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, 1998

                         Commission file number 0-18265

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

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

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

                                 (804) 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
$13,060,000.

<PAGE>

         The aggregate  market value of the voting stock held by  non-affiliates
computed by reference  to the closing  sales price of such stock as of March 26,
1999 was  approximately  $12,785,068.  (The  exclusion  from such  amount of the
market  value of the shares owned by any person shall not be deemed an admission
by the registrant that such person is an affiliate of the registrant.)

         The number of  outstanding  shares of Common Stock as of March 26, 1999
was 1,501,727.

                       DOCUMENTS INCORPORATED BY REFERENCE

     Proxy Statement for the 1999 Annual Meeting of Shareholders - Part III


                                       2
<PAGE>


                                TABLE OF CONTENTS

                                     PART I
                                                                          Page

ITEM 1.  DESCRIPTION OF BUSINESS..........................................  4

ITEM 2.  DESCRIPTION OF PROPERTY.......................................... 13

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................................ 14

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                      CONDITION AND RESULTS OF OPERATION.................. 15

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

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

                                    PART III

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

ITEM 10. EXECUTIVE COMPENSATION........................................... 38

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL
                      OWNERS AND MANAGEMENT............................... 38

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

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


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<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.

         The principal asset of Guaranty 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.  Effective  April 29,
1998 Guaranty  formed  Guaranty  Capital Trust I (the  "Trust"),  a wholly owned
subsidiary.  The  purpose  of the  Trust  was  to  issue  convertible  preferred
securities.  Guaranty's  Common  Stock is quoted on The Nasdaq  National  Market
System under the symbol "GSLC".

         Guaranty's  principal business  activities are attracting  checking and
savings  deposits from the general public through its retail banking offices and
originating,  servicing,  investing in and selling loans.  Of Guaranty's  $173.1
million of gross loans  outstanding  at December  31,  1998,  43.8%  represented
commercial  real estate,  and 38.4%  represented  residential  first  mortgages.
Guaranty also lends funds to retail  banking  customers by means of home equity,
installment  loans, and multi-family  dwellings.  Guaranty has recently begun to
offer  consumer loans and  government-insured  and  conventional  small business
loans.   Guaranty  invests  in  certain  United  States  government  and  agency
obligations and other investments permitted by applicable laws and regulations.

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

Market Area

         Guaranty is  headquartered  in  Charlottesville  or  Albemarle  County,
Virginia. This area had a collective population of approximately 108,000 in 1990
according to census figures,  is located in central Virginia 110 miles southwest
of Washington,  D.C. and 70 miles west of Richmond,  Virginia,  and includes the
University of Virginia,  the area's largest  employer.  Guaranty  operates seven
full service retail branches,  which serve  Charlottesville,  Albemarle  County,
Fluvanna County, and Harrisonburg, Virginia.

Competition

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

         Guaranty  faces  substantial  competition  in attracting  deposits from
commercial  banks,  money  market  and  mutual  funds,  credit  unions and other
investment  vehicles.  The ability of  Guaranty  to attract and retain  deposits
depends on its ability to provide an investment  opportunity  that satisfies the

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<PAGE>

requirements  of  investors  as to rate of  return,  liquidity,  risk and  other
factors.  Guaranty  competes for these deposits by offering a variety of deposit
products at competitive rates and convenient business hours.

         Guaranty operates in a highly  competitive  environment,  competing for
deposits and loans with commercial banks and other financial institutions,  many
of which possess  substantially greater financial resources than those available
to Guaranty.  Certain of these  institutions have  significantly  higher lending
limits  than  Guaranty.  In  addition,  there  can be no  assurance  that  other
financial institutions, with substantially greater resources than Guaranty, will
not establish operations in Guaranty's service area.

Credit Policies

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

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

         Guaranty uses a Management  Loan Committee and Directors Loan Committee
to approve loans. The Management Loan Committee, which consists of the President
and two  additional  loan  underwriters,  meets as  necessary to review all loan
applications.  A  Directors  Loan  Committee,  which  currently  consists of all
directors,  approves  loans in excess of  $1,000,000  that have been  previously
approved by the Management Loan Committee.  Guaranty's  President is responsible
for reporting to the Directors Loan  Committee  monthly on the activities of the
Management  Loan  Committee  and  on  the  status  of  various   delinquent  and
non-performing loans. The Directors Loan Committee also reviews lending policies
proposed by Management.

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

                                       5
<PAGE>

including HUD/FHA,  VA and applicable VHDA loans are underwritten and acted upon
within loan administration requiring two signatures of approval.

         In the normal course of business,  Guaranty  makes various  commitments
and incurs certain contingent  liabilities which are disclosed but not reflected
in its annual financial  statements,  including commitments to extend credit. At
December 31, 1998, commitments to extend credit totaled $61.9 million.

Commercial Real Estate Lending

         During  1998  Guaranty  has focused on  increasing  its  percentage  of
commercial  real estate  loans in relation  to the total loan  portfolio.  These
loans  are  secured  by  various  types of  commercial  real  estate,  including
multi-family  residential  buildings,  commercial  buildings and offices,  small
shopping  centers and  churches.  At December 31, 1998,  commercial  real estate
loans aggregated  $36.9 million or 15.5% of Guaranty's  gross loans.  Guaranty's
commercial  real estate loans have been made at interest rates that adjust based
on yields for one-year U.S.  Treasury  securities,  with a 2% annual cap on rate
adjustments and a 6% cap on interest rates over the life of the loan. Typically,
Guaranty  charges fees ranging  from 1% to 2% on these  loans.  Commercial  real
estate  loans made by Guaranty  generally  amortize  over 15 to 25 years and may
have a call provision of 3 or 5 years.  Guaranty's  commercial real estate loans
are secured by properties in its market area.

         In its underwriting of commercial real estate, Guaranty may lend, under
federal  regulation,  up to  100% of the  secured  property's  appraised  value,
although Guaranty's loan to original appraised value ratio on such properties is
80% or less in most cases.  Commercial real estate lending  entails  significant
additional risk,  compared with residential  mortgage  lending.  Commercial real
estate loans  typically  involve larger loan balances  concentrated  with single
borrowers or groups of related borrowers.  Additionally,  the payment experience
on loans secured by income  producing  properties is typically  dependent on the
successful  operation  of a business  or a real  estate  project and thus may be
subject, to a greater extent, to adverse conditions in the real estate market or
in the economy  generally.  Guaranty's  commercial real estate loan underwriting
criteria require an examination of debt service coverage ratios,  the borrower's
creditworthiness and prior credit history and reputation, and Guaranty generally
requires  personal  guarantees  or  endorsements  of  borrowers.  Guaranty  also
carefully considers the location of the security property.

One-to-Four-Family Residential Real Estate Lending

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

         Although, due to competitive market pressures,  the Bank does originate
fixed-rate mortgage loans, it currently underwrites and documents all such loans
to permit their sale in the  secondary  mortgage

                                       6
<PAGE>

market.  At December 31, 1998,  $20.2  million,  or 11.7%,  of  Guaranty's  loan
portfolio consisted of fixed-rate mortgage loans.

         Guaranty's  current  one-to-four-family   residential   adjustable-rate
mortgage loans ("ARMs") have interest rates that adjust every year, generally in
accordance  with the rates on one-year  U.S.  Treasury  Bills.  Guaranty's  ARMs
generally  limit interest rate increases to 2% each rate  adjustment  period and
have an established ceiling rate at the time the loans are made of up to 6% over
the original  interest rate.  Borrowers are qualified at the first year interest
rate plus 2%. To compete with other lenders in its market area,  Guaranty  makes
one-year ARMs at interest  rates which,  for the first year, are below the index
rate which would  otherwise  apply to these loans.  At December 31, 1998,  $46.1
million,  or 26.7%,  of Guaranty's loan portfolio  consisted of ARMs.  There are
unquantifiable risks resulting from potential increased costs to the borrower as
a result of repricing. It is possible,  therefore, that during periods of rising
interest  rates,  the risk of  defaults on ARMs may  increase  due to the upward
adjustment of interest costs to borrowers.

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

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

Construction Lending

         Guaranty makes local construction loans,  primarily residential and lot
loans. The construction loans are secured by the property for which the loan was
obtained.  At December 31, 1998,  construction  and land loans  outstanding were
$60.0 million, or 16.9%, of gross loans. The average life of a construction loan
is approximately nine months and they reprice daily to meet the market, normally
prime plus two percent.  Because the interest charged on these loans floats with
the market, they help Guaranty in managing its interest rate risk.  Construction
lending entails significant additional risks, compared with residential mortgage
lending. Construction loans often involve larger loan balances concentrated with
single  borrowers or groups of related  borrowers.  Construction  loans  involve
additional risks  attributable to the fact that loan funds are advanced upon the
security of the home under  construction,  which is of uncertain  value prior to
the  completion  of  construction.  Thus,  it  is  more  difficult  to  evaluate
accurately  the total loan funds  required  to  complete a project  and  related
loan-to-value  ratios.  To  minimize  the  risks  associated  with  construction
lending,  Guaranty limits loan amounts to 80.0% of appraised  value, in addition
to its usual credit  analysis of its  borrowers.  Guaranty  also obtains a first
lien on the security property as security for its construction loans.

Consumer Lending

         Guaranty offers various secured and unsecured consumer loans, including
unsecured  personal loans and lines of credit,  share loans,  automobile  loans,
deposit account loans, installment and demand loans, letters of credit, and home
equity loans. At December 31, 1998,  Guaranty had consumer loans of $9.6 million
or 5.5% of gross loans.  During 1997 and 1998,  Guaranty  increased its level of
consumer loans by 43.6%.  Such loans were generally made to customers with which
Guaranty  had an  pre-existing  

                                       7
<PAGE>


relationships.  Guaranty originates all of its consumer loans in its market area
and intends to continue its consumer lending in this geographic area.

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

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

 Commercial Loans

         In July 1996, Guaranty began making commercial loans to qualified small
businesses in its market area. Commercial business loans generally have a higher
degree of risk than residential  mortgage loans, but have commensurately  higher
yields. To manage these risks, Guaranty generally secures appropriate collateral
and  carefully  monitors the  financial  condition  of its  business  borrowers.
Residential  mortgage  loans  generally are made on the basis of the  borrower's
ability to make  repayment  from his employment and other income and are secured
by real  estate  whose  value  tends to be easily  ascertainable.  In  contrast,
commercial  business  loans  typically  are made on the basis of the  borrower's
ability to make  repayment  from cash flow from its  business and are secured by
business assets, such as commercial real estate, accounts receivable,  equipment
and  inventory.  As a result,  the  availability  of funds for the  repayment of
commercial  business loans may be substantially  dependent on the success of the
business  itself.  Further,  the collateral  for  commercial  business loans may
depreciate  over  time  and  cannot  be  appraised  with  as much  precision  as
residential real estate.  Guaranty has a credit review and monitoring  system to
regularly  review the cash flow of commercial  borrowers.  At December 31, 1998,
commercial loans made up 15.5% of the total loan portfolio.

Employees

         At December  31,  1998,  Guaranty  had the  equivalent  of 91 full-time
employees, and currently has 9 part-time employees. None of Guaranty's employees
are represented by any collective bargaining unit.

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<PAGE>

Supervision and Regulation

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

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

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

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

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

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

         For the semi-annual  period beginning  January 1, 1998, the assessments
imposed on all FDIC  deposits  for  deposit  insurance  have an  effective  rate
ranging from 0 to 27 basis points per $100 of insured deposits, depending on the
institution's capital position and other supervisory factors.  However,  because
the legislation enacted in 1996 requires that both Savings Association Insurance
Fund  ("SAIF")  insured and  BIF-insured  deposits pay a pro rata portion of the
interest due on the obligations  issued by the Financing  Corporation  ("FICO"),
the FDIC is assessing  BIF-insured  deposits an additional 1.30 basis points per
$100 of deposits to cover those obligations.

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<PAGE>

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

         Capital.  The Federal Reserve Board has issued  risk-based and leverage
capital guidelines applicable to banking organizations they supervise. Under the
risk-based  capital  requirements,  Guaranty  and the Bank  are  each  generally
required to maintain a minimum  ratio of total capital to  risk-weighted  assets
(including  certain  off-balance  sheet  activities,  such as standby letters of
credit),  of 8%. At least half of the total  capital is to be composed of common
equity, retained earnings and qualifying perpetual preferred stock, less certain
intangibles   ("Tier  1  capital").   The   remainder  may  consist  of  certain
subordinated  debt,  certain hybrid  capital  instruments  and other  qualifying
preferred  stock  and a  limited  amount  of the loan  loss  allowance  ("Tier 2
capital" and, together with Tier 1 capital,  "total  capital").  At December 31,
1998, Guaranty's Tier 1 capital and total capital ratios were 10.44% and 10.99%,
respectively.

         In  addition,  each  of  the  Federal  bank  regulatory  agencies  have
established   minimum   leverage   capital   ratio   requirements   for  banking
organizations. These requirements provide for a minimum leverage ratio of Tier 1
capital to  adjusted  average  quarterly  assets  equal to 4% for banks and bank
holding companies that meet certain specified criteria. All other banks and bank
holding  companies will generally be required to maintain a leverage ratio of at
least 100 to 200 basis  points  above the stated  minimum.  Guaranty's  leverage
ratio at December 31, 1998 was 10.81%.

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

         Other  Safety  and  Soundness  Regulations.   There  are  a  number  of
obligations  and  restrictions  imposed  on bank  holding  companies  and  their
depository  institution  subsidiaries by Federal law and regulatory  policy that
are  designed  to reduce  potential  loss  exposure  to the  depositors  of such
depository  institutions  and to the  FDIC  insurance  funds  in the  event  the
depository  institution  becomes  in danger of  default  or is in  default.  For
example,  under a policy of the  Federal  Reserve  Board  with  respect  to bank
holding  company  operations,  a bank holding  company is required to serve as a
source of financial  strength to its subsidiary  depository  institutions and to
commit resources to support such  institutions in  circumstances  where it might
not do so otherwise.  In addition,  the "cross-guarantee"  provisions of Federal
law require insured  depository  institutions  under common control to reimburse
the FDIC for any loss suffered or reasonably  anticipated  by either the SAIF or
the BIF as a result of the default of a commonly  

                                       10
<PAGE>

controlled insured depository  institution or for any assistance provided by the
FDIC to a  commonly  controlled  insured  depository  institution  in  danger of
default.  The FDIC may decline to enforce the  cross-guarantee  provision  if it
determines  that a  waiver  is in the best  interests  of the SAIF or the BIF or
both. The FDIC's claim for  reimbursement  is superior to claims of shareholders
of the insured depository  institution or its holding company but is subordinate
to claims of  depositors,  secured  creditors and holders of  subordinated  debt
(other  than  affiliates)  of  the  commonly   controlled   insured   depository
institution.

         The Federal  banking  agencies  also have broad  powers  under  current
Federal  law to take  prompt  corrective  action to resolve  problems of insured
depository  institutions.  The extent of these  powers  depends upon whether the
institution   in   question   is   well-capitalized,   adequately   capitalized,
undercapitalized, significantly undercapitalized or critically undercapitalized,
as defined by the law.  As of  December  31,  1998,  Guaranty  and the Bank were
classified as well-capitalized.

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

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

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

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

                                       11
<PAGE>

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

The Year 2000 Issue

         The Year 2000 ("Y2K")  issue relates to whether  computer  systems will
properly  recognize and process date sensitive  information on and after January
1, 2000.  Systems that do not properly recognize such information could generate
erroneous data or fail. The Bank is heavily dependent on computer systems in the
conduct of substantially all of its business activities.

         The  Corporation  has both a Y2K  Committee  and a Y2K Plan  that  were
established  and  adopted  in 1998.  The Plan,  as  recommended  by the  Federal
Financial Institutions Examination Council, is based on five phases:  Awareness,
Assessment, Renovation, Validation and Implementation. The Corporation continues
in the Validation phase, or testing phase,  which is scheduled for completion by
April 1999. In the event that any of its mission critical  computer systems fail
to meet the Y2K requirements, or if other systems that the Bank depends upon for
automated  processing  its  ongoing  transactions,  such as  electrical  or data
transmission  fail,  the Bank is required by Federal  regulators  to develop and
test a comprehensive  contingency  plan. The contingency plan is currently being
developed and should be completed by September 1999.

         Successful  and  timely  completion  of the Y2K  project  is  based  on
management's best estimates  derived from various  assumptions of future events,
which are  inherently  uncertain,  including  the testing of results of the core
processing system  maintained by a third party service bureau,  and readiness of
all vendors,  suppliers and  customers.  No assurance can be given that the Plan
will be  successfully  completed by the Year 2000, in which case the Corporation
could incur data processing delays, mistakes or failures. These delays, mistakes
or failures could have a significant adverse impact on the financial  statements
of the Corporation.

