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, 2002

                         Commission file number 0-25905

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

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

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

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

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

                                               Name of Each Exchange
              Title of Each Class               on Which Registered
              -------------------               -------------------

                    None                                 n/a

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

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

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

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

         The  issuer's  gross  income  for  its  most  recent  fiscal  year  was
$15,306,120.

         The aggregate  market value of the voting stock held by  non-affiliates
computed by  reference  to the closing  sales price of such stock as of February
28, 2003 was approximately  $21,166,000.  (The exclusion from such amount of the
market  value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)

         The number of  outstanding  shares of Common  Stock as of February  28,
2003 was 1,978,377.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Proxy Statement for the 2003 Annual Meeting of Shareholders - Part III
<PAGE>

                                TABLE OF CONTENTS

                                     PART I

                                                                           Page
                                                                           ----

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

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

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

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

                                     PART II

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

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

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

ITEM 8.  CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS
                      ON ACCOUNTING AND FINANCIAL DISCLOSURE................37

                                    PART III

ITEM 9.  DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND
                      CONTROL PERSONS; COMPLIANCE WITH SECTION
                      16(a) OF THE EXCHANGE ACT.............................37

ITEM 10. EXECUTIVE COMPENSATION.............................................37

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                      OWNERS AND MANAGEMENT AND RELATED
                      STOCKHOLDER MATTERS...................................37

ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS.....................38

ITEM 13. EXHIBITS, LIST AND REPORTS ON FORM 8-K.............................38

ITEM 14. CONTROLS AND PROCEDURES............................................39

                                       2
<PAGE>

                                     PART I

Item 1.           Description of Business.

General

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

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

         The Bank is a community  bank that provides a broad range of commercial
and retail  banking  services.  Guaranty's  principal  business  activities  are
attracting  checking and savings  deposits from local businesses and the general
public through its retail banking offices and originating,  servicing, investing
in and selling loans. Of Guaranty's $165.4 million of gross loans outstanding at
December  31,  2002,  23.3%  represented  construction  and  land  loans,  51.1%
represented  commercial  business and  commercial  real estate loans,  and 12.2%
represented  residential  first  mortgages.  Guaranty also lends funds to retail
banking customers by means of home equity,  installment  loans, and multi-family
dwellings.  In addition,  Guaranty offers consumer loans and  government-insured
and conventional small business loans. Guaranty invests in certain United States
government and agency obligations and other investments  permitted by applicable
laws and regulations.

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

Market Area

         Guaranty is headquartered in Charlottesville, Virginia. Charlottesville
and its surrounding area had a collective population of approximately 120,000 in
2000 according to census  figures.  It is located in central  Virginia 110 miles
southwest  of  Washington,  D.C. and 70 miles west of  Richmond,  Virginia,  and
includes the  University  of Virginia,  the area's  largest  employer.  Guaranty
operates  six  full  service  retail  branches,   which  serve  Charlottesville,
Albemarle County, and Fluvanna County, Virginia.

Competition

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

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

                                       3
<PAGE>

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

Credit Policies

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

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

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

         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 available for debt service.
Loan applications are submitted to the underwriting  department for review. Loan
quality is  analyzed  based on the  Bank's  experience  and credit  underwriting
guidelines  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 that Guaranty originates are
not readily salable in the secondary  market because they do not meet all of the
secondary  marketing   guidelines.   Real  estate  collateral  is  appraised  by
independent fee appraisers who have been pre-approved by the Board of Directors.
All  conforming  loans  including  HUD/FHA,  VA and  applicable  VHDA  loans are
underwritten  by  mortgage  loan  administration  according  to the Bank's  loan
authority schedule.

                                       4
<PAGE>

         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, 2002, commitments to extend credit totaled $52.4 million.

Construction Lending

         Guaranty makes local construction  loans,  primarily  residential,  and
land acquisition and development  loans.  The construction  loans are secured by
residential houses under construction and the underlying land for which the loan
was  obtained.  At December 31, 2002,  construction,  land and land  development
loans  outstanding were $38.5 million,  or 23.3%, of gross loans.  Approximately
95% of  these  loans  are  concentrated  in the  Richmond  and  Charlottesville,
Virginia markets.  The average life of a construction loan is approximately nine
months and they  reprice  monthly to meet the market,  typically  prime plus one
percent.  Because  the  interest  rate  charged on these  loans  floats with the
market,  they help  Guaranty in managing  its interest  rate risk.  Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single  borrowers  or groups of related  borrowers.  Another  risk  involved  in
construction  lending is  attributable  to the fact that loan funds are advanced
upon  the  security  of the  land or home  under  construction,  which  value is
estimated prior to the completion of construction. Thus, it is more difficult to
evaluate  accurately  the total loan funds  required  to  complete a project and
related loan-to-value ratios. To mitigate the risks associated with construction
lending,  Guaranty  generally  limits  loan  amounts to 75% to 80% of  appraised
value, in addition to analyzing the creditworthiness of its borrowers.  Guaranty
also obtains a first lien on the property as security for its construction loans
and typically requires personal guarantees from the borrower's principal owners.

Commercial Business Loans

         Commercial  business loans  generally have a higher degree of risk than
residential  mortgage  loans,  but have higher  yields.  To manage  these risks,
Guaranty generally obtains  appropriate  collateral and personal guarantees from
the  borrower's  principal  owners and monitors the  financial  condition of its
business borrowers.  Residential  mortgage loans generally are made on the basis
of the borrower's ability to make repayment from his employment and other income
and are secured by real estate whose value tends to be readily ascertainable. In
contrast,  commercial  business  loans  typically  are made on the  basis of the
borrower's  ability to make  repayment  from cash flow from its business and are
secured by business assets, such as commercial real estate, accounts receivable,
equipment  and  inventory.  As a  result,  the  availability  of  funds  for the
repayment of commercial business loans is substantially dependent on the success
of the business  itself.  Furthermore,  the collateral  for commercial  business
loans may  depreciate  over time and generally  cannot be appraised with as much
precision as residential real estate.  Guaranty has a loan review and monitoring
process to regularly assess the repayment  ability of commercial  borrowers.  At
December 31, 2002, commercial loans totaled $76.6 million, or 46.3% of the total
loan portfolio.

Commercial Real Estate Lending

         Commercial real estate loans are secured by various types of commercial
real  estate in  Guaranty's  market  area,  including  multi-family  residential
buildings,   commercial  buildings  and  offices,  small  shopping  centers  and
churches.  At December 31, 2002,  commercial  real estate loans  aggregated $7.9
million or 4.8% of Guaranty's gross loans.

                                       5
<PAGE>

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

One-to-Four-Family Residential Real Estate Lending

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

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

         Typically, all fixed rate mortgage loans are originated with the intent
to sell. In order to meet  community  needs and retain a competitive  edge,  the
bank occasionally  originates  non-conforming  fixed rate loans. At December 31,
2002,  $8.9 million,  or 5.4%, of Guaranty's  loan portfolio  consisted of fixed
rate mortgage loans.

         Guaranty also originates a non-conforming  adjustable rate product with
a higher entry level rate and margin than that of the conforming adjustable rate
products.  This  non-conforming  loan provides yet another  outlet for loans not
meeting investor guidelines.  The Bank has no current investor  relationship for
selling this ARM product.  Interest rates on adjustable rate products offered by
the Bank are tied to One,  Three,  Five or Seven  Year  United  States  Treasury
bills.  Guaranty's ARM products contain interest rate caps at adjustment periods
and rate ceilings  based on a cap over and above the original  interest rate. At
December  31,  2002,  $11.2  million,  or 6.8%,  of the  Bank's  loan  portfolio
consisted of adjustable rate mortgages.

                                       6
<PAGE>

         All  residential  mortgage  loans  originated  by  Guaranty  contain  a
"due-on-sale"  clause  providing that Guaranty may declare the unpaid  principal
balance due and payable upon sale or transfer of the mortgaged premises,  unless
certain investor  provisions should apply.  "Due-on-sale"  definitions will vary
from  investor to investor,  so  Guaranty's  policy is to adhere to the mortgage
loan  investor's  guidelines,  or in the case of our own  loans,  adhere  to the
defined terms in the security instruments.

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

Consumer Lending

         Guaranty offers various secured and unsecured consumer loans, including
unsecured personal loans and lines of credit,  automobile loans, deposit account
loans,  installment  and demand loans,  credit  cards,  and home equity lines of
credit and loans.  At December  31, 2002,  Guaranty had consumer  loans of $22.2
million or 13.4% of gross loans. Such loans are generally made to customers with
which Guaranty has a pre-existing  relationship.  Guaranty currently  originates
all of its consumer  loans in its geographic  market area.  Most of the consumer
loans are tied to the prime lending rate and reprice monthly.

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

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

Employees

         At  December  31,  2002,  Guaranty  had 87  full-time  and 4  part-time
employees.  None of  Guaranty's  employees  are  represented  by any  collective
bargaining unit.

                                       7
<PAGE>

Supervision and Regulation

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

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

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

         Payment of Dividends.  Guaranty is a legal entity separate and distinct
from its banking and other  subsidiaries.  The majority of  Guaranty's  revenues
will result from  dividends paid to Guaranty by the Bank. The Bank is subject to
laws and  regulations  that limit the amount of  dividends  that it can pay.  In
addition,  both  Guaranty  and  the  Bank  are  subject  to  various  regulatory
restrictions  relating to the payment of dividends,  including  requirements  to
maintain  capital  at or above  regulatory  minimums.  Banking  regulators  have
indicated that banking  organizations should generally pay dividends only if the
organization's  net income available to common  shareholders  over the past year
has been  sufficient to fully fund the dividends,  and the  prospective  rate of
earnings  retention appears  consistent with the  organization's  capital needs,
asset quality and overall financial condition. Guaranty does not expect that any
of these laws, regulations or policies will materially affect the ability of the
Bank to pay  dividends.  During  the year  ended  December  31,  2002,  the Bank
declared $420,875 in dividends payable to Guaranty.

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

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

                                       8
<PAGE>

         The FDIC has  implemented  a risk-based  deposit  insurance  assessment
system  under  which the  assessment  rate for an insured  institution  may vary
according to  regulatory  capital  levels of the  institution  and other factors
(including supervisory evaluations).  Depository institutions insured by the BIF
that are "well capitalized" and that present few or no supervisory concerns, are
required to pay only the statutory  minimum  assessment  of $2,000  annually for
deposit  insurance,  while all other banks are required to pay premiums  ranging
from .03% to .27% of domestic deposits.  The Bank's deposit insurance assessment
was .10% of deposits  per year in 2000 and was .03% of deposits per year in 2001
and 2002. These rate schedules are subject to future adjustments by the FDIC. In
addition,  the FDIC has  authority to impose  special  assessments  from time to
time.  However,  because  the  legislation  enacted in 1996  requires  that both
Savings  Association  Insurance Fund insured and BIF-insured  deposits pay a pro
rata  portion of the  interest due on the  obligations  issued by the  Financing
Corporation, the FDIC is assessing BIF-insured deposits an additional 1.30 basis
points per $100 of deposits to cover those obligations.

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

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

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

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

                                       9
<PAGE>

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

         The federal  banking  agencies  also have broad  powers  under  current
federal  law to take  prompt  corrective  action to resolve  problems of insured
depository  institutions.  The extent of these  powers  depends upon whether the
institution   in  question   is  well   capitalized,   adequately   capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law.  As of  December  31,  2002,  Guaranty  and the Bank were
classified as well capitalized.

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

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

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

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

                                       10
<PAGE>

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

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

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

Forward Looking Statements

         Certain statements in this annual report are forward-looking and may be
identified  by the use of  words  such  as  "believe",  "expect",  "anticipate",
"should", "planned", "estimated", and "potential". These statements are based on
Guaranty's  current  expectations.  A variety of factors could cause  Guaranty's
actual results and experience to differ materially from the anticipated  results
or other expectations  expressed in such forward-looking  statements.  The risks
and uncertainties that may affect the operations, performance,  development, and
results of Guaranty's business include interest rate movements, competition from
both  financial and  non-financial  institutions,  the timing and occurrence (or
nonoccurence)  of transactions  and events that may be subject to  circumstances
beyond Guaranty's control, and general economic conditions.


                                       11
<PAGE>
Item 2.           Description of Property.

         As of March 1, 2003,  Guaranty  conducted  its  business  from its main
office in Charlottesville,  Virginia and six branch offices. The following table
provides certain information with respect to these properties:

<TABLE>
<CAPTION>

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

1658 State Farm Boulevard                                1996                  Owned by Guaranty
Charlottesville, Virginia

Branch Offices:

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

Barracks Road                                            1994                  Lease  expires  in 2004,  subject to
1924 Arlington Boulevard                                                       Guaranty's  right to  renew  for two
Charlottesville, Virginia                                                      additional five-year terms

West Main                                                1998                  Lease  expires  in 2003,  subject to
2211 West Main Street                                                          Guaranty's  right to  renew  for two
Charlottesville, Virginia                                                      additional five-year terms

Route 29 North & Rio Road                                1996                  Lease  expires  in 2012,  subject to
1700 Seminole Trail                                                            Guaranty's  right to  renew  for two
Charlottesville, Virginia                                                      additional five-year terms

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

Forest Lakes                                             2001                  Owned by Guaranty
3290 Worth Crossing
Charlottesville, Virginia
</TABLE>


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

                                       12
<PAGE>


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.


                                     PART II

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

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

                           Market Price and Dividends

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

                                          High          Low       Dividends ($)
                                          ----          ---       -------------

Fiscal Year Ended December 31, 2001:
         1st quarter                       9.000        5.000          --
         2nd quarter                       8.250        7.500          --
         3rd quarter                       8.500        7.270          --
         4th quarter                       9.000        7.500          --


Fiscal Year Ended December 31, 2002:
         1st quarter                      10.950        8.000          --
         2nd quarter                      13.750       10.200          --
         3rd quarter                      14.120       12.200          --
         4th quarter                      14.600       12.500          --


         In October  2000,  both  Guaranty  and the Bank  entered into a written
agreement with the FRB-Richmond and the Bureau of Financial Institutions.  Among
the  restrictions  included in the Written  Agreement was a requirement that any
dividends  paid or declared  by either  Guaranty or the Bank be approved by both
the  FRB-Richmond  and the  Bureau  of  Financial  Institutions.  Following  the
initiation of the written  agreement,  Guaranty's Board of Directors  decided to
suspend dividend  payments on Guaranty's  Common Stock.  The timing,  amount and
payment of future  dividends on Guaranty's  Common Stock is at the discretion of
Guaranty's  Board of  Directors  subject  to the  written  approval  by both the
FRB-Richmond  and the Bureau of Financial  Institutions 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 and the Bank were
released from the Written Agreement in October 2002.

                                       13
<PAGE>

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

         As of February 28, 2003, Guaranty had approximately 987 shareholders of
record.


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

The following  commentary discusses major components of the business of Guaranty
Financial  Corporation  (Guaranty) and presents an overview of its  consolidated
financial  position and results of operations at December 31, 2002 and 2001, and
for the years ended December 31, 2002, 2001 and 2000. This discussion  should be
reviewed in conjunction with the consolidated financial statements,  the summary
of accounting policies and accompanying notes and other statistical  information
presented elsewhere in this annual report.

