranty's  commercial real estate loans are secured by properties in its 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 in most cases.  Commercial real estate lending  entails  significant
additional risk,  compared with residential  mortgage  lending.  Commercial real
estate loans  typically  involve larger loan balances  concentrated  with single
borrowers or groups of related borrowers.  Additionally,  the payment experience
on loans secured by income  producing  properties is typically  dependent on the
successful  operation  of a business  or a real  estate  project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
in the economy  generally.  Guaranty's  commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios,  the borrower's
creditworthiness and prior credit history and reputation, and Guaranty generally
requires  personal  guarantees  or  endorsements  of  borrowers.  Guaranty  also
carefully considers the location of the security property.

Consumer Lending

         Guaranty offers various secured and unsecured consumer loans, including
unsecured  personal loans and lines of credit,  share loans,  automobile  loans,
deposit account loans, installment and demand loans, letters of credit, and home
equity loans. At December 31, 1997,  Guaranty had consumer loans of $7.0 million
or 6.5% of gross loans.  During 1997,  Guaranty  increased its level of consumer
loans.  Such



                                      -6-
<PAGE>

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 1997, Guaranty began offering all types of consumer loans due to
its improved capital position.  Generally these loans provide higher yields than
one-to-four-family mortgages.

Commercial Loans

         In July 1996, Guaranty began making commercial loans to qualified small
businesses in its market area. Commercial business loans generally have a higher
degree of risk than residential  mortgage loans, but have commensurately  higher
yields. To manage these risks, Guaranty generally secures appropriate collateral
and  carefully  monitors the  financial  condition  of its  business  borrowers.
Residential  mortgage  loans  generally are made on the basis of the  borrower's
ability to make  repayment  from his employment and other income and are secured
by real  estate  whose  value  tends to be easily  ascertainable.  In  contrast,
commercial  business  loans  typically  are made on the basis of the  borrower's
ability to make  repayment  from cash flow from its  business and are secured by
business assets, such as commercial real estate, accounts receivable,  equipment
and  inventory.  As a result,  the  availability  of funds for the  repayment of
commercial  business loans may be substantially  dependent on the success of the
business  itself.  Further,  the collateral  for  commercial  business loans may
depreciate  over  time  and  cannot  be  appraised  with  as much  precision  as
residential real estate.  Guaranty has a credit review and monitoring  system to
regularly review the cash flow of commercial borrowers.



                                      -7-
<PAGE>

Employees

         At December  31,  1997,  Guaranty  had the  equivalent  of 64 full-time
employees,  and  currently  has  65  full-time  employees.  None  of  Guaranty's
employees is represented by any collective bargaining unit.

Supervision and Regulation

         The  discussion  below  is only a  summary  of the  principal  laws and
regulations  that comprise the regulatory  framework  applicable to Guaranty and
the  Bank.  The  descriptions  of  these  laws  and  regulations,   as  well  as
descriptions of laws and regulations  contained elsewhere herein, do not purport
to be complete and are  qualified in their  entirety by reference to  applicable
laws and regulations.

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

         As  a  state-chartered   bank,  the  Bank  is  subject  to  regulation,
supervision  and  examination  by the Virginia  State  Corporation  Commission's
Bureau of Financial  Institutions (the "Virginia SCC"). The Bank is also subject
to regulation,  supervision and examination by the Federal Reserve Board and the
Federal Deposit Insurance  Corporation (the "FDIC").  State and federal law also
govern the activities in which the Bank may engage,  the investments it may make
and the aggregate  amount of loans that may be granted to one borrower.  Various
consumer and compliance laws and regulations also affect the Bank's operations.

         The earnings of the Bank,  and therefore the earnings of Guaranty,  are
affected by general economic conditions, management policies and the legislative
and  governmental  actions of various  regulatory  authorities,  including those
referred to above.  The following  description  summarizes some of the state and
federal laws to which Guaranty and the Bank are subject.

         The  Virginia  SCC and the Federal  Reserve  Bank of  Richmond  conduct
regular examinations of the Bank, reviewing such matters as the adequacy of loan
loss  reserves,   quality  of  loans  and  investments,   management  practices,
compliance  with laws,  and other  aspects of their  operations.  In addition to
these  regular  examinations,  the Bank must  furnish the  Virginia  SCC and the
Federal Reserve with periodic reports  containing a full and accurate  statement
of its  affairs.  Supervision,  regulation  and  examination  of  banks by these
agencies are intended  primarily for the  protection  of depositors  rather than
shareholders.

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

         For the semi-annual  period beginning  January 1, 1998, the assessments
imposed on all FDIC  deposits  for  deposit  insurance  have an  effective  rate
ranging from 0 to 27 basis points per $100 of insured deposits, depending on the
institution's capital position and other supervisory factors.  However,  because



                                      -8-
<PAGE>

the legislation enacted in 1996 requires that both Savings Association Insurance
Fund  ("SAIF")  insured and  BIF-insured  deposits pay a pro rata portion of the
interest due on the obligations  issued by the Financing  Corporation  ("FICO"),
the FDIC is assessing  BIF-insured  deposits an additional 1.30 basis points per
$100 of deposits to cover those obligations.

         The FDIC is authorized  to prohibit any  BIF-insured  institution  from
engaging in any activity that the FDIC determines by regulation or order to pose
a serious threat to the respective  insurance fund.  Also, the FDIC may initiate
enforcement actions against banks, after first giving the institution's  primary
regulatory  authority an opportunity to take such action. The FDIC may terminate
the deposit  insurance of any depository  institution if it determines,  after a
hearing,  that the  institution  has engaged or is engaging in unsafe or unsound
practices,  is in an unsafe or unsound condition to continue operations,  or has
violated any  applicable  law,  regulation,  order or any  condition  imposed in
writing by the FDIC. It also may suspend deposit  insurance  temporarily  during
the  hearing  process  for  the  permanent  termination  of  insurance,  if  the
institution has no tangible  capital.  If deposit  insurance is terminated,  the
deposits  at the  institution  at  the  time  of  termination,  less  subsequent
withdrawals,  shall  continue  to be insured for a period from six months to two
years,  as  determined  by  the  FDIC.   Management  is  aware  of  no  existing
circumstances that could result in termination of the Bank's deposit insurance.

         Capital.  The Federal Reserve Board has issued  risk-based and leverage
capital guidelines applicable to banking organizations they supervise. Under the
risk-based  capital  requirements,  Guaranty  and the Bank  are  each  generally
required to maintain a minimum  ratio of total capital to  risk-weighted  assets
(including  certain  off-balance  sheet  activities,  such as standby letters of
credit),  of 8%. At least half of the total  capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles   ("Tier  1  capital").   The   remainder  may  consist  of  certain
subordinated  debt,  certain hybrid  capital  instruments  and other  qualifying
preferred  stock  and a  limited  amount  of the loan  loss  allowance  ("Tier 2
capital" and, together with Tier 1 capital,  "total  capital").  At December 31,
1997, Guaranty's Tier 1 capital and total capital ratios were 14.29% and 15.42%,
respectively.

         In  addition,  each  of  the  Federal  bank  regulatory  agencies  have
established   minimum   leverage   capital   ratio   requirements   for  banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to  adjusted  average  quarterly  assets  equal to 3% for banks and bank
holding companies that meet certain specified criteria. All other banks and bank
holding  companies will generally be required to maintain a leverage ratio of at
least 100 to 200 basis  points  above the stated  minimum.  Guaranty's  leverage
ratio at December 31, 1997 was 9.34%.

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

         Other  Safety  and  Soundness  Regulations.   There  are  a  number  of
obligations  and  restrictions  imposed  on bank  holding  companies  and  their
depository  institution  subsidiaries by Federal law and regulatory  policy that
are  designed  to reduce  potential  loss  exposure  to the  depositors  of such
depository  institutions  and to the  FDIC  insurance  funds  in the  event  the
depository  institution  becomes  in danger of  default  or is in  default.  For
example,  under a policy of the  Federal  Reserve  Board  with  respect  to bank



                                      -9-
<PAGE>

holding  company  operations,  a bank holding  company is required to serve as a
source of financial  strength to its subsidiary  depository  institutions and to
commit resources to support such  institutions in  circumstances  where it might
not do so otherwise.  In addition,  the "cross-guarantee"  provisions of Federal
law require insured  depository  institutions  under common control to reimburse
the FDIC for any loss suffered or reasonably  anticipated  by either the SAIF or
the BIF as a result of the default of a commonly  controlled  insured depository
institution or for any assistance  provided by the FDIC to a commonly controlled
insured  depository  institution  in danger of default.  The FDIC may decline to
enforce the  cross-guarantee  provision if it determines that a waiver is in the
best  interests  of  the  SAIF  or  the  BIF  or  both.  The  FDIC's  claim  for
reimbursement  is superior to claims of shareholders  of the insured  depository
institution  or its holding  company but is subordinate to claims of depositors,
secured  creditors and holders of subordinated  debt (other than  affiliates) of
the commonly controlled insured depository institution.

         The Federal  banking  agencies  also have broad  powers  under  current
Federal  law to take  prompt  corrective  action to resolve  problems of insured
depository  institutions.  The extent of these  powers  depends upon whether the
institution   in   question   is   well-capitalized,   adequately   capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law.  As of  December  31,  1997,  Guaranty  and the Bank were
classified as well-capitalized.

         State regulatory  authorities also have broad  enforcement  powers over
the  Bank,  including  the power to impose  fines and other  civil and  criminal
penalties, and to appoint a receiver in order to conserve the assets of any such
institution for the benefit of depositors and other creditors.

         Payment of Dividends.  Guaranty is a legal entity separate and distinct
from the Bank.  Virtually all of the revenues of Guaranty  result from dividends
paid to Guaranty by the Bank.  The Bank also is subject to state laws that limit
the amount of dividends it can pay. In addition,  both Guaranty and the Bank are
subject  to various  general  regulatory  policies  relating  to the  payment of
dividends,  including requirements to maintain adequate capital above regulatory
minimums.  The Federal  Reserve Board has indicated  that banking  organizations
should  generally  pay  dividends  only if (1)  the  organization's  net  income
available to common  shareholders over the past year has been sufficient to fund
fully the dividends and (2) the prospective rate of earnings  retention  appears
consistent  with the  organization's  capital  needs,  asset quality and overall
financial  condition.   Guaranty  does  not  expect  that  any  of  these  laws,
regulations  or policies will  materially  impact the ability of the Bank to pay
dividends.

         Community Reinvestment.  The requirements of the Community Reinvestment
Act  ("CRA")  are also  applicable  to the Bank.  The CRA  imposes on  financial
institutions an affirmative  and ongoing  obligation to meet the credit needs of
their  local  communities,  including  low and  moderate  income  neighborhoods,
consistent with the safe and sound operation of those institutions.  A financial
institution's  efforts in meeting community credit needs currently are evaluated
as part of the examination process pursuant to twelve assessment factors.  These
factors also are considered in evaluating mergers, acquisitions and applications
to open a branch or facility.  To the best  knowledge of the Bank, it is meeting
its obligations under the CRA. The Bank's CRA rating is "satisfactory".

         Interstate  Banking  and  Branching.  Current  Federal  law  authorizes
interstate  acquisitions of banks and bank holding companies without  geographic
limitation.  Effective June 1, 1997, a bank  headquartered  in one state will be
authorized  to merge  with a bank  headquartered  in another  state,  as long as
neither of the states has opted out of such interstate merger authority prior to
such date.  States are authorized to enact laws  permitting such interstate bank
merger  transactions  prior to June 1, 1997,  as well as  authorizing  a bank to
establish  "de novo"  interstate  branches.  Virginia has enacted early "opt in"
laws,  permitting   interstate  bank  merger  transactions.   Once  a  bank  has
established  branches in a state through an



                                      -10-
<PAGE>

interstate  merger  transaction,  the bank may establish and acquire  additional
branches at any location in the state where a bank  headquartered  in that state
could have established or acquired  branches under  applicable  Federal or state
law.

         Economic and Monetary Polices.  The operations of Guaranty are affected
not only by general economic  conditions,  but also by the economic and monetary
policies of various regulatory authorities.  In particular,  the Federal Reserve
regulates  money,  credit  and  interest  rates in order  to  influence  general
economic  conditions.  These  policies have a  significant  influence on overall
growth and  distribution of loans,  investments and deposits and affect interest
rates charged on loans or paid for time and savings  deposits.  Federal  Reserve
monetary  policies  have had a significant  effect on the  operating  results of
commercial  banks in the  past  and are  expected  to  continue  to do so in the
future.


Item 2.        Description of Property.

         Guaranty's  current  principal  office  opened in December  1996 and is
located at 1658 State Farm Boulevard, Charlottesville, Virginia.

         Guaranty  has operated an office on Seminole  Trail in  Charlottesville
since  1983.  Guaranty  purchased  this  office  in June 1996 at a cost of $1.15
million.

         Guaranty has operated a branch in downtown  Charlottesville since 1981,
and has operated its current Main Street  location since 1992. The current lease
expires in 2002,  subject to Guaranty's right to renew for three additional five
year  periods  under  certain  circumstances.  Guaranty has operated a branch in
Charlottesville  near the  University  of  Virginia  since 1985,  including  the
Arlington  Boulevard  branch  that opened in 1994.  The  current  lease for this
branch  expires  in  1999,  subject  to  Guaranty's  right to  renew  for  three
additional five year periods.

         In December 1996, Guaranty opened a new main office,  operations center
and fourth retail branch in the Pantops area in Albemarle  County,  just east of
Charlottesville.  Guaranty also opened a branch in Harrisonburg, Virginia in May
1997.


Item 3.        Legal Proceedings.

         In the course of its  operations,  Guaranty is a party to various legal
proceedings.  Based upon information  currently  available,  management believes
that such legal proceedings,  in the aggregate, will not have a material adverse
effect on Guaranty's business, financial position, or results of operations.


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

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



                                      -11-
<PAGE>

                                     PART II

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

         Guaranty's  Common Stock has been listed on the Nasdaq  National Market
under the symbol "GSLC" since June 1997. From June 1995 to June 1997, the Common
Stock had been listed on the Nasdaq  SmallCap  Market.  The following table sets
forth, for the quarters indicated,  the high and low sales prices for Guaranty's
Common Stock and per share dividends for the periods  indicated.  All prices and
dividends are adjusted for a two-for-one stock split effective in November 1996.

                           Market Price and Dividends
<TABLE>
<CAPTION>
                                                            Sales Price ($)            Dividends ($)    
                                                            ---------------            -------------    

                                                          High          Low
<S>                                                      <C>           <C>                 <C>  
Fiscal Year Ended June 30, 1996:
         1st quarter                                      7.375         6.375                -
         2nd quarter                                      7.75          7.00                 -
         3rd quarter                                      8.50          7.25                 -
         4th quarter                                      8.50          7.50               .05
Transition Period Ended December 31, 1996:
         July 1 through September 30                      9.25          7.25                 -
         October 1 through December 31                    9.50          8.25               .05
Fiscal Year Ended December 31, 1997:
         1st quarter                                     11.00          8.25                 -
         2nd quarter                                     11.00          9.25               .06
         3rd quarter                                     12.75         10.00               .03
         4th quarter                                     15.25         10.75               .03
</TABLE>
_______________________

         During the third  quarter  of 1997,  Guaranty  decided to begin  paying
dividends on a quarterly basis.  However, the final determination of the timing,
amount and payment of dividends on Guaranty's  Common Stock is at the discretion
of  Guaranty's  Board of Directors and will depend upon the earnings of Guaranty
and its subsidiaries,  principally the Bank, the financial condition of Guaranty
and  other  factors,   including  general  economic  conditions  and  applicable
governmental regulations and policies.

         Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank. The
Bank is subject to certain legal  restrictions  on the amount of dividends it is
permitted to pay to Guaranty.  At December 31, 1997,  the Bank had available for
distribution as dividends to Guaranty approximately $1.7 million.

         As of December 31, 1997,  Guaranty has approximately 1,288 shareholders
of record.


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

         The  following  commentary  discusses  major  components  of Guaranty's
business and  presents an overview of its  consolidated  financial  position and
results of  operations at and for the fiscal year ended



                                      -12-
<PAGE>

December 31, 1997,  the six months ended  December 31, 1996 and the fiscal years
ended June 30, 1996 and 1995. This discussion  should be reviewed in conjunction
with the  consolidated  financial  statements and  accompanying  notes and other
statistical information presented elsewhere in this report. All income statement
data for calendar year 1996 are unaudited.

         Guaranty  is not aware of any  current  recommendations  by  regulatory
authorities,  which,  if  implemented,  would  have  a  material  effect  on its
liquidity,  capital resources or results of operations.  There are no agreements
between  Guaranty  and the  Federal  Reserve,  the  Virginia  State  Corporation
Commission  (the  "SCC") or the FDIC,  nor has any  regulatory  agency  made any
recommendations concerning the operations of Guaranty that could have a material
effect on its liquidity, capital resources or results of operations.