Forward Looking Statements

         Certain   statements   in  this  annual   report  on  Form  10-KSB  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 the  Corporation's  current  expectations.  A variety of
factors could cause the  Corporation'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 the Corporation'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  the
Corporation's control, and general economic conditions.

                                       12
<PAGE>

Item 2.           Description of Property.

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

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

         Guaranty has operated a branch in downtown  Charlottesville since 1981,
and has operated its current Main Street  location since 1992. The current lease
expires  in 2002,  subject  to  Guaranty's  right to renew for three  additional
five-year periods under certain circumstances. Guaranty has operated a branch in
Charlottesville  near the  University  of  Virginia  since 1985,  including  the
Arlington  Boulevard  branch  that opened in 1994.  The  current  lease for this
branch  expires  in  1999,  subject  to  Guaranty's  right to  renew  for  three
additional  five-year  periods,  and West Main Street  branch  which opened July
1998. The current lease for this branch  expires in 2003,  subject to Guaranty's
right to renew for two five year terms.

         In December 1996, Guaranty opened a new main office,  operations center
and fourth retail branch in the Pantops area in Albemarle  County,  just east of
Charlottesville.  Guaranty also opened a branch in Harrisonburg, Virginia in May
1997 and Lake Monticello, Virginia in November 1998.


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.

                                       13
<PAGE>

                                     PART II

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

         Guaranty's  Common Stock has been listed on the Nasdaq  National Market
under the symbol "GSLC" since June 1997. From June 1995 to June 1997, the Common
Stock had been listed on the Nasdaq  SmallCap  Market.  The following table sets
forth, for the quarters indicated,  the high and low sales prices for Guaranty's
Common Stock and per share dividends for the periods indicated.

                           Market Price and Dividends

<TABLE>
<CAPTION>
                                                                    Sales Price ($)
                                                                -------------------------
                                                                   High           Low                 Dividends ($)
                                                                -----------     ---------         ----------------------
<S>                                                                  <C>           <C>                     <C>
Fiscal Year Ended December 31, 1997:
     1st quarter                                                     11.00          8.25                    -
     2nd quarter                                                     11.00          9.25                   .06
     3rd quarter                                                     12.75         10.00                   .03
     4th quarter                                                     15.25         10.75                   .03

Fiscal Year Ended December 31, 1998:
     1st quarter                                                     16.75         13.25                   .03
     2nd quarter                                                     17.00         15.50                   .06
     3rd quarter                                                     17.00         12.375                  .06
     4th quarter                                                     15.00         10.75                   .06
</TABLE>

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

         Guaranty is a legal entity separate and distinct from its subsidiaries,
and its revenues depend primarily on the payment of dividends from the Bank. The
Bank is subject to certain legal  restrictions  on the amount of dividends it is
permitted to pay to Guaranty.  At December 31, 1998,  the Bank had available for
distribution as dividends to Guaranty approximately $2.7 million.

         As of March 26, 1999,  Guaranty has approximately 1,191 shareholders of
record.

                                       14
<PAGE>

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

MANAGEMENT'S DISCUSSION AND ANALYSIS OF
FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The following  commentary  discusses major components of Guaranty's business and
presents an  overview  of its  consolidated  financial  position  and results of
operations at and for the years ended December 31, 1998 and 1997, the six months
ended December 31, 1996 and the fiscal year ended June 30, 1996. This discussion
should be reviewed in conjunction with the consolidated financial statements and
accompanying notes and other statistical information presented elsewhere in this
annual report.

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

OVERVIEW

* On April 28, 1998,  Guaranty Financial  Corporation,  in an effort to increase
its regulatory  capital base,  formed the subsidiary  Guaranty  Capital Trust I,
which issued $6.9 million of 7%  cumulative,  convertible  preferred  securities
that mature on May 28, 2028.

* Guaranty  opened its sixth and seventh retail  branches during 1998, the first
on West Main Street near the University of Virginia in Charlottesville, Virginia
and second at Lake Monticello, a planned community in Fluvanna County, Virginia.

NET INCOME

Net  income for the year  ended  December  31,  1998 was  $1,016,000,  ($.68 per
diluted share), a 13.3% increase when compared to calendar year 1997 earnings of
$898,000 ($.61 per diluted share).  These  increased  earnings where primarily a
result of increased  net interest  margin,  growth and expansion of the existing
branch network and the addition and expansion of the commercial and construction
loan departments.  These increased  revenues were partially offset by additional
costs relating to the expansion of the branch  network and lending  departments.
In addition, 1997 earnings were affected by the one-time expenses related to the
conversion to a state chartered commercial bank.

Management continues to implement strategies to restructure the balance sheet in
accordance with the current strategic plan which focuses on growth and expansion
of  the  existing  branch  network  and  product  offerings  by  maximizing  the
opportunities and benefits resulting from the impact recent bank  consolidations
are having on the local market.  Guaranty Bank is the only  community  bank with
corporate  headquarters  located  in  the  Charlottesville  market  that  has an
existing branch network and established  lending programs in place to capitalize
on these unique growth  opportunities.  However,  there can be no assurance that
management  will be successful in  implementing  these plans,  or if successful,
that these plans will result in improved operating performance.

                                       15
<PAGE>

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

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

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 and
represents Guaranty's net interest margin.

Net interest income was $5.7 million for the year ended December 31, 1998, 62.9%
greater than the $3.5 million  reported during the year ended December 31, 1997.
This  improvement  in the net interest  income was  primarily  due to the volume
increases in the loan portfolios and interest  bearing deposits with other banks
and the decline in the average  cost of interest  bearing  liabilities.  Average
loans  increased 37.6% for the year ended December 31, 1998. The average balance
of the interest  bearing  deposits with other banks was $10.5 million during the
year ended  December 31, 1998 an increase of 87.3%,  from an average  balance of
$5.6  million  during the year ended  December 31,  1997.  The average  yield on
average loans increased 60 basis points from 8.50% in 1997 to 9.15% in 1998. The
yield on interest bearing deposits declined from 6.17% in 1997 to 5.13% in 1998.
The cost of average total  interest  bearing  liabilities  during the year ended
December 31, 1998 declined from 5.29% in 1997 to 5.18% in 1998. The average rate
paid on savings accounts declined 39 basis points from 3.36% in 1997 to 2.97% in
1998. The average rate paid on certificates of deposits  declined 9 basis points
from 5.50% in 1997 to 5.41% in 1998.

                                       16
<PAGE>

Net interest income was $3.5 million for the year ended December 31, 1997, 33.9%
greater  than the  $2.60  million  reported  during  calendar  year  1996.  This
improvement in net interest income was primarily due to volume  increases in the
securities and loan  portfolios and to a decline in the average cost of interest
bearing  liabilities.  Average loans  increased 9.6% for the year ended December
31, 1997. The average  balance of the securities  portfolio was $22.6 million in
calendar 1997, up $7.74 million,  or 51.9% over calendar 1996.  Although  market
interest  rates were in a declining  trend  during the year ended  December  31,
1997, the yield on average loans increased 20 basis points from 8.30% in 1996 to
8.50% in 1997.  The average  yield on  securities  declined from 7.4% in 1996 to
7.0% in 1997.  Also  contributing  to the improvement in net interest income for
the year ended  December  31,  1997 was a decline  in the cost of average  total
interest bearing liabilities from 5.6% in 1996 to 5.3% in 1997. The average rate
paid on interest bearing deposits decreased 7 basis points, from 5.12% to 5.05%,
and the average rate paid on  certificates  of deposit  declined 10 basis points
from 5.60% to 5.50%.  The increase in net interest margin was achieved from both
volume gains and widening  spreads.  The  increase in average  securities  was a
result of loan demand not keeping pace with  increases  in deposits.  This tread
reversed in late 1997 as a result of the expanded  branch network and additional
loan demand.

Net interest income was $1.3 million for the six month period ended December 31,
1996,  15.5% greater than the $1.2 million reported for the same period in 1995.
This improvement in net interest income was primarily due to volume increases in
the securities portfolio and to higher average yields on the loan portfolio. The
average balance of the securities  portfolio was $17.6 million for the six month
period  ended  December 31,  1996,  up 124.7% over the same period in 1995.  The
average balance of the loan portfolio was $83.8 million for the six month period
ended  December  31,  1996,  up 7.6% over the same period in 1995.  The yield on
average  loans  increased 4 basis  points from 8.2% during the six month  period
ended December 31, 1995 to 8.24% for the same period in 1996, while the yield on
securities  declined  182 basis  points to 7.15% for the six month  period ended
December 31, 1996 from 8.97% for the same period in 1995.  Also  contributing to
the improved net interest  margin was a 38 basis point decrease in the rate paid
on average interest  bearing  liabilities to 5.6% for the six month period ended
December 31, 1996 from 5.9% for the same period in 1995.

                                       17
<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>

                                                                                                               Six Months Ended     
                                                                 Year Ended December 31,                          December 31,      
------------------------------------------------------------------------------------------------------------------------------------
                                       ---------------------------------------------------------------------------------------------
  (Dollars in thousands)                   1998                                             1997                     1996           
------------------------------------------------------------------------------------------------------------------------------------
                                                      Interest    Average             Interest Average             Interest  Average
                                          Average     income/      yield/   Average   income/   yield/    Average   income/   yield/
                                          balance     expense       rate    balance   expense    rate     balance   expense    rate 
                                          -------     -------       ----    -------   -------    ----     -------   -------    ---- 
                                                                                                             
<S>                                         <C>         <C>         <C>      <C>       <C>       <C>       <C>         <C>    <C>   
Assets
Interest earning assets:
   Securities                               $18,388     $1,290      7.02%    $22,637   $1,590    7.02%     $17,640     $631   7.15% 
   Loans                                    122,751     11,231      9.15%     89,222    7,584    8.50%      83,816    3,455   8.24% 
   Interest bearing deposits                                               
      in other banks                         10,500        539      5.13%      5,605      346    6.17%       5,257      190   7.23% 
                                             ------        ---      ----       -----      ---    ----        -----      ---   ----  
   Total interest-earning
          assets/total interest income      151,639     13,060      8.61%    117,464    9,520    8.10%     106,713    4,276   8.01% 
                                            -------     ------      ----     -------    -----    ----      -------    -----   ----  
   Noninterest earning assets:
      Cash and due from banks                 2,450                            1,898                         1,082                  
      Premises and Equipment                  6,519                            5,508                         4,038                  
      Other assets                            3,001                            2,624                         2,680                  
      Less Allowance for loan losses         (1,104)                            (890)                         (826)                 
                                             ------                             ----                          ----                  

          Total noninterest earning assets   10,866                            9,140                         6,974                  
                                             ------                            -----                         -----                  

             Total Assets                  $162,505                         $126,604                      $113,687                  
                                           ========                         ========                      ========                  


Liabilities and stockholders equity
Interest bearing liabilities:
   Interest bearing deposits:
      Demand/MMDA accounts                  $24,936       $862      3.46%    $11,110     $289    2.60%      $8,765     $121   2.76% 
      Savings                                 8,551        254      2.97%      5,654      190    3.36%       4,870       83   3.41% 
      Certificates of deposit                93,615      5,068      5.41%     80,779    4,443    5.50%      63,346    1,756   5.54% 
                                             ------      -----      ----      ------    -----    ----       ------    -----   ----  
          Total interest bearing deposits   127,102      6,184      4.87%     97,543    4,922    5.05%      76,981    1,960   5.09% 
                                            -------      -----      ----      ------    -----    ----       ------    -----   ----  
      FHLB advances and other borrowings     13,893        899      6.47%     14,070      804    5.71%      25,871      745   5.76% 
      Bonds payable                           2,142        325     15.17%      2,583      312   12.08%       3,060      235  15.36% 
                                              -----        ---     -----       -----      ---   -----        -----      ---  -----  
          Total interest bearing
             liabilities/total interest 
             expense                        143,137      7,408      5.18%    114,196    6,038    5.29%     105,912    2,940   5.55% 
                                            -------      -----      ----     -------    -----    ----      -------    -----   ----  

      Non interest bearing liabilities:
        Demand deposits                       5,338                            1,658                         1,324                  
        Other liabilities                     3,531                              903                           809                  
                                              -----                              ---                           ---                  
          Total liabilities                 152,006                          116,757                       108,045                  
      Stockholders equity                    10,499                            9,847                         5,642                  
                                             ------                            -----                         -----                  
          Total liabilities and
            stockholders equity            $162,505                         $126,604                      $113,687                  
                                           ========                         ========                      ========                  

      Interest spread (1)                                           3.44%                        2.82%                        2.46% 
      Net interest income/net interest
        margin (2)                                      $5,652      3.73%              $3,482    2.96%               $1,336   2.50% 
                                                        ======      ====               ======    ====                ======   ====  
</TABLE>
<TABLE>
<CAPTION>

                                                    Year Ended             
                                                Year Ended June 30,        
------------------------------------------------------------------------   
                                       ---------------------------------   
  (Dollars in thousands)                                1996               
-----------------------------------------------------------------------    
                                                        Interest  Average  
                                               Average  income/   yield/   
                                               balance  expense   rate     
                                               -------  -------   ----     
                                                                           
<S>                                           <C>         <C>    <C>       
Assets                                                                     
Interest earning assets:                                                   
   Securities                                 $10,523     $820   7.79%     
   Loans                                       79,885    6,442   8.06%     
   Interest bearing deposits                                               
      in other banks                            5,163      355   6.88%     
                                                -----      ---   ----      
   Total interest-earning                                                  
          assets/total interest income         95,571    7,617   7.97%     
                                               ------    -----   ----      
   Noninterest earning assets:                                             
      Cash and due from banks                   2,011                      
      Premises and Equipment                    1,427                      
      Other assets                              2,377                      
      Less Allowance for loan losses             (756)                     
                                                 ----                      
                                                                           
          Total noninterest earning assets      5,059                      
                                                -----                      
                                                                           
             Total Assets                    $100,630                      
                                             ========                      
                                                                           
                                                                           
Liabilities and stockholders equity                                        
Interest bearing liabilities:                                              
   Interest bearing deposits:                                              
      Demand/MMDA accounts                     $8,927     $245   2.74%     
      Savings                                   4,541      152   3.35%     
      Certificates of deposit                  48,460    2,735   5.64%     
                                               ------    -----   ----      
          Total interest bearing deposits      61,928    3,132   5.06%     
                                               ------    -----   ----      
      FHLB advances and other borrowings       25,773    1,553   6.03%     
      Bonds payable                             3,520      507  14.40%     
                                                -----      ---  -----      
          Total interest bearing                                           
             liabilities/total interest                                    
             expense                           91,221    5,192   5.69%     
                                               ------    -----   ----      
                                                                           
      Non interest bearing liabilities:                                    
        Demand deposits                         1,066                      
        Other liabilities                       2,062                      
                                                -----                      
          Total liabilities                    94,349                      
      Stockholders equity                       6,281                      
                                                -----                      
          Total liabilities and                                            
            stockholders equity              $100,630                      
                                             ========                      
                                                                           
      Interest spread (1)                                        2.28%     
      Net interest income/net interest                                     
        margin (2)                                      $2,425   2.54%     
                                                        ======   ====      
</TABLE>                                   

(1)      Interest spread is the average yield earned on earning assets, less the
         average rate incurred on noninterest bearing liabilities.
(2)      Net interest margin is net interest  income,  expressed as a percentage
         of average earning assets.