Overview

Guaranty is headquartered in  Charlottesville,  Virginia and conducts almost all
of its operations  through its  subsidiary,  Guaranty  Bank.  Guaranty Bank is a
community bank serving the Charlottesville  and Fluvanna markets.  Guaranty Bank
(the "Bank")  operated eight branch  locations  throughout the year 2002, one of
which was located in the Harrisonburg market. The Bank closed on the sale of the
Harrisonburg branch to FNB Southeast, on January 24, 2003.

Guaranty made  tremendous  progress  during  calendar  year 2002,  which was the
second year of its strategic  repositioning to become a high performing  banking
company.  Management  continued to focus on initiatives that were established in
2001 to improve earnings.  Guaranty realized  substantial growth in earnings and
maintained a high level of asset  quality,  even while  experiencing a continued
decline in the Federal Reserve's discount rate, which underwent an additional 50
basis point  reduction in the fourth  quarter of 2002,  to .75%.  As a result of
Guaranty's  focused  effort on attracting  low-cost  deposits,  the net interest
margin widened year-over-year from 3.51 to 4.58%.

In October 2000,  Guaranty and the Bank,  entered into a Written  Agreement (the
"Agreement")  with the  Federal  Reserve  Bank of  Richmond  and the  Bureau  of
Financial   Institutions  with  respect  to  various   operating   policies  and
procedures.  As a result of the Agreement,  the Bank revised its asset/liability
management, liquidity, risk management, loan administration and capital adequacy
policies.  Guaranty  addressed  all of the issues  raised in the  Agreement  and
gained formal  written relief from the Agreement in October 2002. As a result of
the Agreement,  Guaranty suspended dividends to its common shareholders from the
third quarter of 2000 through the fourth  quarter of 2002.  Guaranty's  Board of
Directors  re-instated  a dividend to  shareholders  on January 23, 2003, in the
amount of 7.5 cents per share for shareholders of record as of January 29, 2003,
payable February 10, 2003.

Guaranty's  2002 financial  performance  reflected a planned  reduction in total
assets.  This  planned  reduction in total assets is  indicative  of  Guaranty's
emphasis changing from aggressive growth to profitability  management.  Combined
with increased earnings,  the net result increased regulatory capital ratios for
both Guaranty and the Bank.

Net Income

Net  income for the year ended  December  31,  2002,  was  $1,763,000  ($.89 per
diluted share),  which  represented a $1,245,000,  or 240% increase over the net
income  for the  prior  year.  Factors  that  significantly  contributed  to the
increased net income were higher net interest income, lower loan loss

                                       14
<PAGE>

provision,  and  decreased  personnel and  occupancy  expenses,  offset by lower
mortgage  banking fees,  investment  commissions and an increased  provision for
income taxes.

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

Net  income for the year ended  December  31,  2000,  was  $607,000  or $.31 per
diluted share. These earnings,  an increase over 1999 earnings,  were the result
of increased net interest income and deposit fees,  which exceeded  increases in
operating   expenses  and  additional   provisions  for  possible  loan  losses.
Additionally,  net income in 2000 was not  impacted by the losses on the sale of
investments, which negatively impacted the 1999 earnings.

Net Interest Income

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

Net  interest  income was $8.7  million for the year ended  December 31, 2002, a
10.3%  increase  from $7.9  million  in net  interest  income for the year ended
December 31, 2001. The net interest margin was 4.58% for the year ended December
31, 2002, a 107 basis point increase over net interest margin of the prior year.
Interest  on  deposits  decreased  year-over-year  by 61.2%,  falling  from $8.9
million to $3.5  million.  This  decrease was the result of a focused  effort to
attract and retain  low-cost  deposits,  coupled  with lower market  rates.  The
average cost of deposits  decreased 233 basis  points,  from 4.57% to 2.24% from
December  31, 2001 to December  31,  2002.  The impact of lower  interest  rates
offered by the Bank to deposit customers was offset to a certain extent by lower
interest earned on interest  earning assets.  Interest income generated by loans
fell from $15.5 million to $11.6 million, a 24.6% decrease. The average yield on
loans fell by 118 basis points,  to 6.99% for the year ended  December 31, 2002,
from 8.17% for the prior  year.  Interest  earned on  investments  decreased  by
$984,000,  predominantly due to lower balances in the investment  portfolio.  If
there are additional  prime rate decreases in 2003, the net interest margin will
be negatively  impacted,  as the yield on interest earning assets will generally
fall  faster  than the cost of  interest  bearing  liabilities.  Guaranty's  net
interest margin will be positively impacted by stable or rising rates in 2003.

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

                                       15
<PAGE>

Net interest income was $9.8 million for the year ended December 31, 2000, 26.5%
greater than the $7.7 million reported for the year ended December 31, 1999. The
improvement in net interest income reflected higher loan and investment  yields,
higher  average  balances  and an  increased  gap  between the amount of earning
assets and the amount of interest bearing  liabilities.  The net interest margin
increased  due to  Guaranty  shifting  its asset base into both  commercial  and
consumer loans and away from more  conservatively  priced  residential  mortgage
loans.  The net interest margin for the year ended December 31, 2000,  increased
by 56 basis points to 3.99% as compared to the prior year-end.  The increase was
due to a 97 basis point increase in the yield on earning assets,  which exceeded
the 54 basis point increase in the cost of interest bearing liabilities.

                                       16
<PAGE>

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

                                                                       Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                2002                          2001                         2000
------------------------------------------------------------------------------------------------------------------------------------
                                              Interest   Average            Interest   Average           Interest    Average
                                     Average   Income/   Yield/    Average   Income/   Yield/    Average  Income/    Yield/
(Dollars in thousands)               Balance   Expense    Rate     Balance   Expense    Rate     Balance  Expense     Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>         <C>        <C>     <C>        <C>        <C>    <C>        <C>         <C>
Assets
Interest earning assets:
  Securities                        $ 17,226    $ 1,086    6.30%   $ 28,303   $ 1,855    6.55%  $ 25,065   $ 1,786     7.13%
  Loans                              166,634     11,649    6.99%    189,135    15,451    8.17%   213,353    20,103     9.42%
  Interest bearing deposits
   in other banks                      6,078        120    1.97%      7,381       336    4.55%     6,668       469     7.03%
------------------------------------------------------------------------------------------------------------------------------------
  Total interest-earning assets/
   total interest income             189,938     12,855    6.77%    224,819    17,642    7.85%   245,086    22,358     9.12%
------------------------------------------------------------------------------------------------------------------------------------
  Non-interest earning assets:
   Cash and due from banks             8,551                          8,134                        6,599
   Premises and equipment              8,185                          9,245                        9,454
   Other assets                        4,975                          4,504                        4,876
   Less allowance for loan
     losses                           (2,531)                       (2,523)                       (1,798)
------------------------------------------------------------------------------------------------------------------------------------
   Total non-interest earning
     assets                           19,180                         19,360                       19,131
------------------------------------------------------------------------------------------------------------------------------------
   Total Assets                     $209,118                       $244,179                     $264,217
------------------------------------------------------------------------------------------------------------------------------------
Liabilities and Stockholders' Equity
Interest bearing liabilities:
  Interest bearing deposits:
  Demand accounts                  $  27,057         87    0.32%   $ 23,344       243    1.04%  $ 20,151       328     1.63%
  MMDA accounts                       24,864        381    1.53%     21,170       674    3.18%    21,883     1,000     4.57%
  Savings                             13,103         63    0.48%     11,643       195    1.67%    10,922       245     2.24%
  Certificates of deposit             89,635      2,933    3.27%    139,438     7,821    5.61%   149,787     8,949     5.97%
------------------------------------------------------------------------------------------------------------------------------------
  Total interest bearing
   deposits                          154,659      3,464    2.24%    195,595     8,933    4.57%   202,743    10,522     5.19%
------------------------------------------------------------------------------------------------------------------------------------
  FHLB advances and other
   borrowings                          6,136        120    1.96%      4,608       237    5.14%    22,774     1,485     6.50%
  Trust preferred bonds                6,013        481    8.00%      6,013       481    8.00%     6,017       465     7.71%
  Bonds payable                          486         90   18.52%        739       105   14.21%       881       105    11.92%
------------------------------------------------------------------------------------------------------------------------------------
  Total interest bearing
   liabilities/total interest
   expense                           154,659      4,155    2.48%    206,955     9,756    4.71%   232,415    12,577     5.41%
------------------------------------------------------------------------------------------------------------------------------------
  Non-interest bearing liabilities:
  Demand deposits                     22,879                         18,755                       14,409
  Other liabilities                    1,397                          2,259                        1,991
------------------------------------------------------------------------------------------------------------------------------------

   Total liabilities                 191,570                        227,969                      248,815
------------------------------------------------------------------------------------------------------------------------------------
Stockholders' equity                  17,548                         16,210                       15,402
------------------------------------------------------------------------------------------------------------------------------------
  Total liabilities and
   Stockholders' equity             $209,118                       $244,179                     $264,217
------------------------------------------------------------------------------------------------------------------------------------
Interest spread (1)                                        4.29%                         3.13%                         3.71%
Net interest income/net interest
  margin (2)                                     $8,700    4.58%              $ 7,886    3.51%              $9,781     3.99%
====================================================================================================================================
</TABLE>

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

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

                                       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.
<TABLE>
<CAPTION>

                                                           Year Ended December 31, 2002         Year Ended December 31, 2001
                                                                    compared to                          compared to
                                                           Year Ended December 31, 2001         Year Ended December 31, 2000
                                                                  Change Due To:                       Change Due To:
------------------------------------------------------------------------------------------------------------------------------------
                                                                               Increase                            Increase
(Dollars in thousands)                                     Rate      Volume   (Decrease)        Rate    Volume    (Decrease)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>          <C>       <C>             <C>      <C>         <C>
Interest income:
  Securities                                           $     (71)   $  (698)  $   (769)      $  (143)  $   212    $    69
  Loans                                                   (2,229)    (1,573)    (3,802)       (2,674)   (1,978)    (4,652)
  Interest bearing deposits
   in other banks                                           (190)       (26)      (216)         (165)       32       (133)
------------------------------------------------------------------------------------------------------------------------------------
     Total interest income                                (2,490)    (2,297)    (4,787)       (2,982)   (1,734)    (4,716)
------------------------------------------------------------------------------------------------------------------------------------
Interest expense:
  Interest bearing deposits:
   Demand accounts                                          (168)        12       (156)         (118)       33        (85)
   MMDA accounts                                            (350)        57       (293)         (303)      (23)      (326)
   Savings                                                  (139)         7       (132)          (62)       12        (50)
   Certificates of deposit                                (3,258)    (1,630)    (4,888)         (548)     (580)    (1,128)
------------------------------------------------------------------------------------------------------------------------------------
     Total interest bearing deposits                      (3,915)    (1,554)    (5,469)       (1,031)     (558)    (1,589)
   FHLB advances and other                                  (147)        30       (117)         (298)     (934)    (1,232)
   Bonds payable                                              32        (47)       (15)           18       (18)         -
------------------------------------------------------------------------------------------------------------------------------------
   Total interest expense                                 (4,030)    (1,571)    (5,601)       (1,311)   (1,510)    (2,821)
------------------------------------------------------------------------------------------------------------------------------------
   Net interest income                                  $  1,540    $  (726)  $    814       $(1,669)  $  (224)   $(1,895)
====================================================================================================================================
</TABLE>

Interest Sensitivity

An  important  element  of  both  earnings  performance  and  liquidity  is  the
management of the interest  sensitivity gap. The interest sensitivity gap is the
difference between interest-sensitive assets and interest-sensitive  liabilities
maturing or repricing within a specific time interval. The gap can be managed by
repricing assets or liabilities,  by selling investments,  by replacing an asset
or liability  prior to maturity,  or by adjusting  the interest  rate during the
life of an asset or  liability.  Matching the amounts of assets and  liabilities
repricing  in the same time  interval  helps to hedge the risk and  minimize the
impact on net income of changes in market  interest  rates.  Guaranty  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, 2002,  Guaranty had $25.5 million more  liabilities  than assets
that reprice within one year and therefore was in a one-year liability-sensitive
position.  A  liability-sensitive  position  or a  negative  gap  will  tend  to
positively  impact  net  earnings  in a period  of  falling  interest  rates and
negatively  impact  net  earnings  in a period of rising  interest  rates.  This
liability-sensitive  position is primarily the result of fixed rate certificates
of deposit  reaching  maturity in one year or less.  To decrease the gap between
interest-sensitive  assets  and  liabilities,  Guaranty  is in  the  process  of
shifting its deposit mix to include a higher percentage of demand accounts and a
lower  percentage of certificates of deposit.  Guaranty  reduced its gap between
liabilities and assets that reprice within one year by $13.3 million, from $38.8
million at December 31, 2001.

Guaranty has an  Asset/Liability  Committee  ("ALCO"),  which meets regularly to
discuss  deposit  pricing,  changes in borrowed  money,  investment  and trading
activity,  loan  sale  activity,  liquidity  levels  and  the


                                       18
<PAGE>

overall interest sensitivity.  The actions of this committee are reported to the
Board of  Directors  monthly.  The  daily  monitoring  of  interest  rate  risk,
investment and trading activity,  along with any other significant  transactions
are managed by the President  with input from other ALCO members.  The following
table  presents  the  amounts  of  Guaranty's   interest  sensitive  assets  and
liabilities that mature or reprice in the periods indicated.

<TABLE>
<CAPTION>

                                                                                   December 31, 2002
                                                                                Maturing or Repricing In:
------------------------------------------------------------------------------------------------------------------------------------
                                                        3 Months              4-12                    1-5             Over 5
(Dollars in thousands)                                   or less             Months                  Years             Years
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                    <C>                  <C>                  <C>               <C>
Interest-sensitive assets:
  Loans                                                $ 80,034            $  23,350            $  44,569         $  17,429
  Investments and mortgage-backed securities (1)              4                   12                  477             3,540
  Deposits at other institutions                          7,487                    -                    -                 -
------------------------------------------------------------------------------------------------------------------------------------
  Total interest-sensitive assets                        87,525               23,362               45,046            20,969
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive assets                     87,525              110,887              155,933           176,902
------------------------------------------------------------------------------------------------------------------------------------
Interest-sensitive liabilities:
  NOW accounts                                           28,773                    -                    -                 -
  Money market deposit accounts                          34,445                    -                    -                 -
  Savings accounts                                       12,812                    -                    -                 -
  Certificates of deposit                                21,048               39,338               10,110                 8
  Convertible preferred securities                            -                    -                    -             6,013
  Bonds payable                                               3                   11                   70               306
------------------------------------------------------------------------------------------------------------------------------------
  Total interest-sensitive liabilities                   97,081               39,349               10,180             6,327
------------------------------------------------------------------------------------------------------------------------------------
Cumulative interest-sensitive liabilities             $  97,081            $ 136,430            $ 146,610         $ 152,937
------------------------------------------------------------------------------------------------------------------------------------
Period gap                                            $ (9,556)            $ (15,987)           $  34,866         $  14,642
Cumulative gap                                          (9,556)              (25,543)               9,323            23,965
Ratio of cumulative interest-sensitive
  assets to interest-sensitive liabilities               90.16%                81.28%              106.36%           115.67%
Ratio of cumulative gap to total assets                  (4.85%)              (12.96%)               4.73%            12.16%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1) Amounts include Federal Home Loan Bank stock.

Of Guaranty's commercial and construction loans with a maturity of more than one
year, approximately $2.9 million have fixed interest rates and $2.4 million have
variable interest rates.