Overview

         On June 30, 1997, Guaranty Bank, the operating  subsidiary of Guaranty,
converted    from   a    federally-chartered    savings    association    to   a
Virginia-chartered,  federal reserve member  commercial bank. In anticipation of
the charter conversion, in early 1997, Guaranty began to implement a strategy to
gradually  increase its net  interest  margin and  profitability  to levels more
characteristic  of community banks operating in Virginia.  In the second half of
1997,  three statewide banks were acquired by out-of-state  banks.  Two of these
three   acquired   banks  had  a  combined   44%  share  of  bank   deposits  in
Charlottesville  and Albemarle  County at June 30, 1997.  After the acquisitions
were announced, Guaranty immediately began to experience an increase in deposits
and, just as  importantly,  has been able to recruit  experienced  loan officers
with  loyal  customers  who  were  displaced  by  the  acquisitions.  Guaranty's
strategy,  is  influenced by the  consolidation  occurring in its markets and is
expected  to result in  substantial  loan and  deposit  growth in 1998.  Because
growth  in the  amounts  anticipated  would  significantly  alter  the  size and
structure of Guaranty's  balance sheet,  Guaranty  believes it is appropriate to
describe its strategy and expectations, which include the following:

    o    In January  1997, to reduce  interest rate risk and improve  liquidity,
         Guaranty  began to sell all  newly  originated  fixed-rate  residential
         mortgage  loans.  To  further  reduce  interest  rate risk and  provide
         liquidity for anticipated  growth in portfolio loans,  Guaranty sold an
         additional   $9.2   million   in   fixed-rate    mortgage   loans   and
         mortgage-backed securities in January 1998. Management anticipates that
         these funds,  deposit  growth,  sales of loans and loan  participations
         and, if necessary,  FHLB advances will provide the liquidity  needed to
         fund loan growth.

    o    Guaranty is focusing new originations of portfolio loans on commercial,
         consumer,  residential  construction and land development  loans, which
         are  currently  priced  approximately  175 to 250  basis  points  above
         fixed-rate residential mortgage loans. Guaranty hired a commercial loan
         officer in May 1997 and a  construction  loan officer in December 1997,
         both of whom previously were with large banks in Virginia. Loans in the
         above  categories  increased  to an  aggregate  42.6% of gross loans at
         December  31,  1997 from 26.7% at  December  31,  1996.  A  significant
         portion  of this  increase  is  attributable  to hiring  these two loan
         officers  and to  business  shifting  to  Guaranty  following  the 1997
         acquisitions of statewide banks by out-of-state banks. Guaranty expects
         substantial  loan  growth  in 1998  and has  budgeted  a $12.0  million
         increase in commercial real estate loan balances,  an increase of $30.0
         million to $45.0  million in  construction  and land  development  loan
         balances,  an  increase  of $4.6  million  in  consumer  loans,  and an
         additional  $4.2  million  in small  business  loans in 1998.  Budgeted
         amounts  are  merely  estimates  and a variety


                                      -13-
<PAGE>

         of factors,  including  inadequate  deposit  growth,  general  economic
         conditions and competition for loans could cause Guaranty to fall short
         of these targets.

    o    Guaranty  has  emphasized  deposit  growth to fund loan  growth and has
         de-emphasized  Federal  Home Loan Bank  advances  and other  short term
         borrowings.  Deposits increased from $81.4 million at December 31, 1996
         to $112.9  million at  December  31,  1997.  Growth  resulted  from new
         branches  that  opened in December  1996 and May 1997,  as well as from
         customer  migration after the 1997  acquisitions of two statewide banks
         by out-of-state banks that, in the aggregate, held 44% of bank deposits
         in  Charlottesville  and Albemarle County at June 30, 1997. Despite its
         deposit   growth,   Guaranty   held  only  7.0%  of  bank  deposits  in
         Charlottesville  and  Albemarle  County at June 30, 1997.  Federal Home
         Loan Bank advances and other short term borrowings decreased from $24.2
         million at December 31, 1996 to $3.0 million at December 31, 1997.

    o    In  February  1998,  a senior  officer was  recruited  from an acquired
         statewide  bank to manage and  reorganize  Guaranty's  branch  network.
         Guaranty's focus in its branch network for 1998 will be both to improve
         installment  lending  programs  to  individuals  and  to  continue  the
         emphasis on deposit  growth.  Guaranty  expects  significant  growth in
         deposits,  primarily  from  customer  migration  and  one  or  two  new
         branches. Having budgeted $30.0 million for deposit growth during 1998,
         Guaranty  had  already   experienced   a  growth  of  $5.0  million  in
         certificates  of deposit and $3.0  million in checking  accounts by the
         end of  February  1998.  Although  substantial  deposit  growth will be
         necessary to fund  anticipated  loan growth and may restrain efforts to
         reduce  deposit  costs,  Guaranty  plans to lower interest rates on its
         certificates of deposit,  and to aggressively promote customer checking
         accounts in 1998.

    o    Guaranty  plans to  establish  monthly  sales goals for each branch for
         loan and deposit  products.  Guaranty also plans to provide an improved
         array of products for customers,  including additional checking account
         options,  sweep  accounts  for  business  customers  and  debit  cards.
         Guaranty has received  regulatory approval to open a sixth full-service
         retail  branch at Lake  Monticello,  a planned  community  in  Fluvanna
         County,  Virginia.  Opening is  anticipated  to occur in  mid-summer of
         1998.  In  addition,  Guaranty  has  entered  into a letter of  intent,
         subject to regulatory approval,  to lease a seventh branch site on West
         Main Street near the University of Virginia in Charlottesville  that an
         acquired statewide bank will close in mid-1998.

Net Income

         Net income for the year ending  December 31, 1997 was  $898,000,  ($.61
per share),  a 161.8%  increase  when compared to calendar year 1996 earnings of
$343,000 ($.37 per share).  These increased  earnings were primarily a result of
an increased net interest  margin and gains on the sale of loans and  securities
resulting from a favorable  interest rate environment  during a restructuring of
the balance sheet.  These increased  revenues were partially  offset by expenses
relating to the conversion to a state-chartered commercial bank in June 1997 and
costs  relating  to the  expansion  of the  branch  network.  Calendar  1997 was
positively  impacted  by the first  full  year of  operations  for the  combined
corporate  headquarters  and  branch  that  was  opened  on  the  east  side  of
Charlottesville,  Virginia  in  December  1996.  Also,  in  May  1997,  a  fifth
full-service branch was opened in Harrisonburg, Virginia.

         In calendar year 1996, earnings were adversely affected by the one-time
SAIF assessment and  reclassification  of investment  securities  resulting in a
charge to earnings of approximately  $325,000 (net of



                                      -14-
<PAGE>

tax effect).  The return on average  assets was 0.7% for the year ended December
31, 1997, compared to 0.3% for the calendar year ended December 31, 1996.

         For the six months ended December 31, 1996, Guaranty experienced a 102%
decrease in earnings  from the same period in 1995.  During the six months ended
December  31,  1996,  Guaranty's  net loss was $6,000  compared  to  earnings of
$299,000  for the same period in 1995.  Income  decreased  during the six months
ended  December 31, 1996,  due to a loss of $237,000  when it  restructured  its
investment   portfolio  and  a  one  time  special  assessment  of  $347,000  to
recapitalize  the Savings  Association  Insurance  Fund  ("SAIF").  In order for
Guaranty to convert to a commercial bank, securities classified as available for
sale had to be  reclassified as trading  securities.  This resulted in a mark to
market loss of $237,000  which was charged  against net income and  adjusted the
basis of the  securities.  Without these items,  Guaranty would have reported an
after tax net income of $376,000 for the six months ended December 31, 1996.

         Guaranty's  performance  in its fiscal  year ended June 30, 1996 showed
improvement  over the year ended June 30, 1995.  Net income  increased  71.0% in
fiscal 1996 to $643,000  compared  to  $376,000  in fiscal  1995.  After a 69.4%
increase in average shares outstanding following a 360,000 share public offering
completed on June 22, 1995,  earnings per share were constant at $.70. Return on
average  equity during fiscal 1996 increased to 10.2% from 9.7% for fiscal 1995.
The return on average assets was 0.6% in fiscal 1996, compared to 0.4% in fiscal
1995.  Fiscal  1996  marked the first year  since 1989 that  Guaranty's  average
earning assets have  increased  significantly  over the prior fiscal year.  From
1989 through fiscal 1995, due to capital  constraints,  management was forced to
downsize the Bank.  Average  interest  earning assets increased 6.9% from $89.42
million in fiscal 1995 to $95.57 million in fiscal 1996.  Total interest bearing
deposits on average  increased 13.8% from $54.43 million in fiscal 1995 to $61.9
million in fiscal 1996. Average balances of securities increased 38.0% while, on
average,  loans were  relatively  flat,  up only 2.0% from fiscal 1995 to fiscal
1996.

Net Interest Income

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

         Net interest  income was $3.5  million for the year ended  December 31,
1997, 33.9% greater than the $2.6 million earned during calendar year 1996. This
improvement in net interest income was primarily due to volume  increases in the
securities and loan portfolios.  Average loans increased 9.6% for the year ended
December 31, 1997.  The average  balance of the  securities  portfolio was $22.6
million in 1997,  up $7.7 million,  or 51.9% over  calendar year 1996.  Although
market  interest  rates  declined  during the year ended  December 31, 1997, the
yield on average  loans  increased  20 basis points from 8.3% in 1996 to 8.5% in
1997.  The average  yield on  securities  declined from 7.4% in calendar 1996 to
7.0% in 1997.  Also  contributing  to the improvement in net interest income for
the year ended  December  31,  1997 was a decline  in the cost of average  total
interest bearing liabilities from 5.6% in 1996 to 5.3% in 1997. The average rate
paid on interest bearing deposits  decreased 7 basis points. The increase in net
interest  margin was achieved from both volume gains and widening  spreads.  The
increase in average securities was a result of loan demand not keeping pace with
increases in deposits  through the summer of 1997.  This trend  reversed in late
1997 as a result of the expanded branch network and additional loan officers.


                                      -15-
<PAGE>

         Net  interest  income was $1.3  million for the six month  period ended
December 31,  1996,  15.5%  greater than the $1.2 million  reported for the same
period in 1995.  This  improvement  in net interest  income was primarily due to
volume increases in the securities portfolio and to higher average yields on the
loan  portfolio.  The  average  balance of the  securities  portfolio  was $17.6
million for the six month  period ended  December  31, 1996,  up 124.7% over the
same period in 1995. The average balance of the loan portfolio was $83.8 million
for the six month period ended  December 31, 1996,  up 7.6% over the same period
in 1995.  The yield on average  loans  increased 4 basis points from 8.2% during
the six month  period  ended  December  31,  1995 to 8.2% for the same period in
1996,  while the yield on  securities  declined 182 basis points to 7.2% for the
six month period ended  December 31, 1996 from 9.0% for the same period in 1995.
Also  contributing  to the  improved  net  interest  margin was a 38 basis point
decrease in the rate paid on average  interest  bearing  liabilities to 5.6% for
the six month  period  ended  December 31, 1996 from 5.9% for the same period in
1995.

         Net interest income was $2.4 million in fiscal 1996, 14.1% greater than
the $2.1 million  reported during fiscal 1995. This  improvement in net interest
income was primarily due to volume increases in the securities  portfolio and to
higher  average  yields  on the  loan  portfolio.  The  average  balance  of the
securities portfolio was $10.5 million in fiscal 1996, up $3.0 million, or 40.2%
over fiscal 1995. The average balance of the loan portfolio was $79.9 million in
fiscal 1996,  up $1.5  million,  or 2.0% over fiscal 1995.  The yield on average
loans increased 54 basis points from 7.5% in fiscal 1995 to 8.1% in fiscal 1996,
while the yield on  securities  declined 12 basis  points to 7.8% in fiscal 1996
from 7.9% in fiscal 1995.  Also  contributing to the improvement in net interest
income in fiscal 1996 was a decline in the average  amount of FHLB  advances and
borrowings of $1.2 million, or 4.5%, to $25.8 million in fiscal 1996, from $27.0
million  in  fiscal  1995,  and a  decline  in the  average  rates  paid on such
borrowings of 22 basis points from 6.3% in fiscal 1995 to 6.0% in fiscal 1996. A
$9.5  million,  or 24.5%  increase in the average  balances of  certificates  of
deposits from $38.9 million in fiscal 1995 to $48.5 million in fiscal 1996, more
than offset a slight decline in other deposit  accounts and enabled  Guaranty to
reduce FHLB advances and increase balances of investment securities. The average
rate paid on interest  bearing  deposits  increased  58 basis  points to 5.1% in
fiscal 1996 from 4.5% in fiscal  1995 but,  with the decline in volume and rates
on FHLB  advances,  the average rates paid on all interest  bearing  liabilities
increased only 25 basis points to 5.7% in fiscal 1996 from 5.4% in fiscal 1995.

         The  following  table sets forth  average  balances  of total  interest
earning assets and total interest bearing liabilities for the periods indicated,
showing the average  distribution of assets,  liabilities,  stockholders' equity
and the related income,  expense, and corresponding  weighted average yields and
costs.



                                      -16-
<PAGE>



  Average Balances, Interest Income and Expenses, and Average Yields and Rates

<TABLE>
<CAPTION>
                                                                      Six Months            
                              Year Ended December 31               Ended December 31       
                              ----------------------               -----------------       
                                         1997                             1996             
                                         ----                             ----             
                                         Average                         Average           
                             Average     Income/   Yield/    Average     Income/   Yield/  
                            Balance(1)   Expense   Rate(2)   Balance(1)  Expense   Rate(2) 
                            ----------   -------   -------   ----------  -------   ------- 
                                                                                           
                                                 (Dollars in thousands)  
<S>                         <C>         <C>        <C>       <C>         <C>      <C>    
Assets                                                                                     
Interest Earning Assets:                                                                   
 Securities...............    $22,637     $1,590     7.02%     $17,640     $631     7.15%  
 Loans(3).................     89,222      7,584     8.50%      83,816    3,455     8.24%  
 Interest bearing deposits                                                                 
  in other banks..........      5,605        346     6.17%       5,257      190     7.23%  
                                -----        ---                 -----      ---            
  Total interest earning                                                                   
    assets................    117,464      9,520     8.10%     106,713    4,276     8.01%  
                              -------      -----               -------    -----            
Noninterest earning assets:                                                                
 Cash and due from banks..      1,898                            1,082                     
 Premises and equipment...      5,508                            4,038                     
 Other assets.............      2,624                            2,680                     
 Less: Allowance for loan                                                                  
  losses..................      (890)                            (826)                     
                                -----                            -----                     
  Total noninterest earning                                                                
    assets................      9,140                            6,974                     
                                -----                            -----                     
    Total assets..........   $126,604                         $113,687                     
                             ========                         ========                     
Liabilities and                                                                            
  Stockholders' Equity                                                                     
Interest Bearing Liabilities:                                                              
 Interest bearing deposits:                                                                
  Demand/MMDA accounts....    $11,110       $289     2.60%      $8,765     $121     2.76%  
  Savings.................      5,654        190     3.36%       4,870       83     3.41%  
  Certificates of deposits     80,779      4,443     5.50%      63,346    1,756     5.54%  
                               ------      -----                ------    -----            
   Total interest bearing                                                                  
    deposits..............     97,543      4,922     5.05%      76,981    1,960     5.09%  
  FHLB advances and other                                                                  
   borrowings.............     14,070        804     5.71%      25,871      745     5.76%  
  Bonds payable...........      2,583        312    12.08%       3,060      235    15.36%  
                                -----        ---                 -----      ---            
   Total interest bearing                                                                  
    liabilities/total                                                                      
    interest expense......    114,196      6,038     5.29%     105,912    2,940     5.55%  
                              -------      -----               -------    -----            
Noninterest bearing                                                                        
liabilities:                                                                               
  Demand deposits.........      1,658                            1,324                     
  Other liabilities.......        903                              809                     
                                  ---                              ---                     
   Total liabilities......    116,757                          108,045                     
Stockholders' equity......      9,847                            5,642                     
                                -----                            -----                     
   Total liabilities and                                                                   
    stockholders' equity..   $126,604                         $113,687                     
                             ========                         ========                     
Interest spread (4).......                           2.82%                          2.46%  
Net interest income/net                                                                    
 interest margin (5)......                $3,482     2.96%               $1,336     2.50%  
                                          ======                         ======            
</TABLE>



<TABLE>
<CAPTION>
                                                                                                              
                                                               Year ended June 30                             
                                        ---------------------------------------------------------------       
                                                       1996                            1995                   
                                                       ----                            ----                   
                                                      Average                         Average                 
                                         Average      Income/   Yield/    Average     Income/   Yield/        
                                         Balance(1)   Expense   Rate(2)   Balance(1)  Expense   Rate(2)       
                                         ----------   -------   -------   ----------  -------   -------       
                                                                                                              
                                                         (Dollars in thousands)
<S>                                     <C>           <C>      <C>         <C>        <C>     <C>          
Assets                                                                                                        
Interest Earning Assets:                                                                                      
 Securities................                $10,523       $820     7.79%       $7,506     $594    7.91%        
 Loans(3)..................                 79,885      6,442     8.06%       78,382    5,897    7.52%        
 Interest bearing deposits                                                                                    
  in other banks...........                  5,163        355     6.88%        3,531      298    8.44%        
                                             -----        ---                  -----      ---                 
  Total interest earning                                                                                      
    assets.................                 95,571      7,617     7.97%       89,419    6,789    7.59%        
                                            ------      -----                 ------    -----                 
Noninterest earning assets:                                                                                   
 Cash and due from banks...                  2,011                             1,290                          
 Premises and equipment....                  1,427                               415                          
 Other assets..............                  2,377                             1,876                          
 Less: Allowance for loan                                                                                     
  losses...................                  (756)                             (749)                          
                                             -----                             -----                          
  Total noninterest earning                                                                                   
    assets.................                  5,059                             2,832                          
                                             -----                             -----                          
    Total assets...........               $100,630                           $92,251                          
                                          ========                           =======                          
Liabilities and                                                                                               
  Stockholders' Equity                                                                                        
Interest Bearing Liabilities:                                                                                 
 Interest bearing deposits:                                                                                   
  Demand/MMDA accounts.....                 $8,927       $245     2.74%       $9,895     $280    2.83%        
  Savings..................                  4,541        152     3.35%        5,596      193    3.45%        
  Certificates of deposits                  48,460      2,735     5.64%       38,938    1,967    5.05%        
                                            ------      -----                 ------    -----                 
   Total interest bearing                                                                                     
    deposits...............                 61,928      3,132     5.06%       54,429    2,440    4.48%        
  FHLB advances and other                                                                                     
   borrowings..............                 25,773      1,553     6.03%       26,991    1,688    6.25%        
  Bonds payable............                  3,520        507    14.40%        4,275      535   12.51%        
                                             -----        ---                  -----      ---                 
   Total interest bearing                                                                                     
    liabilities/total                                                                                         
    interest expense.......                 91,221      5,192     5.69%       85,695    4,663    5.44%        
                                            ------      -----                 ------    -----                 
Noninterest bearing                                                                                           
liabilities:                                                                                                  
  Demand deposits..........                  1,066                               787                          
  Other liabilities........                  2,062                             1,880                          
                                             -----                             -----                          
   Total liabilities.......                 94,349                            88,362                          
Stockholders' equity.......                  6,281                             3,889                          
                                             -----                             -----                          
   Total liabilities and                                                                                      
    stockholders' equity                  $100,630                           $92,251                          
                                          ========                           =======                          
Interest spread (4)........                                       2.28%                          2.15%        
Net interest income/net                                                                                       
 interest margin (5).......                            $2,425     2.54%                $2,126    2.38%        
                                                       ======                          ======                 
</TABLE>

(1)      Average balances are computed on daily balances and Management believes
         such balances are representative of the operations of the Corporation.
(2)      Yield and rate percentages are all computed  through the  annualization
         of interest  income and expenses  versus the average  balances of their
         respective accounts.
(3)      Non-accrual loans are included in the average loan balances, and income
         on such loans is recognized on a cash basis.
(4)      Interest spread is the average yield earned on interest earning assets,
         less the average rate incurred on interest bearing liabilities.
(5)      Net interest margin is net interest  income,  expressed as a percentage
         of average earning assets.