                                       18
<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>


                                                                                       Six Months Ended
                                                                                       December 31, 1996
                          Year Ended December 31, 1998  Year Ended December 31, 1997      compared to         
                                   compared to                 compared to             Six Months Ended       
                          Year Ended December 31, 1997  Year Ended December 31, 1996    December 31, 1995     
                                 Change Due To:                Change Due to:             Change Due To:      
--------------------------------------------------------------------------------------------------------------
                                              Increase                  Increase                   Increase   
(Dollars in thousands)        Rate    Volume   (Decrease)   Rate  Volume (Decrease)  Rate  Volume  (Decrease) 
--------------------------------------------------------------------------------------------------------------
<S>                              <C>    <C>       <C>       <C>     <C>    <C>     <C>      <C>       <C>     
Interest income:
   Securities                    $0     ($300)    ($300)    ($54)   $544   $490    ($143)   $422      $279    
   Loans                        580     3,067     3,647      163     664    827       31     231       262    
   Interest bearing deposits                                                                                  
     in other banks             (58)      251       193      (49)     11    (38)     (39)     69        30    
--------------------------------------------------------------------------------------------------------------
        Total interests income  522     3,018     3,540       60    1219   1279     (151)    722       571    
Interest expense:                                                                                             
   Interest bearing deposits:                                                                                 
      Demand/MMDA accounts       96       477       573      (13)     63     50       (2)     (4)       (6)   
      Savings                   (22)       86        64       (1)     35     34       (0)      3         3    
      Certificates of deposit   (73)      699       626      (59)   1218   1159     (132)    682       550    
--------------------------------------------------------------------------------------------------------------
        Total interest bearing 
          deposits                1     1,262     1,263      (73)   1316   1243     (134)    681       547    
      FHLB advances and other   107       (12)       95      (10)   (628)  (638)    (154)     43      (111)   
      Bonds payable              66       (53)       13      (78)    (76)  (154)      35     (75)      (40)   
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
      Total interest expense    174     1,197     1,371     (161)    612    451     (253)    649       396    
--------------------------------------------------------------------------------------------------------------
--------------------------------------------------------------------------------------------------------------
      Net interest income      $348    $1,821    $2,169     $221    $607   $828     $102     $73      $175    
--------------------------------------------------------------------------------------------------------------
</TABLE>

<TABLE>
<CAPTION>
                                                                                                                                   
                                  Year Ended June 30, 1996    
                                      compared to           
                                  Year Ended June 30,1995  
                                      Change Due to        
-----------------------------------------------------------
                                                 Increase  
(Dollars in thousands)             Rate   Volume (Decrease)
-----------------------------------------------------------
<S>                                <C>     <C>      <C>    
Interest income:                                           
   Securities                      $226     $9      $235   
   Loans                            545   (430)      115   
   Interest bearing deposits                               
     in other banks                  57     38        95   
-----------------------------------------------------------
        Total interests income      828   (383)      445   
Interest expense:                                          
   Interest bearing deposits:                              
      Demand/MMDA accounts          (35)     9       (26)  
      Savings                       (41)     5       (36)  
      Certificates of deposit       768   (248)      520   
-----------------------------------------------------------
        Total interest bearing                             
          deposits                  692   (234)      458   
      FHLB advances and other      (135)   129        (6)  
      Bonds payable                 (28)  (166)     (194)  
-----------------------------------------------------------
-----------------------------------------------------------
      Total interest expense        529   (271)      258   
-----------------------------------------------------------
-----------------------------------------------------------
      Net interest income          $299  ($112)     $187   
-----------------------------------------------------------
                                                           
</TABLE>

                                       19
<PAGE>


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, 1998,  Guaranty had $17.0  million more assets than  liabilities
that reprice  within one year or less and  therefore  was in an  asset-sensitive
position.  This is an  improvement  over the same period in the prior year where
there were $19.0 million more  liabilities  than assets that repriced within one
year.  This  improvement  is due mainly to  Guaranty  increasing  its prime rate
lending  and  increased  principal  focus on  deposit  marketing  programs  that
attracted low rate transaction accounts.

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

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

<TABLE>
<CAPTION>
                                                                          December 31, 1998
                                                                      Maturing or Repricing In:
----------------------------------------------- ----------------------------------------------------------------------
                                                    3 Months           4-12              1-5              Over 5
                                                    or less           Months            Years             Years
----------------------------------------------- ----------------- ---------------- ----------------- -----------------
(Dollars in thousands)
----------------------------------------------- ----------------- ---------------- ----------------- -----------------
<S>                                                  <C>              <C>               <C>               <C>    
Interest-sensitive assets:

   Loans                                             $73,798          $52,707           $22,020           $24,547
   Investments and mortgage-backed
     securities (1)                                    1,550            1,000            26,909             2,094
   Deposits at other institutions                      7,326                -                 -                 -
----------------------------------------------- ----------------- ---------------- ----------------- -----------------

   Total interest-sensitive assets                    82,674           53,707            48,929            26,641
----------------------------------------------- ----------------- ---------------- ----------------- -----------------

Cumulative interest-sensitive assets                  82,674          136,381           185,310           211,951
Interest-sensitive liabilities:
   NOW accounts (2)                                        -                -                 -            23,433
   Money market deposit accounts                      22,319                -                 -                 -
   Savings accounts (3)                                2,465            1,381             1,184             4,833
   Certificates of deposit                            24,921           66,544            25,725                 -
   Borrowed money                                      1,008                -                 -                 -
   Bonds payable                                          67              201               726               792
----------------------------------------------- ----------------- ---------------- ----------------- -----------------

   Total interest-sensitive liabilities               50,780           68,126            27,635            29,058
----------------------------------------------- ----------------- ---------------- ----------------- -----------------

Cumulative interest-sensitive liabilities             50,780          118,906           146,541           175,599
Period gap                                            31,894         (14,419)            21,294           (2,417)
Cumulative gap                                        31,894           17,475            38,769            36,352
Ratio of cumulative interest-sensitive
  assets to interest-sensitive liabilities           162.81%          114.70%           126.46%           120.70%
Ratio of cumulative gap to total assets               24.40%           13.36%            29.64%            27.81%
----------------------------------------------- ----------------- ---------------- ----------------- -----------------

</TABLE>


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

                                       20
<PAGE>

INVESTMENTS

Total available for sale increased 122.1% to $26.91 million at December 31, 1998
from $11.52 million at December 31, 1997.  The overall  increase was primarily a
result of  management's  efforts to increase the interest  margin by using money
received  from the increase in deposits and  proceeds  from the trust  preferred
securities, offset by the increase in loans.

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

<TABLE>
<CAPTION>

                                           December 31,               December 31,                        June 30,
                                              1998                        1997                 1997                    1996
                                              ----                        ----                 ----                    ----
                                       Cost          Market      Cost         Market      Cost      Market       Cost     Market
                                       ----          ------      ----         ------      ----      ------       ----     ------
(Dollars in thousands)
<S>                                    <C>            <C>        <C>           <C>        <C>        <C>         <C>       <C>    
Held-to-maturity
      Mortgage-backed securities       $ 2,094        $ 2,094    $ 2,745       $ 2,759    $ 3,157    $ 3,349     $ 3,731   $ 3,879
      Other                                250            250        100           100          -          -           -         -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
      Total held-to-maturity             2,344          2,344      2,845         2,859      3,157      3,349       3,731     3,879
-----------------------------------------------------------------------------------------------------------------------------------

Available for sale
      Corporate bonds                   26,463         26,581     11,415        11,474          -          -           -         -
      U.S. Government Obligations          301            328         50            50          -          -           -         -
      Mortgage-backed securities             -              -          -             -          -          -       9,993     9,564
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
      Total available for sale          26,764         26,909     11,465        11,524          -          -       9,993     9,564
-----------------------------------------------------------------------------------------------------------------------------------

Trading
      Mortgage-backed securities             -              -          -             -     16,937     16,736           -         -
      U.S. Government Obligations        1,000          1,001      1,031         1,032          -          -           -         -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
      Total Trading                      1,000          1,001      1,031         1,032     16,937     16,736           -         -
-----------------------------------------------------------------------------------------------------------------------------------

Other
      Federal Reserve Bank, stock            -              -         72            72          -          -           -         -
      Federal Home Loan Bank Stock       1,300          1,300        860           860      1,360      1,360       1,360     1,360
      Other                                  -              -          7             7          -          -           -         -
-----------------------------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------------------------
      Total                            $31,408        $31,554    $16,280       $16,354    $21,454    $21,445     $15,084   $14,803
-----------------------------------------------------------------------------------------------------------------------------------
</TABLE>


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

<TABLE>
<CAPTION>



                                                 Year Ended                      Six months ended          Year Ended
                                                December 31,                        December 31,            June 30,
---------------------------------------------------------------------------------------------------------------------------
                                        1998                   1997                   1996                     1996
---------------------------------------------------------------------------------------------------------------------------
                                    Book      % of         Book      % of         Book      % of         Book      % of
                                   Value      Total       Value      Total       Value      Total       Value      Total
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                <C>        <C>         <C>        <C>         <C>        <C>         <C>        <C>    
Investment securities:

FHLMC mortgage-backed securities    $ 2,094     6.64%      $ 2,745    16.80%      $ 6,819    32.08%      $ 7,459    50.89%
GNMA mortgage-backed securities           -         -            -         -       11,967     56.32        5,836     39.81
Corporate bonds                      26,581     84.24       11,474     70.23            -         -            -         -
Treasury notes                        1,250      3.96        1,082      6.62        1,104      5.19            -         -
Other                                   328      1.04          100      0.61            -         -            -         -
---------------------------------------------------------------------------------------------------------------------------
Subtotal                             30,253     95.88       15,401     94.26       19,890     93.59       13,295     90.70
Other :
FHLB stock                            1,300      4.12          860      5.26        1,360      6.40        1,360      9.28
FRB Stock                                 -         -           72      0.44            -         -            -         -
Other                                     -         -            7      0.04            3      0.01            3      0.02
---------------------------------------------------------------------------------------------------------------------------

Total Investment securities        $ 31,553   100.00%     $ 16,340   100.00%     $ 21,253   100.00%     $ 14,658   100.00%
---------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       21
<PAGE>


LOANS

Net loans  consist of total loans minus  undisbursed  loan funds,  deferred loan
fees and the  allowance  for loan  losses.  Net loans  were  $162.4  million  at
December 31, 1998, an increase of 62.90% over December 31, 1997.  Net loans were
$99.67  million at  December  31,  1997,  an increase of 22.6% over net loans at
December  31,  1996.  Net loans were $81.27  million at  December  31,  1996,  a
decrease  of 3.3% over net loans of $84.1  million at June 30,  1996.  Net loans
increased  11.8% at June 30,  1996 from a balance  of $75.2  million at June 30,
1995.

The average  balance of total loans as a percentage of average assets was 75.5%,
70.5%,  and 73.7% for the years ended  December  31, 1998 and 1997,  and the six
month period ended  December 31, 1996,  respectively.  

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

Loan Portfolio by Category

                           Loan Portfolio by Category
<TABLE>
<CAPTION>

                                                               December 31,                           June 30,
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
                                                     1998           1997          1996           1996          1995
------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                  <C>            <C>           <C>            <C>           <C>     
Mortgage Loans:
     Residential                                      $66,369       $ 66,035      $ 67,016       $ 66,136      $ 62,175
     Commercial                                        36,985         16,641         8,486          7,670         4,508
     Construction and land loans                       60,088         18,263         5,220          8,813         8,887
------------------------------------------------------------------------------------------------------------------------
     Total real estate                                163,442        100,939        80,722         82,619        75,570
Consumer Loans (1)                                      9,630          6,705         4,175          5,386         4,580
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
     Total loans receivable                           173,072        107,644        84,897         88,005        80,150
------------------------------------------------------------------------------------------------------------------------
Less:
     Undistributed loans in process                     9,588          6,752         2,467          2,824         3,858
     Deferred fees and unearned discounts                 113            282           290            314           323
     Allowance for losses                               1,002            935           870            786           747
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
     Total net items                                   10,703          7,969         3,627          3,924         4,928
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
     Total loans receivable, net                     $162,369       $ 99,675      $ 81,270       $ 84,081      $ 75,222
------------------------------------------------------------------------------------------------------------------------
(1) Includes commercial business loans

</TABLE>


                    Loan Portfolio by Percent of Gross Loans

<TABLE>
<CAPTION>

                                                               December 31,                           June 30,
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
                                                     1998           1997          1996           1996          1995
------------------------------------------------------------------------------------------------------------------------
<S>                                                   <C>            <C>           <C>            <C>           <C>    
Mortgage Loans:
     Residential                                       38.35%         61.34%        78.93%         75.15%        77.58%
     Commercial                                        21.37%         15.46%        10.00%          8.72%         5.62%
     Construction and land loans                       34.72%         16.97%         6.15%         10.01%        11.09%
------------------------------------------------------------------------------------------------------------------------
     Total real estate                                 94.44%         93.77%        95.08%         93.88%        94.29%
Consumer Loans (1)                                      5.56%          6.23%         4.92%          6.12%         5.71%
------------------------------------------------------------------------------------------------------------------------
------------------------------------------------------------------------------------------------------------------------
     Total loans receivable                           100.00%        100.00%       100.00%        100.00%       100.00%
------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       22
<PAGE>


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


                 Fixed Rate and Adjustable Rate Loans by Amount

<TABLE>
<CAPTION>


----------------------------------------------------------------------------------------------------------------------------
                                                                  December 31,                           June 30,
----------------------------------------------------------------------------------------------------------------------------
                                                       1998           1997           1996           1996           1995
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                    <C>             <C>            <C>            <C>           <C>     
Fixed-Rate Loans:
     Real Estate
         Residential                                    $20,206        $26,514        $26,061        $28,907       $ 23,577
         Construction and land loans                          -             37            138            339             69
----------------------------------------------------------------------------------------------------------------------------
         Total real estate                               20,206         26,551         26,199         29,246         23,646
----------------------------------------------------------------------------------------------------------------------------
Consumer Loans                                              242          3,099          1,396            597            736
----------------------------------------------------------------------------------------------------------------------------
     Total fixed-rate loans                              20,448         29,650         27,595         29,843         24,382
----------------------------------------------------------------------------------------------------------------------------

Adjustable-Rate Loans:
     Real Estate
     Residential                                         46,163         39,521         40,955         37,229         38,598
     Commercial                                          36,985         16,641          8,486          7,670          4,508
     Construction and land loans                         60,088         18,226          5,082          8,474          8,818
----------------------------------------------------------------------------------------------------------------------------
         Total real estate                              143,236         74,388         54,523         53,373         51,924
Consumer Loans                                            9,388          3,606          2,779          4,789          3,844
----------------------------------------------------------------------------------------------------------------------------
     Total adjustable-rate loans                        152,624         77,994         57,302         58,162         55,768
----------------------------------------------------------------------------------------------------------------------------
         Total loans receivable                         173,072        107,644         84,897         88,005         80,150
----------------------------------------------------------------------------------------------------------------------------

Less:
     Undisbursed loans in process                         9,588          6,752          2,467          2,824          3,858
     Deferred fees and unearned discounts                   113            282            290            314            323
     Allowances for losses                                1,002            935            870            786            747
----------------------------------------------------------------------------------------------------------------------------
         Total net items                                 10,703          7,969          3,627          3,924          4,928
----------------------------------------------------------------------------------------------------------------------------
         Total loans receivable, net                   $162,369        $99,675        $81,270        $84,081       $ 75,222
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

               Fixed Rate and Adjustable Rate Loans by Percentage


<TABLE>
<CAPTION>

----------------------------------------------------------------------------------------------------------------------------
                                                                   December 31,                           June 30,
----------------------------------------------------------------------------------------------------------------------------
                                                       1998            1997            1996          1996          1995
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                     <C>               <C>           <C>           <C>           <C>    
Fixed-Rate Loans:
     Real Estate
         Residential                                      11.67%            24.63%        30.70%        32.84%        29.41%
         Construction and land loans                          -              0.03          0.16          0.39          0.09
----------------------------------------------------------------------------------------------------------------------------
         Total real estate                                11.67             24.66         30.86         33.23         29.50
----------------------------------------------------------------------------------------------------------------------------
Consumer Loans                                             0.14              2.88          1.64          0.68          0.92
----------------------------------------------------------------------------------------------------------------------------
     Total fixed-rate loans                               11.81             27.54         32.50         33.91         30.42
----------------------------------------------------------------------------------------------------------------------------
Adjustable-Rate Loans:
     Real Estate 
     Residential                                          26.67             36.72         48.24         42.30         48.16
     Commercial                                           21.37             15.46         10.00          8.72          5.62
     Construction and land loans                          34.72             16.93          5.99          9.63         11.00
----------------------------------------------------------------------------------------------------------------------------
         Total real estate                                82.76             69.11         64.23         60.65         64.78
Consumer Loans                                             5.43              3.35          3.27          5.44          4.80
----------------------------------------------------------------------------------------------------------------------------
     Total adjustable-rate loans                          88.19             72.46         67.50         66.09         69.58
----------------------------------------------------------------------------------------------------------------------------
         Total loans receivable                         100.00%           100.00%       100.00%       100.00%       100.00%
----------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       23
<PAGE>

The following tables summarize the contractual repayment terms of gross loans as
of December  31,  1998,  as well as the amount of fixed rate and  variable  rate
loans due after  December  31,  1998.  The  tables  have not been  adjusted  for
estimates of  prepayments  and do not reflect  periodic  repricing of adjustable
rate loans.

<TABLE>
<CAPTION>

                            Balance                                   Principal Repayment Contractually Due
                           Outstanding                                in 12-Month Period Ending December 31,
---------------------------------------------------------------------------------------------------------------------------
                           December 31,                                              2002-          2004-       2006 and
                              1998          1999          2000          2001          2003          2005        Therafter
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                          <C>            <C>           <C>           <C>           <C>            <C>          <C>     
Residential and
    commercial real estate    $ 98,120      $ 44,870       $ 5,167       $ 8,878       $ 7,846       $ 5,927      $ 25,432
Construction                    29,976        23,729         1,788         1,780         1,729           950             -
Consumer and other
    loans                       44,976        25,270         8,381         6,618         2,202           744         1,761
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Total                        $ 173,072      $ 93,869      $ 15,336      $ 17,276      $ 11,777       $ 7,621      $ 27,193
---------------------------------------------------------------------------------------------------------------------------
</TABLE>



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

ASSET QUALITY 

Asset quality is an important factor in the successful  operation of a financial
institution.  The 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 which do not currently expose the insured  institution to sufficient risk
to warrant  classification  in one of the  aforementioned  categories but posses
potential  weaknesses  are  required  to  be  designated  "special  mention"  by
management.  On the basis of management's  review of its assets, at December 31,
1998,  Guaranty had classified $2.2 million of it's assets as  substandard,  and
none as doubtful or loss. Not all of Guaranty's assets that have been classified
are included in the table of non-performing  assets set forth below.  Several of
these  loans  are  classified  because  of  previous  credit  problems  but  are
performing.