                                       19
<PAGE>

Investments

Total  investment  securities  decreased  77.0% to $5.4  million at December 31,
2002,  from $23.5  million at December 31,  2001.  During  2002,  Guaranty  took
advantage of the sustained low interest rate  environment  and liquidated  $10.4
million of the corporate  bonds in the available for sale  classification.  This
decreased the corporate  bond  portfolio from $13.6 million at December 31, 2001
to $3.2 million at December 31, 2002, in an effort to improve  liquidity without
incurring  investment losses. This strategy results in decreased interest income
in the short term, however,  the flexibility gained allows Guaranty to build and
maintain an investment  portfolio better structured to meet future liquidity and
profitability objectives.

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

                                                                                December 31,
                                                         2002                       2001                       2000
---------------------------------------------------------------------------------------------------------------------------------
                                                  Cost         Market         Cost        Market         Cost        Market
---------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                            <C>           <C>            <C>          <C>          <C>           <C>
Held-to-maturity
  Mortgage-backed securities                    $    433      $   471      $    720      $    768     $    950      $    970
  Other                                              403          403           250           250          250           250
---------------------------------------------------------------------------------------------------------------------------------
  Total held-to-maturity                             836          874           970         1,018        1,200         1,220
---------------------------------------------------------------------------------------------------------------------------------

Available for sale
  Corporate bonds                                  3,247        3,212        13,620        12,597       19,354        17,508
  U.S. Government Agency Obligations                   -            -         8,000         7,970            -             -
  Federal Reserve Bank & Other Stocks                422          422           422           422          422           422
---------------------------------------------------------------------------------------------------------------------------------
  Total available for sale                         3,669        3,634        22,042        20,989       19,776        17,930
---------------------------------------------------------------------------------------------------------------------------------

Other
  Federal Home Loan Bank Stock                       947          947         1,550         1,550        1,550         1,550
---------------------------------------------------------------------------------------------------------------------------------
  Total                                         $  5,452      $ 5,455      $ 24,562      $ 23,557     $ 22,526      $ 20,700
=================================================================================================================================
</TABLE>

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

                                                                                December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                         2002                       2001                       2000
------------------------------------------------------------------------------------------------------------------------------------
                                                   Book         % of          Book         % of          Book          % of
(Dollars in thousands)                             Value        Total         Value        Total         Value         Total
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>            <C>           <C>            <C>          <C>           <C>
  Investment securities:
   FHLMC mortgage-backed securities             $    431       7.96        $    720         3.06%      $     950       4.59%
   Corporate bonds                                 3,212      59.29          12,597        53.58          17,508      84.66
   Treasury and agency notes                          --         --           8,220        34.97             250       1.21
   FHLB stock                                        947      17.48           1,550         6.59           1,550       7.50
   Other                                             827      15.27             422         1.80             422       2.04
------------------------------------------------------------------------------------------------------------------------------------
Total Investment securities                      $ 5,417     100.00%       $ 23,509       100.00%      $  20,680     100.00%
====================================================================================================================================
</TABLE>

                                       20
<PAGE>

The following table indicates the maturity distribution and yields of investment
securities, held as of December 31, 2002.
<TABLE>
<CAPTION>

                                   Due in 1 year    Due after 1 year   Due after 5 years
                                      or less        through 5 years   through 10 years   Due after 10 years       Total
------------------------------------------------------------------------------------------------------------------------------------
                                  Amount   Yield     Amount   Yield      Amount  Yield      Amount   Yield     Amount  Yield
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                <C>     <C>        <C>      <C>        <C>    <C>          <C>     <C>    <C>      <C>
Securities held for investment:
  U.S. Government securities       $  -     -         $ 403    3.07%     $    -       -     $    -      -    $  403   3.07%
  Mortgage backed securities         16    8.52%         77    8.52%        142   8.52%        198    8.52%     433   8.52%
------------------------------------------------------------------------------------------------------------------------------------
  Total                              16    8.52%        480    3.94%        142   8.52%        198    8.52%     836   5.89%
------------------------------------------------------------------------------------------------------------------------------------

Securities held for sale (1):
  Corporate securities                -        -          -        -      1,020   6.45%      2,192    7.67%   3,212   7.28%

------------------------------------------------------------------------------------------------------------------------------------
Total securities                   $ 16    8.52%      $ 480    3.94%     $1,162   6.70%     $2,390    7.74%  $4,048   7.00%
====================================================================================================================================
</TABLE>

(1)  Excludes Federal Reserve stock of $352,250, Federal Home Loan Bank stock of
     $947,100 and Community Bankers Bank stock of $70,

Loans

Net loans  consist of total loans minus  undisbursed  loan funds,  deferred loan
fees and the  allowance  for loan  losses.  Net loans  were  $163.2  million  at
December 31, 2002, an 8.1% decline from December 31, 2001. During 2002, the size
of Guaranty's loan portfolio decreased as a result of higher credit standards in
light of an uncertain economy.  Net loans declined to $177.6 million at December
31, 2001,  from $201.6 million at December 31, 2000, as Guaranty  controlled its
growth to increase its regulatory capital ratios.

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

                                                                                     December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                          2002           2001           2000            1999           1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                     <C>           <C>             <C>            <C>            <C>
Mortgage Loans:
  Residential                                          $ 20,119       $ 39,864        $ 54,911       $ 62,796       $ 66,369
  Commercial                                              7,894         16,277           3,434          1,179          2,504
  Construction and land loans                            38,480         36,307          59,363         70,009         50,286
------------------------------------------------------------------------------------------------------------------------------------
  Total real estate                                      66,493         92,448         117,708        133,984        119,159
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans                                76,651         66,603          59,120         55,698         34,388
Consumer loans                                           22,238         20,973          27,190         16,960          9,630
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable                                165,382        180,024         204,018        206,642        163,177
------------------------------------------------------------------------------------------------------------------------------------
Adjustments:
  Deferred fees (costs)                                    (110)           (67)            (27)            40            113
  Allowance for losses                                    2,242          2,512           2,396          1,203          1,002
------------------------------------------------------------------------------------------------------------------------------------
  Total net items                                         2,132          2,445           2,369          1,243          1,115
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable, net                          $163,250       $177,579        $201,649       $205,399       $162,062
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>


The changes in Guaranty's  loan portfolio over the past five years represent the
evolution  from  a  savings  association  to a  full  service  commercial  bank.
Commercial  business  lending began in 1998 and now comprises  over 51% of total
loans  outstanding.  During this same time period,  residential  mortgage  loans


                                       21
<PAGE>

outstanding have decreased from $66.4 million to $20.1 million.  Presently,  the
majority of the  residential  mortgage loans  originated are sold on a servicing
released  basis.  Construction  and land  development  loans declined in 2001 as
Guaranty reduced its loan concentration in speculative real estate lending,  and
increased in 2002 through implementation of a plan for targeted growth.
The following  tables show the composition of Guaranty's loan portfolio by fixed
and adjustable rate at the dates indicated.
<TABLE>
<CAPTION>

                                                                                    December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                          2002           2001           2000           1999            1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                    <C>            <C>             <C>            <C>            <C>
Fixed-Rate Loans:
  Real Estate
   Residential                                         $  8,921       $ 27,200        $ 20,403       $ 18,277       $ 20,206
   Commercial                                                 -              -               -          1,179          2,504
   Construction and land loans                                -              -               -              -              -
------------------------------------------------------------------------------------------------------------------------------------
  Total real estate                                       8,921         27,200          20,403         19,456         22,710
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans                                15,745         15,427          12,891         13,678          7,098
Consumer Loans                                            3,606          3,429           3,832          2,825            242
------------------------------------------------------------------------------------------------------------------------------------
  Total fixed-rate loans                                 28,272         46,056          37,126         35,959         30,050
------------------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
  Real Estate
   Residential                                           11,198         12,664          34,508         44,519         46,163
   Commercial                                             7,894         16,277           3,434         11,140         12,853
   Construction and land loans                           38,480         36,307          59,363         70,009         50,286
------------------------------------------------------------------------------------------------------------------------------------
  Total real estate                                      57,572         65,248          97,305        125,668        109,302
------------------------------------------------------------------------------------------------------------------------------------
Commercial business loans                                60,906         51,176          46,229         30,880         14,437
Consumer loans                                           18,632         17,544          23,358         14,135          9,388
------------------------------------------------------------------------------------------------------------------------------------
  Total adjustable-rate loans                           137,110        133,968         166,892        170,683        133,127
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable                                165,382        180,024         204,018        206,642        163,177
------------------------------------------------------------------------------------------------------------------------------------
Less:
  Deferred fees (costs)                                    (110)           (67)            (27)            40            113
  Allowances for losses                                   2,242          2,512           2,396          1,203          1,002
------------------------------------------------------------------------------------------------------------------------------------
  Total net items                                         2,132          2,445           2,369          1,243          1,115
------------------------------------------------------------------------------------------------------------------------------------
  Total loans receivable, net                          $163,250       $177,579        $201,649       $205,399       $162,062
====================================================================================================================================
</TABLE>

The following table presents the remaining  maturities of selected categories of
Guaranty's loan portfolio at December 31, 2002.

                                        Commercial, Financial     Real Estate
                                          and Agricultural       Construction
              -----------------------------------------------------------------
               (Dollars in thousands)
               Within 1 year                   $24,553           $26,083
              -----------------------------------------------------------------
               Variable Rate:
                  1 to 5 years                  10,262             3,604
                  After 5 years                 39,078             1,237
              -----------------------------------------------------------------
               Total                            49,340             4,841
               Fixed Rate:
                  1 to 5 years                   8,170                -
                  After 5 years                  2,482                -
              -----------------------------------------------------------------
               Total                            10,652                -
              -----------------------------------------------------------------
               Total                           $84,545           $30,924
              =================================================================

                                       22
<PAGE>

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

Asset Quality

General

Asset quality is an important factor in the successful  operation of a financial
institution.  Banking regulations require insured institutions to classify their
own assets and to establish  prudent  general  allowances  for losses for assets
classified as "substandard" or "doubtful." For the portion of assets  classified
as "loss," an institution is required to either establish specific allowances of
100% of the amount classified or charge such amounts off its books.

Assets  that do not  currently  expose  Guaranty to  sufficient  risk to warrant
classification  in one of the  aforementioned  categories but possess  potential
weaknesses are required to be designated "special mention" by management. On the
basis of management's  review of its assets, at December 31, 2002,  Guaranty had
classified $8.4 million of its loans as substandard. No loans were classified as
doubtful or loss at December 31, 2002. Most of Guaranty's  assets that have been
classified  are not  included  in the table of  non-performing  assets set forth
below because many loans are classified as substandard based on certain criteria
or previous credit problems but are currently performing.

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

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

                                                                                     December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                           2002           2001            2000           1999           1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                      <C>            <C>             <C>            <C>            <C>
Non-accrual loans                                        $2,363         $  187          $  238         $1,310         $1,686
Restructured loans                                            -              -               -              -              -
------------------------------------------------------------------------------------------------------------------------------------
   Total non-performing loans                             2,363            187             238          1,310          1,686
------------------------------------------------------------------------------------------------------------------------------------
Foreclosed assets                                           397            764           1,301            843            488
------------------------------------------------------------------------------------------------------------------------------------
   Total non-performing assets                           $2,760         $  951          $1,539         $2,153         $2,174
====================================================================================================================================
Loans past due 90 or more days and
   accruing interest                                     $  156         $  103          $1,587         $   93         $  106
Non-performing loans to total loans, at
   period end                                              1.43%          0.10%           0.12%          0.62%          0.97%
Non-performing assets to period end
   total loans and foreclosed assets                       1.67%          0.53%           0.76%          1.02%          1.25%
</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 15 days past due and

                                       23
<PAGE>

again when the loan is 30 days past due. For most loans,  if the  delinquency is
not cured within 60 days, Guaranty issues a notice of intent to foreclose on the
property  and if the  delinquency  is not  cured  within 90 days,  Guaranty  may
institute foreclosure action. In most cases, deficiencies are cured promptly.

                                       24
<PAGE>

Allowance for losses on loans

Guaranty provides valuation  allowances for anticipated losses on loans when its
management  determines  that full  repayment by the borrower is unlikely and the
value of the  collateral is less than the amount of the unpaid  principal of the
related loan plus estimated costs of acquisition and sale. In addition, Guaranty
also provides reserves based on the dollar amount, risk rating and type of loan.
A loss  experience  percentage is established for each risk rating and loan type
and is reviewed  quarterly.  Each quarter the loss  percentage is applied to the
portfolio,  by risk rating and loan type,  to  determine  the minimum  amount of
reserves  required.  Percentages are applied to the various categories of loans,
from 0.12% - 1% of satisfactory loans, and from 2% - 100% of loans for less than
satisfactory  loans.  Mortgage  loans that are HUD or VA guaranteed are excluded
from the allowance for loan loss calculation.  Although management believes that
it uses the best  information  available  to make  such  determinations,  future
adjustments to reserves may be necessary,  and net income could be significantly
affected,  if circumstances differ substantially from assumptions used in making
the initial determinations.

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

                                                                           Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                           2002           2001            2000           1999          1998
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                      <C>            <C>             <C>            <C>           <C>
Balance at beginning of period                           $2,512         $2,396          $1,203         $1,002        $  935
Provision charged to operations                             100            333           1,505            486           184
Charge-offs:
  Real estate                                                 -             66             229            122           120
  Consumer                                                   14             15              72              -             -
  Commercial                                                359            145              34            165             _
Recoveries:
  Real estate                                                 -              1              20              -             3
  Consumer                                                    3              -               2              2             -
  Commercial                                                  -              8               1              -             -
------------------------------------------------------------------------------------------------------------------------------------
Net Charge-offs                                             370            217             312            285           117
------------------------------------------------------------------------------------------------------------------------------------
Balance, end of period                                   $2,242         $2,512          $2,396         $1,203        $1,002
====================================================================================================================================

Allowance for loan losses to period
  end total loans                                          1.36%          1.40%           1.17%          0.57%        0.58%
Allowance for loan losses to nonaccrual
  loans                                                    94.9%      1,343.32%       1,006.72%         91.83%       59.43%
Net charge-offs to average loans                           0.22%          0.12%           0.15%          0.15%        0.10%
</TABLE>

Provision for loan losses

For the years ended  December 31, 2002,  2001 and 2000,  the  provision for loan
losses was approximately $100,000, $333,000 and $1.5 million,  respectively. The
provision for loan losses  decreased  for the years ended  December 31, 2002 and
2001,  as  Guaranty's  loan  portfolio  decreased and its allowance for possible
losses as a percentage of loans  outstanding was above the peer group at each of
the years then ended.