                                      -17-
<PAGE>

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

                            Volume and Rate Analysis

<TABLE>
<CAPTION>
                                                                     Six Months Ended
                                                                     December 31, 1996
                                Year Ended December 31, 1997            compared to           Year Ended June 30, 1996
                                        compared to                  Six Months Ended                compared to
                                Year Ended December 31, 1996         December 31, 1995        Year Ended June 30, 1995
                                       Change Due To:                 Change Due To:                Change Due To:
                                ----------------------------  ----------------------------  ---------------------------        
                                 Increase                      Increase                      Increase
                                (Decrease)   Rate     Volume  (Decrease)   Rate     Volume  (Decrease)  Rate     Volume
                                ----------   ----     ------  ----------   ----     ------  ----------  ----     ------

<S>                                   <C>     <C>       <C>         <C>    <C>        <C>        <C>      <C>      <C> 
Interest income:
  Securities..................        $490    ($54)     $544        $279   ($143)     $422       $226     ($9)     $235
  Loans.......................         827      163      664         262       31      231        545      430      115
  Interest bearing deposits in
    other banks...............        (38)     (49)       11          30     (39)       69         57     (38)       95
                                      ----     ----       --          --     ----       --         --     ----  -------
                                                                                                          
    Total interest income.....       1,279       60    1,219         571    (151)      722        828      383      445
Interest expense:
  Interest bearing deposits:
  Demand/MMDA accounts........          50     (13)       63         (6)      (2)      (4)       (35)      (9)     (26)
  Savings.....................          34      (1)       35           3      (0)        3       (41)      (5)     (36)
  Certificates of deposits....       1,159     (59)    1,218         550    (132)      682        768      248      520
                                     -----     ----    -----         ---    -----      ---        ---      ---      ---
    Total interest bearing
      deposits................       1,243     (73)    1,316         547    (134)      681        692      234      458
FHLB advances and other.......       (638)     (10)    (628)       (111)    (154)       43      (135)    (129)      (6)
Bonds payable.................       (154)     (78)     (76)        (40)       35     (75)       (28)      166    (194)
                                     ----      ----     ----        ---        --     ---        ---       ---    -----
                                                                                                                  
    Total interest expense....         451    (161)      612         396    (253)      649        529      271      258
                                       ---    -----      ---         ---    -----      ---        ---  -------  -------
Net interest income...........        $828     $221     $607        $175     $102      $73       $299     $112     $187
                                      ====     ====     ====        ====     ====      ===       ====  =======  =======
</TABLE>

Interest Sensitivity

         An important element of both earnings  performance and liquidity is the
management of the interest  sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive  liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing  assets or  liabilities,  by  selling  investments  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 income of changes in market interest rates.

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

         At December 31, 1997,  Guaranty had $19.0  million more in  liabilities
than  assets  that  reprice  within  one  year or less  and  therefore  was in a
liability-sensitive  position.  A negative gap adversely  impacts  earnings in a
period of rising interest rates. This negative position is primarily a result of
maturing  certificates  of deposit.  As a result of loan and  security  sales in
January 1998,  Guaranty's  ratio of  cumulative  rate  sensitive  assets to rate
sensitive liabilities was 99.3% in a one year time frame. This trend



                                      -18-
<PAGE>

is expected  to continue as prime rate  lending is  increased.  In  addition,  a
principal focus of deposit marketing programs will be the attraction of low rate
transaction accounts.

         Guaranty has an Asset/Liability  Committee ("ALCO").  The ALCO meets 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 and CFO with input from other ALCO members.

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

                          Interest Sensitivity Analysis
<TABLE>
<CAPTION>

                                                                                  December 31, 1997
                                                                              Maturing or Repricing In:
                                                                  --------------------------------------------------
                                                                   3 Months        4-12          1-5          Over
                                                                   or less        Months        Years       5 Years
                                                                   -------        ------        -----       -------
                                                                                (Dollars in thousands)
<S>                                                                   <C>         <C>          <C>           <C>    
Interest-sensitive assets:
  Loans.....................................................          $35,586     $28,562       $6,765       $31,594
  Investments and mortgage-backed securities(1).............            1,066         270        1,016        13,324
  Deposits at other institutions............................            3,078           -            -             -
                                                                        -----           -            -             -
    Total interest-sensitive assets.........................           39,730      28,832        7,781        44,918
                                                                       ======      ======        =====        ======

Cumulative interest-sensitive assets........................           39,730      68,562       76,343       121,261

Interest-sensitive liabilities:
  NOW accounts (2)..........................................                -           -            -         9,266
  Money market deposit accounts.............................            4,001           -            -             -
  Savings accounts (3)......................................            1,608         901          772         3,152
  Certificates of deposit...................................           22,147      55,509       12,820             -
  Borrowed money............................................            2,989           -            -             -
  Bonds payable.............................................               95         283        1,023         1,118
                                                                           --         ---        -----         -----
    Total interest-sensitive liabilities....................          $30,840     $56,693      $14,615       $13,536
                                                                      =======     =======      =======       =======

Cumulative interest-sensitive liabilities...................          $30,840     $87,533     $102,148      $115,684

Period gap..................................................            8,890    (27,861)      (6,834)        31,382

Cumulative gap..............................................            8,890    (18,971)     (25,805)         5,577

Ratio of cumulative interest-sensitive
  assets to interest-sensitive liabilities..................          128.83%      78.33%       74.74%       104.82%

Ratio of cumulative gap to total assets.....................            6.80%    (14.52%)     (19.76%)         4.27%
</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.


                                      -19-
<PAGE>

Investments

         Total  available  for sale and trading  securities  decreased  24.4% to
$12.6 million at December 31, 1997 from $16.7 million at December 31, 1996.  The
overall decrease was primarily a result of securities sales to provide liquidity
to fund anticipated loan closings during the first half of 1998. At December 31,
1996, as a result of a combined  federal and state  examination  relating to the
banks  conversion  to a  state  chartered  commercial  bank,  $15.7  million  of
available for sale securities were  reclassified  as trading.  Subsequently,  on
January 1, 1997,  these  securities were transferred back to available for sale,
at the then current market value.

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

         The following  table shows the amortized  cost and fair market value of
investment securities and mortgage-backed securities at the dates indicated.

                                   Investments
<TABLE>
<CAPTION>

                                        December 31,        December 31,                     June 30,
                                             1997                1996                1996                1995
                                     ------------------  ------------------  ------------------    ----------------
                                         Cost    Market      Cost    Market      Cost    Market      Cost    Market
                                         ----    ------      ----    ------      ----    ------      ----    ------
                                                                 (Dollars in thousands)
<S>                                   <C>       <C>       <C>       <C>       <C>       <C>       <C>       <C>    
Held-to-maturity
  Mortgage-backed securities....       $2,745    $2,759    $3,157    $3,349   $ 3,731   $ 3,879   $ 4,733   $ 4,887
  Other.........................          100       100         -         -         -         -         -         -
                                      -------   -------   -------   -------   -------   -------   -------   -------
    Total held-to-maturity......        2,845     2,859     3,157     3,349     3,731     3,879     4,733     4,887

Available for sale
  Bonds.........................       11,415    11,474         -         -         -         -         -         -
  U.S. Government Obligations ..           50        50         -         -         -         -         -         -
  Mortgage-backed securities....            -         -         -         -     9,993     9,564         -         -
                                      -------   -------   -------   -------   -------   -------   -------   -------
    Total available for sale....       11,465    11,524         -         -     9,993     9,564         -         -

Trading 
  Mortage Backed Securities.....            -         -    16,937    16,736         -         -         -         -
  U.S. Government Obligations...        1,031     1,032         -         -         -         -         -         -
                                      -------   -------   -------   -------   -------   -------   -------   -------
    Total trading...............        1,031     1,032         -         -         -         -         -         -

Federal Reserve Bank stock......           72        72         -         -         -         -         -         -
Federal Home Loan Bank stock....          860       860     1,360     1,360     1,360     1,360     1,360     1,360
Other...........................            7         7         -         -         -         -         -         -
                                      -------   -------   -------   -------   -------   -------   -------   -------
      Total.....................      $16,280   $16,354   $21,454   $21,445   $15,084   $14,803   $ 6,093   $ 6,247
                                      =======   =======   =======   =======   =======   =======   =======   =======

</TABLE>


                                      -20-
<PAGE>

         The table below shows the weighted average expected yields,  maturities
and expected  principal  repayments,  at carrying value, of held to maturity and
available for sale debt securities at December 31, 1997:

                            Maturities of Investments
<TABLE>
<CAPTION>

Maturity or Expected                           After One But      After Five But
Principal Repayment       Within One Year    Within Five Years  Within Ten Years     After Ten Years          Total
                        -----------------   ------------------  -----------------  ------------------  ------------------
                           Amount   Yield     Amount   Yield      Amount   Yield     Amount   Yield      Amount    Yield
                           ------   -----     ------   -----      ------   -----     ------   -----      ------    -----
                                                                 (In thousands)
<S>                        <C>      <C>       <C>       <C>       <C>      <C>      <C>        <C>       <C>       <C>  
Held to maturity:
  Mortgage-backed
    securities........       $165    8.00%      $883     8.26%      $411    8.53%    $1,286     8.53%     $2,745    8.46%
  Other...............        100    5.25%         -         -         -        -         -         -        100    5.25%

Available for sale....         50    5.00%     1,014     6.75%     3,039    6.65%     7,421     7.98%     11,524    7.52%
                             ----    -----    ------     -----     -----    -----     -----     -----    -------    -----

  Total...............      $ 315             $1,897              $3,450             $8,707             $ 14,369
                            =====             ======               =====              =====              =======

</TABLE>

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

                       Portfolio of Investment Securities

<TABLE>
<CAPTION>

                                   Year Ended        Six Months Ended
                                  December 31,          December 31,                 Year Ended June 30,
                                  ------------          ------------       -----------------------------------------
                                       1997                  1996                 1996                   1995
                                ------------------   -----------------     -------------------  --------------------
                                  Book      % of        Book      % of       Book       % of       Book       % of
                                 Value      Total      Value      Total     Value      Total      Value      Total
                                 -----      -----      -----      -----     -----      -----      -----      -----
                                                              (Dollars in thousands)
<S>                              <C>       <C>        <C>        <C>       <C>        <C>         <C>       <C>    
Investment securities:
  FHLMC mortgage-backed
    securities...........         $2,745    16.73%     $6,819     32.08%    $7,459     50.89%     $4,733     77.68%
  GNMA mortgage-backed
    securities...........              -     0.00%     11,967     56.31%     5,836     39.81%          -      0.00%
  Corporate bonds .......         11,474    70.23%          -      0.00%         -      0.00%          -      0.00%
  Treasury notes ........          1,082     6.29%      1,104      5.19%         -      0.00%          -      0.00%
   Other.................            100      .58%          -      0.00%         -      0.00%          -      0.00%
                                  ------    ------     ------     ------    ------     ------      -----     ------
    Subtotal.............         15,401    93.83%     19,980     93.58%    13,295     90.70%      4,733     77.68%
                                  ------    ------     ------     ------    ------     ------      -----     ------

Other:
FHLB stock...............            860     5.24%      1,360      6.42%     1,360      9.28%      1,360     22.32%
FRB Stock................             72     0.44%          -      0.00%         -      0.00%          -      0.00%
Other....................              7     0.49%          3      0.01%         3      0.02%          -      0.00%
                                  ------    ------     ------     ------    ------     ------      -----    -------

Total investment
securities ..............        $16,340   100.00%    $21,250    100.00%   $14,658    100.00%     $6,093    100.00%
                                 =======   =======    =======    =======   =======    =======     ======    =======
</TABLE>


                                      -21-
<PAGE>

Loans

         Net loans consist of total loans minus undisbursed loan funds, deferred
loan fees and the  allowance  for loan losses.  Net loans were $99.7  million at
December 31, 1997, an increase of 22.65% over December 31, 1996.  Net loans were
$84.1  million  at June 30,  1996,  an 11.8%  increase  over 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 70.5%,  73.7%.  and 79.4% for
the year ended  December 31, 1997,  the six month period ended December 31, 1996
and the fiscal year ended June 30, 1996, respectively.

         The  following  tables set forth the  composition  of  Guaranty's  loan
portfolio in dollars and percentages at the dates indicated.

                            Loan Portfolio by Amount

<TABLE>
<CAPTION>
                                     December 31,    December 31,                         June 30,
                                     ------------    ------------    ----------------------------------------------
                                          1997           1996         1996         1995         1994          1993
                                          ----           ----         ----         ----         ----          ----
                                                               (Dollars in thousands)
<S>                                      <C>            <C>          <C>          <C>          <C>          <C>    
Mortgage Loans:
  Residential......................      $66,035        $67,016      $66,136      $62,175      $67,385      $59,845
  Commercial.......................       16,641          8,486        7,670        4,508        4,251        4,155
  Construction and land loans......       18,263          5,220        8,813        8,887        5,819        4,900
                                          ------          -----        -----        -----        -----        -----
    Total real estate..............      100,939         80,722       82,619       75,570       77,455       68,900

Consumer loans (1).................        6,705          4,175        5,386        4,580        3,685        4,462
      Total loans receivable.......      107,644         84,897       88,005       80,150       81,140       73,362
                                         -------         ------       ------       ------       ------       ------
Less:
  Undisbursed loans in
    process........................        6,752          2,467        2,824        3,858        2,249        1,978
  Deferred fees and unearned
    discounts......................          282            290          314          323          382          442
  Allowance for losses.............          935            870          786          747          754          746
                                             ---            ---          ---          ---          ---          ---
    Total net items................        7,969          3,627        3,924        4,928        3,385        3,166
                                           -----          -----        -----        -----        -----        -----
      Total loans receivable, net..      $99,675        $81,270      $84,081      $75,222      $77,755      $70,196
                                         =======        =======      =======      =======      =======      =======
</TABLE>

-------------------
(1) Includes commercial business loans of approximately $503,000.


                    Loan Portfolio by Percent of Gross Loans

<TABLE>
<CAPTION>
                               December 31,    December 31,                             June 30,
                               ------------    ------------     ------------------------------------------------
                                   1997            1996           1996          1995         1994          1993
                                   ----            ----           ----          ----         ----          ----
<S>                               <C>            <C>             <C>          <C>           <C>          <C>    
Mortgage Loans:
  Residential.................     61.34%         78.94%          75.15%       77.57%        83.05%       81.57%
  Commercial..................     15.45          10.00            8.72         5.62          5.24         5.67
  Construction and land loans.     16.97           6.15           10.01        11.09          7.17         6.68
                                   -----           ----           -----        -----          ----         ----
    Total real estate.........     93.76          95.09           93.88        94.29         95.46        93.92

Consumer and other loans......      6.24           4.91            6.12         5.71          4.54         6.08
                                    ----           ----            ----         ----          ----         ----
      Total loans receivable..    100.00%        100.00%         100.00%      100.00%       100.00%      100.00%
                                  =======        =======         =======      =======       =======      =======
</TABLE>


                                      -22-
<PAGE>

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

                 Fixed Rate and Adjustable Rate Loans by Amount

<TABLE>
<CAPTION>
                                        December 31,   December 31,                          June 30,
                                        ------------   ------------    ---------------------------------------------
                                            1997           1996           1996        1995        1994         1993
                                            ----           ----           ----        ----        ----         ----
                                                                 (Dollars in thousands)
<S>                                         <C>            <C>          <C>         <C>         <C>          <C>    
Fixed - Rate Loans:
  Real Estate
    Residential.................            $26,514        $26,061      $28,907     $23,577     $27,796      $22,105
    Construction and land
      loans.....................                 37            138          339          69           -            -
                                                 --            ---          ---          --           -            -
      Total real estate.........             26,551         26,199       29,246      23,646      27,796       22,105
Consumer loans..................              3,099          1,396          597         736         691        1,547
                                              -----          -----          ---         ---         ---        -----
      Total fixed-rate loans....             29,650         27,595       29,843      24,382      28,487       23,652

Adjustable-Rate Loans:
  Real Estate
    Residential.................             39,521         40,955       37,229      38,598      39,590       37,740
    Commercial..................             16,641          8,486        7,670       4,508       4,251        4,155
    Construction and land
      loans.....................             18,226          5,082        8,474       8,818       5,819        4,900
                                             ------          -----        -----       -----       -----        -----
      Total real estate.........             74,388         54,523       53,373      51,924      49,660       46,795
Consumer loans..................              3,606          2,779        4,789       3,844       2,993        2,915
                                              -----          -----        -----       -----       -----        -----
      Total adjustable-rate
        loans...................             77,994         57,302       58,162      55,768      52,653       49,710
                                             ------         ------       ------      ------      ------       ------
        Total loans receivable..            107,644         84,897       88,005      80,150      81,140       73,362
                                            -------         ------       ------      ------      ------       ------
Less:
  Undisbursed loans in
    process.....................              6,752          2,467        2,824       3,858       2,249        1,978
  Deferred fees and
    unearned discounts..........                282            290          314         323         382          442
  Allowance for losses..........                935            870          786         747         754          746
                                                ---            ---          ---         ---         ---          ---
    Total net items.............              7,969          3,627        3,924       4,928       3,385        3,166
                                              -----          -----        -----       -----       -----        -----
      Total loans receivable,
        net.....................            $99,675        $81,270      $84,081     $75,222     $77,755      $70,196
                                            =======        =======      =======     =======     =======      =======

</TABLE>


                                      -23-
<PAGE>

               Fixed Rate and Adjustable Rate Loans By Percentage
<TABLE>
<CAPTION>

                                        December 31,   December 31,                        June 30,
                                        ------------   ------------   ----------------------------------------------
                                            1997           1996            1996        1995        1994        1993
                                            ----           ----            ----        ----        ----        ----
<S>                                          <C>            <C>          <C>         <C>         <C>         <C>   
Fixed - Rate Loans:
  Real Estate
    Residential...............               24.63%         30.70%       32.84%      29.41%      34.26%      30.13%
    Construction and land
      loans...................                 .03%           .16%        0.39%       0.09%       0.00%       0.00%
                                               ----           ----        -----       -----       -----       -----
      Total real estate                      24.66%         30.86%       33.23%      29.50%      34.26%      30.13%
Consumer loans................                2.88%          1.64%        0.68%       0.92%       0.85%       2.11%
                                              -----          -----        -----       -----       -----       -----
      Total fixed-rate loans..               27.54%         32.50%       33.91%      30.42%      35.11%      32.24%

Adjustable-Rate Loans:
  Real Estate
    Residential...............               36.71%         43.04%       42.30%      48.16%      48.79%      51.45%
    Commercial................               15.46%          9.38%        8.72%       5.62%       5.24%       5.66%
    Construction and land
      loans...................               16.93%          8.52%        9.63%      11.00%       7.17%       6.68%
                                             ------          -----        -----      ------       -----       -----
      Total real estate.......               69.10%         60.94%       60.65%      64.78%      61.20%      63.79%
Consumer loans................                3.36%          6.56%        5.44%       4.80%       3.69%       3.97%
                                              -----          -----        -----       -----       -----       -----
      Total adjustable-rate
        loans.................               72.46%         67.50%       66.09%      69.58%      64.89%      67.76%
                                             ------         ------       ------      ------      ------      ------
        Total loans receivable              100.00%        100.00%      100.00%     100.00%     100.00%     100.00%
                                            =======        =======      =======     =======     =======     =======
</TABLE>

         The following tables summarize the contractual repayment terms of gross
loans as of December 31, 1997,  as well as the amount of fixed rate and variable
rate loans due after  December 31, 1997.  The tables have not been  adjusted for
estimates of  prepayments  and do not reflect  periodic  repricing of adjustable
rate loans.