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

                                       24
<PAGE>

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

<TABLE>
<CAPTION>
                                                               December 31,                         June 30,
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
                                                    1998           1997          1996           1996        1995
---------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                  <C>            <C>           <C>            <C>         <C>    
Nonaccrual loans                                     $ 1,686        $ 1,436       $ 1,670        $ 1,458     $ 1,556
Restructured loans                                         -              -            11             11          12
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
     Total non-performing loans                        1,686          1,436         1,681          1,469       1,568
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
Foreclosed assets                                        488             65            51             41         122
---------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------
     Total non-performing assets                     $ 2,174        $ 1,501       $ 1,732        $ 1,510     $ 1,690
---------------------------------------------------------------------------------------------------------------------

Loans past due 90 or more days and
     accruing interest                                 $ 106          $ 189           $ -           $ 19         $ 1
Non-performing loans to total loans, at
     period end                                        0.97%          1.42%         1.98%          1.67%       2.06%
Non-performing assets to period end
     total loans and foreclosed assets                 1.25%          1.49%         2.04%          1.72%       2.21%
</TABLE>


Delinquent and problem loans

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

The following table sets forth information  concerning  delinquent  mortgage and
other loans at December  31, 1998.  The amounts  presented  represent  the total
remaining  principal  balances  of the  related  loans,  rather  than the actual
payment amounts which are overdue.

<TABLE>
<CAPTION>


                                 Residential                 Commercial               Construction
                                 Real Estate                Real Estate                 and Land              Consumer
-------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)      Number        Amount        Number       Amount        Number      Amount     Number      Amount
-------------------------------------------------------------------------------------------------------------------------------
<S>                                 <C>       <C>             <C>       <C>                         <C>          <C>     <C>  
Loans delinquent for:
31-59 days                          1         $ 567           20        $3,817            -         $ -          3       $ 106
60-89 days                          2           108            3         1,607            1         215          2          47
90 days and over                    1            57            2           319            -           -          1           3
-------------------------------------------------------------------------------------------------------------------------------
Total delinquent loans              4         $ 732           25        $5,743            1       $ 215          6       $ 156
-------------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       25
<PAGE>

Allowance for losses on loans and real estate

Guaranty provides valuation  allowances for anticipated losses on loans and real
estate when its management determines that a significant decline in the value of
the collateral has occurred, and if the value of the collateral is less than the
amount of the unpaid  principal  of the  related  loan plus  estimated  costs of
acquisition and sale. In addition,  Guaranty also provides reserves based on the
dollar  amount and type of  collateral  securing its loans,  in order to protect
against  unanticipated  losses. A loss experience  percentage is established for
each loan type and is reviewed  annually.  Each quarter,  the loss percentage is
applied to the  portfolio,  by product type, to determine the minimum  amount of
reserves  required.   Although   management  believes  that  it  uses  the  best
information  available  to  make  such  determinations,  future  adjustments  to
reserves may be necessary,  and net income could be significantly  affected,  if
circumstances  differ  substantially from 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>

                                                                                   Six Months
                                                                                     Ended                 Year Ended
                                                   Year Ended December 31,         December 31,             June 30,
----------------------------------------------------------------------------------------------------------------------------
                                                    1998             1997             1996             1996            1995
----------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
----------------------------------------------------------------------------------------------------------------------------
<S>                                                <C>                <C>              <C>               <C>          <C>  
Balance at beginning of period                       $ 935            $ 870            $ 788             $ 747        $ 754
Provision charged to operations                        184              122               92                57          (10)
Charge-offs:
     Real estate                                       120               57               10                39            -
     Consumer                                            -                -                -                 -            1
Recoveries:
     Real estate                                         3                -                -                19            -
     Consumer                                            -                -                -                 4            4
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Net Charge-offs                                        117               57               10                16           (3)
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
Balance, end of period                             $ 1,002            $ 935            $ 870             $ 788        $ 747
----------------------------------------------------------------------------------------------------------------------------

Allowance for loan losses to period
     end total loans                                 0.58%            0.93%            1.06%             0.93%        0.98%
Allowance for loan losses to nonaccrual
     loans                                          59.43%           67.20%           52.10%            54.05%       48.01%
Net charge-offs to average loans                     0.10%            0.06%            0.01%             0.02%        0.00%

</TABLE>

                                       26
<PAGE>


Provision for loan losses

For the year  ended  December  31,  1998,  the  provision  for loan  losses  was
$184,200,  compared to  $122,000  at  December  31, 1997 and $92,000 for the six
month period ended December 31, 1996. The provision for loan losses increased to
$57,000 for the year ended June 30, 1996 compared to a credit of $10,000 for the
same period ended 1995.

Guaranty  monitors  its loan loss  allowance  monthly  and makes  provisions  as
necessary. Management believes that the level of Guaranty's loan loss reserve is
adequate.

A  breakdown  of the general  allowance  for loan losses in dollars and loans in
each category to total loans in percentages is provided in the following tables.
Because  all of these  factors  are  subject to  change,  the  breakdown  is not
necessarily predictive of future loan losses in the indicated categories.


<TABLE>
<CAPTION>
                                                                                                      Six Months Ended
                                                   Year Ended December 31,                           Year Ended June 30,
                                           1998                             1997                            1996
----------------------------------------------------------------------------------------------------------------------------
                                                 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                  $ 384         38.35%           $ 523          57.40%          $ 471          73.74%
Commercial real estate                     214         21.37              166           8.12             179           9.38
Construction                               348         34.72               52          17.10              38           8.68
Consumer and other loans                    56          5.56               43          17.38              13           8.20
Unallocated                                  -             -              115              -               8              -
----------------------------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------------------------
     Total                            $  1,002       100.00%            $ 899        100.00%           $ 709        100.00%
----------------------------------------------------------------------------------------------------------------------------

</TABLE>

<TABLE>
<CAPTION>


                                              Year Ended June 30,
---------------------------------------------------------------------------------------------
                                          1996                           1995
---------------------------------------------------------------------------------------------
                                                 Ratio of                        Ratio of
                                                 Loans to                        Loans to
                                                Total Gross                    Total Gross
                                   Allowance       Loans          Allowance       Loans
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
(Dollars in thousands)
---------------------------------------------------------------------------------------------
<S>                                      <C>         <C>                <C>          <C>    
Residential real estate                  $ 327        75.15%            $ 311         77.58%
Commercial real estate                     194          8.72              220           5.62
Construction                                70         10.01               86          11.09
Consumer and other loans                    40          6.12               32           5.71
Unallocated                                  -             -                -              -
---------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------
     Total                               $ 631       100.00%            $ 649        100.00%
---------------------------------------------------------------------------------------------
</TABLE>

                                       27

<PAGE>



NON-INTEREST INCOME

Guaranty's  non-interest  income  consists  primarily of loan fees and servicing
income, net gains on sale of loans and securities,  and fees and service charges
on deposit accounts.  For the year ended December 31, 1998,  non-interest income
totaled $2.0 million.  Loan fees and servicing  income were  $232,000,  gains on
sales of loans and  securities  were  $1,063,000,  service  charges on  checking
accounts totaled $424,000,  and other income was $247,000.  Loans and securities
sales were a result of the  continued  strategy of selling all newly  originated
fixed rate mortgage loans in the secondary market,  restructuring of the balance
sheet to reduce  interest  rate risk  relating to fixed rate  mortgages,  and to
provide  liquidity to fund  anticipated  loan closings  during the first half of
1999. 

For the year ended  December  31,  1997,  loan fees and  servicing  income  were
$456,000,  gains on  sales of loans  and  securities  were  $1,067,000,  service
charges on checking accounts totaled $166,000, and other income was $178,000.

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

In the years  ended  June 30,  1996 and 1995,  loan  fees and  servicing  income
accounted for 55.1% and 74.8%,  respectively,  of non-interest  income. Gains on
the sale of loans and securities were 21.94% and .02% of non-interest  income in
fiscal 1996 and 1995,  respectively.  Service charges on checking  accounts were
$90,000 in fiscal 1996 and $78,000 in fiscal 1995. Non interest income in fiscal
year ended June 30, 1996 was $1.1  million,  an increase of $235,000 or 27% over
non-interest  income for the fiscal  year ended  June 30,  1995.  


Mortgage loan servicing is a significant business for Guaranty, and a by-product
of its  residential  lending  business.  Guaranty  derives  fees  from  mortgage
servicing rights ("MSRs"). Loan servicing includes collecting and remitting loan
payments,  accounting  for  principal  and  interest,  holding  escrow funds for
payment of taxes and  insurance,  making  required  inspections of the mortgaged
premises,  contacting  delinquent  mortgagors,  supervising  foreclosures in the
event of  unremitted  defaults  and  generally  administering  the loans for the
investors to whom they have been sold. MSRs are intangible assets that represent
the rights to service  mortgage  loans and in turn to receive  the  service  fee
income  associated  with the mortgage loans.  MSRs are amortized  against income
over the estimated average lives of the loans serviced.  If loans are prepaid at
rates faster than those originally  assumed,  adjustments may be required to the
unamortized  balance,  which  could  result  in  charges  to  current  earnings.
Conversely,  slower prepayments rates could result in increases in mortgage loan
servicing income in future periods.  Impairment of MSRs is assessed based on the
fair value of those rights.  Fair values are  estimated  using  discounted  cash
flows based on a current  market  interest  rate.  For the purposes of measuring
impairment,   the  rights  are  stratified   based  on  the   predominant   risk
characteristics of the underlying loans. The amount of impairment  recognized is
the amount by which  capitalized  MSRs for a stratum exceed their fair value. At
December  31,  1998 MSRs  totaled  $1,978,000.  Impairment  on these  rights was
$342,000 for the year ended  December 31, 1998.  See  "Financial  Statements  -D
Summary of Accounting  Policies."  At December 31, 1998 and 1997 loans  serviced
for others  totaled $173.1 million and $123.8  million,  respectively.  Guaranty
serviced loans for others aggregating  approximately  $172.8 million at December
31,  1996 and,  $168.4  million  at June 30,  1996.  

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

During the year ended December 31, 1998 and 1997 Guaranty sold $60.3 million and
$24.4 million, respectively, of loans and securitized loans. Guaranty sold $11.8
million for the six month period ended December 31, 1996 and $7.3 million during
fiscal year ended 1996. The sale of fixed rate product creates  liquidity and an
income stream from servicing fees on loans sold.  

                                       28
<PAGE>

Guaranty also trades treasury securities in an effort to take advantage of short
term movements in market  interest  rates.  It is Guaranty's  policy not to hold
trading  securities  with a cost in excess of $5  million  at one time.  Trading
securities are marked to market  monthly.  Sales of trading  account  securities
totaled $105.9 million,  $89.5 million, $35.3 million, and $107.3 million during
the  years  ended  December  31,  1998 and 1997 and the six month  period  ended
December  31,  1996 and the year ended  June 30,  1996,  respectively.  Guaranty
experienced losses of $302,000,  $255,000 and $64,000 on such sales for the year
ended December 31, 1998, the six month period ended December 31, 1996 and fiscal
year ended June 30, 1996,  respectively,  and a gain of $5,000 in the year ended
December 31, 1997. 

Loan  fees,  net of loan  underwriting  and  closing  costs,  are  deferred  and
amortized into income over the estimated  remaining  lives of the loans to which
they relate.  Guaranty had deferred fees, net of direct  underwriting  costs, of
$113,000,   $283,000  and  $290,000  at  December  31,  1998,   1997  and  1996,
respectively.  

NON-INTEREST  EXPENSES  

For the year ended December 31, 1998,  non-interest  expenses were $5.8 million,
compared to $3.9 million for the year ended  December 31, 1997. The $1.9 million
increase  was due  primarily  to increased  costs  associated  with the expanded
branch network and the new commercial loan department.  For the six month period
ended  December 31, 1996,  non-interest  expenses were $1.7 million  compared to
$1.2 million for the same period in 1995. This increase was primarily due to the
overall growth of the Corporation.  Non-interest  expenses were $2.5 million for
the year ended June 30, 1996.

INCOME TAXES 

Income tax  expense  for the years ended  December  31,  1998 and 1997,  and the
fiscal  year  ended  June  30,  1996  was  $624,000,   $486,000,  and  $344,000,
respectively.  The increases are a direct result of increased earnings.  For the
six month period ended December 31, 1996 the Corporation  reported an income tax
benefit of $3,500 due to a loss before taxes of $10,000.

SOURCES OF FUNDS

Deposits  

Deposits have  traditionally  been the principal  source of Guaranty's funds for
use in lending and for other general business purposes. In addition to deposits,
Guaranty  derives  funds  from  loan  repayments,   cash  flows  generated  from
operations,  which includes interest  credited to deposit  accounts,  repurchase
agreements  entered  into with  commercial  banks and FHLB of Atlanta  advances.
Contractual loan payments are a relatively stable source of funds, while deposit
inflows  and  outflows  and  related  cost of such funds  have a 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 is expanding to provide  products  and  services  for small  businesses  and
brokered  deposits.  Guaranty's  principal use of deposits is to originate loans
and fund investment securities.

At December 31, 1998, deposits were $172.8 million, up 53.0% from $112.9 million
at December 31, 1997.  Deposits  increased 9.0% to $81.4 million at December 31,
1996.  The deposit  growth is a reflection of  aggressive  pricing and increased
marketing.  In  order  to  reduce  the  overall  cost of funds  and  reduce  the
Corporation's reliance on high cost time deposits and short term borrowings as a
funding  source,  management  continues to direct  extensive  marketing  efforts
towards  attracting  lower  cost  transaction  accounts.  However,  there  is no
assurance that these efforts will be successful,  or if successful,  will reduce
the Corporations reliance on time deposits and short term borrowings.

                                       29
<PAGE>

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,                   June 30,
                                                     1998           1997           1996          1996
----------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                                                  <C>            <C>            <C>           <C>     
Statement savings accounts                            $ 9,863        $ 6,434        $ 4,738       $ 4,654
Now accounts                                           23,433         12,037          6,929         6,440
Money market accounts                                  22,319          4,000          3,410         3,213
30-to-180-day certificates                             40,587          1,326            250           227
Nine-month certificates                                     -          1,638              -             -
One-to five-year fixed-rate certificates               76,603         87,467         66,013        52,698
Eighteen-month prime rate certificates                      -             45             61         7,455
----------------------------------------------------------------------------------------------------------
----------------------------------------------------------------------------------------------------------
     Total                                           $172,805       $112,947       $ 81,401      $ 74,687
----------------------------------------------------------------------------------------------------------

</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>
                                                                                 Six months ended          Year Ended
                                 Years Ended December 31,                           December 31,            June 30,
---------------------------------------------------------------------------------------------------------------------------
                                  1998                     1997                      1996                     1996
---------------------------------------------------------------------------------------------------------------------------
                                      Average                  Average                  Average                   Average
                           Average      Rate        Average      Rate        Average      Rate         Average     Rate
                           Balance      Paid        Balance      Paid        Balance      Paid         Balance     Paid
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
<S>                        <C>            <C>        <C>           <C>        <C>           <C>         <C>          <C>  
Noninterest bearing
demand deposits              $ 5,338      0.00%       $ 1,658      0.00%       $ 1,324      0.00%        $ 1,066     0.00%
Interest bearing
demand deposits               24,936      3.46%        11,110      2.59%         8,765      2.76%          8,927     2.73%
Savings deposits               8,551      2.97%         5,654      3.36%         4,870      3.41%          4,541     3.25%
Time deposits                 93,615      5.41%        80,779      5.51%        63,346      5.54%         48,460     5.57%
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Total deposits             $ 132,440      4.67%      $ 99,201      4.97%      $ 78,305      5.00%       $ 62,994     4.91%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

                                       30
<PAGE>


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

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

<TABLE>
<CAPTION>

                                                           Year Ended                 Six months        Year Ended
                                                          December 31,               Ended Dec 31,       June 30,
-------------------------------------------------------------------------------------------------------------------
                                                     1998              1997              1996              1996
-------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
-------------------------------------------------------------------------------------------------------------------
<S>                                           <C>                     <C>                 <C>             <C>     
Opening balance                               $        112,947        $   81,401          $ 74,687        $ 52,461
Net deposits (withdrawals)                              53,673            26,624             4,754          19,093
Interest credited                                        6,185             4,922             1,960           3,133
-------------------------------------------------------------------------------------------------------------------
-------------------------------------------------------------------------------------------------------------------
Ending balance                                $        172,805        $  112,947          $ 81,401        $ 74,687
-------------------------------------------------------------------------------------------------------------------

Net increase (decrease)                       $         59,858         $  31,546          $  6,714        $ 22,226
Percent increase (decrease)                              53.00%            38.75%             8.99%          42.37%
-------------------------------------------------------------------------------------------------------------------

</TABLE>


The following table indicates the amount of Guaranty's  certificates of deposits
by time remaining until maturity as of December 31, 1998.