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

                                       25
<PAGE>

A comparison  of the  allocation  of the allowance for loan losses in dollars by
loan  category  to the  percentage  of the loan  portfolio  represented  by each
category is provided in the  following  table.  Because all of these factors are
subject to change,  the allocation is not necessarily  predictive of future loan
losses in the indicated categories.
<TABLE>
<CAPTION>
                                                                           December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                           2002                               2001                              2000
------------------------------------------------------------------------------------------------------------------------------------
                                                 Ratio of                           Ratio of                      Ratio of
                                                 Loans to                           Loans to                      Loans to
                                                Total Gross                        Total Gross                   Total Gross
                                  Allowance        Loans              Allowance       Loans           Allowance     Loans
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                <C>            <C>                <C>              <C>             <C>           <C>
Residential real estate            $   27          12.2%              $   50           22.1%           $  109        26.9%
Construction and land                 548          23.3                  611           20.2             1,056        29.1
Commercial                          1,434          51.1                1,165           46.0               861        30.7
Consumer and other loans              110          13.4                  105           11.7               137        13.3
Unallocated                           123             -                  581              -               233           -
------------------------------------------------------------------------------------------------------------------------------------
  Total                            $2,242         100.0%              $2,512          100.0%           $2,396       100.0%
====================================================================================================================================
</TABLE>
<TABLE>
<CAPTION>
                                                                           December 31,
------------------------------------------------------------------------------------------------------------------------------------
                                                          1999                            1998
------------------------------------------------------------------------------------------------------------------------------------
                                                              Ratio of                          Ratio of
                                                              Loans to                          Loans to
                                                             Total Gross                      Total Gross
                                                Allowance       Loans             Allowance       Loans
------------------------------------------------------------------------------------------------------------------------------------
<S>                                             <C>              <C>               <C>             <C>
(Dollars in thousands)
Residential real estate                         $   78           29.8%             $  101          38.4%
Construction and land                              383           31.4                 384          34.7
Commercial                                         575           30.7                 402          21.4
Consumer and other loans                           167            8.1                 115           5.5
Unallocated                                          -              -                   -             -
------------------------------------------------------------------------------------------------------------------------------------
  Total                                         $1,203          100.0%             $1,002         100.0%
====================================================================================================================================
</TABLE>

Non-Interest Income

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

The  following  table  presents  information  on  the  sources  and  amounts  of
non-interest income.
<TABLE>
<CAPTION>
                                                                                  Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Income                                               2002                     2001                  2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                              <C>                     <C>                    <C>
Mortgage banking income                                         $   999                  $1,093                 $  213
Loan and deposit fees and servicing income                          907                     831                    939
Increase in cash surrender value of life insurance                  183                       -                      -
Investment sales commissions                                        104                     254                    195
Net gain (loss) on sale of securities                                20                       3                    (76)
Other                                                               273                     325                    227
------------------------------------------------------------------------------------------------------------------------------------
Total                                                           $ 2,486                  $2,506                 $1,498
====================================================================================================================================
</TABLE>

                                       26
<PAGE>

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

Non-interest income increased by $1.0 million to $2.5 million for the year ended
December 31, 2001. The increase in  non-interest  income was due primarily to an
increase in income from  Guaranty's  mortgage  banking  unit  resulting  from an
increase in sales of  residential  mortgage  loans to $63.5  million  from $39.8
million in the prior year. In mid-2001,  Guaranty  revised its mortgage  banking
business model and as a result sells all originated  residential  mortgage loans
on a servicing  released basis.  Residential  mortgage loan originations for the
year ended  December 31, 2001,  increased to $70.7 million from $40.1 million in
the prior year. The increase was due to the employment of an additional mortgage
loan  originator  in 2001 and the impact of declining  interest  rates.  Service
charges on deposit  accounts  increased  by 9.3% to $785,000  for the year ended
December 31, 2001, due to increased volume of transaction accounts.

As part of its  revised  mortgage  banking  business  model,  Guaranty  sold its
residential   mortgage  loan   servicing  for  others   portfolio  in  2001  for
approximately $900,000. The transfer of the loan servicing,  which was completed
in October 2001,  resulted in a gain of approximately  $9,000.  With the present
practice  of selling all  residential  mortgage  loans on a  servicing  released
basis,  Guaranty  will  not  accumulate  mortgage  loan  servicing  rights  as a
by-product of its mortgage lending business.  Generally,  the value of servicing
rights moves inversely with the value of interest  bearing  securities as market
interest rates change.  Guaranty has found that the value of servicing rights is
extremely  sensitive  to changes  in market  interest  rates,  but tends to fall
faster as interest rates decline creating volatility in net earnings.  Increases
and decreases in the value of servicing rights are treated as income or expense.
Because  Guaranty  cannot  control or predict  changes in the value of servicing
rights or the rate of  amortization  as loans  prepay,  it  decided  to exit the
mortgage loan servicing business.

Non-Interest Expenses

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

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

                                       27
<PAGE>

Non-interest  expenses  increased by approximately  $1.4 million to $8.9 million
for the year ended  December 31, 2000.  The increase was in all  categories  and
reflected the continued growth of Guaranty.


                                       28
<PAGE>

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

                                                                                  Year Ended December 31,
------------------------------------------------------------------------------------------------------------------------------------
Non-Interest Expense                                              2002                     2001                  2000
------------------------------------------------------------------------------------------------------------------------------------
 (Dollars in thousands)
<S>                                                              <C>                      <C>                   <C>
Personnel                                                        $4,561                   $4,811                $4,227
Occupancy                                                         1,168                    1,412                 1,353
Data Processing                                                   1,158                    1,153                   984
Marketing                                                           159                      211                   317
Professional fees                                                   294                      385                   423
Other                                                             1,168                    1,301                 1,549
------------------------------------------------------------------------------------------------------------------------------------
Total                                                            $8,508                   $9,273                $8,853
====================================================================================================================================
</TABLE>

Income Taxes

Income tax expense for the years ended  December  31, 2002,  2001 and 2000,  was
$814,000, $267,000 and $313,000, respectively. The decreases and increases are a
direct result of earnings  levels for the  respective  year-ends.  The effective
income tax rate was 31.6% for the year ended  December 31, 2002, as the increase
in cash  surrender  value of BOLI is a non-taxable  item and  therefore  reduces
Guaranty's  effective  tax rate.  The effective tax rate was 34.0% for the years
ended December 31, 2001 and 2000.

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,  repurchase
agreements  entered  into  with  commercial  banks  and  Federal  Home Loan Bank
("FHLB") of Atlanta advances.  Contractual loan payments are a relatively stable
source of funds, while deposit inflows and outflows and the related cost of such
funds have varied widely. Borrowings may be used to compensate for reductions in
deposits or  deposit-inflows at less than projected levels and have been used on
a longer-term basis to support expanded lending activities.

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

At December 31, 2002,  deposits were $171.3 million, a 14.6% decline from $200.6
million at December 31,  2001.  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  continues to direct extensive  efforts towards
attracting  lower  cost  transaction  accounts.  Low-cost  transaction  accounts
comprise 58.7% of total  deposits as of December 31, 2002,  compared to 41.1% as
of December 31,  2001.  Current  rates  offered by Guaranty on  certificates  of
deposit are  substantially  below those  offered two years ago.  The majority of
certificates of deposit are initially issued with a one-year maturity.  As these
certificates  of deposit  continue to mature and  reprice,  Guaranty's  interest
expense will  decrease and its net interest  income will  increase.  The average
cost of certificate of deposits for the year ended December 31, 2002 declined by
234 basis points to 3.27% from the same period a year ago.

At December 31, 2001,  deposits were $200.6 million, a 7.6% decrease from $217.0
million at December 31,  2000.  The  decrease in deposits  corresponds  with the
decrease in the loan  portfolio in 2001.  During 2001,  Guaranty  increased  its
non-interest  bearing demand balances by 25.3% to $22.1 million and its

                                       29
<PAGE>

interest  bearing  demand  balances  by 11.1% to $25.5  million.  The  financial
markets were affected by eleven short-term interest rate reductions totaling 475
basis points in 2001.

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

December 31,                                                      2002                     2001                  2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)

<S>                                                            <C>                      <C>                    <C>
Demand deposit accounts                                        $ 53,498                 $ 47,570               $ 40,879
Statement savings account                                        12,812                   12,992                 10,319
Money market accounts                                            34,445                   22,394                 18,893
30-to-180-day certificates                                        3,326                    1,427                  4,613
Seven to eleven month certificates                                  856                    6,404                 37,027
One-to-five year fixed-rate certificates                         62,857                  105,608                 98,540
Eighteen-month prime rate certificates                            3,465                    4,237                  6,773
------------------------------------------------------------------------------------------------------------------------------------
Total                                                          $171,259                 $200,632               $217,044
====================================================================================================================================
</TABLE>

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

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                    2002                         2001                       2000
------------------------------------------------------------------------------------------------------------------------------------
                                                              Average                      Average                     Average
                                                Average        Rate         Average         Rate         Average      Rate
(Dollars in thousands)                          Balance        Paid         Balance         Paid         Balance      Paid
------------------------------------------------------------------------------------------------------------------------------------
<S>                                           <C>               <C>        <C>               <C>        <C>           <C>
Non-interest bearing demand deposits          $ 22,879          0.00%      $ 18,755          0.00%      $ 14,409      0.00%
Interest bearing demand deposits                51,921          0.90%        44,514          2.06%        42,034      3.16%
Savings deposits                                13,103          0.53%        11,643          1.67%        10,922      2.24%
Time deposits                                   89,635          3.27%       139,438          5.61%       149,787      5.97%
------------------------------------------------------------------------------------------------------------------------------------
Total deposits                                $177,538          1.95%      $214,350          4.17%      $217,152      4.84%
====================================================================================================================================
</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 to  eliminate,  the threat of  disintermediation  (the flow of
funds away from depository institutions such as banking institutions into direct
investment vehicles such as government and corporate securities). The ability of
Guaranty to attract and maintain  deposits,  has been,  and will continue to be,
significantly affected by market conditions.

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

Year Ended December 31,                                           2002                     2001                  2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                             <C>                     <C>                    <C>
Opening balance                                                $ 200,632                $217,044               $199,595
Net deposits                                                     (32,838)                (25,345)                 6,927
Interest credited                                                  3,465                   8,933                 10,522
------------------------------------------------------------------------------------------------------------------------------------
Ending balance                                                  $171,259                $200,632               $217,044
====================================================================================================================================

Net increase (decrease)                                        $ (29,373)              $ (16,412)              $ 17,449
Percent increase (decrease)                                      (14.64%)                 (7.56%)                 8.74%
====================================================================================================================================
</TABLE>

                                       30
<PAGE>

The following table  indicates the amount of Guaranty's  certificates of deposit
by time remaining until maturity as of December 31, 2002.
<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     $ 18,386        $ 10,592          $ 22,260          $  7,876         $59,114
Certificates of deposit of $100,000 or more       4,951           1,380             3,458             1,601          11,390
------------------------------------------------------------------------------------------------------------------------------------
Total of certificates of deposits              $ 23,337        $ 11,972          $ 25,718          $  9,477         $70,504
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Borrowings

As a member of the FHLB of Atlanta, Guaranty is required to own capital stock in
the FHLB of Atlanta and is  authorized  to apply for  advances  from the FHLB of
Atlanta.  Each FHLB credit program has its own interest rate, which may be fixed
or variable,  and range of  maturities.  The FHLB of Atlanta may  prescribe  the
acceptable  uses to which these  advances may be put, as well as the size of the
advances and repayment provisions. The advances are collateralized by Guaranty's
investment  in  FHLB  stock  and  certain  mortgage  loans.  See  the  Notes  to
Consolidated  Financial Statements for information  regarding the maturities and
rate structure of Guaranty's FHLB advances.  At December 31, 2002,  Guaranty had
no  outstanding  borrowings  from the FHLB  compared  to $1.0  million and $14.0
million outstanding at the end of the prior two years, respectively.

Guaranty has also used  securities  sold under  agreements to  repurchase,  with
mortgage-backed  securities  or other  securities  pledged  as  collateral.  The
proceeds  have been used for general  corporate  purposes.  Guaranty did not use
securities sold under agreements to repurchase during the calendar years 2002 or
2001.

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.

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

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                  2002                      2001                        2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                    <C>                        <C>                         <C>
Maximum Balance:
  FHLB advances                                        $15,000                    $18,000                     $31,000
  Securities sold under
   agreements to repurchase                                  -                          -                      16,684
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

                                                              Weighted                   Weighted                   Weighted
                                                  Average      Average       Average      Average       Average      Average
                                                  Balance       Rate         Balance       Rate         Balance       Rate
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>           <C>          <C>            <C>        <C>             <C>
  FHLB advances                                   $6,136        1.96%        $4,608         5.14%      $18,147         6.68%
  Securities sold under
   agreements to repurchase                            -            -             -             -        4,265         6.39%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

 December 31,                                              2002                         2001                       2000
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)

<S>                                                          <C>                       <C>                       <C>
FHLB advances                                                 -                        $1,000                    $14,000

Weighted average interest rate of
   short-term FHLB advances                                   -                         2.13%                       6.35%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       31
<PAGE>

Liquidity and Capital Resources

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

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

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

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

At  December  31,  2000,  cash and cash  equivalents  were  approximately  $15.6
million. Financing activities reduced cash and cash equivalents by approximately
$6.1 million  during 2000.  This amount  represents  the  combination of the net
decrease in advances from the FHLB of $6.0 million,  a decrease of $16.7 million
in securities sold under  agreements to repurchase and the growth in deposits of
$17.1 million.  Approximately  $353,000 in dividends to common shareholders were
paid during 2000. Daily operating  activities  provided $3.4 million in cash and
cash equivalents.  Investing  activities  provided an additional $5.6 million in
cash and cash  equivalents  that consisted mainly of the sale of $4.8 million in
securities  and a net  decrease  in the loan  portfolio  of $2.6  million.  This
additional  cash  flow was used to invest in  office  properties  and  equipment
(primarily  for the new Forest Lakes  branch) of $1.3  million,  and $453,000 in
originated mortgage-servicing rights.

Guaranty uses its sources of funds  primarily to meet  operating  needs,  to pay
deposit  withdrawals  and fund loan  commitments.  At December 31,  2002,  total
approved loan commitments were $2.5 million. In addition,  at December 31, 2002,
commitments  under unused lines of credit were $49.9  million.  Certificates  of
deposit scheduled to mature or re-price in one year or less at December 31, 2002
totaled $61.0 million.

Management  intends to fund anticipated loan closings and operating needs during
2003  through cash on hand,  cash  generated  from  operations  and  anticipated
increases  in  deposits.  Current and  anticipated  marketing  programs  will be
primarily targeted at the attraction of lower cost transaction accounts.


                                       32
<PAGE>

The following summarizes Guaranty's  contractual cash obligations and commercial
commitments, including maturing certificates of deposit, as of December 31, 2002
and the effect such  obligations  may have on liquidity and cash flows in future
periods.
<TABLE>
<CAPTION>

                             Contractual Obligations
------------------------------------------------------------------------------------------------------------------------------------
                                                Less Than          2-3               4-5             Over 5
                                                One Year          Years             Years             Years             Total
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                           <C>              <C>               <C>              <C>              <C>
Certificate of deposit maturities (1)         $  61,027        $  7,552          $  1,917         $       8        $ 70,504
Undisbursed credit lines                         49,872               -                 -                 -          49,872
------------------------------------------------------------------------------------------------------------------------------------
Commitments to extend credit                      2,484               -                 -                 -           2,484
Standby letters of credit                         5,054               -                 -                 -           5,054
Total obligations                             $ 118,437        $  7,552          $  1,917         $       8        $127,914
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

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

Guaranty  and the Bank are subject to  regulatory  capital  requirements  of the
Federal Reserve.  At December 31, 2002,  Guaranty and the Bank exceeded all such
regulatory capital requirements as shown in the following table.
<TABLE>
<CAPTION>

                                                                                           December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
                                                                          Guaranty Financial                Guaranty
                                                                              Corporation                     Bank
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                                            <C>                           <C>
Tier 1 Capital:
   Common stock                                                                $  2,463                      $  2,000
   Capital surplus                                                                9,034                         9,742
   Cumulative preferred securities (2)                                            6,013                             -
   Retained earnings                                                              7,133                        12,632
------------------------------------------------------------------------------------------------------------------------------------
     Total Tier 1 Capital                                                        24,643                        24,374
------------------------------------------------------------------------------------------------------------------------------------

Tier 2 Capital:
   Allowance for loan losses (1)                                                  2,076                         2,073
   Cumulative preferred securities                                                    -                             -
------------------------------------------------------------------------------------------------------------------------------------
     Total Tier 2 Capital                                                         2,076                         2,073
------------------------------------------------------------------------------------------------------------------------------------
       Total Risk Based Capital                                                $ 26,719                      $ 26,447
====================================================================================================================================

Risk Weighted Assets                                                           $165,911                      $165,691

Capital Ratios:
   Tier 1 Risk-based                                                             14.87%                        14.73%
   Total Risk-based                                                              16.12%                        15.98%
   Tier 1 Capital to average adjusted total assets                               12.36%                        12.24%
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

(1)  Limited  to 1.25%  of risk  weighted  assets.
(2)  Limited to 1/3 of core capital.