                         Loan Portfolio Maturity Schedule

<TABLE>
<CAPTION>

                                  Balance                  Principal Repayment Contractually Due
                                Outstanding               in 12-Month Period Ending December 31,
                                -----------   ------------------------------------------------------------------
                                December 31,                                       2001-     2003-     2008 and
                                   1997            1998       1999      2000        2002      2007   Thereafter
                                   ----            ----       ----      ----        ----      ----   ----------
                                                               (In thousands)

<S>                              <C>             <C>        <C>       <C>        <C>       <C>         <C>    
Residential and
  commercial real estate...      $82,676         $6,758     $1,760    $2,048      $6,944   $16,646      $48,520
Construction...............       18,263         18,263          -         -           -         -            -
Consumer and other
  loans....................        6,705            431        545       837       4,140       588          164
                                 -------        -------       ----     -----      ------   -------      -------
  Total....................     $107,644        $25,452     $2,305    $2,885     $11,084   $17,234      $48,684
                                ========        =======     ======    ======     =======   =======      =======
</TABLE>



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


                                      -24-
<PAGE>

Asset Quality

         Asset quality is an important  factor in the successful  operation of a
financial  institution.  Federal  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.  On the basis of  management's  review of its
assets, at December 31, 1997, Guaranty had classified $2.9 million of its assets
as  substandard,  $8,000  as loss and none as  doubtful.  Not all of  Guaranty's
assets that have been  classified  are  included in the table of  non-performing
assets  set forth  below.  Several  of these  loans are  classified  because  of
previous credit problems but are performing.

         Unless well secured and in the process of collection,  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 at
the dates indicated.

                              Nonperforming Assets
<TABLE>
<CAPTION>

                                          December 31    December 31                       June 30
                                          -----------    -----------   --------------------------------------------
                                             1997           1996          1996        1995        1994        1993
                                             ----           ----          ----        ----        ----        ----
                                                                 (Dollars in thousands)
<S>                                          <C>             <C>         <C>         <C>         <C>         <C>  
Nonaccrual loans...........................  $1,436         $1,670      $1,458      $1,556     $   887        $934
Restructured loans.........................       -             11          11          12         415       1,143
                                                  -             --          --          --         ---       -----
    Total non-performing loans.............   1,436          1,681       1,469       1,568       1,302       2,077
                                              -----          -----       -----       -----       -----       -----
Foreclosed assets..........................      65             51          41         122           -           -
                                                 --             --          --         ---           -           -
    Total non-performing assets............   1,501          1,732       1,510       1,690       1,302       2,077
                                              -----          -----       -----       -----       -----       -----
Loans past due 90 or more days and
  accruing interest........................    $189           $  -         $19          $1        $288        $190
Non-performing loans to total loans
  at period end............................   1.42%          1.98%       1.67%       2.06%       1.65%       2.91%
Non-performing assets to period end
  total loans and foreclosed assets........   1.49%          2.04%       1.72%       2.21%       1.65%       2.91%
</TABLE>

Delinquent and Problem Loans

         When a borrower  fails to make a required  payment on a loan,  Guaranty
attempts to cure the delinquency by contacting the borrower.  A notice is mailed
to the  borrower  after a payment is 17 days past due and again when the loan is
30 days past due.  For most loans,  if the  delinquency  is not cured  within 60
days, Guaranty issues a notice of intent to foreclose on the property and if the
delinquency  is not cured  within 90 days,  Guaranty may  institute  foreclosure
action.  If  foreclosed  on,  real  property is sold at a public sale and may be
purchased by Guaranty. In most cases, deficiencies are cured promptly.


                                      -25-
<PAGE>

         The  following  table  sets  forth  information  concerning  delinquent
mortgage and other loans at December 31, 1997. The amounts  presented  represent
the total  remaining  principal  balances of the related loans,  rather that the
actual payment amounts which are overdue.

                                Delinquent Loans
<TABLE>
<CAPTION>

                                  Residential          Commercial          Construction
                                  Real Estate          Real Estate           and Land             Consumer
                              -----------------    -----------------    -----------------    -----------------
                              Number     Amount    Number     Amount    Number     Amount    Number     Amount
                              ------     ------    ------     ------    ------     ------    ------     ------
                                                          (Dollars in thousands)
<S>                               <C>    <C>            <C>       <C>        <C>       <C>        <C>    <C>  
Loans delinquent for:
  31-59 days...........           16     $1,260         -         $-         -         $-         6      $  65
  60-89 days...........            3        515         -          -         -          -         1         68
  90 days and over.....           11        862         -          -         -          -         1        140
                                  --        ---         -          -         -          -         -        ---

    Total delinquent loans        30     $2,637         -         $-         -         $-         8       $273
                                  ==     ======         =         ==         =         ==         =       ====
</TABLE>

Allowance for Losses on Loans and Real Estate

         Guaranty provides valuation  allowances for anticipated losses on loans
and real estate when its management determines that a significant decline in the
value of the  collateral  has occurred,  if 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. 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.   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.


                                      -26-
<PAGE>

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

                            Allowance for Loan Losses

<TABLE>
<CAPTION>

                                                           Six Months
                                            Year Ended        Ended
                                           December 31,   December 31,                 Year Ended June 30,
                                           ------------   ------------    -----------------------------------------
                                               1997           1996         1996        1995        1994        1993
                                               ----           ----         ----        ----        ----        ----
                                                                  (Dollars in thousands)
<S>                                             <C>            <C>         <C>         <C>         <C>         <C> 
Balance at beginning of period.........         $870           $788        $747        $754        $746        $689
Provision (credit) charged to
   operations..........................          122             92          57        (10)          74          37
Charge-offs:
  Real estate..........................           57             10          39           -          66           -
  Consumer.............................            -              -           -           1           -           -

Recoveries:
  Real Estate..........................            -              -          19           -           -           -
  Consumer.............................            -              -           4           4           -          20
Net Charge-offs........................           57             10          16         (3)          66        (20)
                                                  --             --          --         ---          --        ----
Balance, end of period.................         $935           $870        $788        $747        $754        $746
                                                ====           ====        ====        ====        ====        ====

Allowance for loan losses to period
  end total loans......................        0.93%          1.06%       0.93%       0.98%       0.96%       1.05%
Allowance for loan losses to
   nonaccrual loans....................       67.20%         52.10%      54.05%      48.01%      85.01%      79.87%
Net charge-offs to average loans.......        0.06%          0.01%       0.02%       0.00%       0.09%     (0.03%)
</TABLE>

Provision for Loan Losses

         For the year ended December 31, 1997, the provision for loan losses was
$122,000,  compared to $138,000 for  calendar  year 1996 and $92,000 for the six
month period ended December 31, 1996. The provision for loan losses increased to
$57,000  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  allowance
monthly and makes provisions as necessary. Management believes that the level of
Guaranty's loan loss reserve is adequate. 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.


                                      -27-
<PAGE>

         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.
Because  all of these  factors  are  subject to  change,  the  breakdown  is not
necessarily predictive of future loan losses in the indicated categories.

                     Allocation of Allowance for Loan Losses

<TABLE>
<CAPTION>

                                                                    Six Months Ended
                                       Year Ended December 31          December 31            Year Ended June 30
                                                 1997                      1996                       1996
                                       -----------------------   -----------------------    -----------------------
                                                    Ratio of                   Ratio of                  Ratio of
                                                    Loans to                   Loans to                  Loans to
                                                      Total                      Total                     Total
                                                      Gross                      Gross                     Gross
                                        Allowance     Loans        Allowance     Loans       Allowance     Loans
                                        ---------     -----        ---------     -----       ---------     -----
                                                                  (Dollars in thousands)
<S>                                     <C>           <C>         <C>           <C>          <C>         <C>   
Residential real estate..........       $  523         57.40%     $  471         73.74%       $  327       75.15%
Commercial real estate...........          166          8.12         179          9.38           194        8.72
Construction.....................           52         17.10          38          8.68            70       10.01
Consumer and other loans.........           43         17.38          13          8.20            40        6.12
Unallocated......................          115          -              8          -                -        -
                                           ---          -              -          -                -        -
  Total general allowance........          899        100.00%        709        100.00%          631      100.00%
                                                      =======                   =======                   =======
  Total specific allowance.......           36                       161                         157
                                            --                       ---                         ---
     Total allowance.............         $935                      $870                        $788
                                          ====                      ====                        ====
</TABLE>

<TABLE>
<CAPTION>


                                                                     Year Ended June 30
                                       -----------------------------------------------------------------------------
                                                 1995                      1994                       1993
                                       -----------------------   -----------------------    ------------------------
                                                    Ratio of                   Ratio of                  Ratio of
                                                    Loans to                   Loans to                  Loans to
                                                      Total                      Total                     Total
                                                      Gross                      Gross                     Gross
                                        Allowance     Loans        Allowance     Loans       Allowance     Loans
                                        ---------     -----        ---------     -----       ---------     -----
                                                                  (Dollars in thousands)
<S>                                       <C>        <C>            <C>        <C>              <C>      <C>    
Residential real estate.............      $311         77.58%       $300         83.05%         $185       81.58%
Commercial real estate..............       220          5.62         253          5.24           270        5.66
Construction........................        86         11.09          62          7.17           108        6.68
Consumer and other loans............        32          5.71          30          4.54            15        6.08
                                            --          ----          --          ----            --        ----
  Total general allowance...........       649        100.00%        645        100.00%          578      100.00%
                                                      =======                   =======                   =======
  Total specific allowance..........        98                       109                         168
                                            --                       ---                         ---
      Total allowance...............      $747                      $754                        $746
                                          ====                      ====                        ====
</TABLE>

Non-Interest Income

         Guaranty's  non-interest  income  consists  primarily  of loan fees and
servicing  income,  net gains on the sale of loans and securities,  and fees and
service  charges on deposit  accounts.  For the year ended  December  31,  1997,
non-interest  income totaled $1.9 million.  Loan fees and servicing  income were
$456,000, gains on sales of loans and securities were $907,000,  service charges
on checking accounts totaled $166,000,  gain on the sale of purchased  servicing
was $160,000, and other income was $178,000. Management concluded that the costs
associated with managing the purchased servicing portfolio, which was secured by
property  located  outside of  Guaranty's  market  area,  exceeded  the benefits
derived from the monthly  servicing  income.  After this sale,  primarily all of
Guaranty's  servicing  portfolio  is secured by property  located in  Guaranty's
market area.  Guaranty  intends to continue to service all residential  mortgage
loans sold in the secondary  market that it originates.  This is consistent with
its  focus on a



                                      -28-
<PAGE>

customer service approach to banking.  Management does not anticipate purchasing
any material  servicing  rights.  Loan and securities sales were a result of the
continued  strategy of selling all newly originated fixed rate mortgage loans in
the secondary market and a restructuring of the balance sheet to reduce interest
rate risk  relating to fixed rate  mortgages  and to provide  liquidity  to fund
anticipated loan closings during the first half of 1998.

         For the six months ended  December 31,  1996,  non-interest  income was
$462,000.  Loan  fees and  servicing  income,  gains  on the  sale of loans  and
securities,  and service charges on checking  comprised 57.8%,  15.8% and 11.3%,
respectively,  of total  non-interest  income for the six months ending December
31, 1997.

         In the  years  ended  June 30,  1996,  1995  and  1994,  loan  fees and
servicing  income  accounted  for  55.1%,  74.8% and  317.3%,  respectively,  of
non-interest  income. Gains on sales of loans and securities were 21.9% and 0.0%
of non-interest income in fiscal 1996 and fiscal 1995, respectively. In the year
ended  June 30,  1994,  Guaranty  had a loss of  $491,000  on sales of loans and
securities. Service charges on checking accounts were $90,000 in fiscal 1996 and
$78,000 in each of the years ended June 30, 1995 and 1994.

         Non-interest  income  in  fiscal  year  ended  June  30,  1996 was $1.1
million,  an increase of $235,000 or 27.0% over non-interest  income of $872,000
in fiscal year 1995.  Non-interest  income for fiscal year ended June 30,  1995,
increased by $745,000 or 591.0% over fiscal year 1994.

         Mortgage loan servicing is a significant  business for Guaranty,  and a
by-product  of its  residential  lending  business.  Guaranty  derives fees from
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 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 amortized  against income over the
estimated  average  lives of the loans  serviced.  If loans are prepaid at rates
faster  than  those  originally  assumed,  adjustments  may be  required  to the
unamortized  balance,  which  could  result  in  charges  to  current  earnings.
Conversely,  slower  prepayment rates could result in increases in mortgage loan
servicing income in future periods. At December 31, 1997, MSRs totaled $904,000.
The weighted  average note rate of mortgage  loans serviced for others was 7.94%
and  7.77%  at  December  31,  1997  and  1996,  respectively.   See  "Financial
Statements-Summary  of Accounting Policies." At December 31, 1997 and 1996 loans
serviced for others  totaled $123.8  million and $172.8  million,  respectively.
Guaranty serviced loans for others aggregating  approximately  $168.4 million at
June 30, 1996 and $169.6 million at June 30, 1995.

         Guaranty sells fixed rate residential  production on an individual loan
basis and securitizes  loans through the creation of Federal  National  Mortgage
Association  ("FNMA"),  Federal Home Loan  Mortgage  Corporation  ("FHLMC")  and
Government National Mortgage Association ("GNMA") mortgage-backed securities.

         During the year ended  December 31, 1997 and the six month period ended
December 31, 1996, Guaranty sold $24.4 million and $11.8, respectively, of loans
and securitized  loans.  Guaranty sold $7.3 million of fixed rate mortgage loans
and  securitized  loans during  fiscal year 1996,  compared to $17.2  million in
fiscal year 1995. The sale of fixed rate product creates liquidity and an income
stream from servicing fees on loans sold.


                                      -29-
<PAGE>

         Guaranty also trades treasury securities in an effort to take advantage
of short term movements in market interest rates. It is Guaranty's policy not to
hold trading securities with a cost in excess of $5 million at one time. Trading
securities  are marked to market  monthly.  Sale of trading  account  securities
totaled $89.5 million,  $35.3  million,  $107.3 million and $43.1 million during
the year ended  December 31, 1997,  the six month period ended December 31, 1996
and the years ended June 30, 1996 and 1995, respectively. Guaranty experienced a
gain of $5,000 and $24,000 on such sales in the year ended December 31, 1997 and
fiscal 1995, respectively, and net losses of $255,000 and $64,000 during the six
month  period  ended  December  31,  1996 and the  year  ended  June  30,  1996,
respectively.

         Generally accepted  accounting  principles ("GAAP") allow the inclusion
of loan fees in current  income to an amount  limited to 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.  Guaranty  had
deferred  fees,  net of direct  underwriting  costs,  of $283,000,  $290,000 and
$314,000 at December 31, 1997 and 1996, and June 30, 1996, respectively.

Non-Interest Expenses

         For the year ended December 31, 1997,  non-interest  expenses were $3.9
million,  compared to $3.0 million for calendar year 1996. The $860,000 increase
was due primarily to increased costs associated with the expanded branch network
and costs  associated  with  conversion to a state chartered bank effective June
30,  1997.  For the  six-month  period ended  December  31,  1996,  non-interest
expenses were $1.7 million compared to $1.2 million for the same period in 1995.
This increase was primarily due to overall growth of Guaranty.

         Non-interest  expenses  were $2.5  million  for the year ended June 30,
1996,  compared  to $2.5  million for fiscal year 1995,  a 1.6%  decrease,  that
resulted  primarily from a reduction in personnel  expense after loan production
offices in Richmond, Virginia, and Waynesboro, Virginia, were closed.

Income Taxes

         Income tax expense for the year ended  December 31, 1997 and the fiscal
years  ended  June  30,  1996  and 1995 was  $486,000,  $344,000  and  $100,000,
respectively.  The increases are a direct result of increased earnings.  For the
six month  period  ended  December  31,  1996,  Guaranty  reported an income tax
benefit of $4,000 due to a loss before taxes of $10,000.

Sources of Funds

Deposits

         Deposits have  traditionally  been the  principal  source of Guaranty's
funds for use in lending and for other general business purposes. In addition to
deposits, Guaranty derives funds from loan repayments, cash flows generated from
operations,  which  includes  interest  credited to deposit  accounts,  and from
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 to compensate for reductions in deposits
or  deposit-inflows  at less  than  projected  levels  and have  been  used on a
longer-term basis to support expanded lending activities.


                                      -30-
<PAGE>

         Guaranty  attracts  both  short-term  and  long-term  deposits from the
general  public by offering a wide  assortment  of accounts and rates.  Guaranty
offers statement  savings  accounts,  various checking  accounts,  various money
market accounts,  fixed-rate  certificates with varying  maturities,  individual
retirement  accounts and is expanding to provide products and services for small
businesses.  Guaranty does not solicit brokered deposits.  Guaranty's  principal
use of deposits is to originate loans and fund investment securities.

         At December 31, 1997, deposits were $112.9 million, up 38.8% from $81.4
million at December 31, 1996.  Deposits increased 42.3% to $74.7 million at June
30,  1996 from $52.5  million at June 30,  1995.  In order to reduce the overall
cost of funds and reduce  Guaranty's  reliance  on high cost time  deposits  and
short term borrowings as a funding source,  management plans extensive marketing
efforts towards attracting lower cost transaction accounts. However, there is no
assurance that these efforts will be successful,  or if successful,  will reduce
Guaranty's reliance on time deposits and short term borrowings.

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

                                    Deposits
<TABLE>
<CAPTION>

                                           December 31         December 31          June 30              June 30
                                              1997                1996                1996                1995
                                          --------------      --------------     ---------------      --------------
                                                                   (Dollars in thousands)
<S>                                            <C>                  <C>                 <C>                 <C>    
Statement savings accounts............           $6,434              $4,738              $4,654              $4,688
Now accounts..........................           12,037               6,929               6,440               5,818
Money market accounts.................            4,000               3,410               3,213               4,131
30- to 180-day certificates...........            1,326                 250                 227                 324
Nine-month certificate................            1,638                   -                   -                   -
One- to five-year fixed-rate          
  certificates........................           87,467              66,013              52,698              29,987
Eighteen-month prime rate certificate.               45                  61               7,455               7,513
                                                 ------              ------              ------              ------
  Total...............................         $112,947             $81,401             $74,687             $52,461
                                               ========             =======             =======             =======
</TABLE>

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

                                   Year Ended          Six Months Ended
                                  December 31            December 31                    Years Ended June 30
                                  -----------            -----------                    -------------------
                                      1997                   1996                   1996                   1995
                                      ----                   ----                   ----                   ----
                                Average     Average    Average     Average    Average     Average    Average     Average
                                Balance   Rate Paid    Balance   Rate Paid    Balance   Rate Paid    Balance   Rate Paid
                                -------   ---------    -------   ---------    -------   ---------    -------   ---------
<S>                             <C>           <C>      <C>           <C>      <C>           <C>      <C>           <C>  
Noninterest bearing demand
  deposits                       $1,658       0.00%     $1,324       0.00%     $1,066       0.00%       $787       0.00%
Interest bearing demand
  deposits                                    2.59%                  2.76%                  2.74%                  2.83%
                                 11,110                  8,765                  8,927                  9,895
Savings deposits                              3.36%                  3.41%                  3.35%                  3.45%
                                  5,654                  4,870                  4,541                  5,596
Time deposits                    80,779       5.51%     63,346       5.54%     48,460       5.64%     38,938       5.05%
                                -------       -----    -------       -----    -------       -----    -------       -----
Total deposits                  $99,201       4.97%    $78,305       5.00%    $62,994       5.06%    $55,216       4.81%
                                =======       =====    =======       =====    =======       =====    =======       =====
</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
to, although not eliminate,  the threat of disintermediation  (the flow of funds
away from  depository  institutions  into  direct  investment  vehicles  such as
government  and  corporate  securities).  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.