<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>            <C>     
Certificates of deposit less than $100,000           $ 22,443        $ 23,237       $ 19,276       $ 22,595       $ 87,551
Certificates of deposit of $100,000 or more             2,478           2,403         21,627          3,131         29,639
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
     Total certificates of deposits                  $ 24,921        $ 25,640       $ 40,903       $ 25,726       $117,190
---------------------------------------------------------------------------------------------------------------------------

</TABLE>

                                       31
<PAGE>

Borrowings

As a member of the FHLB of Atlanta, Guaranty is required to own capital stock in
the FHLB of Atlanta and is  authorized  to apply for  advances  from the FHLB of
Atlanta.  Each FHLB credit program has its own interest rate, which may be fixed
or variable,  and range of  maturities.  The FHLB of Atlanta may  prescribe  the
acceptable  uses to which these  advances  may be put, as well as on the size of
the advances and  repayment  provisions.  The  advances  are  collateralized  by
Guaranty's  investment  in  Federal  Home Loan Bank stock and  certain  mortgage
loans.  See the  Notes to  Consolidated  Financial  Statements  for  information
regarding the  maturities and rate  structure of Guaranty's  FHLB  advances.  At
December  31,  1998,  $21  million  were  outstanding  to the  FHLB.

Guaranty's   borrowings  also  include   securities  sold  under  agreements  to
repurchase,  with  mortgage-backed  securities or Treasury securities pledged as
collateral. The proceeds are used by Guaranty for general corporate purposes. At
December 31, 1998,  Guaranty had $1.0 million  outstanding  in  securities  sold
under agreement to repurchase.

Guaranty uses  borrowings  to  supplement  deposits when they are available at a
lower  overall  cost to Guaranty  or the 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                        Six Months Ended           Year Ended
                                                December 31,                         December 31,             June 30,
------------------------------------------------------------------------------------------------------------------------------------
                                        1998                   1997                     1996                    1996
------------------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
------------------------------------------------------------------------------------------------------------------------------------
<S>                                   <C>                     <C>                      <C>                     <C>    
Maximum Balance:
     FHLB Advances                    $26,000                 $17,500                  $22,500                 $28,050
     Securities sold under
        agreements to repurchase       6,856                   5,867                    9,957                   9,930
------------------------------------------------------------------------------------------------------------------------------------
</TABLE>
<TABLE>
<CAPTION>

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

<S>                                      <C>         <C>        <C>          <C>         <C>          <C>        <C>          <C>  
FHLB Advances                            $9,748      5.57%      $10,956      6.18%       $19,550      5.79%      $22,829      6.21%
Securities sold under
     agreements to repurchase             2,336      5.00%        2,007      6.33%         6,321      5.66%        3,112      5.65%
------------------------------------------------------------------------------------------------------------------------------------

</TABLE>


At  December  31,  1998,  Guaranty  had $21.0  million  outstanding  to the FHLB
compared to no advances  outstanding  at December 31, 1997 and $17.5  million at
December 31, 1996.  

                                       32
<PAGE>

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


<TABLE>
<CAPTION>

                                                                   December 31,                         June 30,
-----------------------------------------------------------------------------------------------------------------
                                                   1998               1997              1996              1996
-----------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
-----------------------------------------------------------------------------------------------------------------
<S>                                                <C>                     <C>          <C>              <C>    
FHLB advances                                      $21,000                 $0           $7,500           $12,500
Securities sold under agreements
  to repurchase                                      1,008              2,989            6,681             6,104
-----------------------------------------------------------------------------------------------------------------
-----------------------------------------------------------------------------------------------------------------
     Total short-term borrowings                   $22,008             $2,989          $14,181           $18,604
-----------------------------------------------------------------------------------------------------------------
Weighted average interest rate of
  short-term FHLB advances                           5.57%              0.00%            6.35%             6.02%
Weighted average interest rate of
  securities sold under agreements to
  repurchase                                         5.00%              6.29%            6.50%             5.65%
-----------------------------------------------------------------------------------------------------------------
</TABLE>

See notes 7 and 8 to the Consolidated Financial Statements.


LIQUIDITY AND CAPITAL RESOURCES

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

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

Cash and cash equivalents were  approximately  $10.5 million and $6.0 million at
December 31, 1998 and 1997,  respectively.  Financing  activities provided $84.7
million  primarily as a result of net advances from FHLB of $21.0  million,  net
increase in deposits of  approximately  $59.9 million and proceeds from issuance
of convertible preferred securities of $6.9 million.  Approximately $596,000 was
absorbed by operating  activities which was primarily a result of an increase in
other assets which  include  approximately  $1.5 million  increase in originated
mortgage   servicing  rights,   increase  in  accrued  interest   receivable  of
approximately  $807,000 and  amortization of deferred loan fees of approximately
$529,000. In addition, investing activities absorbed approximately $79.5 million
which was primarily a result of a net increase in loans of  approximately  $62.7
million,  net investment  securities  purchases of $15 million, and purchases of
office properties and equipment of approximately $1.5 million.

                                       33
<PAGE>

For the six months ended December 31, 1996, cash and cash equivalents  increased
$645,000  to $6.1  million  as net cash  provided  by  investing  and  financing
activities exceeded the cash used in operating  activities.  The $2.1 million of
cash  provided by investing  activities  resulted  mainly from a net decrease in
loans while the $6.7 million of cash provided by financing  activities  resulted
mainly from a net increase in deposits.

Guaranty uses its sources of funds  primarily to meet  operating  needs,  to pay
deposit  withdrawals  and fund loan  commitments.  At December 31, 1998 and 1997
total approved loan commitments were $9.6 million and $3.8 million respectively.
In addition,  at December 31, 1998 and 1997,  commitments  under unused lines of
credit were $52.3 million and $14.3 million,  respectively. At December 31, 1996
and June 30, 1996, the total approved loan commitments  outstanding  amounted to
$3.0  million and $3.9  million,  respectively.  At the same dates,  commitments
under  unused  lines of  credit  amounted  to $6.4  million  and  $5.4  million.
Certificates of deposits scheduled to mature in one year or less at December 31,
1998,  1997 and 1996 and June 30, 1996 totaled  $91.5  million,  $77.7  million,
$57.3  million  and $51.2  million,  respectively.  Management  believes  that a
significant  portion of maturing deposits well remain with Guaranty.  

Management  intends to fund anticipated loan closings and operating needs during
1999 through cash on hand, brokered deposits utilized, proceeds from the sale of
loans and securities,  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.  Concurrent with
the strategies employed to attract these accounts, management plans to gradually
reduce the rate paid on time deposits in comparison to the competition. However,
the pricing of time deposits  will be balanced  against  upcoming  maturities to
ensure  that  liquidity  is not  adversely  impacted  by a large run off of time
deposits.  

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.  In an  effort  to  increase  the  capital  base
Guaranty's  wholly-owned subsidiary Guaranty Capital Trust I issued $6.9 million
of 7.0% cumulative  convertible  trust  preferred  securities in April 1998. The
proceeds, less issuance costs of approximately $276,000 were added to the Bank's
additional  paid in  capital.  

                                       34
<PAGE>

The Corporation and Bank are subject to Federal Reserve  regulations,  including
the Bank Holding  Company Act. At December 31, 1998,  the Bank exceeded all such
regulatory capital requirements as shown in the following table.

<TABLE>
<CAPTION>
                                                                                              Six Months
                                                                     Year Ended                 Ended          Year Ended
                                                                    December 31,               December 31,     June 30,
---------------------------------------------------------------------------------------------------------------------------
                                                                1998            1997             1996             1996
---------------------------------------------------------------------------------------------------------------------------
(Dollars in thousands)
---------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>             <C>             <C>              <C>     
Tier 1 Capital:
Common Stock                                                      $ 2,000         $ 2,000         $ 1,149          $ 1,149
Capital Surplus                                                       400             400           1,978            1,978
Cumulative Preferred Securities (2)                                 4,161
Retained Earnings                                                  10,084           9,358           3,530            3,579
Unrealized Loss on available for sale securities                        -               -               -                -
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Total Tier 1 Capital                                               16,645          11,758           6,657            6,706
---------------------------------------------------------------------------------------------------------------------------

Tier 2 Capital:
Allowance for loan losses (1)                                       1,002             935             706              631
Allowable long term debt                                                -               -               -                -
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Total Tier 2 Capital                                                1,002             935             706              631
---------------------------------------------------------------------------------------------------------------------------
---------------------------------------------------------------------------------------------------------------------------
Total Risk Based Capital                                         $ 17,647        $ 12,693         $ 7,363          $ 7,337
---------------------------------------------------------------------------------------------------------------------------

Risk Weighted Assets                                             $181,147        $ 82,666        $ 56,500         $ 54,650

Capital Ratios:
Tier 1 Risk-based                                                   9.19%          14.22%          11.78%           12.27%
Total Risk-based                                                    9.74%          15.35%          13.03%           13.43%
Tier 1 Capital to average adjusted total assets                     9.52%           9.53%           5.89%            6.59%
---------------------------------------------------------------------------------------------------------------------------
</TABLE>

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

IMPACT OF INFLATION AND CHANGING PRICES AND SEASONALITY

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

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

                                       35
<PAGE>

ACCOUNTING RULES

In June 1997,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 130, Reporting  Comprehensive Income ("SFAS
130"),  which  establishes  standards for reporting and display of comprehensive
income, its components and accumulated balances. Comprehensive income is defined
to include all changes in equity  except those  resulting  from  investments  by
owners  and  distributions  to  owners.  SFAS  130 is  effective  for  financial
statements for periods beginning after December 15, 1997 and has been adopted by
the Corporation.  The only component of accumulated other  comprehensive  income
was unrealized gain (loss) on available for sale  securities.  

In June 1998,  the  Financial  Accounting  Standards  Board issued  Statement of
Financial  Accounting  Standards No. 133, Accounting for Derivative  Instruments
and Hedging Activities ("SFAS 133"), which establishes  accounting and reporting
standards for derivative  instruments,  including certain derivative instruments
embedded in other contracts, and for hedging activities.  SFAS 133 requires that
an entity  recognize  all  derivatives  as either assets or  liabilities  in the
statement of financial  position and measure those instruments at fair value. If
certain  requirements are met, a derivative may be specifically  designated as a
hedge and an entity  that  elects  to apply  hedge  accounting  is  required  to
establish at the inception of the hedge the method it will use for assessing the
effectiveness  of the  hedging  derivative  and  the  measurement  approach  for
determining  the  ineffective  aspect  of  the  hedge.  Those  methods  must  be
consistent  with the entity's  approach to managing risk.  SFAS 133 is effective
for all fiscal  quarters  of fiscal  years  beginning  after  June 15,  1999 and
requires application prospectively.

SUBISDIARY  ACTIVITIES 

The Holding Company has two subsidiaries Guaranty Bank ("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
Note 12 in 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 loss of $15,800 and $27,000 for the years ended December 31, 1998
and 1997,  respectively  and net  income of $3,000  and $1,000 for the six month
period ended December 31, 1996 and the year ended June 30, 1996, respectively.

In 1987,  Guaranty  formed  GMSC  and  entered  into a REMIC in order to  create
liquidity.  Guaranty  utilized  the REMIC to pool  $19.9  million  of fixed rate
mortgages  into mortgage  backed  securities,  which were used as collateral for
bonds sold to private investors.  The bonds bore a coupon of 8% and were sold at
a discount  and costs of  issuance  of  approximately  $3.3  million.  The bonds
discount and issuance costs are amoritzed against income as mortgage  underlying
the bonds repay.  In the fiscal years ended June 30, 1996 and 1995, with rapidly
falling interest rates, Guaranty experienced significant repayment of mortgages,
resulting in an amortization expense of $160,000 and $124,000, respectively. For
the  years  ended  December  31,  1998 and 1997 and the six month  period  ended
December  31,  1996,  amortization  expense was  $101,000,  $64,000 and $39,000,
respectively.  The  amortization  of the REMIC  expenses  is treated as interest
expense.

                                       36
<PAGE>

YEAR 2000 PROJECT 

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

Guaranty,  in conjunction with its outside service bureau,  has developed a plan
to  address  Year  2000  exposure  surrounding   Guaranty's  computer  and  data
processing  systems.  Since early 1997,  Guaranty has been updating its in-house
systems  hardware  to be Year 2000  compliant.  The next step  involves  testing
system software,  which is scheduled to begin in early 1999, and it is estimated
that the process will cost  approximately  $25,000 to complete.  In  conjunction
with this testing, Guaranty plans to test its other systems that are not related
to the  service  bureau.  Management  anticipates  Guaranty  will be  Year  2000
compliant, thus satisfying all regulatory requirements.

                                       37
<PAGE>

Item 7.           Financial Statements.

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

         Report of Independent Certified Public Accountants
         Consolidated Balance Sheets as of December 31, 1998 and 1997
         Consolidated  Statements of Operations for the years ended December 31,
              1998  and 1997 and  June  30,  1996  and  the  six  months  ended
              December 31, 1996
         Statements of Comprehensive Income
         Consolidated  Statements  of  Stockholders'  Equity for the years ended
              December  31,  1998 and 1997 and June 30,  1996 and the six months
              ended December 31, 1996
         Consolidated  Statements of Cash Flows for the years ended December 31,
              1998 and 1997 and June 30, 1996 and 1995 and the six months  ended
              December 31, 1996
         Summary of Accounting Policies
         Notes to Consolidated Financial Statements


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

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


                                    PART III

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

         Information  set forth  under the  headings  "Election  of  Directors,"
"Executive  Officers  Who Are Not  Directors,"  and  "Section  16(a)  Beneficial
Ownership Reporting Compliance" in Guaranty's definitive Proxy Statement for its
1999 Annual Meeting of  Shareholders,  which Proxy  Statement will be filed with
the Securities and Exchange  Commission within 120 days of the end of Guaranty's
1998  fiscal  year (the  "1999  Proxy  Statement"),  is hereby  incorporated  by
reference.

Item 10.          Executive Compensation

         Information  set forth under the headings  "Executive  Compensation  --
Summary of Cash and Certain Other  Compensation,"  "-- Stock Option Grants," "--
Option  Exercises  and  Holdings,"  "--  Directors'  Fees,"  and "--  Employment
Agreements" in the 1999 Proxy Statement is hereby incorporated by reference.


Item 11.          Security Ownership of Certain Beneficial Owners and Management

         Information  set  forth  under  the  headings  "Security  Ownership  of
Management" and "Security  Ownership of Certain  Beneficial  Owners" in the 1999
Proxy Statement is incorporated by reference.

                                       38
<PAGE>

Item 12.          Certain Relationships and Related Transactions

         Information set forth under the heading  "Transactions with Management"
in the 1999 Proxy Statement is hereby incorporated by reference.


Item 13.          Exhibits and Reports on Form 8-K

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

         (a)      Exhibits

                  3.1      Amended and  Restated  Articles of  Incorporation  of
                           Guaranty   Financial    Corporation    (restated   in
                           electronic  format),  attached  as Exhibit 3.1 to the
                           Registrant's  Annual  Report on Form  10-KSB  for the
                           year ended December 31, 1998,  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,  1998,
                           incorporated herein by reference.

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

                  21       Subsidiaries of the Registrant.

                  27       Financial Data Schedule (filed electronically only).


         (b)      Reports on Form 8-K

                  No  reports on Form 8-K were filed  during the  quarter  ended
December 31, 1998.