                                       33
<PAGE>

Impact of Inflation, Changing Prices and Seasonality

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

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

Recent Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which was  effective  July 1, 2001.  SFAS 141 requires  the  purchase  method of
accounting  for  business  combinations   initiated  after  June  30,  2001  and
eliminates the  pooling-of-interests  methods.  The adoption of SFAS 141 has not
had an effect on Guaranty's financial statements.

Also in July 2001, the FASB issued Statement of Financial  Accounting  Standards
No.  142  ("SFAS  142"),  "Goodwill  and  Other  Intangible  Assets",  which was
effective  January  1,  2002.  SFAS  142  requires,   among  other  things,  the
discontinuance  of goodwill  amortization.  In addition,  the standard  includes
provisions for the  reclassification of certain existing recognized  intangibles
as  goodwill,   reassessment   of  the  useful  lives  of  existing   recognized
intangibles,  reclassification of certain intangibles out of previously reported
goodwill and the  identification  of  reporting  units for purposes of assessing
potential future impairments of goodwill.  SFAS 142 also requires a transitional
goodwill  impairment  test six  months  from the date of  adoption  and  further
requires an evaluation of the carrying value of goodwill for impairment annually
thereafter.  The  adoption  of SFAS  142 has not  had an  effect  on  Guaranty's
financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".  This statement  addresses financial  accounting
and  reporting  for the  impairment  or  disposal  of  long-lived  assets.  This
statement  supersedes FASB Statement No. 121,  "Accounting for the Impairment of
Long-Lived  Assets  and  for  Long-Lived  Assets  to Be  Disposed  Of",  and the
accounting  and  reporting  provisions  of APB  Opinion No. 30,  "Reporting  the
Results of  Operations  --  Reporting  the Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions".  This statement also amends ARB No. 51,  "Consolidated  Financial
Statements",  to eliminate the exception to  consolidation  for a subsidiary for
which  control  is likely to be  temporary.  This  statement  requires  that one
accounting  model be used  for  long-lived  assets  to be  disposed  of by sale,
whether previously held and used or newly acquired. This statement also broadens
the   presentation   of   discontinued   operations  to  include  more  disposal
transactions.  SFAS 144 is effective for fiscal years  beginning  after December
15, 2001 and interim  periods within those fiscal years.  Guaranty  believes the
adoption  of SFAS 144 will not have a material  effect on  Guaranty's  financial
statements.

On July 6, 2001, the SEC issued Staff  Accounting  Bulletin No. 102 ("SAB 102"),
"Selected  Loan  Loss  Allowance  Methodology  and  Documentation  Issues".  The
bulletin  expresses  the  SEC's  views  on the  development,  documentation  and
application of a systematic  methodology for determining allowances for loan and
lease losses in accordance with generally accepted accounting  principles.  This
includes  for each period  reported  the "books and  records of the  registrants
engaged  in  lending  activities   include   documentation  of:  (a)  systematic
methodology to be employed each period in determining  the amount of loan losses
to be reported,  and (b) rationale  supporting each period's  determination that
the amounts reported were adequate."  Management believes that its documentation
and methodologies are compliant with SAB 102.


                                       34
<PAGE>

In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or  Disposal  Activities",  ("SFAS  146").  This  statement  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities  and  nullifies  Emerging  Issues Task Force  (EITF)  Issue No. 94-3,
"Liability  Recognition of Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This
statement  requires  that a  liability  for a cost  associated  with  an exit or
disposal  activity be recognized when the liability is incurred.  This statement
also establishes that fair value is the objective for initial measurement of the
liability.  The  provisions of this statement are effective for exit or disposal
activities  that are initiated after December 31, 2002. The adoption of SFAS 146
will not have an effect on Guaranty's financial statements.

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

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

Subsidiary Activities

Guaranty  has two  subsidiaries,  the Bank  and  Guaranty  Capital  Trust I (the
"Trust").  The Trust was formed on April 29, 1998 and is the holder of the trust
preferred  securities,  which  were  sold  for  $6,900,000.  See  Notes  to  the
Consolidated  Financial  Statements for  information  regarding the terms of the
securities. The Bank has two wholly owned subsidiaries,  GMSC, Inc. ("GMSC") and
Guaranty  Investments  Corporation  ("GICO").  GMSC  is a  financing  subsidiary
through  which  Guaranty  formed  a  Real  Estate  Mortgage  Investment  Conduit
("REMIC"). Guaranty sells non-deposit investment products through GICO. GICO had
a net income of $560, $53,000 and $42,000 for the years ended December 31, 2002,
2001 and 2000, respectively.

In 1987,  Guaranty  formed  GMSC  and  entered  into a REMIC in order to  create
liquidity.  Guaranty  utilized  the REMIC to pool  $19.9  million  of fixed rate
mortgages  into mortgage  backed  securities,  which were used as collateral for
bonds sold to private investors.  The bonds bore a coupon of 8% and were sold at
a discount  and costs of  issuance of  approximately  $3.3  million.  The bonds'
discount and issuance costs are amortized against income as mortgages underlying
the  bonds  repay.  For the  years  ended  December  31,  2002,  2001 and  2000,
amortization  expense  was  $44,000,  $36,000  and  $21,000,  respectively.  The
amortization of the REMIC expenses is treated as interest expense.


                                       35
<PAGE>
Critical Accounting Policies, Estimates and Judgments

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

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

Forward Looking Statements

Guaranty  cautions  readers that certain  statements  in this annual report with
respect  to   Guaranty's   future   operations   and  business   prospects   are
forward-looking  statements  made pursuant to the safe harbor  provisions of the
Private  Securities   Litigation  Reform  Act  of  1995.  These  forward-looking
statements  are  generally  identified  by phrases such as  "Guaranty  expects,"
"Guaranty believes" or words of similar import. Such forward-looking  statements
involve  known and unknown  risks  including,  but not  limited  to,  changes in
general   economic  and  business   conditions,   interest  rate   fluctuations,
competition  within and from  outside the banking  industry,  new  products  and
services  in the  banking  industry,  risks  inherent  in making  loans  such as
repayment risks and fluctuating  collateral values,  changing trends in customer
profiles and changes in laws and  regulations  applicable to Guaranty.  Although
Guaranty  believes  that its  expectations  with respect to the  forward-looking
statements  are  based  upon  reliable  assumptions  within  the  bounds  of its
knowledge of its business and operations,  there can be no assurance that actual
results, performance or achievements of Guaranty will not differ materially from
any future  results,  performance or  achievements  expressed or implied by such
forward-looking statements.


Item 7.           Financial Statements.

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

         Report of Independent Certified Public Accountants
         Consolidated Balance Sheets as of December 31, 2002 and 2001
         Consolidated  Statements of Operations for the years ended December 31,
         2002, 2001 and 2000
         Consolidated  Statements of Comprehensive  Income (Loss) for the  years
         ended December 31, 2002, 2001 and 2000
         Consolidated  Statements  of  Stockholders'  Equity for the years ended
         December 31, 2002, 2001 and 2000
         Consolidated Statements of Cash Flows for the years ended December 31,
         2002, 2001 and 2000
         Summary  of Accounting Policies Notes to
         Consolidated Financial Statements

                                       36
<PAGE>
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
2003  Annual  Meeting of  Shareholders  (the "2003 Proxy  Statement")  is hereby
incorporated by reference.

Item 10. Executive Compensation

         Information  set forth under the heading  "Executive  Compensation " in
the 2003 Proxy Statement is hereby incorporated by reference.


Item 11. Security Ownership of Certain Beneficial Owners and Management and
         Related Stockholder Matters

         Information  set  forth  under  the  headings  "Security  Ownership  of
Management" and "Security  Ownership of Certain  Beneficial  Owners" in the 2003
Proxy Statement is incorporated by reference.

                      Equity Compensation Plan Information

         The  following  table sets forth  information  as of December 31, 2002,
with respect to  compensation  plans under which shares of the Company's  Common
Stock are authorized for issuance.

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

<S>                                         <C>                          <C>                          <C>
Equity Compensation Plans
   Approved by Shareholders
    1991 Amended Incentive                  76,012                       $10.01                       109,988
        Stock Option Plan

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

Total                                       76,012                       $10.01                       109,988
</TABLE>

---------

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

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

                                       37
<PAGE>
Item 12.          Certain Relationships and Related Transactions

         Information  set forth under the  heading  "Executive  Compensation  --
Transactions with Management" in the 2003 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 (restated in electronic format), attached as
                           Exhibit  3.1 to  Guaranty's  Annual  Report  on  Form
                           10-KSB  for  the  year  ended   December   31,  1997,
                           incorporated herein by reference.

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

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

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

                 21        Subsidiaries of Guaranty.

                 99.1      Statement of Chief Executive  Officer  Pursuant to 18
                           U.S.C.ss.1350.

                 99.2      Statement of Chief Financial  Officer  Pursuant to 18
                           U.S.C.ss.1350.


                                       38
<PAGE>




         (b) Reports on Form 8-K

                  No  reports on Form 8-K were filed  during the  quarter  ended
December 31, 2002.


ITEM 14.          Controls and Procedures

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

         Within  the 90 day  period  prior  to the  filing  of this  report,  an
evaluation  of the  effectiveness  of the design  and  operation  of  Guaranty's
disclosure  controls and  procedures was carried out under the  supervision  and
with the participation of Guaranty's  management,  including the chief executive
officer  and  chief  financial  officer.  Based  on and as of the  date  of such
evaluation, these officers concluded that Guaranty's disclosure controls and
procedures were effective.

         Guaranty also maintains a system of internal  accounting  controls that
is  designed  to  provide   assurance  that  assets  are  safeguarded  and  that
transactions  are executed in accordance  with  management's  authorization  and
properly  recorded.  This system is  continually  reviewed  and is  augmented by
written policies and procedures, the careful selection and training of qualified
personnel and an internal audit program to monitor its effectiveness. There have
been no  significant  changes to this  system of  internal  controls or in other
factors that could significantly affect those controls subsequent to the date of
Guaranty's evaluation.



                                       38
<PAGE>

                        [LETTERHEAD OF BDO SEIDMAN, LLP]


Independent Auditors' Report



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

We  have  audited  the  consolidated   balance  sheets  of  Guaranty   Financial
Corporation  and  subsidiaries as of December 31, 2002 and 2001, and the related
consolidated  statements  of  operations,  stockholders'  equity,  comprehensive
income,  and cash flows for each of the three years in the period ended December
31, 2002. These financial statements are the responsibility of the Corporation's
management.  Our  responsibility  is to express  an  opinion on these  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Guaranty  Financial  Corporation  and  subsidiaries  as of December 31, 2002 and
2001,  and the results of their  operations and their cash flows for each of the
three years in the period ended December 31, 2002 in conformity  with accounting
principles generally accepted in the United States of America.




                                                           /s/ BDO Seidman, LLP

Richmond, Virginia
January 17, 2003




<PAGE>


GUARANTY FINANCIAL CORPORATION
CONSOLIDATED BALANCE SHEETS
<TABLE>
<CAPTION>

December 31,                                                                     2002                          2001
------------------------------------------------------------------------------------------------------------------------------------

Assets
<S>                 <C>            <C>                                  <C>                            <C>
Cash and cash equivalents (including interest bearing deposits
   of approximately $6,979,000 and $2,739,000)                          $  15,391,874                  $ 12,437,293
Investment securities (Note 1)
   Held-to-maturity                                                           836,114                       969,989
   Available for sale                                                       3,634,150                    20,988,725
Investment in Federal Home Loan Bank stock, at cost                           947,100                     1,550,000
Loans receivable, net (Notes 2 and 9)                                     163,249,885                   177,578,914
Accrued interest receivable                                                   909,767                     1,245,266
Real estate owned                                                             397,155                       763,873
Office properties and equipment, net (Note 3)                               7,442,935                     8,109,789
Other assets (Note 8)                                                       4,335,896                     1,522,512
------------------------------------------------------------------------------------------------------------------------------------
                                                                         $197,144,876                  $225,166,361
====================================================================================================================================

Liabilities and Stockholders' Equity
Liabilities
   Deposits (Note 4)                                                     $171,259,105                  $200,631,703
   Advances from Federal Home Loan Bank (Note 7)                                    -                     1,000,000
   Bonds payable (Notes 1 and 6)                                              359,847                       595,374
   Accrued interest payable                                                    57,801                       137,491
   Prepayments by borrowers for taxes and insurance                           126,802                       164,662
   Other liabilities                                                          721,368                       545,113
------------------------------------------------------------------------------------------------------------------------------------
Total liabilities                                                         172,524,923                   203,074,343
------------------------------------------------------------------------------------------------------------------------------------

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

Convertible preferred securities (Notes 11 and 12)                          6,012,500                     6,012,500
------------------------------------------------------------------------------------------------------------------------------------

Stockholders'  Equity (Notes 12 and 13) Preferred stock, par value $1 per share,
   500,000 shares
      authorized, none issued                                                       -                             -
   Common stock, par value $1.25 per share, 4,000,000 shares
      authorized, 1,970,677 and 1,961,727 shares issued
      and outstanding                                                       2,463,346                     2,452,159
   Additional paid-in capital                                               9,034,207                     8,953,230
   Accumulated other comprehensive loss                                       (23,007)                    (695,336)
   Retained earnings - substantially restricted                             7,132,907                     5,369,465
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                 18,607,453                    16,079,518
------------------------------------------------------------------------------------------------------------------------------------
                                                                         $197,144,876                  $225,166,361
====================================================================================================================================
</TABLE>

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


<PAGE>


GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF OPERATIONS
<TABLE>
<CAPTION>

Year Ended December 31,                                              2002                   2001                   2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                <C>                   <C>                   <C>
Interest income
   Loans                                                           $11,648,714           $15,451,066           $20,102,511
   Investment securities                                             1,206,296             2,190,541             2,254,749
------------------------------------------------------------------------------------------------------------------------------------
Total interest income                                               12,855,010            17,641,607            22,357,260
------------------------------------------------------------------------------------------------------------------------------------

Interest expense
   Deposits                                                          3,464,836             8,932,880            10,522,255
   Borrowings                                                          691,049               822,993             2,054,883
------------------------------------------------------------------------------------------------------------------------------------

Total interest expense                                               4,155,885             9,755,873            12,577,138
------------------------------------------------------------------------------------------------------------------------------------

Net interest income                                                  8,699,125             7,885,734             9,780,122
Provision for loan losses (Note 2)                                      99,998               333,467             1,505,000