                                      -31-
<PAGE>

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

                                  Deposit Flows
<TABLE>
<CAPTION>

                                         Year Ended          Six Months Ended
                                        December 31             December 31                Year Ended June 30
                                      -----------------      ------------------      -------------------------------
                                            1997                   1996                   1996            1995
                                            ----                   ----                   ----            ----
                                                                 (Dollars in thousands)
<S>                                        <C>                     <C>                   <C>             <C>    
Opening balance.................           $81,401                 $74,687               $52,461         $53,467
Net deposits (withdrawals)......            26,624                   4,754                19,093         (3,446)
Interest credited...............             4,922                   1,960                 3,133           2,440
                                             -----                   -----                 -----           -----
Ending balance..................          $112,947                 $81,401               $74,687         $52,461
                                          ========                 =======               =======         =======

Net increase (decrease).........           $31,546                  $6,714               $22,226        ($1,006)
Percent increase (decrease).....            38.75%                   8.99%                42.37%         (1.88%)

</TABLE>

         The following table indicates the amount of Guaranty's  certificates of
deposits by time remaining until maturity as of December 31, 1997.

                                Maturities of CDs
<TABLE>
<CAPTION>

                                                                           Maturity
                                           --------------------------------------------------------------------------
                                                3 Months      Over 3 to      Over 6 to        Over
                                                or less        6 months      12 months      12 months          Total
                                                -------        --------      ---------      ---------          -----
                                                                    (Dollars in thousands)
<S>                                              <C>            <C>            <C>            <C>            <C>    
Certificates   of   deposit   less   than 
  $100,000................................       $16,452        $19,070        $31,879        $11,967        $79,368

Certificates  of deposit of  $100,000  or
  more....................................         5,715            649          3,895            849         11,108
                                                  ------         ------        -------         ------        -------
  Total of certificates of deposits.......       $22,167        $19,719        $35,774        $12,816        $90,476
                                                 =======        =======        =======        =======        =======
</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 on the size
of the advances and repayment  provisions.  The advances are  collateralized  by
Guaranty's  investment  in  Federal  Home Loan Bank stock and  certain  mortgage
loans.  See  Note  9 of the  Notes  to  Consolidated  Financial  Statements  for
information  regarding the  maturities  and rate  structure of  Guaranty's  FHLB
advances. At December 31, 1997, no advances were outstanding to the FHLB.

         Guaranty's  borrowings also include securities sold under agreements to
repurchase,  with  mortgage-backed  securities or Treasury securities pledged as
collateral. The proceeds are used by Guaranty for general corporate purposes. At
December 31, 1997,  Guaranty had $3.0 million  outstanding  in  securities  sold
under agreement to repurchase.

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


                                      -32-
<PAGE>

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

                                   Borrowings
<TABLE>
<CAPTION>

                                       Year Ended         Six Months Ended
                                      December 31           December 31                   Year Ended June 30
                                      -----------           -----------                   ------------------
                                          1997                  1996                  1996                  1995
                                          ----                  ----                  ----                  ----
                                                                  (Dollars in thousands)
<S>                                     <C>                   <C>                   <C>                   <C>    
Maximum Balance:
  FHLB advances...............          $17,500               $22,500               $28,050               $28,250
  Securities sold under
    agreements to repurchase..            5,867                 9,957                 9,930                 4,230
</TABLE>


<TABLE>
<CAPTION>
                                    Average   Average     Average   Average    Average    Average     Average   Average
                                    Balance    Rate       Balance    Rate      Balance     Rate       Balance    Rate
                                    -------    ----       -------    ----      -------     ----       -------    ----
<S>                                 <C>        <C>        <C>        <C>       <C>        <C>         <C>        <C>  
FHLB advances.................      $10,869    6.23%      $19,550    5.79%     $22,829    6.21%       $26,208    6.67%
Securities sold under
  agreements to repurchase....        3,200    3.97%        6,321    5.66%       3,112    5.65%           783    7.98%

</TABLE>

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

                              Short-Term Borrowings
<TABLE>
<CAPTION>

                                                      December 31         December 31                  June 30
                                                     ---------------    ----------------    ------------------------------
                                                          1997               1996                1996           1995
                                                          ----               ----                ----           ----
                                                                              (Dollars in thousands)
<S>                                                      <C>                 <C>               <C>             <C>    
FHLB advances.....................................           $0               $7,500           $12,500         $19,550
Securities sold under agreements to repurchase....        2,989                6,681             6,104               0
                                                          -----                -----             -----               -
    Total short-term borrowings...................       $2,989              $14,181           $18,604         $19,550
                                                         ======              =======           =======         =======

Weighted average interest rate of
  short-term FHLB advances........................        0.00%                6.35%             6.02%           4.52%

Weighted average interest rate of
  securities sold under agreements to repurchase..        6.29%                6.50%             5.65%           0.00%
</TABLE>

         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.  Cash flow projections
are  regularly  reviewed  and  updated  to assure  that  adequate  liquidity  is
provided.  As a result of Guaranty's management of liquid assets and the ability
to generate  liquidity through  increasing  deposits,  Management  believes that
Guaranty   maintains  overall  liquidity  that  is  sufficient  to  satisfy  its
depositors' requirements and meet its customers' credit needs.


                                      -33-
<PAGE>

         Guaranty's  primary  sources  of funds are  deposits,  borrowings,  and
amortization,  prepayments  and maturities of outstanding  loans and investments
and loan sales.  While  scheduled  payments from the  amortization  of loans and
securities are relatively  predictable sources of funds,  deposit flows and loan
prepayments  are  greatly   influenced  by  general  interest  rates,   economic
conditions and competition.  Excess funds are invested in overnight  deposits to
fund cash  requirements  experienced in the normal course of business.  Guaranty
has been able to  generate  sufficient  cash  through  its  deposits  as well as
borrowings.

         The  following  information  should  be read in  conjunction  with  the
statements  of cash flows,  which appear on pages F-8 through F-10 of Guaranty's
consolidated financial statements.

         Cash and cash equivalents were  approximately  $6.0 million at December
31,  1997 and  1996.  The  $16.0  million  of net  cash  provided  by  operating
activities was primarily a result of $898,000 of net income,  proceeds from loan
sales of $24.8  million,  and  proceeds  from the sale of  securities  of $114.5
million. In addition, financing activities provided $14.3 million primarily as a
result of a net increase in deposits of $31.5 million,  and net proceeds of $4.5
million from a secondary stock offering that closed in January 1997.  Total cash
provided by operating and financing  activities of $30.3 million was absorbed by
investing  activities  consisting  primarily of a net increase in loans of $18.5
million,  expenditures of $1.4 million for property and equipment (primarily for
the new Harrisonburg branch that opened in May 1997), and purchases of available
for sale  securities  totaling  $33.3 million  (offset by sales of available for
sale securities of $21.9 million).

         For the year ended June 30, 1995, cash and cash  equivalents  increased
$4.5  million  to $5.8  million,  as the net  cash  provided  by  investing  and
financing  activities exceeded the cash used in operating  activities.  The $3.7
million of net funds  provided by investing  activities  resulted  mainly from a
$2.5 million decrease in loans and $1.3 million in principal  payment on held to
maturity  securities.  The  $1.2  million  of net  cash  provided  by  financing
activities resulted primarily from proceeds from the issuance of common stock of
$2.1 million.

         Guaranty uses its sources of funds  primarily to meet operating  needs,
to pay deposit  withdrawals and fund loan commitments.  At December 31, 1997 and
1996,  total  approved  loan  commitments  were $3.8  million and $3.0  million,
respectively.  In  addition,  at December 31, 1997 and 1996,  commitments  under
unused lines of credit were $14.3  million and $6.4  million,  respectively.  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.  Certificates of deposits  scheduled to mature in one year or less
at December 31, 1997 and 1996,  and June 30, 1996 totaled $77.7  million,  $57.3
million and $51.2 million, respectively.  Management believes that a significant
portion of maturing deposits will remain with Guaranty.

         Management  intends to fund  anticipated  loan  closings and  operating
needs during 1998 through cash on hand,  proceeds  from the sale of an offering,
proceeds from the sale of loans and  securities,  cash generated from operations
and anticipated  increases in deposits.  Through February 28, 1998, net deposits
were $121.4 million, an increase of $8.5 million in comparison to total deposits
at December 31, 1997 of $112.9  million.  This increase  consisted  primarily of
increases in time deposits  (primarily with a one-year  maturity at origination)
of $3.4 million and demand  deposits of $2.2  million.  Current and  anticipated
marketing  programs will be primarily  targeted at the  attraction of lower cost
transaction  accounts.  Concurrent with the strategies employed to attract these
accounts, management plans to gradually reduce the rate paid on time deposits in
comparison  to the  competition.  However,  the pricing of time deposits will be
balanced against  upcoming  maturities to ensure that liquidity is not adversely
impacted by a large run off of time deposits.


                                      -34-
<PAGE>

         Proceeds  from the sale of  securitized  loans  and  fixed  rate  loans
originated for sale in the secondary  market were $11.6 million through February
28, 1998.  In addition,  at February 28, 1998,  loans  available for sale in the
secondary  market were $10.6  million (cost  approximates  market at this date).
Although  management  has no plans to sell  adjustable  rate  mortgages  (ARMs),
approximately $24.0 million of conforming ARMs are currently carried in the loan
portfolio and could be sold if needed to meet liquidity  needs of Guaranty.  The
need to sell portfolio loans to meet liquidity  requirements is mitigated by the
Bank's  $20.0  million  line of  credit at the FHLB.  As of March 31,  1998,  no
outstanding  balances  existed under this line nor was this line used during the
period  January 1, 1998 through  March 31, 1998 to fund short term cash needs of
Guaranty.

         No  assurances  can be made  that  management's  plans to  provide  for
Guaranty's liquidity needs will be successful,  or if successful,  will generate
the cash needed to fund operations or reduce Guaranty's  historical  reliance on
higher cost time deposits and FHLB advances as the primary funding source.

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

         Guaranty  and the Bank are  subject  to  Federal  Reserve  regulations,
including the BHCA. At December 31, 1997,  Guaranty exceeded all such regulatory
capital requirements as shown in the following table.


                                      -35-
<PAGE>

                                     Capital
<TABLE>
<CAPTION>

                                                                       Six Months
                                                   Year Ended            Ended
                                                  December 31         December 31               Year Ended June 30
                                                 ---------------    -----------------    ---------------------------------
                                                      1997                1996               1996               1995
                                                      ----                ----               ----               ----
                                                                               (Dollars in thousands)
<S>                                                <C>                   <C>              <C>                 <C>    
Tier 1 Capital:
  Common stock...............................       $1,877                $1,155           $1,149              $1,144
  Capital surplus............................        5,725                 1,976            1,981               1,971
  Retained earnings..........................        4,208                 3,445            3,498               2,900
  Unrealized Loss on available for sale
    securities...............................            -                    -                 -                   -
                                                    ------                 -----            -----               -----
    Total Tier 1 Capital.....................       11,810                 6,576            6,628               6,015
                                                    ------                 -----            -----               -----

Tier 2 Capital:
  Allowance for loan losses (1)..............          935                   706              631                 565
  Allowable long-term debt...................            -                    -                 -                   -
                                                    ------                 -----            -----               -----
    Total Tier 2 Capital.....................          935                   706              631                 565
                                                    ------                 -----            -----               -----
      Total Risk-Based Capital...............      $12,745                $7,282           $7,259              $6,580
                                                   =======                ======           ======              ======

Risk-weighted assets.........................      $82,666               $56,500          $54,650             $45,200

Capital Ratios:
  Tier 1 Risk-Based Capital ratio............       14.29%                11.64%           12.13%              13.31%
  Total Risk-Based Capital ratio.............       15.42%                12.89%           13.28%              14.56%
  Tier 1 Capital to average adjusted total   
     assets..................................        9.57%                 5.81%            6.59%               6.52%
</TABLE>
------------------

(1)      The allowance for loan losses included in Tier 1 Capital calculation is
         limited by regulation to 1.25% of Risk-weighted assets.

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.

Accounting Rules

         In June 1997, the Financial Accounting Standards Board issued Statement
of Financial Accounting Standards No. 130, Reporting Comprehensive Income ("SFAS
130"),  which  establishes  standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity  except those  resulting  from  investments  by
owners and distributions to owners.  Among other disclosures,  SFAS 130 requires
that all items that are  required  to be  recognized  under  current  accounting
standards  as  components  of  comprehensive  income be  reported in a


                                      -36-
<PAGE>


financial  statement  that is  displayed  with  the  same  prominence  as  other
financial statements. SFAS 130 is effective for financial statements for periods
beginning  after  December 15, 1997 and  requires  comparative  information  for
earlier years to be restated. Management does not expect the application of this
pronouncement to have a material effect on the financial statements of Guaranty.

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 non-deposit  investment products through
GICO.  GICO had a net loss of $27,000 for the year ended  December  31, 1997 and
net income of $3,000 and $1,000 for the six month period ended December 31, 1996
and the year ended June 30, 1996, respectively.

         In 1987,  Guaranty  formed  GMSC and  entered  into a REMIC in order to
create  liquidity.  Guaranty  utilized the REMIC to pool $19.9  million of fixed
rate mortgages into mortgage  backed  securities,  which were used as collateral
for bonds  sold to private  investors.  The bonds bore a coupon of 8.0% 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.  For the year ended December 31, 1997 and the six month
period ended  December 31, 1996,  amortization  expense was $64,000 and $39,000,
respectively.  The  amortization  of the REMIC  expenses  is treated as interest
expense.

Year 2000 Project

         The Year 2000 presents  problems for  businesses  that are dependent on
computer hardware and software to perform date dependent  calculations and logic
comparisons.  A great deal of software and  microchip  technology  was developed
utilizing two digit years rather than four digit years  (example:  97 instead of
1997).  Technology  utilizing  two digit  years most  likely will not be able to
distinguish  the year 2000 from  1900,  and  therefore  may shut down or perform
miscalculations and comparisons as much as 100 years off.

         Management is fully aware this presents a potential business disruption
and has begun a program of due  diligence in  addressing  the impact of the Year
2000 on  Guaranty.  Presently,  Guaranty  is  still  in the  discovery  stage of
identifying all areas and processes rendering exposure to the Year 2000 problem.
However, Guaranty, in conjunction with its outside service bureau, has developed
a plan to address Year 2000 exposure  surrounding  Guaranty's  computer and data
processing  systems.  Since early 1997,



                                      -37-
<PAGE>

Guaranty has been updating its systems  hardware to be Year 2000 compliant.  The
next step involves testing system  software,  which is scheduled to begin in mid
to late 1998,  and it is  estimated  that the  process  will cost  approximately
$25,000 to complete.  In conjunction  with this testing,  Guaranty plans to test
its  other  systems  that are not  related  to the  service  bureau.  Management
anticipates Guaranty will be Year 2000 compliant, thus satisfying all regulatory
requirements.


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 December 31, 1997 and 1996
         Consolidated  Statements of Operations for the years ended December 31,
            1997 and June 30,  1996 and 1995 and the six months  ended  December
            31, 1996
         Consolidated  Statements  of  Stockholders'  Equity for the years ended
            December  31,  1997 and June  30,  1996 and 1995 and the six  months
            ended December 31, 1996
         Consolidated  Statements of Cash Flows for the years ended December 31,
            1997 and June 30,  1996 and 1995 and the six months  ended  December
            31, 1996
         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  Persons;
               Compliance with Section 16(a) of the Exchange Act.

         Information  set forth  under the  headings  "Election  of  Directors,"
"Executive  Officers  Who Are Not  Directors,"  and  "Section  16(a)  Beneficial
Ownership Reporting Compliance" in Guaranty's definitive Proxy Statement for its
1998 Annual Meeting of  Shareholders,  which Proxy  Statement will be filed with
the Securities and Exchange  Commission within 120 days of the end of Guaranty's
1997  fiscal  year (the  "1998  Proxy  Statement"),  is hereby  incorporated  by
reference.


                                      -38-
<PAGE>

Item 10.        Executive Compensation

         Information  set forth under the headings  "Executive  Compensation  --
Summary of Cash and Certain Other  Compensation,"  "-- Stock Option Grants," "--
Option  Exercises  and  Holdings,"  "--  Directors'  Fees,"  and "--  Employment
Agreements" in the 1998 Proxy Statement is hereby incorporated by reference.


Item 11.        Security Ownership of Certain Beneficial Owners and Management

         Information  set  forth  under  the  headings  "Security  Ownership  of
Management" and "Security  Ownership of Certain  Beneficial  Owners" in the 1998
Proxy Statement is incorporated by reference.


Item 12.        Certain Relationships and Related Transactions

         Information set forth under the heading  "Transactions with Management"
in the 1998 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. (restated in electronic
                         format).

                3.2      Bylaws of Guaranty Financial  Corporation.

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


         (b)    Reports on Form 8-K

                No  reports  on Form 8-K were filed  during  the  quarter  ended
                December 31, 1997.




                                      -39-
<PAGE>











                                                  Guaranty Financial Corporation
                                                                  and Subsidiary





                                                            Financial Statements
                                           For the Year Ended December 31, 1997,
                                      the Six Months Ended December 31, 1996 and
                                          the Years Ended June 30, 1996 and 1995

<PAGE>


                         GUARANTY FINANCIAL CORPORATION
                                 AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>


<S>                                                                                                   <C>
Report of Independent Certified Public Accountants                                                        F-3

Consolidated Financial Statements

  Balance Sheets as of December 31, 1997 and 1996                                                         F-4

  Statements of Operations for the years ended December 31, 1997 and
    June 30, 1996 and 1995 and the six months ended December 31, 1996                               F-5 - F-6

  Statements of Stockholders' Equity for the years ended December 31, 1997
    and June 30, 1996 and 1995 and the six months ended December 31, 1996.                                F-7

  Statements of Cash Flows for the years ended December 31, 1997 and June 30, 1996
    and 1995 and the six months ended December 31, 1996                                            F-8 - F-10


Summary of Accounting Policies                                                                    F-11 - F-17

Notes to Consolidated Financial Statements                                                        F-18 - F-39


</TABLE>




                                                                             F-2
<PAGE>

Report of Independent Certified Public Accountants

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

We  have  audited  the  consolidated   balance  sheets  of  Guaranty   Financial
Corporation  and  subsidiary  as of December 31, 1997 and 1996,  and the related
consolidated statements of operations,  stockholders' equity, and cash flows for
the year ended December 31, 1997 and the six months ended December 31, 1996, and
for each of the two years in the period  ended June 30,  1996.  These  financial
statements  are  the  responsibility  of  the  Corporation's   management.   Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Guaranty Financial  Corporation and subsidiary as of December 31, 1997 and 1996,
and the  results  of their  operations  and their  cash flows for the year ended
December  31, 1997,  the six months ended  December 31, 1996 and for each of the
two  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 1995, respectively.