                                       39

<PAGE>

                                                  Guaranty Financial Corporation
                                                                and Subsidiaries







                                                            Financial Statements
                                 For the Years Ended December 31, 1998 and 1997,
                                      the Six Months Ended December 31, 1996 and
                                                    the Year Ended June 30, 1996


<PAGE>

                         GUARANTY FINANCIAL CORPORATION
                                 AND SUBSIDIARY

                   INDEX TO CONSOLIDATED FINANCIAL STATEMENTS



<TABLE>
<CAPTION>
<S>                                                                                               <C>
Report of Independent Certified Public Accountants                                                    3

Consolidated Financial Statements

  Balance Sheets as of December 31, 1998 and 1997                                                     4

  Statements of Operations  for the years ended  December 31, 1998 and 1997, and
    June 30, 1996, and the six months ended December 31, 1996                                     5 - 6

  Statements of Comprehensive Income                                                                  7

  Statements of  Stockholders'  Equity for the years ended December 31, 1998 and
    1997, and June 30, 1996, and the six months ended December 31, 1996                               8

  Statements of Cash Flows for the years ended  December 31, 1998 and 1997,  and
    June 30, 1996, and the six months ended December 31, 1996                                    9 - 11

Summary of Accounting Policies                                                                  12 - 18

Notes to Consolidated Financial Statements                                                      19 - 44

</TABLE>



                                                                               2

<PAGE>



Report of Independent Certified Public Accountants

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

We  have  audited  the  consolidated   balance  sheets  of  Guaranty   Financial
Corporation  and  subsidiary  as of December 31, 1998 and 1997,  and the related
consolidated  statements  of  operations,  stockholders'  equity,  comprehensive
income,  and cash flows for the years ended  December 31, 1998 and 1997, and the
six months ended December 31, 1996, and for the year ended June 30, 1996.  These
financial statements are the responsibility of the Corporation's management. Our
responsibility  is  to  express  an  opinion  on  these  consolidated  financial
statements based on our audits.

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

In our opinion, the consolidated  financial statements referred to above present
fairly,  in all  material  respects,  the  consolidated  financial  position  of
Guaranty Financial  Corporation and subsidiary as of December 31, 1998 and 1997,
and the  results of their  operations  and their cash flows for the years  ended
December 31, 1998 and 1997, the six months ended December 31, 1996, and the year
ended June 30, 1996 in conformity with generally accepted accounting principles

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



                                              BDO Seidman, LLP
Richmond, Virginia
January 29, 1999




                                                                               3

<PAGE>

<TABLE>
<CAPTION>
                                                                           December 31,          
                                                                     1998                1997
----------------------------------------------------------------------------------------------------



    Assets
<S>                                                             <C>                  <C>
Cash and cash equivalents                                       $ 10,526,732         $  5,916,504
Investment securities (Note 1)
  Held-to-maturity                                                 2,343,827            2,845,560
  Available for sale                                              26,909,320           11,523,908
  Trading                                                          1,000,000            1,032,188
Investment in Federal Home Loan Bank stock, at
  cost (Note 8)                                                    1,300,000              860,100
Other investments                                                        -                 79,000
Loans receivable, net (Notes 2 and 10)                           162,369,285           99,674,549
Accrued interest receivable                                        1,650,876              844,212
Real estate owned                                                    488,273               64,985
Office properties and equipment, net (Note 3)                      7,049,982            5,999,778
Mortgage servicing rights (Note 2)                                 1,978,000              904,383
Other assets (Note 9)                                              1,403,511              963,310
----------------------------------------------------------------------------------------------------







                                                                $217,019,806         $130,708,477
----------------------------------------------------------------------------------------------------
</TABLE>






                                                                               3

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                     Consolidated Balance Sheets
<TABLE>
<CAPTION>
--------------------------------------------------------------------------------------------------------------

                                                                                      December 31,  
                                                                                1998               1997
--------------------------------------------------------------------------------------------------------------


   Liabilities and Stockholders' Equity
<S>                                                                         <C>                <C>
Liabilities
  Deposits (Note 4)                                                         $172,805,284       $112,947,012
  Bonds payable (Notes 1 and 6)                                                1,785,754          2,360,083
  Advances from Federal Home Loan Bank (Note 8)                               21,000,000                -
  Securities sold under agreement to repurchase (Notes 1 and 7)                1,008,750          2,989,000
  Accrued interest payable                                                       124,826             58,404
  Income taxes payable (Note 9)                                                  242,649            181,100
  Prepayments by borrowers for taxes and insurance                               128,133             80,824
  Other liabilities                                                              470,139            231,900
--------------------------------------------------------------------------------------------------------------

Total liabilities                                                            197,565,535        118,848,323
--------------------------------------------------------------------------------------------------------------

Commitments and Contingencies (Notes 11, 12, 14 and 16)
--------------------------------------------------------------------------------------------------------------

Convertible preferred securities (Note 12)                                     6,900,000                -
--------------------------------------------------------------------------------------------------------------

Stockholders' Equity (Notes 13 and 14) 
  Preferred stock, par value $1 per share, 500,000 shares
    authorized, none issued
  Common stock, par value $1.25 per share, 4,000,000 shares  
    authorized, 1,501,727, and 1,501,383 shares issued and
    outstanding                                                                1,877,159          1,876,729
  Additional paid-in capital                                                   5,724,524          5,724,954
  Accumulated other comprehensive income                                          89,625             50,971
  Retained earnings - substantially restricted                                 4,862,963          4,207,500
--------------------------------------------------------------------------------------------------------------

Total stockholders' equity                                                    12,554,271         11,860,154
--------------------------------------------------------------------------------------------------------------

                                                                            $217,019,806       $130,708,477
--------------------------------------------------------------------------------------------------------------
</TABLE>


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



                                                                               4

<PAGE>


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


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Operations
<TABLE>
<CAPTION>
----------------------------------------------------------------------------------------------------------------------

                                                  Year Ended                  Six Months Ended
                                                  December 31,                   December 31,        Year Ended
                                            1998                1997                1996            June 30,1996
----------------------------------------------------------------------------------------------------------------------


<S>                                       <C>                 <C>                <C>                 <C>       
Interest income
  Loans                                   $11,230,838         $7,584,732         $3,454,559          $6,441,903
  Mortgage-backed securities                  207,406          1,045,831            564,079             652,639
  Investment securities                     1,622,022            889,245            254,833             498,686
  Trading account assets                          -                  -                2,911              23,390
----------------------------------------------------------------------------------------------------------------------


Total interest income                      13,060,266          9,519,808          4,276,382           7,616,618
----------------------------------------------------------------------------------------------------------------------


Interest expense
  Deposits                                  6,184,500          4,922,258          1,960,029           3,132,660
  Borrowings (Notes 6, 7 and 8)             1,224,475          1,116,152            979,936           2,059,402
----------------------------------------------------------------------------------------------------------------------


Total interest expense                      7,408,975          6,038,410          2,939,965           5,192,062
----------------------------------------------------------------------------------------------------------------------


Net interest income                         5,651,291          3,481,398          1,336,417           2,424,556

Provision for loan losses
  (Note 2)                                    184,200            122,320             91,850              56,665
----------------------------------------------------------------------------------------------------------------------


Net interest income after
  provision for loan losses                 5,467,091          3,359,078          1,244,567           2,367,891
----------------------------------------------------------------------------------------------------------------------


Other income
  Loan fees and servicing income              231,878            456,515            266,505             610,020
  Net gain on sale of loans
    and securities                          1,062,670          1,067,348             72,547             242,866
  Service charges on checking                 424,415            166,072             52,058              90,156
  Other                                       247,240            177,837             70,977             164,090
----------------------------------------------------------------------------------------------------------------------


Total other income                          1,966,203          1,867,772            462,087           1,107,132
----------------------------------------------------------------------------------------------------------------------
</TABLE>



                                                                    continued...

                                                                               5

<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Operations
                                                                     (continued)
<TABLE>
<CAPTION>
-------------------------------------------------------------------------------------------------------------------------

                                                    Year Ended                Six Months Ended
                                                    December 31,                 December 31,            Year Ended
                                              1998               1997               1996               June 30, 1996
-------------------------------------------------------------------------------------------------------------------------

<S>                                        <C>                <C>                <C>                    <C>  
Other expenses
  Personnel (Notes 14 and 15)              $3,089,212         $2,010,794         $  748,083             $1,013,674
  Occupancy (Note 11)                         783,473            523,502            131,593                302,139
  Data processing (Note 11)                   585,282            422,851            165,548                257,038
  BIF/SAIF premium disparity
    assessment                                    -                  -              346,851                     -
  Deposit insurance premiums                   23,182             87,298            100,908                190,263
  Other                                     1,311,666            798,650            223,553                724,321
-------------------------------------------------------------------------------------------------------------------------


Total other expenses                        5,792,815          3,843,095          1,716,536              2,487,435
-------------------------------------------------------------------------------------------------------------------------


Income (loss) before income
  taxes                                     1,640,479          1,383,755             (9,882)               987,588

Provision for income taxes
  (Note 9)                                    624,200            486,040             (3,500)               344,338
-------------------------------------------------------------------------------------------------------------------------


Net income (loss)                          $1,016,279         $  897,715         $   (6,382)            $  643,250
-------------------------------------------------------------------------------------------------------------------------



Basic and Diluted Earnings
  (Loss) Per Share                       $        .68         $      .61         $     (.01)            $      .70
-------------------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                                                               6

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                 Consolidated Statements of Comprehensive Income
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------

                                                       Year Ended             Six Months Ended
                                                       December 31,              December 31,          Year Ended
                                                   1998            1997             1996             June 30, 1996
-----------------------------------------------------------------------------------------------------------------------

<S>                                             <C>              <C>             <C>                    <C>
Net income (loss)                               $1,016,279       $897,715        $  (6,382)             $643,250
-----------------------------------------------------------------------------------------------------------------------


  Other comprehensive income
    Unrealized gains on securities
      Unrealized holding gains (losses)
        arising during period                      144,557         82,211              -                (450,293)
      Less: reclassification adjustment for
        gains (losses) included in net income      (82,211)           -            450,293                   -
-----------------------------------------------------------------------------------------------------------------------


  Other comprehensive income (loss),
    before tax                                      62,346         82,211          450,293              (450,293)

    Income tax (expense) benefit
      related to items of other
      comprehensive income                         (23,692)       (31,240)        (171,111)              171,111
-----------------------------------------------------------------------------------------------------------------------


  Other comprehensive income (loss)
    net of tax                                      38,654         50,971          279,182              (279,182)
-----------------------------------------------------------------------------------------------------------------------


Comprehensive income                            $1,054,933       $948,686         $272,800              $364,068
-----------------------------------------------------------------------------------------------------------------------
</TABLE>


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


                                                                               7

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                 Consolidated Statements of Stockholders' Equity

<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------
                                                                                Accumulated
                                                                 Additional        Other           Total
                                                     Common       Paid-in      Comprehensive      Retained     Stockholders'
                                                     Stock        Capital         Income          Earnings        Equity
-----------------------------------------------------------------------------------------------------------------------------

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

Cash dividend                                       -                   -              -            (46,200)       (46,200)
Accumulated other comprehensive
  income                                            -                   -          279,182              -          279,182
Stock options exercised (Note 14)                  12,500            32,000            -                -           44,500
Repurchase of common stock                         (6,450)          (38,050)           -                -          (44,500)
Net loss                                             -                  -              -             (6,382)        (6,382)
---------------------------------------------------------------------------------------------------------------------------


Balance, December 31, 1996                      1,155,010         1,975,695            -          3,445,044      6,575,749
Issuance of common stock (Note 13)                718,750         3,752,228            -                -        4,470,978
Cash dividend                                         -                 -              -           (135,259)      (135,259)
Accumulated other comprehensive
  income                                              -                 -           50,971              -           50,971
Stock options exercised (Note 14)                   5,000            14,520            -                -           19,520
Repurchase of common stock                         (2,031)          (17,489)           -                -          (19,520)
Net income                                            -                 -              -            897,715        897,715
---------------------------------------------------------------------------------------------------------------------------


Balance, December 31, 1997                      1,876,729         5,724,954         50,971        4,207,500     11,860,154
Cash dividend                                         -                 -               -          (360,816)      (360,816)
Accumulated other comprehensive
  income                                              -                 -           38,654              -           38,654
Stock options exercised (Note 14)                   2,500            21,500            -                -           24,000
Repurchase of common stock                         (2,070)          (21,930)           -                -          (24,000)
Net income                                            -                 -              -          1,016,279      1,016,279
---------------------------------------------------------------------------------------------------------------------------


Balance, December 31, 1998                     $1,877,159        $5,724,524      $  89,625       $4,862,963    $12,554,271
---------------------------------------------------------------------------------------------------------------------------
</TABLE>



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


                                                                               8

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                           Consolidated Statements of Cash Flows
<TABLE>
<CAPTION>
-----------------------------------------------------------------------------------------------------------------------------


                                                             Year Ended              Six Months Ended
                                                            December 31,                December 31,            Year Ended
                                                      1998               1997              1996               June 30, 1996
-----------------------------------------------------------------------------------------------------------------------------

<S>                                              <C>             <C>                   <C>                    <C>          
Operating activities
  Net income (loss)                              $  1,016,279    $      897,715        $       (6,382)        $     643,250
  Adjustments to reconcile net
    income (loss) to net cash
    provided (absorbed) by
    operating activities
      Provision for loan losses                       184,200           122,320                91,850                56,665
      Depreciation and amortization                   487,073           354,005                76,160                95,511
      Amortization of deferred loan fees             (529,287)          (89,564)              (63,841)             (136,086)
      Net amortization of premiums
        and accretion of discounts                    194,913            64,154                84,606               199,060
      Gain on sale of loans                        (1,328,575)         (518,736)             (216,537)             (204,901)
      Originations of loans held
        for sale                                  (58,985,227)      (24,280,323)          (11,773,561)           (7,203,819)
      Proceeds from sale of loans                  60,313,802        24,799,059            11,822,300             7,160,241
      (Gain) loss on sale of
        mortgage-backed securities                    201,715          (236,761)             (111,039)                  -
      Purchase of mortgage backed
        securities                                (35,874,372)      (24,754,127)          (23,980,081)                  -
      Proceeds from sale of
        mortgage-backed securities                 35,672,657        24,990,888            17,844,790                   -
      Gain on sale of securities
        available for sale                           (579,797)         (147,433)                  -                (101,685)
      (Gain) loss on disposal of office
        properties and equipment                        6,316               -                     -                  (1,341)
      (Gain) loss on sale of trading
        account securities                            301,869            (5,520)              255,030                63,720
      Purchases of trading account
        securities                               (106,204,637)      (73,838,893)          (36,330,973)         (107,346,227)
      Sales of trading account
        securities                                105,934,956        89,548,520            35,305,544           107,282,507

</TABLE>


                                                                    continued...

                                                                               9

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

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

                                                               Year Ended               Six Months Ended
                                                               December 31,                December 31,        Year Ended
                                                           1998            1997               1996            June 30, 1996
-----------------------------------------------------------------------------------------------------------------------------

<S>                                                    <C>           <C>                   <C>                <C>         
Operating activities (cont'd)
      Changes in
        Accrued interest receivable                    $  (806,664)  $   (173,001)         $   40,631         $  (127,600)
        Other assets                                    (1,014,818)      (115,936)            (24,917)           (442,298)
        Accrued interest payable                            66,422        (15,698)            (38,308)             13,018
        Income taxes                                        61,549        214,100              (3,000)                -
        Prepayments by borrowers
          for taxes and insurance                           47,309        (25,077)            (39,829)           (160,616)
        Other liabilities                                  238,239       (777,389)         (1,141,898)            689,882
-----------------------------------------------------------------------------------------------------------------------------


Net cash provided (absorbed)
  by operating activities                                 (596,078)    16,012,303          (8,209,455)            479,281
-----------------------------------------------------------------------------------------------------------------------------


Investing activities
  Net (increase) decrease in
    loans                                              (62,772,937)   (18,451,153)          2,880,494          (8,486,970)
  Repayments on held to
    maturity securities                                    555,607        309,815             776,007             998,457
  Purchase of held to
    maturity securities                                   (150,000)           -                   -                   -
  Purchase of securities
    available for sale                                 (69,486,875)   (33,334,183)                -           (28,399,062)
  Proceeds from sales of
    securities available for sale                       54,798,914     21,929,679                 -            18,507,960
  Sale of FHLB stock                                           -          500,100                 -                   -
  Purchase of FHLB stock                                  (439,900)           -                   -                   -
  Purchase of servicing rights                            (499,000)           -                   -                   -
  Proceeds from sale of office
    properties and equipment                                   -              -                   -                 4,522
  Purchases of office properties
    and equipment                                       (1,543,593)    (1,407,630)         (1,515,180)         (3,186,982)
-----------------------------------------------------------------------------------------------------------------------------


Net cash provided (absorbed)
  by investing activities                              (79,537,784)   (30,453,372)          2,141,321         (20,562,075)
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>


                                                                    continued...