------------------------------------------------------------------------------------------------------------------------------------
Net interest income after
   provision for loan losses                                         8,599,127             7,552,267             8,275,122
------------------------------------------------------------------------------------------------------------------------------------

Other income
   Mortgage banking income                                             999,168             1,093,393               212,910
   Loan and deposit fees and servicing income                          906,785               830,704               938,500
   Increase in cash surrender value of life insurance                  182,825                     -                     -
   Investment sales commissions                                        104,298               254,433               195,378
   Net gain (loss) on sale of securities                                20,125                 3,046             (76,206)
   Other                                                               272,875               324,679               227,257
------------------------------------------------------------------------------------------------------------------------------------

Total other income                                                   2,486,076             2,506,255             1,497,839
------------------------------------------------------------------------------------------------------------------------------------

Other expenses
   Personnel                                                         4,560,540             4,810,577             4,226,707
   Occupancy (Note 10)                                               1,167,544             1,411,567             1,352,567
   Data processing (Note 10)                                         1,158,381             1,153,186               983,610
   Other                                                             1,621,038             1,897,717             2,289,858
------------------------------------------------------------------------------------------------------------------------------------

Total other expenses                                                 8,507,503             9,273,047             8,852,742
------------------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                           2,577,700               785,475               920,219

Provision for income taxes (Note 8)                                    814,258               267,100               313,103
------------------------------------------------------------------------------------------------------------------------------------

Net income                                                         $ 1,763,442            $  518,375            $  607,116
====================================================================================================================================

Basic and Diluted Earnings Per Share                                   $   .89               $   .26               $   .31
====================================================================================================================================
</TABLE>

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


<PAGE>


GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

<TABLE>
<CAPTION>

Year Ended December 31,                                           2002                    2001                      2000
------------------------------------------------------------------------------------------------------------------------------------

------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                       <C>                      <C>
Net income                                                     $1,763,442                $518,375                 $607,116

Other comprehensive income
      Unrealized gains on securities
        arising during period                                   1,038,806                 795,429                  514,370
      Reclassification adjustment for (gains)
        losses included in net income                             (20,125)                 (3,046)                  76,206
------------------------------------------------------------------------------------------------------------------------------------

    Other comprehensive income,
      before tax                                                1,018,681                 792,383                  590,576

    Income tax expense related to
      items of other comprehensive
      income                                                     (346,352)               (269,410)                (200,796)
------------------------------------------------------------------------------------------------------------------------------------

    Other comprehensive income,
      net of tax                                                  672,329                 522,973                  389,780
------------------------------------------------------------------------------------------------------------------------------------

Comprehensive income                                           $2,435,771              $1,041,348                 $996,896
====================================================================================================================================
</TABLE>

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

<PAGE>


GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
<TABLE>
<CAPTION>

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

<S>                                       <C>              <C>              <C>               <C>              <C>
Balance, December 31, 1999                $2,452,159       $8,943,119       $(1,608,089)      $4,479,382       $14,266,571
Cash dividend                                    -                -                 -           (235,408)         (235,408)
Other comprehensive income                       -                -             389,780              -             389,780
Repurchase of trust preferred
   securities (note 12)                            -           10,111                 -                -            10,111
Net income                                       -                -                 -            607,116           607,116
------------------------------------------------------------------------------------------------------------------------------------

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

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

Balance, December 31, 2002                $2,463,346       $9,034,207    $     (23,007)       $7,132,907       $18,607,453
====================================================================================================================================
</TABLE>

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


<PAGE>


GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS

<TABLE>
<CAPTION>


Year Ended December 31,                                          2002                     2001                    2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                         <C>                     <C>                         <C>
Operating activities
  Net income                                                $  1,763,442            $      518,375              $  607,116
  Adjustments to reconcile net income to net cash
   provided (absorbed) by operating activities:
   Provision for loan losses                                      99,998                   333,467               1,505,000
   Provision for loss on sale of other real estate owned          86,701                        -                        -
   Depreciation and amortization                                 585,810                 1,122,468                 721,954
   Deferred loan fees                                           (109,386)                  (72,009)                (63,298)
   Net amortization of premiums and accretion of
     discounts                                                   134,398                   160,696                (92,757)
   Gain on sale of loans                                        (999,168)               (1,249,393)               (338,318)
   Originations of loans held for sale                       (45,748,750)              (70,683,960)            (40,142,264)
   Proceeds from sale of loans                                57,437,524                63,478,428              39,803,946
   Loss (gain) on sale of held to maturity and securities
     available for sale                                          (20,125)                   (3,046)                 76,206
   Loss (gain) on disposal of office properties
     and equipment                                                (7,481)                   (3,036)                 27,554
   Loss on sale of real estate owned                              22,416                        -                        -
   Gain on sale of branch                                              -                   (79,289)                      -
   Changes in:
     Accrued interest receivable                                 335,499                   833,425                (335,755)
     Other assets                                                167,924                    87,544               1,865,189
     Accrued interest payable                                    (79,690)                 (256,296)                135,908
     Income taxes                                               (120,548)                  156,510                  36,108
     Prepayments by borrowers for taxes and insurance            (37,860)                  (99,311)               (229,752)
     Other liabilities                                           176,255                      (212)               (186,381)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by operating activities          13,686,959                (5,755,639)              3,390,456
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
  Net decrease in loans                                        3,392,299                27,695,518                2,559,072
  Repayments on held to maturity securities                      286,302                   229,620                 383,340
  Purchase of held to maturity securities                       (812,434)                 (250,000)               (250,000)
  Proceeds from retirement of held to maturity securities        650,000                   250,000                       -
  Purchase of securities available for sale                            -               (26,000,000)                      -
  Proceeds from sales of securities available for sale        18,378,584                23,683,500               4,798,122
  Sale of FHLB stock                                             602,900                        -                  500,000
  Purchase of FHLB stock                                               -                        -                 (550,000)
  Purchase of other stock                                              -                        -                 (102,500)
  Proceeds from sales of real estate owned                       514,451                   830,293                       -
  Improvements to real estate owned                              (66,337)                       -                        -
  Purchase of bank owned life insurance                       (3,000,000)                       -                        -
  Increase in bank owned life insurance                         (213,694)                       -                        -
  Net decrease in cash from sale of branch:
   Proceeds from sale of loans                                         -                 4,358,781                       -
   Sale of deposits                                                    -                (7,143,692)                      -
   Proceeds from sale of office properties,
     equipment and land                                                -                 1,057,608                       -
  Origination of mortgage servicing rights                             -                  (331,307)               (453,285)
  Proceeds from sales of mortgage servicing rights, net                -                   825,938                       -
  Purchase of office properties and equipment                 (1,194,301)                 (374,986)             (1,295,199)
  Proceeds from sales of office properties and equipment       1,289,408                   109,883                       -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by investing activities                     19,827,178                24,941,156               5,589,550
====================================================================================================================================
</TABLE>
                                   (Continued)

<PAGE>


GUARANTY FINANCIAL CORPORATION
CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

<TABLE>
<CAPTION>

Year Ended December 31,                                          2002                     2001                    2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                          <C>                     <C>                      <C>
Financing activities
  Net increase (decrease) in deposits                        (29,372,598)              (9,101,991)              17,132,526
  Repayment of Federal Home Loan Bank advances               (49,000,000)             (62,000,000)             (62,000,000)
  Proceeds from Federal Home Loan Bank advances               48,000,000               49,000,000               56,000,000
  Payments on bonds payable, including unapplied
   payments                                                     (279,122)                (196,445)                (130,977)
  Decrease in securities sold under agreements to
   repurchase                                                          -                        -              (16,650,250)
  Repurchase of convertible preferred securities                       -                        -                  (62,500)
  Proceeds from issuance of common stock, net                     92,164                        -                        -
  Dividends paid                                                       -                        -                 (353,111)
---------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by financing activities                    (30,559,556)             (22,298,436)              (6,064,312)
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash and cash equivalents               2,954,581               (3,112,919)               2,915,694
Cash and cash equivalents, beginning of year                  12,437,293               15,550,212               12,634,518
------------------------------------------------------------------------------------------------------------------------------------
Cash and cash equivalents, end of year                       $15,391,874              $12,437,293              $15,550,212
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

<PAGE>


GUARANTY FINANCIAL CORPORATION
Summary of Accounting Policies

Nature of Business and Regulatory Environment

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

The Federal  Deposit  Insurance  Corporation  ("FDIC")  is the  federal  deposit
insurance  administrator for 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.

Principles of Consolidation

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

Estimates

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

Reclassifications

Certain  reclassifications  have  been  made  in  the  prior  year  consolidated
financial statements and notes to conform to the December 31, 2002 presentation.

Investment Securities

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

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

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

If any, investments in debt and equity securities classified as trading would be
stated  at  market  value.  Unrealized  holding  gains and  losses  for  trading
securities  would be included in the statement of  operations.  Guaranty held no
securities that were classified as trading as of December 31, 2002 or 2001.

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

Loans Held for Sale

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

<PAGE>

Guaranty had  approximately  $332,000,  $14,279,000 and $2,193,000 of loans held
for sale at December 31, 2002, 2001 and 2000, respectively. The estimated market
value of these loans exceeded their carrying cost.

Loans Receivable

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

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

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

Sale of Loans and Participation in Loans

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

Historically,  Guaranty allocated the cost of acquiring or originating  mortgage
loans  between  the  mortgage  servicing  rights and the  loans,  based on their
relative fair values, if the bank sold or securitized the loans and retained the
mortgage servicing rights.  Guaranty assessed its capitalized mortgage servicing
rights for impairment based on the fair value of those rights.

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

Allowance for Possible Loan Losses

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

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

<PAGE>

due may  remain on  accrual  status if  management  determines  it has  adequate
collateral to cover the principal and interest.

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



<PAGE>


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

At  December  31,  2002 and 2001  Guaranty  had no loans  that  were  considered
impaired.

Real Estate Owned

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

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

Securities Sold Under Agreements to Repurchase

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

Office Properties and Equipment

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

Income Taxes

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

For tax years beginning prior to January 1, 1996, savings banks that met certain
definitional tests and other conditions  prescribed by the Internal Revenue Code
were allowed, within limitations, to deduct from taxable income an allowance for
bad debts using the "percentage of taxable  income"  method.  The cumulative bad
debt reserve, upon which no taxes have been paid, was approximately  $236,000 at
December 31, 1998.

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

<PAGE>

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

<PAGE>


Basic and Diluted Earnings Per Share

Basic earnings per share includes no dilution and is computed by dividing income
available to common shareholders by the weighted average number of common shares
outstanding  for the period.  Diluted  earnings per share reflects the potential
dilution of securities that could share in the earnings of an entity.  The basic
and diluted weighted  average number of shares of common stock  outstanding were
1,963,415,  1,961,727 and 1,961,727 for the years ended December 31, 2002,  2001
and 2000, respectively.

Statements of Cash Flows

Cash and cash equivalents include Federal funds sold with original maturities of
three months or less.  Interest paid was approximately  $4,236,000,  $10,012,000
and  $12,713,000  for  the  years  ended  December  31,  2002,  2001  and  2000,
respectively.  Cash paid for income taxes was approximately  $811,000,  $380,000
and $697,000 for the years ended December 31, 2002, 2001 and 2000, respectively.
Real estate  acquired in the  settlement  of loans was  approximately  $191,000,
$305,000  and $941,000  for the years ended  December  31, 2002,  2001 and 2000,
respectively.

Accounting Pronouncements

In July 2001, the Financial Accounting Standards Board ("FASB") issued Statement
of Financial Accounting Standards No. 141 ("SFAS 141"), "Business Combinations",
which was  effective  July 1, 2001.  SFAS 141 requires  the  purchase  method of
accounting  for  business  combinations   initiated  after  June  30,  2001  and
eliminates the  pooling-of-interests  methods.  The adoption of SFAS 141 has not
had an effect on Guaranty's financial statements.

Also in July 2001, the FASB issued Statement of Financial  Accounting  Standards
No.  142  ("SFAS  142"),  "Goodwill  and  Other  Intangible  Assets",  which was
effective  January  1,  2002.  SFAS  142  requires,   among  other  things,  the
discontinuance  of goodwill  amortization.  In addition,  the standard  includes
provisions for the  reclassification of certain existing recognized  intangibles
as  goodwill,   reassessment   of  the  useful  lives  of  existing   recognized
intangibles,  reclassification of certain intangibles out of previously reported
goodwill and the  identification  of  reporting  units for purposes of assessing
potential future impairments of goodwill.  SFAS 142 also requires a transitional
goodwill  impairment  test six  months  from the date of  adoption  and  further
requires an evaluation of the carrying value of goodwill for impairment annually
thereafter.  The  adoption  of SFAS  142 has not  had an  effect  on  Guaranty's
financial statements.

In October 2001, the FASB issued SFAS No. 144, "Accounting for the Impairment or
Disposal of Long-Lived Assets".  This statement  addresses financial  accounting
and  reporting  for the  impairment  or  disposal  of  long-lived  assets.  This
statement  supersedes FASB Statement No. 121,  "Accounting for the Impairment of
Long-Lived  Assets  and  for  Long-Lived  Assets  to Be  Disposed  Of",  and the
accounting  and  reporting  provisions  of APB  Opinion No. 30,  "Reporting  the
Results of  Operations  --  Reporting  the Effects of Disposal of a Segment of a
Business,  and  Extraordinary,  Unusual and  Infrequently  Occurring  Events and
Transactions".  This statement also amends ARB No. 51,  "Consolidated  Financial
Statements",  to eliminate the exception to  consolidation  for a subsidiary for
which  control  is likely to be  temporary.  This  statement  requires  that one
accounting  model be used  for  long-lived  assets  to be  disposed  of by sale,
whether previously held and used or newly acquired. This statement also broadens
the   presentation   of   discontinued   operations  to  include  more  disposal
transactions.  SFAS 144 is effective for fiscal years  beginning  after December
15, 2001 and interim  periods within those fiscal years.  Guaranty  believes the
adoption  of SFAS 144 will not have a material  effect on  Guaranty's  financial
statements.

On July 6, 2001, the SEC issued Staff  Accounting  Bulletin No. 102 ("SAB 102"),
"Selected  Loan  Loss  Allowance  Methodology  and  Documentation  Issues".  The
bulletin  expresses  the  SEC's  views  on the  development,  documentation  and
application of a systematic  methodology for determining allowances for loan and
lease losses in accordance with generally accepted accounting  principles.  This
includes  for each period  reported  the "books and  records of the

<PAGE>

registrants  engaged  in  lending  activities  include   documentation  of:  (a)
systematic  methodology to be employed each period in determining  the amount of
loan  losses  to  be  reported,  and  (b)  rationale  supporting  each  period's
determination that the amounts reported were adequate." Management believes that
its documentation and methodologies are compliant with SAB 102.

<PAGE>


In June 2002,  the FASB issued SFAS No. 146,  "Accounting  for Costs  Associated
with Exit or  Disposal  Activities",  ("SFAS  146").  This  statement  addresses
financial  accounting and reporting for costs  associated  with exit or disposal
activities  and  nullifies  Emerging  Issues Task Force  (EITF)  Issue No. 94-3,
"Liability  Recognition of Certain Employee Termination Benefits and Other Costs
to Exit an Activity (including Certain Costs Incurred in a Restructuring)". This
statement  requires  that a  liability  for a cost  associated  with  an exit or
disposal  activity be recognized when the liability is incurred.  This statement
also establishes that fair value is the objective for initial measurement of the
liability.  The  provisions of this statement are effective for exit or disposal
activities that are initiated after December 31, 2002.  Guaranty does not expect
the adoption of SFAS 146 to have an effect on the financial statements.