                                                     /s/ BDO Seidman, LLP

                                                     BDO Seidman, LLP
Richmond, Virginia
January 30, 1998



                                                                             F-3
<PAGE>



<TABLE>
<CAPTION>

December 31,                                                                     1997               1996
--------------------------------------------------------------------------------------------------------

<S>                                                                      <C>                <C>        
    Assets

Cash and cash equivalents                                                $  5,916,504       $  6,076,315
Investment securities (Notes 1 and 7)
  Held-to-maturity                                                          2,845,560          3,156,857
  Available for sale                                                       11,523,908                  -
  Trading                                                                   1,032,188         16,736,295
Investment in Federal Home Loan Bank stock, at
  cost (Note 9)                                                               860,100          1,360,200
Other investments                                                              79,000                  -
Loans receivable, net (Notes 2 and 11)                                     99,674,549         81,270,173
Accrued interest receivable                                                   844,212            671,211
Real estate owned                                                              64,985             50,964
Office properties and equipment, net (Note 3)                               5,999,778          4,946,153
Other assets (Note 2)                                                       1,867,693          1,751,757
--------------------------------------------------------------------------------------------------------








                                                                         $130,708,477       $116,019,925
========================================================================================================
</TABLE>





                                                                               
<PAGE>




                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                     Consolidated Balance Sheets


<TABLE>
<CAPTION>

December 31,                                                                                     1997               1996
------------------------------------------------------------------------------------------------------------------------

   Liabilities and Stockholders' Equity
<S>                                                                                      <C>                <C>        
Liabilities
  Deposits (Note 4)                                                                      $112,947,012        $81,401,071
  Bonds payable (Notes 1 and 7)                                                             2,360,083          2,705,813
  Advances from Federal Home Loan Bank (Note 9)                                                     -         17,500,000
  Securities sold under agreement to repurchase (Notes 1 and 8)                             2,989,000          6,681,000
  Accrued interest payable                                                                     58,404             60,989
  Income taxes payable (Note 10)                                                              181,100                  -
  Prepayments by borrowers for taxes and insurance                                             80,824            105,901
  Other liabilities                                                                           231,900            989,402
------------------------------------------------------------------------------------------------------------------------

Total liabilities                                                                         118,848,323        109,444,176
------------------------------------------------------------------------------------------------------------------------

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

Stockholders'  Equity (Notes 13 and 14) 
  Preferred stock, par value $1 per share, 500,000 shares
    authorized, none issued
  Common stock, par value $1.25 per share, 4,000,000 shares  
    authorized, 1,501,383, and 924,008 shares issued and
    outstanding                                                                             1,876,729          1,155,010
  Additional paid-in capital                                                                5,724,954          1,975,695
  Unrealized gain on available for sale securities (Note 1)                                    50,971                  -
  Retained earnings - substantially restricted                                              4,207,500          3,445,044
------------------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                                 11,860,154          6,575,749
------------------------------------------------------------------------------------------------------------------------

                                                                                         $130,708,477       $116,019,925
========================================================================================================================
</TABLE>

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




                                                                             F-4
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Operations

<TABLE>
<CAPTION>

                                                       Year Ended       Six Months Ended              
                                                       December 31,       December 31,            Year Ended June 30,
                                                          1997               1996                1996             1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>                 <C>              <C>       
Interest income
  Loans                                                $7,584,732        $3,454,559          $6,441,903       $5,897,002
  Mortgage-backed securities                            1,045,831           564,079             652,639          495,620
  Investment securities                                   889,245           254,833             498,686          383,555
  Trading account assets                                        -             2,911              23,390           12,176
------------------------------------------------------------------------------------------------------------------------

Total interest income                                   9,519,808         4,276,382           7,616,618        6,788,353
------------------------------------------------------------------------------------------------------------------------

Interest expense
  Deposits                                              4,922,258         1,960,029           3,132,660        2,439,585
  Borrowings (Notes 7, 8 and 9)                         1,116,152           979,936           2,059,402        2,223,267
------------------------------------------------------------------------------------------------------------------------

Total interest expense                                  6,038,410         2,939,965           5,192,062        4,662,852
------------------------------------------------------------------------------------------------------------------------

Net interest income                                     3,481,398         1,336,417           2,424,556        2,125,501

Provision (credit) for loan losses
  (Note 2)                                                122,320            91,850              56,665          (9,443)
------------------------------------------------------------------------------------------------------------------------

Net interest income after
  provision for loan losses                             3,359,078         1,244,567           2,367,891        2,134,944
------------------------------------------------------------------------------------------------------------------------

Other income
  Loan fees and servicing income                          456,515           266,505             610,020          651,852
  Net gain on sale of loans
    and securities                                      1,067,348            72,547             242,866              206
  Service charges on checking                             166,072            52,058              90,156           77,542
  Other                                                   177,837            70,977             164,090          142,034
------------------------------------------------------------------------------------------------------------------------

Total other income                                      1,867,772           462,087           1,107,132          871,634
------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                    continued...



                                                                             F-5
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Operations
                                                                     (continued)


<TABLE>
<CAPTION>

                                                       Year Ended       Six Months Ended             
                                                       December 31,        December 31,           Year Ended June 30,
                                                          1997                1996               1996            1995
-----------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>               <C>                 <C>             <C>       
Other expenses
  Personnel (Notes 14 and 15)                          $2,010,794        $  748,083          $1,013,674      $1,194,410
  Occupancy (Note 12)                                     523,502           131,593             302,139         310,114
  Data processing (Note 12)                               422,851           165,548             257,038         210,110
  BIF/SAIF premium disparity                   
    assessment                                                  -           346,851                 -                 -
  Deposit insurance premiums                               87,298           100,908             190,263         195,818
  Other                                                   798,650           223,553             724,321         619,373
-----------------------------------------------------------------------------------------------------------------------

Total other expenses                                    3,843,095         1,716,536           2,487,435       2,529,825
-----------------------------------------------------------------------------------------------------------------------
Income (loss) before income                    
  taxes                                                 1,383,755            (9,882)            987,588         476,753
                                               
Provision for income taxes (Note 10)                      486,040            (3,500)            344,338         100,508
-----------------------------------------------------------------------------------------------------------------------

Net income (loss)                                      $  897,715        $   (6,382)         $  643,250      $  376,245
=======================================================================================================================

Basic and Diluted Earnings Per Share                   $      .61        $     (.01)         $      .70      $      .70
=======================================================================================================================
</TABLE>

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





                                                                             F-6
<PAGE>                                         

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>


                                                                                    Unrealized                      
                                                                   Additional     Gain (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, 1994                           $  671,460       $  335,730       $        -         $2,524,089       $ 3,531,279

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

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

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

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

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

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

Issuance of common stock (Note 13)                  718,750        3,752,228                -                  -         4,470,978
Cash dividend                                             -                -                -           (135,259)         (135,259)
Unrealized gain on available for
  sale securities (Note 1)                                -                -           50,971                  -            50,971
Stock options exercised (Note 14)                     5,000           14,520                -                  -            19,520
Repurchase of common stock                           (2,031)         (17,489)               -                  -           (19,520)
Net income                                                -                -                -            897,715           897,715
------------------------------------------------------------------------------------------------------------------------------------

Balance, December 31, 1997                       $1,876,729       $5,724,954       $   50,971         $4,207,500       $11,860,154
====================================================================================================================================
</TABLE>

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




                                                                             F-7
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows

<TABLE>
<CAPTION>

                                                       Year Ended         Six Months Ended             
                                                      December 31,          December 31,                 Year Ended June 30,
                                                          1997                  1996                  1996               1995
----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                  <C>                  <C>        
Operating activities
  Net income (loss)                                  $    897,715          $     (6,382)        $     643,250        $    376,245
  Adjustments to reconcile net
    income (loss) to net cash
    provided (absorbed) by
    operating activities
      Provision (credit) for loan losses                  122,320                91,850                56,665              (9,443)
      Depreciation and amortization                       354,005                76,160                95,511              93,775
      Amortization of deferred loan fees                  (89,564)              (63,841)             (136,086)           (123,528)
      Net amortization of premiums
        and accretion of discounts                         64,154                84,606               199,060              54,822
      Loss (gain) on sale of loans                       (518,736)             (216,537)             (204,901)             60,367
      Originations of loans held
        for sale                                      (24,280,323)          (11,773,561)           (7,203,819)        (11,765,459)
      Proceeds from sale of loans                      24,799,059            11,822,300             7,160,241          11,825,826
      Gain on sale of
        mortgage-backed securities                       (236,761)             (111,039)                    -             (36,418)
      Originations of loans securitized                         -                     -                     -          (5,596,082)
      Purchase of mortgage backed
        securities                                    (24,754,127)          (23,980,081)                    -                   -
      Proceeds from sale of
        mortgage-backed securities                     24,990,888            17,844,790                     -           5,415,983
      Gain on sale of securities
        available for sale                               (147,433)                    -              (101,685)                  -
      Gain on disposal of office
        properties and equipment                                -                     -                (1,341)             (1,806)
      (Gain) loss on sale of trading
        account securities                                 (5,520)              255,030                63,720             (24,155)
      Purchases of trading account
        securities                                    (73,838,893)          (36,330,973)         (107,346,227)        (43,113,114)
      Sales of trading account
        securities                                     89,548,520            35,305,544           107,282,507          43,137,269
</TABLE>

                                                                    continued...




                                                                             F-8
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows
                                                                     (continued)


<TABLE>
<CAPTION>
                                                       Year Ended          Six Months Ended
                                                      December 31,           December 31,                Year Ended June 30,
                                                          1997                   1996                  1996               1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                   <C>                  <C>                  <C>           
Operating activities (cont'd)
      Changes in
        Accrued interest receivable                  $   (173,001)         $      40,631        $     (127,600)      $     (27,424)
        Other assets                                     (115,936)               (24,917)             (442,298)           (192,025)
        Accrued interest payable                          (15,698)               (38,308)               13,018             (21,951)
        Income taxes                                      214,100                 (3,000)                    -             (87,000)
        Prepayments by borrowers
          for taxes and insurance                         (25,077)               (39,829)             (160,616)            181,671
        Other liabilities                                (777,389)            (1,141,898)              689,882            (592,864)
-----------------------------------------------------------------------------------------------------------------------------------

Net cash provided (absorbed)
  by operating activities                              16,012,303             (8,209,455)              479,281            (445,311)
-----------------------------------------------------------------------------------------------------------------------------------

Investing activities
  Net (increase) decrease in
    loans                                             (18,451,153)             2,880,494           (8,486,970)           2,484,824
  Principal repayments on held
    to maturity securities                                309,815                776,007              998,457            1,260,076
  Purchase of securities
    available for sale                                (33,334,183)                     -          (28,399,062)                   -
  Proceeds from sales of
    securities available for sale                      21,929,679                      -           18,507,960                    -
  Sale of FHLB stock                                      500,100                      -                    -               77,300
  Proceeds from sale of office
    properties and equipment                                    -                      -                4,522               15,389
  Purchases of office properties
    and equipment                                      (1,407,630)            (1,515,180)          (3,186,982)            (152,668)
-----------------------------------------------------------------------------------------------------------------------------------

Net cash provided (absorbed)
  by investing activities                             (30,453,372)             2,141,321          (20,562,075)           3,684,921
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                                                    continued...




                                                                             F-9
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows
                                                                     (continued)

<TABLE>
<CAPTION>

                                                       Year Ended         Six Months Ended
                                                      December 31,          December 31,               Year Ended June 30,
                                                          1997                  1996                 1996                1995
-----------------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>                  <C>                   <C>                  <C>         
Financing activities
  Net increase (decrease)
    in deposits                                       $31,545,941          $ 6,713,625           $22,226,807          $(1,006,244)
  Repayment of Federal Home
    Loan Bank advances                                (21,000,000)         (10,000,000)          (31,510,000)         (15,200,000)
  Proceeds from Federal Home
    Loan Bank advances                                  3,500,000           10,000,000            23,960,000           16,300,000
  Principal payments on bonds
    payable, including
    unapplied payments                                   (408,402)            (531,459)             (988,607)            (968,556)
  Increase (decrease) in
    securities sold under
    agreements to repurchase                           (3,692,000)             577,000             6,104,000                    -
  Proceeds from issuance of
    common stock                                        4,470,978                    -                15,300            2,108,215
  Dividends paid                                         (135,259)             (46,200)              (45,958)                   -
-----------------------------------------------------------------------------------------------------------------------------------

Net cash provided
  by financing activities                              14,281,258            6,712,966            19,761,542            1,233,415
-----------------------------------------------------------------------------------------------------------------------------------

Increase (decrease) in cash
  and cash equivalents                                   (159,811)             644,832              (321,252)           4,473,025

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

Cash and cash equivalents,
  end of period                                       $ 5,916,504          $ 6,076,315           $ 5,431,483          $ 5,752,735
===================================================================================================================================
</TABLE>

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




                                                                            F-10
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies




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

                         At June 30, 1997, the Bank was converted from a federal
                         savings  association  to a Virginia  chartered  Federal
                         Reserve  member  bank.  As a  result,  the  Corporation
                         changed their year end from June 30, to December 31.

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

                         Pursuant to the Economic Growth and Paperwork Reduction
                         Act of 1996  (the  "Act"),  the FDIC  imposed a special
                         assessment  on  Savings   Association   Insurance  Fund
                         ("SAIF") members to capitalize the SAIF to a designated
                         reserve  level.  Prior to the  Bank's  conversion  to a
                         state  chartered  bank,  it was a  member  of SAIF  and
                         therefore,  subject  to the  SAIF  special  assessment.
                         Based on the Bank's  deposits as of March 31, 1995, the
                         date for measuring the special assessment, the Bank was
                         assessed  approximately  $347,000 during the six months
                         ended December 31, 1996. 

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

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



                                                                            F-11
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)




Estimates                The  preparation of financial  statements in conformity
                         with generally accepted accounting  principles requires
                         management  to  make  estimates  and  assumptions  that
                         affect the reported  amounts of assets and  liabilities
                         at  the  date  of  the  financial  statements  and  the
                         reported  amounts of revenues and  expenses  during the
                         reporting  period.  Actual  results  could  differ from
                         those estimates.                   
                         
Investment Securities    In May 1993, the Financial  Accounting  Standards Board
                         issued Statement of Financial  Accounting Standards No.
                         115 ("SFAS 115"),  "Accounting for Certain  Investments
                         in Debt and Equity Securities". The Corporation adopted
                         the  provisions  of SFAS 115 during the year ended June
                         30, 1995.  The adoption of this Statement had no effect
                         on the operations of the Corporation. SFAS 115 requires
                         that  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           Mortgage loans  originated and intended for sale in the
Sale                     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.                                     

                         The Corporation had  approximately  $9,200,000 of loans
                         held for  sale at  December  31,  1997.  The  estimated
                         market value of these loans  exceeded the carrying cost
                         at December 31, 1997. The Corporation had no loans held
                         for sale at December 31, 1996.




                                                                            F-12
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)




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

                         Loans receivable  consists  primarily of long-term real
                         estate loans  secured by first deeds of trust on single
                         family   residences,    other   residential   property,
                         commercial  property,  construction  and  land  located
                         primarily in the state of Virginia.  Interest income on
                         mortgage   loans  is   recorded   when  earned  and  is
                         recognized  based  on  the  level  yield  method.   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            The  Corporation  is able to generate  funds by selling
and Participation        loans and  participations  in loans to the Federal Home
in Loans                 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.





                                                                            F-13
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)




Sale of Loans            The cost of mortgage  servicing  rights is amortized in
and Participation        proportion  to, and over the period of,  estimated  net
in Loans                 servicing  revenues.  Impairment of mortgage  servicing
(continued)              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            The  allowance for loan losses is maintained at a level
Possible Loan            considered  by  management  to be  adequate  to  absorb
Losses                   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.

                         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.




                                                                            F-14
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)




Allowance for            For impaired loans that are on nonaccrual status,  cash
Possible Loan            payments  received are generally  applied to reduce the
Losses                   outstanding  principal  balance.   However,  all  or  a
(continued)              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              Real estate acquired  through  foreclosure is initially
Owned                    recorded  at the  lower  of fair  value,  less  selling
                         costs,  or the  balance of the loan on the  property at
                         date of foreclosure.  Costs relating to the development
                         and  improvement of property are  capitalized,  whereas
                         those  relating to holding the  property are charged to
                         expense.

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

Securities Sold          The Corporation  enters into sales of securities  under
Under Agreements         agreements    to   repurchase    (reverse    repurchase
to 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        Office properties and equipment are stated at cost less
and Equipment            accumulated  depreciation and amortization.  Provisions
                         for  depreciation  and  amortization are computed using
                         the  straight-line  method  over the  estimated  useful
                         lives  of the  individual  assets  or the  terms of the
                         related leases, if shorter, for leasehold improvements.
                         Expenditures  for  betterments  and major  renewals are
                         capitalized  and ordinary  maintenance  and repairs are
                         charged to expense as incurred. 

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

                         For tax  years  beginning  prior to  January  1,  1996,
                         savings banks that met certain  definitional  tests and
                         other  conditions  prescribed  by the Internal  Revenue
                         Code were allowed,  within limitations,  to deduct from
                         taxable  income an  allowance  for bad debts  using the
                         "percentage of taxable income"  method.  The cumulative
                         bad debt  reserve,  upon which no taxes have been paid,
                         was approximately $926,000 at December 31, 1997.




                                                                            F-15
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)




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

                         As a result of the Act, the Corporation  must recapture
                         into taxable income approximately $354,000 ratably over
                         the next six years,  beginning December 31, 1998, since
                         the Corporation met the  residential  loan  requirement
                         exemption for the period ended December 31, 1997. 

Basic and Diluted        Basic  earnings  per share  includes no dilution and is
Earnings Per Share       computed  by  dividing   income   available  to  common
                         shareholders  by the weighted  average number of common
                         shares outstanding for the period. Diluted earnings per
                         share  reflects the  potential  dilution of  securities
                         that could  share in the  earnings  of an  entity.  The
                         weighted  average  number of  shares  of  common  stock
                         outstanding  were 1,466,843 for the year ended December
                         31,  1997 and 920,681  for the six month  period  ended
                         December  31,  1996,  and  917,668  and 541,768 for the
                         years  ended  June 30,  1996,  and 1995,  respectively.
                         

Statements of Cash       Cash and cash  equivalents  include  Federal funds sold
Flows                    with  original  maturities  of  three  months  or less.
                         Interest paid was approximately $6,060,000 for the year
                         ended  December  31,  1997 and  $2,978,000  for the six
                         month period ended  December 31, 1996,  and  $5,179,000
                         and  $4,685,000  for the years  ended June 30, 1996 and
                         1995,  respectively.  Cash  paid for  income  taxes was
                         approximately  $350,000 for the year ended December 31,
                         1997  and  $277,000  for the  six  month  period  ended
                         December  31,  1996,  and  $180,000 and $42,000 for the
                         years ended June 30, 1996 and 1995, respectively. There
                         was no real estate  acquired in settlement of loans for
                         the six month  period  ended  December  31,  1996,  and
                         approximately  $64,000,  $33,000 and  $122,000  for the
                         years  ended  December  31,  1997 and June 30, 1996 and
                         1995, respectively.





                                                                            F-16
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)




Reclassifications        Certain  reclassifications  have been made in the prior
                         year  consolidated  financial  statements  and notes to
                         conform to the  December  31,  1997  presentation.   
 