                                                                              10

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

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

                                                  Year Ended                    Six Months Ended
                                                 December 31,                      December 31,            Year Ended
                                            1998              1997                     1996               June 30, 1996
-----------------------------------------------------------------------------------------------------------------------------

<S>                                     <C>              <C>                       <C>                    <C>         
Financing activities
  Net increase in deposits              $59,858,272      $ 31,545,941              $ 6,713,625            $ 22,226,807
  Repayment of Federal Home
    Loan Bank advances                  (39,000,000)      (21,000,000)             (10,000,000)            (31,510,000)
  Proceeds from Federal Home
    Loan Bank advances                   60,000,000         3,500,000               10,000,000              23,960,000
  Payments on bonds
    payable, including
    unapplied payments                     (673,116)         (408,402)                (531,459)               (988,607)
  Increase (decrease) in
    securities sold under
    agreements to repurchase             (1,980,250)       (3,692,000)                 577,000               6,104,000
  Proceeds from issuance of
    convertible preferred
    securities                            6,900,000               -                        -                       -
  Proceeds from issuance of
    common stock                                -           4,470,978                      -                    15,300
  Dividends paid                           (360,816)         (135,259)                 (46,200)                (45,958)
-----------------------------------------------------------------------------------------------------------------------------


Net cash provided
  by financing activities                84,744,090        14,281,258                6,712,966              19,761,542
-----------------------------------------------------------------------------------------------------------------------------


Increase (decrease) in cash
  and cash equivalents                    4,610,228          (159,811)                 644,832                (321,252)

Cash and cash equivalents,
  beginning of period                     5,916,504         6,076,315                5,431,483               5,752,735
-----------------------------------------------------------------------------------------------------------------------------


Cash and cash equivalents,
  end of period                         $10,526,732      $  5,916,504               $6,076,315             $ 5,431,483
-----------------------------------------------------------------------------------------------------------------------------
</TABLE>



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


                                                                              11

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies

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


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

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

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

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

Principles of           The  consolidated   financial   statements  include  the
Consolidation           accounts  of   Guaranty   Financial   Corporation,   its
                        wholly-owned subsidiaries,  Guaranty Capital Trust I and
                        Guaranty 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.                        

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




                                                                             12

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)

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


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

Investment Securities   Investments  in  securities  are  classified  as  either
                        held-to-maturity,   trading,   or  available  for  sale,
                        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.

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

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

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

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




                                                                              13

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)

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


Loans Held for          The   Corporation  had   approximately   $1,080,000  and
Sale                    $9,200,000  of loans held for sale at December  31, 1998
(continued)             and 1997,  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.   The  Corporation
                        provides an allowance for accrued  interest deemed to be
                        uncollectible,  which is netted against accrued interest
                        receivable in the consolidated balance sheets.

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

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


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




                                                                              14

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)

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


Sale of Loans           The cost of mortgage  servicing  rights is  amortized in
and Participation       proportion  to, and over the period  of,  estimated  net
in Loans                servicing  revenues.  Impairment  of mortgage  servicing
(continued)             rights  is  assessed  based on the  fair  value of those
                        rights.  Fair values are estimated using discounted cash
                        flows  based on a  current  market  interest  rate.  For
                        purposes  of  measuring   impairment,   the  rights  are
                        stratified based on the predominant risk characteristics
                        of  the  underlying  loans.  The  amount  of  impairment
                        recognized  is  the  amount  by  which  the  capitalized
                        mortgage  servicing  rights for a stratum  exceed  their
                        fair value.  At December  31,  1998,  an  impairment  of
                        approximately $342,000 was recognized on those rights.  

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

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

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



                                                                              15

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)

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


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

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

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

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

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

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

                        For tax  years  beginning  prior  to  January  1,  1996,
                        savings  banks that met certain  definitional  tests and
                        other conditions prescribed by the Internal Revenue Code
                        were allowed, within limitations, to deduct from taxable
                        income an allowance for bad debts using the  "percentage
                        of  taxable  income"  method.  The  cumulative  bad debt
                        reserve,  upon  which  no  taxes  have  been  paid,  was
                        approximately $295,000 at December 31, 1998.


                                                                              16

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)

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


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

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

Basic and Diluted       Basic  earnings  per share  includes no dilution  and is
Earnings Per Share      computed  by  dividing   income   available   to  common
                        shareholders  by the weighted  average  number of common
                        shares outstanding for the period.  Diluted earnings per
                        share reflects the potential dilution of securities that
                        could share in the  earnings of an entity.  The weighted
                        average  number of shares  of common  stock  outstanding
                        were   1,501,604  and  1,466,843  for  the  years  ended
                        December  31, 1998 and 1997,  respectively,  and 920,681
                        for the six month  period ended  December 31, 1996,  and
                        917,668 for the year ended June 30, 1996.               

Statements of Cash      Cash and cash  equivalents  include  Federal  funds sold
Flows                   with  original  maturities  of  three  months  or  less.
                        Interest   paid   was   approximately   $7,343,000   and
                        $6,060,000  for the years  ended  December  31, 1998 and
                        1997,  respectively,  and  $2,978,000  for the six month
                        period ended  December 31, 1996,  and $5,179,000 for the
                        year ended June 30, 1996. Cash paid for income taxes was
                        approximately  $656,000 and $350,000 for the years ended
                        December 31, 1998 and 1997,  respectively,  and $277,000
                        for the six month  period ended  December 31, 1996,  and
                        $180,000 for the year ended June 30, 1996.  There was no
                        real estate  acquired in settlement of loans for the six
                        month period ended December 31, 1996, and  approximately
                        $488,000,  $64,000  and  $33,000  for  the  years  ended
                        December 31, 1998 and 1997 and June 30, 1996.           




                                                                              17

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                                  Summary of Accounting Policies
                                                                     (continued)

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


Reclassifications       Certain  reclassifications  have  been made in the prior
                        year  consolidated  financial  statements  and  notes to
                        conform to the December 31, 1998 presentation.

New Accounting          In June 1997, the Financial  Accounting  Standards Board
Pronouncements          issued Statement of Financial  Accounting  Standards No.
                        130, Reporting  Comprehensive Income ("SFAS 130"), which
                        establishes  standards  for  reporting  and  display  of
                        comprehensive  income,  its components  and  accumulated
                        balances. Comprehensive income is defined to include all
                        changes   in  equity   except   those   resulting   from
                        investments by owners and distributions to owners. Among
                        other disclosures, SFAS 130 requires that all items that
                        are required to be recognized  under current  accounting
                        standards  as  components  of  comprehensive  income  be
                        reported in a financial statement that is displayed with
                        the same prominence as other financial statements.  SFAS
                        130 is effective  for financial  statements  for periods
                        beginning   after   December   15,  1997  and   requires
                        comparative   information   for  earlier   years  to  be
                        restated.  At December 31, 1998,  the only  component of
                        accumulated  other  comprehensive  income was unrealized
                        gains (loss) on available for sale securities.          

                        In June 1998, the Financial  Accounting  Standards Board
                        issued Statement of Financial  Accounting  Standards No.
                        133,  Accounting for Derivative  Instruments and Hedging
                        Activities ("SFAS 133"),  which  establishes  accounting
                        and  reporting  standards  for  derivative  instruments,
                        including  certain  derivative  instruments  embedded in
                        other contracts,  and for hedging  activities.  SFAS 133
                        requires that an entity  recognized  all  derivatives as
                        either  assets  or   liabilities  in  the  statement  of
                        financial position and measure those instruments at fair
                        value. If certain requirements are met, a derivative may
                        be specifically designated as a hedge and an entity that
                        elects  to  apply  hedge   accounting   is  required  to
                        establish  at the  inception  of the hedge the method it
                        will use for assessing the  effectiveness of the hedging
                        derivative and the measurement  approach for determining
                        the ineffective  aspect of the hedge. Those methods must
                        be  consistent  with the  entity's  approach to managing
                        risk.  SFAS 133 is effective for all fiscal  quarters of
                        fiscal years  beginning after June 15, 1999 and requires
                        application prospectively.



                                                                              18

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements

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


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

                        December 31, 1998

<TABLE>
<CAPTION>

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

<S>                                             <C>                <C>              <C>          <C>        
Held to Maturity

  Mortgage-backed
    securities                                  $ 2,093,827        $ 93,173         $   -        $ 2,187,000
  Other                                             250,000             -               -            250,000

                                                  2,343,827          93,173             -          2,437,000

Available for sale

  Corporate bonds                                26,463,324         279,136         161,491       26,580,969
  Other                                             301,438          26,913             -            328,351

                                                 26,764,762         306,049         161,491       26,909,320

                                                $29,108,589        $399,222        $161,491      $29,346,320

</TABLE>



                                                                              19

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


1. Investment           A summary of the  carrying  value and  estimated  market
   Securities           value of investment securities is as follows:           
   (continued)        


                        December 31, 1997

<TABLE>
<CAPTION>
                                                                     Gross           Gross       Estimated
                                                    Amortized     Unrealized      Unrealized      Market
                                                      Cost           Gains          Losses         Value
                                                    
<S>                                               <C>               <C>            <C>         <C>     
Held to Maturity

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

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

Available for sale

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

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

                                                  $14,311,189       $80,163        $8,444      $14,382,908
</TABLE>



                                                                              20

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


1.  Investment          The  amortized  cost  and  estimated   market  value  of
    Securities          available  for sale and held to maturity  securities  at
    (continued)         December 31, 1998 by maturity is as follows:            
                    
<TABLE>
<CAPTION>

                                                                                                 Estimated
                                                                                 Amortized         Market
                                                                                    Cost            Value
<S>                                                                             <C>              <C>
                        Held to Maturity
                          Mortgage-backed securities                            $ 2,093,827      $ 2,187,000
                          Other                                                     250,000          250,000

                                                                                  2,343,827        2,437,000

                       Available for Sale
                         Due after five years                                    26,764,762       26,909,320

                                                                                 26,764,762       26,909,320

                                                                                $29,108,589      $29,436,320

</TABLE>



                                                                              21

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


1.  Investment          Proceeds from sales of securities available for sale was
    Securities          approximately  $54,799,000 and $21,930,000 for the years
    (continued)         ended  December  31,  1998 and 1997,  respectively,  and
                        $18,508,000  for the  year  ended  June  30,  1996.  The
                        Corporation   had  no  sales  of   available   for  sale
                        securities  during the period ending  December 31, 1996.
                        Gross  gains of  approximately  $579,800,  $147,400  and
                        $101,700  were  realized on those sales during the years
                        ended December 31, 1998 and 1997, respectively, and June
                        30, 1996, respectively.                                 

                        Proceeds  from  the  sale  of  trading   securities  was
                        approximately $105,935,000 and $89,549,000 for the years
                        ended  December  31,  1998 and 1997,  respectively,  and
                        $35,306,000  for the six months ended December 31, 1996,
                        and $107,346,000 for the year ended June 30, 1996. Gross
                        gains of  approximately  $162,000 and $134,000 and gross
                        losses  of  approximately  $464,000  and  $128,000  were
                        realized on those sales for the year ended  December 31,
                        1998   and   1997,   respectively.    Gross   gains   of
                        approximately  $9,900 and gross losses of  approximately
                        $265,000 were realized on those sales for the six months
                        ended  December 31, 1996.  Gross gains of  approximately
                        $209,000 and gross losses of approximately  $272,700 was
                        realized on those  sales  during the year ended June 30,
                        1996.

                        Proceeds from the sale of mortgage backed securities was
                        approximately  $35,673,000 and $24,991,000 for the years
                        ended  December  31,  1998 and 1997,  respectively,  and
                        $17,845,000  for the six months ended December 31, 1996.
                        Gross  gains  of  approximately  $0  and  $237,000  were
                        realized on those sales for the years ended December 31,
                        1998 and 1997, respectively, and $111,000, were realized
                        on those  sales for the six months  ended  December  31,
                        1996.  Gross  losses  on the  sales  of  mortgage-backed
                        securities  were  $202,000  and $0 for the  years  ended
                        December 31, 1998 and 1997,  $0 for the six months ended
                        December  31,  1996.  The  Corporation  had no  sales of
                        mortgage  backed  securities  during the year ended June
                        30, 1996.

                        Mortgage backed  securities of approximately  $2,094,000
                        and   $2,838,000   at   December   31,  1998  and  1997,
                        respectively,  were pledged for bonds  payable (Note 6).
                        At December 31, 1998 and 1997 investment securities with
                        a  market   value  of   approximately   $1,008,000   and
                        $3,141,000,  respectively,  were  pledged as  collateral
                        under repurchase agreements (Note 7).



                                                                              22

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


2.    Loans Receivable  Loans receivable are summarized as follows:
<TABLE>
<CAPTION>
                        December 31,                                              1998               1997

<S>                                                                       <C>                <C>         
                        Residential real estate                           $ 66,369,418       $ 66,035,224
                        Commercial real estate                              36,985,202         16,641,057
                        Construction and land                               60,088,110         18,263,062
                        Consumer                                             9,629,551          6,705,023

                                                                            173,072,281       107,644,366

                        Less
                          Undisbursed loan funds                             9,587,873          6,752,222
                          Deferred loan fees                                   112,809            282,618
                          Allowance for loan losses                          1,002,314            934,977

                                                                            10,702,996          7,969,817

                                                                          $162,369,285       $ 99,674,549
</TABLE>

                        The allowance for loan losses is summarized as follows:
<TABLE>
<CAPTION>
<S>                                                                                            <C>       
                        Balance at June 30, 1995                                               $  747,486
                        Provision charged to expense                                               56,665
                        Net charge-offs                                                           (16,005)

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

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

                        Balance at December 31, 1997                                              934,977
                        Provision charge to expense                                               184,200
                        Net charge-offs                                                          (116,863)

                        Balance at December 31, 1998                                           $1,002,314

</TABLE>


                                                                              23

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




2.  Loans Receivable    The  Corporation  serviced loans for others  aggregating
    (continued)         approximately  $173,147,000 and $123,834,000 at December
                        31,  1998 and  1997,  respectively.  Mortgage  servicing
                        rights were  approximately  $1,978,000  and  $904,000 at
                        December  31,  1998  and  1997,  respectively.  Mortgage
                        servicing rights of approximately  $1,584,000,  $507,000
                        and  $226,000  were  capitalized  during the years ended
                        December 31, 1998 and 1997 and six months ended December
                        31, 1996, respectively.                                 

                        Gross  gains  and  gross  losses  on the  sale of  loans
                        totalling  approximately   $1,374,000  and  $46,000  and
                        $520,000 and $1,000 were realized during the years ended
                        December 31, 1998 and 1997,  respectively,  $283,000 and
                        $67,000  during the six months ended  December 31, 1996,
                        and $205,000 and $0, for the year ended June 30, 1996.

                        At December 31, 1998 and 1997,  the  Corporation  had no
                        loans that were considered as impaired.

3.   Office Properties  Office   properties  and  equipment  are  summarized  as
     and Equipment      follows:                                            
<TABLE>
<CAPTION>
                        December 31,                                                  1998            1997

<S>                                                                             <C>              <C>       
                        Land                                                    $2,127,055       $1,910,922
                        Building and leasehold improvements                      3,691,488        3,084,362
                        Furniture and fixtures                                   1,052,840          823,234
                        Equipment                                                1,479,974        1,147,688
                        Automobiles                                                 59,598           55,362

                                                                                 8,410,955        7,021,568
                        Less accumulated depreciation
                          and amortization                                       1,360,973        1,021,790
                        
                        Net office properties and equipment                     $7,049,982       $5,999,778

</TABLE>



                                                                              24

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


4.  Deposits            Deposits are summarized as follows:
<TABLE>
<CAPTION>
                        December 31,                                              1998                       1997

                                                                           Amount      Percent         Amount     Percent
<S>                                                                      <C>            <C>         <C>           <C>
                        Passbook, statement savings and
                         interest checking accounts
                         Non-interest bearing                            $ 8,408,737     4.9%        $2,771,114     2.5%
                         1.00 to 2.00%                                     9,304,150     5.4          8,318,148     7.4
                         2.01 to 3.00%                                    15,582,682     9.0            953,976      .8
                         3.01 to 4.00%                                     5,638,171     3.3          6,433,351     5.7
                         4.01 to 5.00%                                            -       -           3,994,110     3.5
                         5.01 to 6.00%                                    16,681,267     9.7                -        -
                                                                                                

                                                                          55,615,007    32.3         22,470,699    19.9

                       Certificates:
                         0 to 5.00%                                       42,020,778    24.3             65,962      .1
                         5.01 to 6.00%                                    69,883,330    40.4         75,747,649    67.1
                         6.01 to 7.00%                                     5,286,169     3.0         14,662,702    12.9

                                                                         117,190,277    67.7         90,476,313    80.1

                                                                        $172,805,284   100.0%      $112,947,012   100.0%
</TABLE>


                        The aggregate  amount of  certificates of deposit with a
                        minimum   denomination  of  $100,000  was  approximately
                        $29,640,000  and  $11,108,000  at December  31, 1998 and
                        1997, respectively.