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

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





<PAGE>


NOTES TO THE CONSOLIDATED FINANCIAL STATEMENTS

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


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

December 31, 2002
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                        <C>                   <C>             <C>            <C>
Held to Maturity
  Mortgage-backed securities                               $  432,656            $38,152                  -     $   470,808
  U.S. Treasury Bonds                                         403,458                -                    -         403,458
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity                                        836,114             38,152                  -         874,266
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
  Corporate bonds                                           3,246,760                  -            (34,860)      3,211,900
  Other                                                       422,250                  -                  -         422,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale                                    3,669,010                  -            (34,860)      3,634,150
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities                                $4,505,124            $38,152           $(34,860)    $ 4,508,416
------------------------------------------------------------------------------------------------------------------------------------

December 31, 2001
------------------------------------------------------------------------------------------------------------------------------------
Held to Maturity
  Mortgage-backed securities                             $    719,989            $48,288           $      -     $   768,277
  U.S. Treasury Bonds                                         250,000                -                    -         250,000
------------------------------------------------------------------------------------------------------------------------------------
Total Held to Maturity                                        969,989             48,288                  -       1,018,277
------------------------------------------------------------------------------------------------------------------------------------
Available for Sale
  U.S. Government Agency Bonds                              8,000,000                  -            (30,125)      7,969,875
  Corporate bonds                                          13,620,016                  -         (1,023,416)     12,596,600
  Other                                                       422,250                  -                  -         422,250
------------------------------------------------------------------------------------------------------------------------------------
Total Available for Sale                                   22,042,266                  -         (1,053,541)     20,988,725
------------------------------------------------------------------------------------------------------------------------------------
Total Investment Securities                               $23,012,255            $48,288        $(1,053,541)    $22,007,002
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>



The amortized cost and estimated  market value of available for sale and held to
maturity securities at December 31, 2002 by maturity is as follows:
<TABLE>
<CAPTION>

                                                                              Estimated
                                                           Amortized            Market
                                                             Cost               Value
-----------------------------------------------------------------------------------------
<S>                                                        <C>                   <C>
Held to Maturity
  Mortgage-backed securities                              $   432,656         $  470,808
  U.S. Treasury Bonds                                         403,458            403,458
-----------------------------------------------------------------------------------------
Total Held to Maturity                                        836,114            874,266
-----------------------------------------------------------------------------------------
Available for Sale
  Corporate bonds and other due after five years            3,246,760          3,211,900
  Other                                                       422,250            422,250
-----------------------------------------------------------------------------------------
Total Available for Sale                                    3,669,010          3,634,150
-----------------------------------------------------------------------------------------
Total Investment Securities                                $4,505,124         $4,508,416
-----------------------------------------------------------------------------------------
</TABLE>


<PAGE>


1. Investment Securities (continued)

Gross  gains and  losses  from the sale of  securities  during  the years  ended
December 31, 2002, 2001 and 2000 were as follows:

<TABLE>
<CAPTION>
                                                      2002                         2001                          2000
                                               Gains        Losses          Gains       Losses            Gains        Losses
-----------------------------------------------------------------------------------------------------------------------------------

<S>                                         <C>            <C>          <C>            <C>              <C>         <C>
Held to Maturity                            $      -       $    -       $      -       $     -          $    -      $       -
Available for Sale                            20,125            -          3,046             -               -         76,206
-----------------------------------------------------------------------------------------------------------------------------------
Totals                                      $ 20,125       $    -       $  3,046       $     -          $    -      $  76,206
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>

Mortgage backed  securities of approximately  $433,000 and $720,000 December 31,
2002 and 2001, respectively, were pledged for bonds payable (Note 6).

2. Loans Receivable

Loans receivable are summarized as follows:
<TABLE>
<CAPTION>

December 31,                                                           2002                             2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                 <C>                             <C>
Mortgage loans
  Residential                                                       $ 20,118,677                    $ 39,854,284
  Commercial                                                           7,893,953                      16,276,612
  Construction and land loans                                         38,479,836                      36,307,260
------------------------------------------------------------------------------------------------------------------------------------

Total real estate                                                     66,492,466                      92,438,156

Commercial business loans                                             76,651,355                      66,603,247
Consumer loans                                                        22,238,245                      20,982,986
------------------------------------------------------------------------------------------------------------------------------------
Total loans receivable                                               165,382,066                     180,024,389
------------------------------------------------------------------------------------------------------------------------------------
Less
  Deferred loan fees (costs), net                                      (109,911)                        (66,525)
  Allowance for loan losses                                            2,242,092                       2,512,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                       2,132,181                       2,445,475
------------------------------------------------------------------------------------------------------------------------------------
                                                                    $163,249,885                    $177,578,914
====================================================================================================================================
</TABLE>

The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>

                                                                                                        Amount
------------------------------------------------------------------------------------------------------------------
<S>                                                                                                   <C>
Balance at December 31, 1999                                                                          $1,203,238
Provision charge to expense                                                                            1,505,000
Net charge-offs                                                                                         (311,726)
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2000                                                                           2,396,512
Provision charged to expense                                                                             333,467
Net charge-offs                                                                                         (217,979)
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2001                                                                           2,512,000
Provision charged to expense                                                                              99,998
Net charge-offs                                                                                         (369,906)
------------------------------------------------------------------------------------------------------------------
Balance at December 31, 2002                                                                          $2,242,092
==================================================================================================================
</TABLE>




<PAGE>

2. Loans Receivable (continued)

Guaranty serviced loans for others aggregating  approximately  $12.4 million and
$13.2 million at December 31, 2002 and 2001, respectively.  The servicing rights
to  approximately  $189,000,000 in loans were sold and transferred  during 2001.
Mortgage  servicing rights of $0 and $331,307 were capitalized  during the years
ended December 31, 2002 and 2001, respectively.

Gross  gains  and  gross  losses  on the sale of loans  and  servicing  totaling
approximately $999,000 and $0, $1,249,000 and $0, and $643,000 and $305,000 were
realized during the years ended December 31, 2002, 2001 and 2000, respectively.

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

December 31,                                                            2002                             2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                             <C>
Land                                                                  $2,817,101                      $3,123,848
Building and leasehold improvements                                    4,062,185                       4,419,899
Furniture and fixtures                                                 1,335,238                       1,293,824
Equipment                                                              2,546,040                       2,309,371
Automobiles                                                                    -                          32,949
------------------------------------------------------------------------------------------------------------------------------------
                                                                      10,760,564                      11,179,891
Less accumulated depreciation
  and amortization                                                     3,317,629                       3,070,102
------------------------------------------------------------------------------------------------------------------------------------
Net office properties and equipment                                   $7,442,935                      $8,109,789
====================================================================================================================================
</TABLE>


4. Deposits

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

December 31,                                                           2002                            2001
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                               <C>                              <C>
Statement savings accounts                                        $  12,811,611                    $ 12,991,825
Demand deposit accounts                                              53,498,243                      47,569,392
Money market accounts                                                34,444,896                      22,394,469
------------------------------------------------------------------------------------------------------------------------------------

                                                                    100,754,750                      82,955,686
------------------------------------------------------------------------------------------------------------------------------------

Time deposits                                                        70,504,355                     117,676,017
------------------------------------------------------------------------------------------------------------------------------------

                                                                   $171,259,105                    $200,631,703
====================================================================================================================================
</TABLE>

The aggregate  amount of certificates of deposit with a minimum  denomination of
$100,000 was approximately  $11,390,000 and $20,589,000 at December 31, 2002 and
2001, respectively.

At December  31,  2002,  scheduled  maturities  of  certificates  are as follows
(rounded to the nearest thousand):
<TABLE>
<CAPTION>

Year Ending December 31,
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                                  <C>
   2003                                                                                              $61,027,000
   2004                                                                                                6,362,000
   2005                                                                                                1,190,000
   2006                                                                                                1,917,000
   2007 and thereafter                                                                                     8,000
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                     $70,504,000
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<PAGE>


5. Fair Value of Financial Instruments

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

<TABLE>
<CAPTION>

December 31,                                                         2002                                  2001
------------------------------------------------------------------------------------------------------------------------------------
                                                        Carrying             Fair             Carrying            Fair
                                                         Amount              Value             Amount              Value
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                  <C>                <C>                <C>                <C>
Financial assets
  Cash and short-term investments                    $ 15,391,874       $ 15,392,000       $ 12,437,293       $ 12,437,000
  Securities                                            4,470,264          4,508,000         21,958,714         22,008,000
  Loans, net of allowance for loan losses             163,249,885        164,798,000        177,578,914        174,715,000
Financial liabilities
  Deposits                                            171,259,105        171,729,000        200,631,703        201,277,000
Advances from Federal Home Loan Bank                            -                  -          1,000,000          1,000,000
Bonds payable                                             359,847                N/A            595,374                N/A


                                                         Notional               Fair         Notional              Fair
                                                           Amount              Value          Amount               Value
------------------------------------------------------------------------------------------------------------------------------------
Unrecognized financial instruments
  Commitments to
   extend credit                                      $52,356,000        $52,356,000       $ 52,009,000       $ 52,009,000
</TABLE>

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

Cash and short-term investments

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

Securities

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

Loan receivables

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

Deposit liabilities

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

Advances from Federal Home Loan Bank

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


<PAGE>


5. Fair Value of Financial Instruments (continued)

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

Securities sold under agreement to repurchase

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

Bonds payable

Due to the nature and terms (Note 6) of the bonds payable held by GMSC,  Inc. at
December 31, 2002 and 2001, it was not deemed  practicable  to estimate the fair
value.

Commitments to extend credit

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

Forward Commitments to purchase mortgage-backed securities

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


6. Bonds Payable

In October 1987, GMSC, Inc. issued serial bonds (the "Bonds")  collateralized by
mortgage-backed   securities  which  are  treated  as  a  real  estate  mortgage
investment conduit ("REMIC") under the Internal Revenue Code of 1986 for federal
tax purposes.  The Bonds 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,                                                             2002                           2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                             <C>
Serial Bonds
  Class A-3, maturing January 20, 2019,
   at 8.0%                                                              $455,428                        $739,648
  Unapplied payments                                                     (30,000)                        (35,098)
------------------------------------------------------------------------------------------------------------------------------------
                                                                         425,428                         704,550
  Less unamortized discount                                              (65,581)                       (109,176)
------------------------------------------------------------------------------------------------------------------------------------
                                                                        $359,847                        $595,374
====================================================================================================================================
</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-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 balance sheet.  The account  established for payment of interest and
debt maturities is netted with cash and bonds payable on the balance sheet.


<PAGE>


7. Advances From Federal Home Loan Bank

Information  related to borrowing activity from the Federal Home Loan Bank is as
follows:

<TABLE>
<CAPTION>

Year Ended December 31,                                                 2002                            2001
------------------------------------------------------------------------------------------------------------------------------------

<S>                                                                  <C>                             <C>
Maximum amount outstanding during the year                           $15,000,000                     $18,000,000
Average amount outstanding during the year                           $ 6,136,000                     $ 4,608,000
Average interest rate during the year                                       1.96%                           5.14%

</TABLE>

8. Income Taxes

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

Year Ended December 31,                                                     2002                2001                2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>                 <C>
Current income tax                                                      $927,972            $285,743            $744,103
Deferred income tax expense (benefit)                                   (113,714)            (18,643)           (431,000)
------------------------------------------------------------------------------------------------------------------------------------
                                                                        $814,258            $267,100            $313,103
====================================================================================================================================
</TABLE>

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

Year Ended December 31,                                                     2002                2001                2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                     <C>                 <C>                 <C>
Tax expense at statutory rate                                           $876,418            $267,062            $312,874
Adjustments
  Other                                                                   62,160                  38                 229
------------------------------------------------------------------------------------------------------------------------------------
                                                                        $814,258            $267,100            $313,103
====================================================================================================================================
</TABLE>

The  components  of the net deferred  income  taxes,  which is included in other
assets in the balance sheet, are as follows:
<TABLE>
<CAPTION>

December 31,                                                                2002                            2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                             <C>
Deferred tax asset
  Bad debt reserves                                                   $  742,000                      $  814,000
  REO reserves                                                            82,000                          68,000
  Deferred loan fees                                                       7,000                           8,000
  Available for sale securities                                           12,000                         358,000
  Other                                                                   23,000                               -
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax asset                                                 866,000                       1,248,000
------------------------------------------------------------------------------------------------------------------------------------
Deferred tax liability
  GMSC REMIC                                                              63,000                          81,000
  Fixed assets                                                           405,000                         305,000
  Other                                                                        -                         118,000
------------------------------------------------------------------------------------------------------------------------------------
Total deferred tax liability                                             468,000                         504,000
------------------------------------------------------------------------------------------------------------------------------------
Net deferred tax asset                                                  $398,000                      $  744,000
====================================================================================================================================
</TABLE>

<PAGE>


9. Related Party Transactions

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

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

December 31,                                                                2002                            2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                   <C>                               <C>
Balance at the beginning of year                                      $2,044,000                        $1,165,000
Additional loans                                                         171,000                         1,978,000
Loan reductions                                                         (146,000)                       (1,099,000)
------------------------------------------------------------------------------------------------------------------------------------
Balance at end of year                                                $2,069,000                        $2,044,000
====================================================================================================================================
</TABLE>

10. Commitments and Contingencies

Guaranty  leases office space under  operating  leases expiring at various dates
through 2012 and has contracts for data  processing  services whose initial term
expires in February  2004 and  requires  minimum  payments of $60,100 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, 2002, are
as follows:

<TABLE>
<CAPTION>
                                                                                       Amount
------------------------------------------------------------------------------------------------------------------------------------
                                                                                                         Data
Year Ending December 31,                                                  Leases                      Processing
------------------------------------------------------------------------------------------------------------------------------------
<C>                                                                  <C>                                <C>
2003                                                                 $   166,200                        $721,200
2004                                                                     162,100                          70,100
2005                                                                     141,800                               -
2006                                                                     144,200                               -
2007 and thereafter                                                    1,698,000                               -
------------------------------------------------------------------------------------------------------------------------------------
                                                                      $2,312,300                        $791,300
====================================================================================================================================
</TABLE>

Total rental expense amounted to approximately  $140,000,  $179,000 and $108,000
for the years ended December 31, 2002, 2001 and 2000,  respectively.  Total data
processing expense amounted to approximately $1,049,000, $1,037,000 and $926,000
for the years ended December 31, 2002, 2001 and 2000, respectively.

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

11. Convertible Preferred Stock

On April 29, 1998,  Guaranty  formed Guaranty  Capital Trust I (the "Trust"),  a
wholly owned  subsidiary.  The Trust issued 276,000  shares of 7.0%  convertible
preferred securities maturing May 5, 2028 for $6,900,000, with an option to call
on or  after  April  29,  2003.  Conversion  of the  preferred  securities  into
Guaranty's stock may occur at any time prior to maturity.  The Trust also issued
8,537 shares of convertible  common stock for $213,425.  Guaranty  purchased all
shares  of the  common  stock.  The  proceeds  from  the  sale of the  preferred
securities  were  utilized to purchase from Guaranty  junior  subordinated  debt
securities  (guaranteed by the Bank), of $7,113,425 bearing interest at 7.0% and
maturing May 5, 2028.  All  intercompany  interest and equity was  eliminated in
consolidation.
<PAGE>
In January 2000, Guaranty  repurchased 2,500 shares of the cumulative  preferred
securities  at a price  of  $17.50  per  share  which  resulted  in a net  gain,
recognized  in the  statement of  stockholders'  equity,  on the  repurchase  of
$10,111. In December 1999, Guaranty  repurchased 33,000 shares of the cumulative
preferred securities at an average price of $17.97 per share which resulted in a
net gain, recognized in the statement of stockholders' equity, on the repurchase
of $101,000.