New Accounting           In February  1997, the Financial  Accounting  Standards
Pronouncements           Board  issued   Statement   of   Financial   Accounting
                         Standards  No. 128,  "Earnings  per Share ("SFAS 128").
                         SFAS  128  is  effective  for   financial   statements,
                         including  interim  periods,  issued for periods ending
                         after December 15, 1997.  SFAS 128 provides a different
                         method  for  calculating  earnings  per  share  than is
                         currently used in accordance with APB 15, "Earnings per
                         Share." SFAS 128 provides for the  calculation of Basic
                         and Diluted  earnings  per share.  Basic  earnings  per
                         share  includes no dilution and is computed by dividing
                         income available to common shareholders by the weighted
                         average  number of common  shares  outstanding  for the
                         period.   Diluted   earnings  per  share  reflects  the
                         potential  dilution of  securities  that could share in
                         earnings  of  an  entity,   similar  to  fully  diluted
                         earnings per share.

                         In June 1997, the Financial  Accounting Standards Board
                         issued Statement of Financial  Accounting Standards No.
                         130, Reporting Comprehensive Income ("SFAS 130"), which
                         establishes  standards  for  reporting  and  display of
                         comprehensive  income,  its components and  accumulated
                         balances.  Comprehensive  income is  defined to include
                         all  changes  in equity  except  those  resulting  from
                         investments  by owners  and  distributions  to  owners.
                         Among other  disclosures,  SFAS 130  requires  that all
                         items that are required to be recognized  under current
                         accounting  standards as  components  of  comprehensive
                         income be  reported in a  financial  statement  that is
                         displayed with the same  prominence as other  financial
                         statements.   SFAS  130  is  effective   for  financial
                         statements  for periods  beginning  after  December 15,
                         1997 and requires  comparative  information for earlier
                         years to be  restated.  Management  does not expect the
                         application  of this  pronouncement  to have a material
                         effect on the financisal statements of the Corporation.





                                                                            F-17
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements




1.   Investment          A summary of the carrying  value and  estimated  market
     Securities          value of investment securities is as follows:          
<TABLE>
<CAPTION>

                         December 31, 1997
                         -----------------------------------------------------------------------------------
                                                                    Gross           Gross         Estimated
                                                    Amortized     Unrealized      Unrealized        Market
                                                      Cost          Gains          Losses           Value
                         -----------------------------------------------------------------------------------
<S>                                               <C>               <C>            <C>           <C>        
                         Held to Maturity

                           Mortgage-backed                       
                            securities            $ 2,745,560      $ 13,440        $     -       $ 2,759,000
                           Other                      100,000             -              -           100,000
                         -----------------------------------------------------------------------------------

                                                    2,845,560        13,440              -         2,859,000
                         -----------------------------------------------------------------------------------

                         Available for sale

                           Bonds                   11,415,793        66,590          8,444        11,473,939
                           US Government
                            obligations                49,836           133              -            49,969
                         -----------------------------------------------------------------------------------

                                                   11,465,629        66,723          8,444        11,523,908
                         -----------------------------------------------------------------------------------

                         Trading

                           US Government
                            obligations             1,030,625         1,563              -         1,032,188
                         -----------------------------------------------------------------------------------

                                                    1,030,625         1,563              -         1,032,188
                         -----------------------------------------------------------------------------------

                                                  $15,341,814       $81,726         $8,444       $15,415,096
                         ===================================================================================
</TABLE>





                                                                            F-18
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



<TABLE>
<CAPTION>


1.   Investment          December 31, 1996                                                                    
     Securities          -----------------------------------------------------------------------------------  
     (continued)                                                     Gross           Gross        Estimated   
                                                    Amortized     Unrealized      Unrealized       Market     
                                                      Cost           Gains          Losses          Value     
                         -----------------------------------------------------------------------------------  
<S>                                                  <C>             <C>              <C>           <C>          
                         Held to Maturity                                                                     
                           Mortgage-backed                                                                    
                            securities            $ 3,156,857     $ 192,143        $      -      $ 3,349,000  
                         -----------------------------------------------------------------------------------  

                                                    3,156,857       192,143               -        3,349,000  
                         -----------------------------------------------------------------------------------  

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

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

                                                  $20,093,386     $ 192,143       $ 200,234      $20,085,295  
                         ===================================================================================  
</TABLE>

                         The  amortized  cost  and  estimated  market  value  of
                         investment  securities at December 31, 1997 by maturity
                         is as follows:

<TABLE>
<CAPTION>

                                                                                                   Estimated
                                                                                    Amortized        Market
                                                                                       Cost          Value
                         -----------------------------------------------------------------------------------
<S>                                                                               <C>            <C>        
                         Held to Maturity
                           Mortgage-backed securities                             $ 2,745,560    $ 2,759,000
                           Other                                                      100,000        100,000
                         -----------------------------------------------------------------------------------
                         
                                                                                    2,845,560      2,859,000
                         -----------------------------------------------------------------------------------

                         Available for Sale
                           Due in one year or less                                    149,836        149,969
                           Due in one through five years                            1,013,547      1,015,000
                           Due after five years                                    10,302,246     10,358,939
                         -----------------------------------------------------------------------------------

                                                                                   11,465,629     11,523,908
                         -----------------------------------------------------------------------------------

                                                                                  $14,311,189    $14,382,908
                         ===================================================================================
</TABLE>





                                                                            F-19
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




1.   Investment          Proceeds  from sales of  securities  available for sale
     Securities          was  approximately   $21,930,000  for  the  year  ended
     (continued)         December  31, 1997 and  $18,508,000  for the year ended
                         June  30,  1996.  The   Corporation  had  no  sales  of
                         available for sale securities  during the period ending
                         December  31,  1996.   Gross  gains  of   approximately
                         $147,400  and  $101,700  were  realized  on those sales
                         during the years ended  December  31, 1997 and June 30,
                         1996, respectively.                                    
 
                         Proceeds  from  the  sale  of  trading  securities  was
                         approximately  $89,549,000  for the year ended December
                         31,  1997  and  $35,306,000  for the six  months  ended
                         December 31, 1996, and $107,346,000,and $43,113,000 for
                         the years ended June 30, 1996, and 1995,  respectively.
                         Gross gains of approximately  $134,000 and gross losses
                         of approximately  $128,000 were realized on those sales
                         for the year ended  December 31,  1997.  Gross gains of
                         approximately  $9,900 and gross losses of approximately
                         $265,000  were  realized  on  those  sales  for the six
                         months  ended   December  31,  1996.   Gross  gains  of
                         approximately  $209,000,  and $142,600 and gross losses
                         of approximately  $272,700,  and $118,400 were realized
                         on those sales during the years ended June 30, 1996 and
                         1995, respectively.

                         Proceeds  from the sale of mortgage  backed  securities
                         was  approximately   $24,991,000  for  the  year  ended
                         December 31, 1997 and  $17,845,000,  and $5,416,000 and
                         for the six months ended December 31, 1996 and the year
                         ended  June  30,  1995,  respectively.  Gross  gains of
                         approximately $237,000 were realized on those sales for
                         the year ended  December  31,  1997 and  $111,000,  and
                         $40,000 were realized on those sales for the six months
                         ended  December  31,  1996 and the year  ended June 30,
                         1995,  respectively.  Gross  losses  on  the  sales  of
                         mortgage-backed  securities  were $0 for the year ended
                         December  31,  1997,  $0 and  $4,000 for the six months
                         ended  December  31,  1996 and the years ended June 30,
                         1995,  respectively.  The  Corporation  had no sales of
                         mortgage backed  securities  during the year ended June
                         30, 1996.

                         Mortgage backed securities of approximately  $2,838,000
                         and   $3,157,000   at  December   31,  1997  and  1996,
                         respectively,  were pledged for bonds payable (Note 7).
                         At  December  31, 1997 and 1996  investment  securities
                         with a market  value of  approximately  $3,141,000  and
                         $7,349,000,  respectively  were  pledged as  collateral
                         under repurchase agreements (Note 8).





                                                                            F-20
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)


<TABLE>
<CAPTION>

2.   Loans Receivable    Loans receivable are summarized as follows:

                         December 31,                                       1997            1996
                         -----------------------------------------------------------------------
<S>                                                                  <C>             <C>        
                         Residential real estate                     $66,035,224     $67,015,734
                         Commercial real estate                       16,641,057       8,485,966
                         Construction and land                        18,263,062       5,219,979
                         Commercial non-real estate                      503,002               -
                         Consumer                                      6,202,021       4,174,984
                         -----------------------------------------------------------------------

                                                                     107,644,366      84,896,663
                         -----------------------------------------------------------------------
                         Less  
                           Undisbursed loan funds                      6,752,222       2,466,623
                           Deferred loan fees                            282,618         290,016
                           Allowance for loan losses                     934,977         869,851
                         -----------------------------------------------------------------------

                                                                       7,969,817       3,626,490
                         -----------------------------------------------------------------------

                                                                     $99,674,549     $81,270,173
                         =======================================================================
</TABLE>

<TABLE>
<CAPTION>
                         The allowance for loan losses is summarized as follows:
<S>                                                                                     <C>     
                         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                                                 (16,005)
                         -----------------------------------------------------------------------

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

                         Balance at December 31, 1996                                    869,851
                         Provision charged to expense                                    122,320
                         Net charge-offs                                                 (57,194)
                         -----------------------------------------------------------------------

                         Balance at December 31, 1997                                   $934,977
                         =======================================================================
</TABLE>




                                                                            F-21
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




2.   Loans Receivable    The Corporation  serviced loans for others  aggregating
     (continued)         approximately $123,834,000 and $172,771,000 at December
                         31,  1997 and 1996,  respectively.  Mortgage  servicing
                         rights,  included in other  assets,  was  approximately
                         $904,000  and  $974,000 at December  31, 1997 and 1996,
                         respectively.     Mortgage    servicing    rights    of
                         approximately  $507,000 and $226,000  were  capitalized
                         during the year ended  December 31, 1997 and six months
                         ended December 31, 1996, respectively.                 

                         Gross  gains  and  gross  losses  on the  sale of loans
                         totalling   approximately   $520,000  and  $1,000  were
                         realized  during  the year  ended  December  31,  1997,
                         $283,000  and  $67,000  during  the  six  months  ended
                         December 31, 1996, and $205,000 and $0, and $51,000 and
                         $112,000  for the years  ended  June 30,  1996 and 1995
                         respectively.  There were no loans  classified  as held
                         for sale at December 31, 1997 and 1996.

                         At December 31, 1997 and 1996, the  Corporation  had no
                         loans that were considered as impaired.

3.   Office Properties   Office  properties  and  equipment  are  summarized  as
     and Equipment       follows:                                               
<TABLE>
<CAPTION>

                         December 31                                       1997             1996
                         -----------------------------------------------------------------------
<S>                                                                  <C>              <C>       
                         Land                                        $1,910,922       $1,880,950
                         Building and leasehold improvements          3,084,362        2,407,983
                         Furniture and fixtures                         823,234          599,367
                         Equipment                                    1,147,688          821,606
                         Automobiles                                     55,362                -
                         -----------------------------------------------------------------------
                                                                      7,021,568        5,709,906
                         Less accumulated depreciation
                           and amortization                           1,021,790          763,753
                         -----------------------------------------------------------------------

                         Net office properties and equipment         $5,999,778       $4,946,153
                         =======================================================================
</TABLE>




                                                                            F-22
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

<TABLE>
<CAPTION>

4.   Deposits            Deposits are summarized as follows:

                         December 31                                     1997                     1996
                         -------------------------------------------------------------------------------------
                                                                  Amount      Percent      Amount      Percent
                         -------------------------------------------------------------------------------------
<S>                                                          <C>             <C>       <C>             <C> 
                         Passbook, statement savings and
                           interest checking accounts
                             Non-interest bearing            $  2,771,114      2.4%    $  1,505,640      1.9%
                             1.00 to 2.00%                      8,318,148      7.4                -        -
                             2.01 to 3.00%                        953,976       .9        5,400,365      6.6
                             3.01 to 4.00%                      6,433,351      5.7        8,170,916     10.0
                             4.01 to 5.00%                      3,994,110      3.5                -        -
                         -------------------------------------------------------------------------------------

                                                               22,470,699     19.9       15,076,921     18.5
                         -------------------------------------------------------------------------------------

                         Certificates:
                             0 to 5.00%                            65,962       .1          259,828       .3
                             5.01 to 6.00%                     75,747,649     67.1       66,064,322     81.2
                             6.01 to 7.00%                     14,662,702     12.9                -        -
                         -------------------------------------------------------------------------------------

                                                               90,476,313     80.1       66,324,150     81.5
                         -------------------------------------------------------------------------------------

                                                             $112,947,012    100.0%    $ 81,401,071    100.0%
                         =====================================================================================
</TABLE>

                         The aggregate  amount of certificates of deposit with a
                         minimum  denomination  of  $100,000  was  approximately
                         $11,108,000  and  $9,663,000  at December  31, 1997 and
                         1996, respectively.

                         Scheduled maturities of certificates are as follows:

<TABLE>
<CAPTION>

                         December 31,                                                  1997               1996
                         -------------------------------------------------------------------------------------
<S>                                                                             <C>                <C>        
                         Within one year                                        $77,659,702        $57,305,347
                         One to two years                                         6,565,313          5,095,223
                         Two to three years                                       1,743,083          1,381,536
                         Three to four years                                      2,427,116          1,178,064
                         Five years and thereafter                                2,081,099          1,363,980
                         -------------------------------------------------------------------------------------

                                                                                $90,476,313        $66,324,150
                         =====================================================================================
</TABLE>




                                                                            F-23
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




5.   Fair Value of       The   estimated   fair  values  of  the   Corporation's
     Financial           financial instruments are as follows:                  
     Instruments         
<TABLE>
<CAPTION>
                         December 31,                                      1997                           1996
                         ------------------------------------------------------------------------------------------------
                                                                 Carrying          Fair         Carrying          Fair
                                                                  Amount           Value         Amount           Value
                         ------------------------------------------------------------------------------------------------
<S>                                                           <C>             <C>             <C>            <C>         
                         Financial assets
                           Cash and short-term    
                            investments                       $  5,916,504    $  5,917,000    $  6,076,315   $  6,076,000
                           Securities                           15,566,382      15,587,000      19,984,374     20,085,000
                           Loans, net of allowance
                            for loan losses                     99,674,549     100,595,000      81,270,173     80,858,000

                         Financial liabilities
                           Deposits                            112,947,012     113,117,000      81,401,071     81,345,000
                           Advances from Federal
                            Home Loan Bank                               -               -      17,500,000     17,500,000
                           Securities sold under
                            agreement to
                            repurchase                           2,989,000       2,989,000       6,681,000      6,681,000
                           Bonds payable                         2,360,083           N/A         2,705,813            N/A


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

                         Unrecognized financial
                          instruments
                             Commitments to
                              extend credit                   $ 18,145,000     $18,145,000      $9,356,000     $9,356,000
                             Forward commitments
                              to purchase
                              mortgage-backed
                              securities                                 -               -       6,054,000      6,041,000
</TABLE>




                                                                            F-24
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




5.   Fair Value of       The  following  methods  and  assumptions  were used to
     Financial           estimate  the  fair  value of each  class of  financial
     Instruments         instruments  for which it is  practicable  to  estimate
     (continued)         that value.                                            

                         Cash and short-term investments
                         -------------------------------

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

                         Securities
                         ----------

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

                         Loan receivables
                         ----------------

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

                         Deposit liabilities
                         -------------------

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

                         Advances from Federal Home Loan Bank
                         ------------------------------------

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

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





                                                                            F-25
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)


5.   Fair Value of       Securities sold under agreement to repurchase
     Financial           ---------------------------------------------
     Instruments
     (continued)         Fixed-coupon reverse repurchase  agreements are treated
                         as  short-term   financings.   The  carrying  value  is
                         considered a reasonable estimate of fair value.        

                         Bonds payable
                         -------------

                         Due to the  nature  and  terms  (Note  7) of the  bonds
                         payable  held by GMSC,  Inc. at  December  31, 1997 and
                         1996,  it was not deemed  practicable  to estimate  the
                         fair value.

                         Commitments to extend credit
                         ----------------------------

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

                         Forward   Commitments   to   purchase   mortgage-backed
                         securities
                         -------------------------------------------------------

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

6.   Results of          Unaudited  results of operations of the Corporation for
     Operations for      the six months ended December 31, 1995  (unaudited) are
     the Six Months      as follows:                                            
     Ended December      
     31, 1995

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

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




                                                                            F-26
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



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

                         December 31,                                          1997              1996
                         -----------------------------------------------------------------------------
<S>                                                                      <C>                <C>       
                         Serial Bonds
                           Class A-2, maturing January 20,
                             2012, at 8.0%                               $  285,701         $1,066,586
                           Class A-3, maturing January 20,
                             2019, at 8.0%                                2,649,648          2,444,544
                           Unapplied payments                              (159,100)          (326,479)
                         ------------------------------------------------------------------------------

                                                                          2,776,249          3,184,651
                         Less unamortized discount                         (416,166)          (478,838)
                         ------------------------------------------------------------------------------

                                                                         $2,360,083         $2,705,813
                         ==============================================================================
</TABLE>

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





                                                                            F-27
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




8.   Securities Sold     The  following  is a  summary  of  certain  information
     Under Agreements    regarding the Bank's repurchase agreements:            
     to Repurchase       
<TABLE>
<CAPTION>
                                                                          Year Ended           Six Months Ended
                                                                       December 31, 1997       December 31, 1996
                         ---------------------------------------------------------------------------------------
<S>                                                                       <C>                     <C>       
                         Balance at end of period                         $2,989,000              $6,681,000
                         Weighted average interest rate
                           at end of period                                    6.29%                   6.50%
                         Average amount outstanding
                           during the period                              $2,006,792              $6,321,040
                         Maximum amount outstanding
                           at any month end during the
                           period                                         $5,867,000              $9,957,000
</TABLE>

9.   Advances From       Information  related  to  borrowing  activity  from the
     Federal Home        Federal Home Loan Bank is as follows:                  
     Loan Bank           
<TABLE>
<CAPTION>
                                                                          Year Ended           Six Months Ended
                                                                       December 31, 1997       December 31, 1996
                         ---------------------------------------------------------------------------------------
<S>                                                                      <C>                     <C>        
                         Maximum amount
                           outstanding
                           during the
                           period                                        $17,500,000             $22,500,000
                         =======================================================================================

                         Average amount
                           outstanding
                           during the period                             $10,956,000             $19,550,000
                         =======================================================================================

                         Average interest
                           rate during the
                           period                                               6.23%                   5.79%
                         =======================================================================================
</TABLE>



                                                                            F-28
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



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

<TABLE>
<CAPTION>

                                                                          Year Ended           Six Months Ended
                                                                       December 31, 1997       December 31, 1996
                         ---------------------------------------------------------------------------------------
<S>                                                                        <C>                     <C>     
                         Current income tax (benefit)                      $458,040                 $(3,500)
                         Deferred income tax                                 28,000                       -
                         ---------------------------------------------------------------------------------------

                                                                           $486,040                 $(3,500)
                         =======================================================================================

                         Year Ended June 30                                    1996                    1995
                         ---------------------------------------------------------------------------------------

                         Current income tax                                $344,338                $187,885
                         Deferred income tax (benefit)                            -                 (87,377)
                         ---------------------------------------------------------------------------------------

                                                                           $344,338                $100,508
                         =======================================================================================
</TABLE>

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

                                                                         Year Ended            Six Months Ended
                                                                      December 31, 1997        December 31, 1996
                         ---------------------------------------------------------------------------------------
<S>                                                                       <C>                     <C>     
                         Tax expense (benefit) at statutory rate          $470,477                 $(3,360)
                         Adjustments
                           Effect of state taxes                            55,350                    (395)
                           Other                                           (39,787)                    255
                         ---------------------------------------------------------------------------------------

                                                                          $486,040                 $(3,500)
                         =======================================================================================

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

                         Tax expense at statutory rate                    $335,780                $162,096
                         Adjustments
                           Effect of state taxes                            39,504                  18,880
                           Other                                           (30,946)                (80,468)
                         ---------------------------------------------------------------------------------------

                                                                          $344,338                $100,508
                         =======================================================================================
</TABLE>




                                                                            F-29
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)





10.  Income Taxes        The components of deferred income taxes are as follows:
     (continued)
<TABLE>
<CAPTION>
                         December 31,                                          1997                   1996
                         ---------------------------------------------------------------------------------
<S>                                                                        <C>                    <C>     
                         Deferred tax asset
                           Bad debt reserves                               $243,000               $164,000
                           Deferred loan fees                                43,000                 54,000
                           Excess servicing                                  16,000                 38,000
                           Trading securities                                     -                 90,000
                           Other                                             60,000                136,000
                         ---------------------------------------------------------------------------------

                         Total deferred tax asset                           362,000                482,000
                         ---------------------------------------------------------------------------------

                         Deferred tax liability
                           GMSC REMIC                                       185,000                204,000
                           FHLB stock                                       118,000                187,000
                           Fixed Assets                                      42,000                      -
                           Other                                             12,000                 58,000
                         ---------------------------------------------------------------------------------

                         Total deferred tax liability                       357,000                449,000
                         ---------------------------------------------------------------------------------

                         Net deferred tax asset                            $  5,000               $ 33,000
                         =================================================================================
</TABLE>

11.  Related Party       In the normal course of business, the Corporation makes
     Transactions        loans to directors, officers and other related parties.
                         These loans are made on substantially the same terms as
                         those   prevailing   at   the   time   for   comparable
                         transactions  with the other borrowers.  The loans with
                         related  parties  outstanding  at December 31, 1997 and
                         1996,   are   approximately   $191,000  and   $163,000,
                         respectively.                                          





                                                                            F-30
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



12.  Commitments         The  Corporation  leases  office space under  operating
     and                 leases expiring at various dates through 2002 and has a
     Contingencies       contract  for  the   performance  of  data   processing
                         services  whose  initial term expires in May,  1999 and
                         requires minimum  payments of $8,100 per month.  Future
                         minimum rental and data  processing  payments  required
                         that have initial or remaining  noncancelable  terms in
                         excess  of one year as of  December  31,  1997,  are as
                         follows:                                               
<TABLE>
<CAPTION>
                                                                                   Amount
                                                                       -----------------------------
                                                                                             Data
                         Year Ending December 31,                        Leases           Processing
                         ---------------------------------------------------------------------------
<S>                                                                    <C>                  <C>     
                         1998                                          $ 49,700             $ 97,200
                         1999                                            50,000               40,500
                         2000                                            20,200                    -
                         2001                                            20,200                    -
                         Thereafter                                      10,700                    -
                         ---------------------------------------------------------------------------

                                                                       $150,800             $137,700
                         ===========================================================================
</TABLE>

                         Total rental expense amounted to approximately  $47,000
                         for the year ended  December  31,  1997 and $23,000 for
                         the six months ended  December 31, 1996,  and $168,000,
                         and  $187,000  for the years  ended  June 30,  1996 and
                         1995, 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
                         pending or threatened litigation.





                                                                            F-31
<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



13.  Stockholders'       On June 28, 1995, the Corporation  completed an initial
     Equity              public offering of its common stock through the sale of
                         180,000 shares of common stock at a price of $13.00 per
                         share.  Proceeds to the  Corporation  from the offering
                         (net of offering  expenses of  approximately  $312,000)
                         were approximately $2,028,000.                         
                                                                                
                         On November 30, 1995, the Board of Directors declared a
                         two-for-one  stock split to be  distributed  on January
                         31, 1996, to all  shareholders  of record as of January
                         15, 1996.                                              
                                                                                
                         On  January  23,  1997,  the  Corporation  completed  a
                         secondary offering of its common stock through the sale
                         of 575,000  shares of common  stock at a price of $8.50
                         per  share.   Proceeds  to  the  Corporation  from  the
                         offering  (net of offering  expenses  of  approximately
                         $416,000) were approximately $4,471,000.               
                                                                                
                         The following  table  represents the Bank's  regulatory
                         capital  levels at December  31,  1997  relative to the
                         Federal Reserve requirements.                          
<TABLE>
<CAPTION>

                                                 Amount       Percent       Actual      Actual     Excess
                         December 31, 1997      Required      Required      Amount      Percent    Amount
                         ----------------------------------------------------------------------------------
<S>                                            <C>             <C>       <C>            <C>      <C>       
                         Leverage              $3,306,000      4.00%     $ 7,911,000     9.57%   $4,605,000
                         Tier 1 risk based      3,306,000      4.00       11,810,000    14.29     8,504,000
                         Total risk based
                          capital               6,613,000      8.00       12,745,000    15.42     6,132,000
</TABLE>

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

                                                 Amount       Percent       Actual      Actual     Excess
                         December 31, 1996      Required      Required      Amount      Percent    Amount
                         ----------------------------------------------------------------------------------
<S>                                            <C>             <C>       <C>            <C>      <C>       
                         Tangible capital      $1,743,000      1.50%     $ 6,639,000     5.70%   $4,896,000
                         Core capital           3,490,000      3.00        6,639,000     5.70     3,149,000
                         Risk-based capital     4,519,000      8.00        7,345,000    13.00     2,826,000
</TABLE>

                         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.




                                                                            F-32
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



14.  Stock Option        The Corporation has a noncompensatory stock option plan
     Plan                (the "Plan") designed to provide  long-term  incentives
                         to key employees. All options are exercisable upon date
                         of vesting.                                            
                                                                                
                         The Corporation  applies  Accounting  Principles  Board
                         Opinion No. 25 (APB 25), Accounting for Stock Issued to
                         Employees,  and related  interpretations  in accounting
                         for its plan.  Accordingly,  no  compensation  cost has
                         been  recognized  for this plan against  earnings.  For
                         those  companies  applying APB 25, FASB  Statement  No.
                         123, Accounting for Stock-Based Compensation,  requires
                         certain proforma disclosures of net income and earnings
                         per share.  Net income and earnings per share  computed
                         under FASB Statement No. 123 do not  materially  differ
                         from the amounts reported in the consolidated financial
                         statements.                                            
                                                                                
                         The following table summarizes options outstanding:    

<TABLE>
<CAPTION>

                                                                                                        Six months
                                                                          Year Ending                     ending
                                                                       December 31, 1997             December 31, 1996
                         ------------------------------------------------------------------------------------------------
                                                                                 Weighted -                    Weighted -
                                                                                  average                       average
                                                                                  exercise                      exercise
                                                                   Shares           price         Shares         price
                         ------------------------------------------------------------------------------------------------
<S>                                                                <C>            <C>             <C>            <C>  
                         Options outstanding at
                           beginning of period                      4,000         $ 4.88           14,000        $4.75
                         Granted                                   72,000          15.25                -            -
                         Forfeited                                   (800)         12.00                -            -
                         Exercised                                 (4,000)          4.88          (10,000)        4.70
                         ------------------------------------------------------------------------------------------------

                         Options outstanding at end
                           of period                               71,200         $15.25            4,000        $4.88
                         ================================================================================================

                         Options exercisable at end
                           of period                                9,600                           4,000
                         ================================================================================================
</TABLE>


                         The  weighted  average  fair value of  options  granted
                         during the year ended December 31, 1997 was $1.14.




                                                                            F-33
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

<TABLE>
<CAPTION>

14.  Stock Option        Year Ending June 30,                                1996                        1995             
     Plan                -----------------------------------------------------------------------------------------------  
     (continued)                                                                 Weighted -                  Weighted -   
                                                                                  average                     average    
                                                                                  exercise                    exercise    
                                                                   Shares           price        Shares         price     
                         -----------------------------------------------------------------------------------------------  
<S>                                                                <C>              <C>          <C>           <C>        
                         Options outstanding at                                                                           
                           beginning of period                     17,600           $4.65        36,000        $4.50      
                         Granted                                        -               -             -            -      
                         Forfeited                                      -               -             -            -      
                         Exercised                                 (3,600)           4.25       (18,400)        4.36      
                         -----------------------------------------------------------------------------------------------  
                                                                                                                          
                         Options outstanding at end                                                                       
                           of period                               14,000           $4.75        17,600        $4.65      
                         ===============================================================================================  
                                                                                                                          
                         Options exercisable at end                                                                       
                           of period                               14,000                        13,600                   
                         ===============================================================================================  
</TABLE>

                         The Corporation  applies  Accounting  Principals  Board
                         Opinion 25 in accounting  for stock options  granted to
                         employees.  Had  compensation  expense been  determined
                         based  upon the fair  value of the  awards at the grant
                         date and consistent  with the method under Statement of
                         Financial  Accounting  Standards 123, the Corporation's
                         net  earnings  and net  earnings per share for the year
                         ended  December  31, 1997 would have been  decreased to
                         the pro forma amounts indicated in the following table:
<TABLE>
<CAPTION>

                            Net income                                  
                            ------------------------------------------------------------
<S>                                                                             <C>     
                              As reported                                       $897,715
                              Pro forma                                          844,363
                            ------------------------------------------------------------

                            Net income per share (basic and diluted)
                            ------------------------------------------------------------

                              As reported                                       $   0.61
                              Pro forma                                             0.58
</TABLE>





                                                                            F-34
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



14.  Stock Option        There were no options  granted for the six months ended
     Plan                December 31, 1996 and for the years ended June 30, 1996
     (continued)         and 1995,  therefore  there are no pro forma effects on
                         net income and net income per share.                   
                                                                                
                         The fair value of each option  granted is  estimated on
                         the date of grant using the Black-Sholes option pricing
                         model with the  following  assumptions  used for grants
                         for the year  ended  December  31,  1997:  a risk  free
                         interest  rate  of  5.85%,  dividend  yield  of  1.00%,
                         expected  weighted  average  term of 2.48 years,  and a
                         volatility of 25.00%.                                  
                                                                                
                         The follow  table  summarizes  information  about stock
                         options outstanding at December 31, 1997:              

<TABLE>
<CAPTION>

                                                              Options Outstanding                  Options Exercisable
                         -----------------------------------------------------------------------------------------------
                                                                    Weighted        Weighted                    Weighted
                                                                     average         average                     average
                                                                    remaining       exercise                    exercise
                         Range of exercise        Number of        contractual        price       Number of       price
                         prices                    Shares         life (years)      per share      Shares       per share
                         ------------------------------------------------------------------------------------------------
<S>                      <C>                      <C>                 <C>            <C>           <C>           <C>   
                         $12.00 - 17.57           65,200              2.21           $14.87        9,600         $12.00
                         $19.33 - 21.26            6,000              5.83            20.29            -              -
                         ------------------------------------------------------------------------------------------------

                                                  71,200              2.48           $15.25        9,600         $12.00
                         ================================================================================================
</TABLE>

15.  Employee Benefit    Effective February 16, 1989, the Corporation  adopted a
     Plans               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 $10,300 for the
                         year ended  December 31, 1997 and $4,600 and $5,800 for
                         the years ended June 30,  1996 and 1995,  respectively,
                         and $5,500 for the six months ended  December 31, 1996,
                         respectively.                                          





                                                                            F-35
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



16.  Financial           The  Corporation  is a party to  financial  instruments
     Instruments With    with  off-balance-sheet  risk in the  normal  course of
     Off-Balance-Sheet   business to meet the  financing  needs of its customers
     Risk                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.                               

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

                                                                                        Contract
                                                                                     Notional Amount

                         December 31,                                          1997                 1996
                         ----------------------------------------------------------------------------------
<S>                                                                        <C>                   <C>       
                         Financial instruments whose contract
                           amounts represent credit risk
                             Commitments to extend credit                  $18,145,000           $9,356,000
                             Standby letters of credit written                 944,000              463,000

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

</TABLE>



                                                                            F-36
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)



16.  Financial           Commitments  to extend credit are agreements to lend to
     Instruments With    a  customer  as long as  there is no  violation  of any
     Off-Balance-Sheet   condition  established  in  the  contract.  Commitments
     Risk                generally   have  fixed   expiration   dates  or  other
     (continued)         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.                                            

17.  Condensed           Condensed financial information is shown for the Parent
     Financial           Company only as follows:                               
     Information of the  
     Corporation                                                                
     (Parent Company           Condensed Statements of Financial Condition      
     Only)                                                                      
<TABLE>
<CAPTION>
                         December 31,                                         1997                     1996 
                         ---------------------------------------------------------------------------------- 
                                                                                                            
                            Assets                                                                          
                                                                                                            
<S>                                                                    <C>                       <C>        
                         Investment in the Bank, at equity             $11,758,347               $6,657,155 
                         Cash                                               10,000                   10,000 
                         Prepaid expenses and other assets                  40,836                   90,680 
                         ---------------------------------------------------------------------------------- 
                                                                                                            
                                                                       $11,809,183               $6,757,835 
                         ================================================================================== 
</TABLE>





                                                                            F-37
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

<TABLE>
<CAPTION>
<S>                      <C>                                                 <C>                 <C>
17.  Condensed           December 31,                                               1997               1996 
     Financial           ---------------------------------------------------------------------------------- 
     Information of the  
     Corporation           Liabilities and Stockholders' Equity                                             
     (Parent Company                                                                                        
     Only)               Liabilities                                         $         -         $  182,086 
     (continued)         ---------------------------------------------------------------------------------- 
                                                                                                            
                         Stockholders' Equity                                                               
                           Common stock                                        1,876,729          1,155,010 
                           Additional paid-in capital                          5,724,954          1,975,695 
                           Retained earnings                                   4,207,500          3,445,044 
                         ---------------------------------------------------------------------------------- 
                                                                                                            
                         Total stockholders' equity                           11,809,183          6,575,749 
                         ---------------------------------------------------------------------------------- 
                                                                                                            
                                                                             $11,809,183         $6,757,835 
                         ================================================================================== 
</TABLE>

<TABLE>
<CAPTION>
                                                 Condensed Statements of Operations
                         ----------------------------------------------------------------------------------
                                                                       Year Ended          Six Months Ended
                                                                      December 31,           December 31,
                                                                          1997                   1996
                         ----------------------------------------------------------------------------------
<S>                                                                     <C>                    <C>    
                         Income
                           Dividends received from Bank                 $135,259               $46,200
                         ----------------------------------------------------------------------------------

                         Total income                                    135,259                46,200
                         ----------------------------------------------------------------------------------

                         Noninterest expenses                             (7,028)              (52,582)
                         ----------------------------------------------------------------------------------

                         Income (loss) before undistributed
                            net income of the Bank                       128,231                (6,382)
                         Undistributed net income                        769,484                43,562
                         ----------------------------------------------------------------------------------

                         Net income                                     $897,715              $ 37,180
                         ==================================================================================
</TABLE>





                                                                            F-38
<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

<TABLE>
<CAPTION>
<S>                                                                                    <C>              <C>
17.  Condensed                                   Condensed Statements of Cash Flows    
     Financial           -----------------------------------------------------------------------------------------------
     Information of the                                                                 Year Ended      Six Months Ended
     Corporation                                                                       December 31,       December 31,  
     (Parent Company                                                                       1997               1996      
     Only)               -----------------------------------------------------------------------------------------------
     (continued)                                                                                 
                         Operating activities                                                                           
                          Net income                                                   $  897,715          $  37,180    
                          Adjustments                                                                                   
                             Undistributed earnings of the Bank                          (769,484)           (43,562)   
                             (Increase) decrease in prepaid and                                                         
                               other assets                                                49,844            (21,701)   
                             (Decrease) increase in other liabilities                    (182,086)            37,686    
                             Other                                                          4,011             (9,603)   
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Net cash absorbed by operating                                                                 
                           activities                                                           -                  -    
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Investing activities                                                                           
                           Dividends received from Bank                                   135,259             46,200    
                           Investment in the Bank                                      (4,470,978)                 -    
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Net cash provided (absorbed) by                                                                
                           investing activities                                        (4,335,719)            46,200    
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Financing activities                                                                           
                           Cash dividends paid on common stock                           (135,259)           (46,200)   
                           Issuance of common stock                                     4,470,978                  -    
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Net cash provided (absorbed) by financing                                                      
                           activities                                                   4,335,719            (46,200)   
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Increase in cash                                                       -                  -    
                                                                                                                        
                         Cash, beginning of period                                         10,000             10,000    
                         -----------------------------------------------------------------------------------------------
                                                                                                                        
                         Cash, end of period                                           $   10,000          $  10,000    
                         ===============================================================================================
                                                                                                                        
                         
                         
                         

                         
                         
</TABLE>





                                                                            F-39


<PAGE>

                                   SIGNATURES

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

                                           GUARANTY FINANCIAL CORPORATION



Date:  April 13, 1998                      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 Director                      April 13, 1998
            Thomas P. Baker                      (Principal Executive Officer)
                                                 

/s/ Vincent B. McNelley                    Senior Vice President and Chief Financial           April 13, 1998
-------------------------------------           Officer (Principal Financial and 
          Vincent B. McNelley                           Accounting Officer)       
                                                  

                                                     Chairman of the Board                     April __, 1998
-------------------------------------
           Douglas E. Caton


                                                  Vice Chairman of the Board                   April __, 1998
-------------------------------------
            Harry N. Lewis


                                                           Director                            April __, 1998
-------------------------------------                                                  
            Henry J. Browne


/s/ Robert P. Englander                                    Director                            April 13, 1998
-------------------------------------
          Robert P. Englander


/s/ John R. Metz                                           Director                            April 13, 1998
-------------------------------------
              John R. Metz

<PAGE>


                                                           Director                            April __, 1998
-------------------------------------
           James R. Sipe, Jr.


/s/ Oscar W. Smith, Jr.                                    Director                            April 13, 1998
-------------------------------------
          Oscar W. Smith, Jr.


/s/ John B. Syer                                           Director                            April 13, 1998
-------------------------------------
              John B. Syer
</TABLE>



<PAGE>

                                  EXHIBIT INDEX


Exhibit No.                             Document
-----------                             --------

3.1               Amended and  Restated  Articles of  Incorporation  of Guaranty
                  Financial Corporation. (restated in electronic format).

3.2               Bylaws of Guaranty Financial Corporation.

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.