12.  Stockholders' Equity

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

                                             Amount             Percent          Actual          Actual            Excess
December 31, 2002                           Required           Required          Amount          Percent           Amount
------------------------------------------------------------------------------------------------------------------------------------
<S>  <C>                                  <C>                     <C>          <C>                <C>            <C>
Tier 1 risk based                         $ 6,628,000             4.00%        $24,374,000        14.73%         $17,746,000
Total risk based capital                   13,255,000             8.00          26,447,000        15.98           13,192,000

                                             Amount             Percent          Actual          Actual            Excess
December 31, 2001                           Required           Required          Amount          Percent           Amount
------------------------------------------------------------------------------------------------------------------------------------
Tier 1 risk based                         $ 7,279,000             4.00%        $22,542,000        12.39%         $15,263,000
Total risk based capital                   14,560,000             8.00          24,818,000        13.64           10,258,000
</TABLE>

The ratios which have been established for well-capitalized banks are 6% and 10%
for Tier 1 risk  based  capital  and total  risk  based  capital,  respectively.
Guaranty  may not  declare  or pay a cash  dividend,  or  repurchase  any of its
capital stock if the effect  thereof would cause the net worth of Guaranty to be
reduced below the net worth requirement imposed by federal regulations.

Proceeds from the Trust Preferred  Securities were contributed to capital of the
Bank and are included,  to the extent allowed,  in the calculation of regulatory
capital.

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

13. Stock Option Plan

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

                                                        2002                        2001                       2000
------------------------------------------------------------------------------------------------------------------------------------
                                                             Weighted -                  Weighted -                 Weighted -
                                                               average                     average                    average
                                                              exercise                    exercise                   exercise
                                                 Shares         price        Shares         price      Shares          price
------------------------------------------------------------------------------------------------------------------------------------
<S>                                               <C>          <C>          <C>            <C>         <C>            <C>
Options outstanding at
  beginning of period                             57,912       $12.07       101,900        $14.16      130,000        $13.69
Granted                                           47,500         8.59        16,512          8.74            -             -
Forfeited                                        (21,500)       12.45       (60,500)        12.10      (28,100)        12.00
Exercised                                         (7,900)       10.59             -             -            -             -
------------------------------------------------------------------------------------------------------------------------------------
Options outstanding at end
  of period                                       76,012        10.01        57,912         12.07      101,900        $14.16
------------------------------------------------------------------------------------------------------------------------------------
Options exercisable at end
  of period                                       76,012                     48,900                     73,200
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>

The  weighted  average  fair  value of  options  granted  during  the year ended
December 31, 2002 and 2001 was $2.74 and $4.28, respectively.
<PAGE>
Guaranty  applies  Accounting  Principals Board Opinion No. 25 in accounting for
stock options  granted to employees.  Had  compensation  expense been determined
based upon the fair value of the  awards at the grant date and  consistent  with
the method under Statement of Financial Accounting Standards 123, Guaranty's net
earnings and net  earnings per share would have been  decreased to the pro forma
amounts indicated in the following table:
<TABLE>
<CAPTION>

Year Ended December 31,                                       2002                2001                2000
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                     <C>                   <C>                  <C>
Net income
  As reported                                           $1,763,442            $518,375             $607,116
  Pro forma                                              1,677,417             498,434              607,116

Net income per share (basic and diluted)
  As reported                                              $  0.89              $ 0.26               $ 0.31
  Pro forma                                                   0.85                0.25                 0.31
</TABLE>

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, 2002: a risk free interest rate of 4.97%,
dividend  yield  of 2%,  expected  weighted  average  term of 7.0  years,  and a
volatility of 30%.

14. Employee Benefit Plans

Effective February 16, 1989,  Guaranty adopted a 401(k)  profit-sharing  plan in
which all  employees are eligible to  participate  after one year of service and
are at least  twenty-one  years of age.  Participants  may elect to contribute a
percentage of their compensation to the plan. Guaranty may make contributions to
the plan at its discretion.  Guaranty's  contributions are allocated to employee
accounts using a systematic formula based on participant compensation.  Guaranty
contributed  approximately  $67,000,  $60,000  and  $65,000  for the years ended
December 31, 2002, 2001 and 2000, respectively.

15. Financial Instruments With Off-Balance-Sheet Risk

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

Guaranty's  exposure to credit loss in the event of  nonperformance by the other
party to the financial  instrument for  commitments to extend credit and standby
letters of credit written is
<PAGE>

represented by the contractual  notional amount of those  instruments.  Guaranty
uses the same credit policies in making commitments and conditional  obligations
as it does for on-balance-sheet instruments. For options purchased, the contract
or notional amounts do not represent exposure to credit loss.

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

December 31,                                                                    2002                 2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                          <C>                 <C>
Financial instruments whose contract
  amounts represent credit risk
   Commitments to extend credit                                              $52,356,000         $52,009,000
   Standby letters of credit written                                           5,054,000           3,282,000
</TABLE>
<PAGE>

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

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

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

Substantially  all of  Guaranty's  loan activity was with  customers  located in
Charlottesville and Richmond, Virginia and surrounding counties.

16. Selected quarterly financial data (Unaudited)

Condensed quarterly financial data is shown as follows:

<TABLE>
<CAPTION>

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

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

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

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

<PAGE>

16. Selected quarterly financial data (Unaudited) (continued)
<TABLE>
<CAPTION>

------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31, 2001
                                                                First            Second               Third            Fourth
(Dollars in thousands except per share data)                   Quarter           Quarter             Quarter           Quarter
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                            <C>                <C>                 <C>            <C>
Total interest income                                          $5,105             $4,569              $4,204         $3,763
Total interest expense                                          2,929              2,753               2,328          1,746
------------------------------------------------------------------------------------------------------------------------------------
Net interest income                                             2,176              1,816               1,876          2,017
Provision for loan losses                                         150                 75                  75             33
------------------------------------------------------------------------------------------------------------------------------------
Net interest income after provision
  for loan losses                                               2,026              1,741               1,801          1,984

Other income                                                      538                560                 583            709
Other expenses                                                  2,310              2,290               2,325          2,231
------------------------------------------------------------------------------------------------------------------------------------
Income before income tax expense                                  254                 11                  59            462

Income tax expense                                                 86                  4                  20            157
------------------------------------------------------------------------------------------------------------------------------------
Net income                                                    $   168           $      7              $   39         $  305
====================================================================================================================================

Basic and diluted earnings per share                          $  0.08            $  0.00              $ 0.02         $ 0.16
====================================================================================================================================
</TABLE>

17. Condensed Financial Information of the Parent Company Only

                   Condensed Statements of Financial Condition
<TABLE>
<CAPTION>

December 31,                                                                            2002                       2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                 <C>                       <C>
Assets
Investment in subsidiaries, at equity                                               $24,324,165               $22,552,191
  Cash                                                                                   83,784                       152
  Prepaid expenses and other assets                                                     448,437                   448,437
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    $24,856,386               $23,000,780
====================================================================================================================================

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

Stockholders' Equity
  Common stock                                                                        2,463,346                 2,452,159
  Additional paid-in capital                                                          9,034,207                 8,953,230
  Retained earnings                                                                   7,132,908                 5,369,466
------------------------------------------------------------------------------------------------------------------------------------
Total stockholders' equity                                                           18,630,461                16,774,855
------------------------------------------------------------------------------------------------------------------------------------
                                                                                    $24,856,386               $23,000,780
====================================================================================================================================
</TABLE>


<PAGE>


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

                       Condensed Statements of Operations
<TABLE>
<CAPTION>

Year Ended December 31,                                                                      2002                    2001
------------------------------------------------------------------------------------------------------------------------------------
<S>                                                                                   <C>                        <C>
Income
  Dividends received from bank                                                        $   420,875                $420,875
------------------------------------------------------------------------------------------------------------------------------------
Total income                                                                              420,875                 420,875
------------------------------------------------------------------------------------------------------------------------------------

Interest expense                                                                         (420,875)               (420,875)
Non-interest expenses                                                                      (8,531)                 (1,724)
------------------------------------------------------------------------------------------------------------------------------------

Income before undistributed
   net income of the Bank                                                                  (8,531)                 (1,724)
Undistributed net income                                                                1,771,973                 520,099
------------------------------------------------------------------------------------------------------------------------------------

Net income                                                                            $1,763,442                 $518,375
====================================================================================================================================


                       Condensed Statements of Cash Flows
------------------------------------------------------------------------------------------------------------------------------------
Year Ended December 31,                                                                      2002                    2001
------------------------------------------------------------------------------------------------------------------------------------
Operating activities
  Net income                                                                           $1,763,442               $ 518,375
  Adjustments
   Undistributed earnings of the Bank                                                  (1,771,973)               (520,099)
   Decrease in prepaid and other assets                                                         -                  15,531
   decrease in other liabilities                                                                -                 (15,531)
------------------------------------------------------------------------------------------------------------------------------------
Net cash absorbed by operating activities                                                  (8,531)                 (1,724)
------------------------------------------------------------------------------------------------------------------------------------
Investing activities
  Dividends received from Bank                                                             420,875                420,875
  Investment in the bank                                                                 (420,875)               (420,875)
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided (absorbed) by investing activities                                                -                   -
------------------------------------------------------------------------------------------------------------------------------------
Financing activities
  Issuance of common stock                                                                  92,163                      -
------------------------------------------------------------------------------------------------------------------------------------
Net cash provided by financing activities                                                   92,163                      -
------------------------------------------------------------------------------------------------------------------------------------
Increase (decrease) in cash                                                                 83,632                 (1,724)
Cash, beginning of year                                                                        152                  1,876
------------------------------------------------------------------------------------------------------------------------------------
Cash, end of year                                                                   $      83,784           $         152
====================================================================================================================================

</TABLE>



<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:  March 17, 2003                 By:  /s/ William E. Doyle, Jr.
                                           -------------------------------------
                                           William E. Doyle, Jr.
                                           President and Chief Executive Officer


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

<TABLE>
<CAPTION>
               Signature                                      Title                                 Date
               ---------                                      -----                                 ----

<S>                                        <C>                                                <C>
       /s/ William E. Doyle, Jr.           President and Chief Executive Officer and           March 17, 2003
-------------------------------------                      Director
         William E. Doyle, Jr.                 (Principal Executive Officer)


         /s/ Tara Y. Harrison                       Chief Financial Officer                    March 17, 2003
-------------------------------------              (Principal Financial and
            Tara Y. Harrison                          Accounting Officer)


         /s/ Douglas E. Caton                        Chairman of the Board                     March 17, 2003
-------------------------------------
            Douglas E. Caton


          /s/ Harry N. Lewis                      Vice Chairman of the Board                   March 17, 2003
-------------------------------------
             Harry N. Lewis


                                                           Director                            March 17, 2003
-------------------------------------
            Henry J. Browne


       /s/ Jason I. Eckford, Jr.                           Director                            March 17, 2003
-------------------------------------
         Jason I. Eckford, Jr.


           /s/ John R. Metz                                Director                            March 17, 2003
-------------------------------------
              John R. Metz

<PAGE>

        /s/ James R. Sipe, Jr.                             Director                            March 17, 2003
-------------------------------------
           James R. Sipe, Jr.


        /s/ Oscar W. Smith, Jr.                            Director                            March 17, 2003
-------------------------------------
          Oscar W. Smith, Jr.
</TABLE>

<PAGE>
                                  CERTIFICATION


I, William E. Doyle, Jr., certify that:

1.       I have reviewed this annual report on Form 10-KSB of Guaranty Financial
         Corporation;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         (a)      designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         (b)      evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         (c)      presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent functions):

         (a)      all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual  report  whether  there were  significant  changes  in  internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.


         Date:  March 17, 2003           /s/ William E. Doyle, Jr.
                                         --------------------------------------
                                         William E. Doyle, Jr.
                                         President and Chief Executive Officer

<PAGE>
                                  CERTIFICATION


I, Tara Y. Harrison, certify that:

1.       I have reviewed this annual report on Form 10-KSB of Guaranty Financial
         Corporation;

2.       Based on my  knowledge,  this annual report does not contain any untrue
         statement of a material fact or omit to state a material fact necessary
         to make the statements made, in light of the circumstances  under which
         such  statements  were made, not misleading  with respect to the period
         covered by this annual report;

3.       Based on my knowledge,  the financial  statements,  and other financial
         information  included  in this  annual  report,  fairly  present in all
         material  respects the financial  condition,  results of operations and
         cash flows of the  registrant as of, and for, the periods  presented in
         this annual report;

4.       The registrant's  other  certifying  officers and I are responsible for
         establishing  and  maintaining  disclosure  controls and procedures (as
         defined in Exchange Act Rules 13a-14 and 15d-14) for the registrant and
         have:

         (a)      designed  such  disclosure  controls and  procedures to ensure
                  that  material   information   relating  to  the   registrant,
                  including its consolidated  subsidiaries,  is made known to us
                  by others  within  those  entities,  particularly  during  the
                  period in which this annual report is being prepared;

         (b)      evaluated the  effectiveness  of the  registrant's  disclosure
                  controls and  procedures  as of a date within 90 days prior to
                  the filing date of this annual report (the "Evaluation Date");
                  and

         (c)      presented  in this  annual  report our  conclusions  about the
                  effectiveness of the disclosure  controls and procedures based
                  on our evaluation as of the Evaluation Date;

5.       The registrant's other certifying officers and I have disclosed,  based
         on our most recent  evaluation,  to the  registrant's  auditors and the
         audit  committee  of  registrant's   board  of  directors  (or  persons
         performing the equivalent functions):

         (a)      all  significant  deficiencies  in the design or  operation of
                  internal   controls   which   could   adversely   affect   the
                  registrant's ability to record, process,  summarize and report
                  financial  data  and  have  identified  for  the  registrant's
                  auditors any material weaknesses in internal controls; and

         (b)      any fraud,  whether or not material,  that involves management
                  or  other  employees  who  have  a  significant  role  in  the
                  registrant's internal controls; and

6.       The registrant's other certifying officers and I have indicated in this
         annual  report  whether  there were  significant  changes  in  internal
         controls or in other factors that could  significantly  affect internal
         controls  subsequent  to  the  date  of  our  most  recent  evaluation,
         including   any   corrective   actions   with  regard  to   significant
         deficiencies and material weaknesses.


         Date:  March 17, 2003       /s/ Tara Y. Harrison
                                     -----------------------------------
                                     Tara Y. Harrison
                                     Vice President and Chief Financial Officer

<PAGE>

                                  EXHIBIT INDEX

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

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

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

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

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

         21                Subsidiaries of Guaranty Financial Corporation.

         99.1              Statement of Chief Executive  Officer  Pursuant to 18
                           U.S.C. Section 1350

         99.2              Statement of Chief Financial  Officer  Pursuant to 18
                           U.S.C. Section 1350