                        At  December   31,   1998,   scheduled   maturities   of
                        certificates are as follows:

                        Year Ending December 31,

                                 1999                          $ 91,464,890
                                 2000                            14,334,216
                                 2001                             7,889,119
                                 2002                             2,744,041
                         2003 and thereafter                        758,011

                                                               $117,190,277



                                                                              25

<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


5.  Fair Value of       The estimated fair values of the Corporation's financial
    Financial           instruments are as follows:                             
    Instruments         

<TABLE>
<CAPTION>
                        December 31,                                      1998                             1997

                                                                Carrying          Fair           Carrying           Fair
                                                                 Amount           Value           Amount            Value
<S>                                                            <C>             <C>             <C>              <C>     
                        Financial assets                        
                          Cash and short-term
                            investments                        $10,526,732     $10,527,000     $  5,916,504     $  5,917,000
                          Securities                            30,253,147      30,346,000       15,566,382       15,587,000
                          Loans, net of allowance
                            for loan losses                    162,369,285     163,090,000       99,674,549      100,595,000
             
                        Financial liabilities                 
                          Deposits                             172,805,284     173,825,000      112,947,012      113,117,000
                          Advances from Federal
                            Home Loan Bank                      21,000,000      21,000,000              -                -
                          Securities sold under
                            agreement to
                            repurchase                           1,008,750       1,009,000        2,989,000        2,989,000
                          Bonds payable                          1,785,754          N/A           2,360,083            N/A
                        
                        
                                                                 Notional         Fair           Notional           Fair
                                                                  Amount          Value           Amount            Value


                        Unrecognized financial                
                          instruments
                            Commitments to
                              extend credit                    $61,917,000     $61,917,000      $18,145,000      $18,145,000
                            Forward commitments
                              to purchase
                              mortgage-backed
                              securities                        10,000,000      10,000,000              -                -
</TABLE>



                                                                              26

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)




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

                        Cash and short-term investments

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

                        Securities

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

                        Loan receivables

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

                        Deposit liabilities

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

                        Advances from Federal Home Loan Bank

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

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



                                                                              27

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


5.  Fair Value of       Securities sold under agreement to repurchase
    Financial       
    Instruments         Fixed-coupon  reverse repurchase  agreements are treated
    (continued)         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, 1998 and
                        1997, 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.



                                                                              28

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


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,                                          1998               1997
<S>                                                                     <C>                 <C> 
                        Serial Bonds                                  
                          Class A-2, maturing January 20,
                            2012, at 8.0%                                $        -         $  285,701
                          Class A-3, maturing January 20,
                            2019, at 8.0%                                 2,169,815          2,649,648
                          Unapplied payments                                (66,683)          (159,100)
                        
                                                                          2,103,132          2,776,249
                          Less unamortized discount                        (317,378)          (416,166)
                        
                                                                         $1,785,754         $2,360,083
</TABLE>

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



                                                                              29

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


7.  Securities Sold     The  following  is  a  summary  of  certain  information
    Under Agreements    regarding the Bank's repurchase agreements: 
    to Repurchase       

<TABLE>
<CAPTION>
                        Year Ended December 31,                                    1998               1997
<S>                                                                          <C>                <C>
                        Balance at end of period                             $1,009,000         $2,989,000
                        Weighted average interest rate
                          at end of period                                        5.00%              6.29%
                        Average amount outstanding
                          during the period                                  $2,336,294         $2,006,792
                        Maximum amount outstanding
                          at any month end during the
                          period                                             $6,856,060         $5,867,000
</TABLE>

8.  Advances From       Information  related  to  borrowing  activity  from  the
    Federal Home        Federal Home Loan Bank is as follows:                   
    Loan Bank           
<TABLE>
<CAPTION>
                        Year Ended December 31,                                    1998               1997
<S>                                                                         <C>                <C>
                        Maximum amount           
                          outstanding
                          during the
                          period                                            $26,000,000        $17,500,000
                        
                        Average amount
                          outstanding
                          during the period                                 $ 9,748,000        $10,956,000
                        
                        Average interest
                          rate during the
                          period                                                  5.57%              6.23%
</TABLE>



                                                                              30

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


9.  Income Taxes        The  provision  for  income  taxes as  presented  in the
                        consolidated statements of operations are as follows:   
<TABLE>
<CAPTION>
                                                                             Six Months
                                                            Year Ended          Ended        Year Ended
                                                           December 31,      December 31,     June 30,
                                                        1998         1997        1996            1996
<S>                                                   <C>          <C>         <C>             <C>     
                        Current income tax            $624,200     $458,040    $(3,500)        $344,338
                        Deferred income tax                  -      28,000        -                  -

                                                      $624,200     $486,040    $(3,500)        $344,338
</TABLE>

                        Reconciliations   of  the  provision  for  income  taxes
                        computed at the federal statutory income tax rate to the
                        effective rate follows:
<TABLE>
<CAPTION>
                                                                             Six Months
                                                            Year Ended          Ended        Year Ended
                                                           December 31,      December 31,     June 30,
                                                        1998         1997        1996            1996
<S>                                                  <C>           <C>         <C>             <C>
                        Tax expense at           
                          statutory rate             $557,800      $470,477    $(3,360)        $335,780
                        Adjustments              
                          Effect of state taxes             -        55,350       (395)          39,504
                          Other                        66,400       (39,787)       255          (30,946)
                                                 
                                                     $624,200      $486,040    $(3,500)        $344,338
</TABLE>



                                                                              31

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


9.  Income Taxes        The components of deferred income taxes are as follows: 
    (continued)         

<TABLE>
<CAPTION>
                        December 31,                                     1998                 1997
<S>                                                                  <C>                 <C>
                        Deferred tax asset            
                          Bad debt reserves                          $241,000             $243,000
                          Deferred loan fees                           30,000               43,000
                          Servicing rights                            116,000               16,000
                          Other                                       143,000               60,000
                                                       
                        Total deferred tax asset                      530,000              362,000
                                                       
                        Deferred tax liability        
                          GMSC REMIC                                  133,000              185,000
                          FHLB stock                                  167,000              118,000
                          Fixed Assets                                 84,000               42,000
                          Trading securities                           90,000                  -
                          Other                                           -                 12,000
                                                      
                        Total deferred tax liability                  474,000              357,000
                                                       
                        Net deferred tax asset                       $ 56,000            $   5,000
</TABLE>

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

                        The  following  is a summary of loan  transactions  with
                        directors, officers and other related parties:
<TABLE>
<CAPTION>
                        December 31,                                     1998                 1997
                                                           
<S>                                                                  <C>                  <C>     
                        Balance at the beginning of year             $293,000             $276,000
                        Additional loans                              856,000               19,000
                        Loan reductions                              (174,000)              (2,000)
                                                           
                                                           
                        Balance at end of year                       $975,000             $293,000
</TABLE>



                                                                              32

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


11.  Commitments        The  Corporation  leases  office  space under  operating
     and                leases  expiring at various dates through 2002 and has a
     Contingencies      contract for the performance of data processing services
                        whose  initial  term  expires in May,  1999 and requires
                        minimum  payments  of $8,100 per month.  Future  minimum
                        rental and data processing  payments  required that have
                        initial or  remaining  noncancelable  terms in excess of
                        one year as of December 31, 1998, are as follows:   

<TABLE>
<CAPTION>
                                                                            Amount           
                                                                 ----------------------------
                                                                                     Data
                        Year Ending December 31,                   Leases         Processing
<S>                     <C>                                       <C>             <C>     
                        1999                                      $ 82,366        $ 40,500
                        2000                                        63,156               -
                        2001                                        63,156               -
                        2002                                        56,436               -
                        Thereafter                                  21,498               -

                                                                  $286,612        $ 40,500
</TABLE>

                        Total rental expense amounted to  approximately  $70,000
                        and $47,000 for the years  ended  December  31, 1998 and
                        1997, respectively, and $23,000 for the six months ended
                        December 31, 1996,  and $168,000 for the year ended June
                        30,  1996.  Total data  processing  expense  amounted to
                        approximately  $585,000  and $423,000 for the year ended
                        December 31, 1998 and 1997,  respectively,  and $170,000
                        for the six months ended  December 31, 1996 and $257,000
                        for the year ended June 30, 1996.

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

12.  Convertible        On April  29,  1998,  the  Corporation  formed  Guaranty
     Preferred Stock    Capital   Trust  I  (the   "Trust"),   a  wholly   owned
                        subsidiary.  The  Trust  issued  276,000  shares of 7.0%
                        cumulative  preferred  securities  maturing  May 5, 2028
                        with an option to call on or after  April 29, 2003 (call
                        price of $18.50 per share) for $6,900,000. Conversion of
                        the preferred securities into the corporations stock may
                        occur at any time  prior to  maturity.  The  Trust  also
                        issued  8,537  shares of  convertible  common  stock for
                        $213,425.  The  Corporation  purchased all shares of the
                        common  stock.   The  proceeds  from  the  sale  of  the
                        preferred  securities were utilized to purchase from the
                        Corporation   junior    subordinated   debt   securities
                        (guaranteed by the Bank), of $7,113,425 bearing interest
                        of 7.0%  and  maturing  May 5,  2028.  All  intercompany
                        interest and equity was eliminated in consolidation.    




                                                                              33

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


13.  Stockholders'      On November 30, 1995, the Board of Directors  declared a
     Equity             two-for-one stock split to be distributed on January 31,
                        1996,  to all  shareholders  of record as of January 15,
                        1996.                                                   
                                                                                
                        On  January  23,  1997,  the  Corporation   completed  a
                        secondary  offering of its common stock through the sale
                        of  575,000  shares of common  stock at a price of $8.50
                        per share. Proceeds to the Corporation from the offering
                        (net of  offering  expenses of  approximately  $416,000)
                        were approximately $4,471,000.                          

                        The following  table  represents  the Bank's  regulatory
                        capital   levels   relative  to  the   Federal   Reserve
                        requirements.
<TABLE>
<CAPTION>
                                                          Amount       Percent        Actual        Actual        Excess
                        December 31, 1998                Required      Required       Amount        Percent       Amount
<S>                                                     <C>            <C>         <C>             <C>         <C>       
                        Tier 1 risk based               $ 7,246,000      4.00%      $16,645,000       9.19%     $9,399,000
                        Total risk based  
                         capital                         14,492,000      8.00        17,647,000       9.74       3,155,000


                                                          Amount        Percent       Actual        Actual        Excess
                        December 31, 1997                Required       Required      Amount        Percent       Amount
                                          
                                          
                        Tier 1 risk based                $3,306,000      4.00%      $11,758,000      14.22%     $8,452,000
                        Total risk based  
                          capital                         6,613,000      8.00        12,693,000      15.53       6,080,000
</TABLE>

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

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



                                                                              34

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


14.  Stock Option       The Corporation has a noncompensatory  stock option plan
     Plan               (the "Plan") designed to provide long-term incentives to
                        key employees.  All options are exercisable upon date of
                        vesting.                                                

                        The following table summarizes options outstanding:
<TABLE>
<CAPTION>
                        Year Ending December 31,               1998                     1997

                                                                    Weighted -                Weighted -
                                                                     average                   average
                                                                    exercise                  exercise
                                                       Shares         price       Shares       price
<S>                                                  <C>          <C>            <C>         <C>
Options outstanding at
  beginning of period                                  71,200       $15.25         4,000      $ 4.88
Granted                                                37,500        15.86        72,000       15.25
Forfeited                                             (18,700)       16.03          (800)      12.00
Exercised                                              (2,000)       12.00        (4,000)       4.88


Options outstanding at end
  of period                                            88,000       $15.86        71,200      $15.25
 

Options exercisable at end
  of period                                            24,200                     11,240

</TABLE>

                        The  weighted  average  fair  value of  options  granted
                        during the year ended December 31, 1998 was $4.85.



                                                                              35

<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


14.  Stock Option
     Plan
     (continued)

                        <TABLE>     
                        <CAPTION>   
                                    
                                                                                Six Months           
                                                                                  Ending                   Year Ending       
                                                                             December 31, 1996            June 30, 1996      
                                                                                                                             
                                                                                         Weighted -               Weighted - 
                                                                                          average                  average   
                                                                                          exercise                 exercise  
                                                                            Shares         price       Shares       price    
 <S>                                                                      <C>             <C>         <C>         <C>         
                        Options outstanding at                                                                               
                          beginning of period                               14,000         $4.75       17,600      $4.65     
                        Granted                                                -             -            -          -       
                        Forfeited                                              -             -            -          -       
                        Exercised                                          (10,000)         4.70       (3,600)      4.25     
                                                                                                                             
                        Options outstanding at end                                                                           
                          of period                                          4,000         $4.88       14,000      $4.75     
                                                                                                                             
                        Options exercisable at end                                                                           
                          of period                                          4,000                     14,000                
</TABLE>                                                  
          
                        The  Corporation  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, the  Corporation's
                        net  earnings  and net  earnings per share for the years
                        ended  December  31,  1998  and  1997  would  have  been
                        decreased  to the pro  forma  amounts  indicated  in the
                        following table:
<TABLE>
<CAPTION>
                        Year ended December 31,                             1998                 1997
<S>                                                                   <C>                    <C>
                        Net income                                
                          As reported                                 $1,016,279             $897,715
                          Pro forma                                      896,242              844,363
                                                                  
                        Net income per share (basic and diluted)  
                          As reported                                 $      .68             $   0.61
                          Pro forma                                          .60                 0.58

</TABLE>



                                                                              36

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


14.  Stock Option       There were no options  granted for the six months  ended
     Plan               December  31, 1996 and for the year ended June 30, 1996,
     (continued)        therefore  there are no pro forma  effects on net income
                        and net income per share.                               

                        The fair value of each option  granted is  estimated  on
                        the date of grant using the Black-Sholes  option pricing
                        model with the following assumptions used for grants for
                        the year ended  December 31, 1998: a risk free  interest
                        rate  of  5.56%,   dividend  yield  of  1.00%,  expected
                        weighted average term of 5.00 years, and a volatility of
                        25.00%.

                        The follow  table  summarizes  information  about  stock
                        options outstanding at December 31, 1998:
<TABLE>
<CAPTION>
                                                              Options Outstanding                   Options Exercisable


                                                                          Weighted      Weighted                Weighted
                                                                           average       average                 average
                                                                          remaining     exercise                exercise
Range of exercise                                           Number of    contractual      price     Number of     price
prices                                                       Shares      life (years)   per share    Shares     per share

<S>                                                          <C>             <C>         <C>         <C>         <C>   
$12.00 - 17.57                                               77,000          3.38        $14.91      24,200      $12.79
$19.00 - 21.26                                               11,000          4.03         19.47           -           -

                                                             88,000          3.46        $15.86      24,200      $12.79
</TABLE>


15.  Employee Benefit   Effective  February 16, 1989, the Corporation  adopted a
     Plans              401(k)  profit-sharing  plan in which all  employees are
                        eligible  to  participate  after one year of service and
                        are at least twenty-one  years of age.  Participants may
                        elect to contribute a percentage  of their  compensation
                        to the plan. The Corporation may make  contributions  to
                        the plan at its  discretion.  Corporation  contributions
                        are  allocated to employee  accounts  using a systematic
                        formula   based   on   participant   compensation.   The
                        Corporation   contributed   approximately   $14,900  and
                        $10,300 for the year ended  December  31, 1998 and 1997,
                        respectively,  and  $4,600  for the year  ended June 30,
                        1996,  and $5,500 for the six months ended  December 31,
                        1996.                                                   




                                                                              37

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


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

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

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

                                                                                              Contract     
                                                                                           Notional Amount 
                                                                                           ---------------
                        December 31,                                                   1998                   1997
<S>                                                                             <C>                    <C>
                        Financial instruments whose contract   
                          amounts represent credit risk        

                            Commitments to extend credit                        $61,917,000            $18,145,000
                            Standby letters of credit written                     1,454,000                944,000
                                                               
                        Financial instruments whose contract   
                          amount represent interest rate risk  
                            Forward commitment to purchase     
                              mortgage-backed securities                         10,000,000                    -
</TABLE>




                                                                              38

<PAGE>

                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


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

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

                        Substantially all of the Corporation's loan activity was
                        with customers located in Charlottesville,  Virginia and
                        surrounding  counties,  with  approximately  65%  of the
                        loans  collateralized by one to four family  residential
                        properties.





                                                                              39

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


17.  Selected Quarterly Financial Data (Unaudited)

Condensed  quarterly  financial data is shown as follows:  (Dollars in thousands
except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1998
----------------------------------------------------------------------------------------------------------
                                                     First            Second         Third          Fourth
                                                    Quarter          Quarter        Quarter        Quarter
----------------------------------------------------------------------------------------------------------
<S>                                                  <C>              <C>           <C>             <C>   
Total interest income                                $2,508           $2,956        $3,506          $4,090
Total interest expense                                1,540            1,753         2,065           2,051
----------------------------------------------------------------------------------------------------------

Net interest income                                     968            1,203         1,441           2,039
Provision for loan losses                                42               44            49              49
----------------------------------------------------------------------------------------------------------

Net interest income after provision
 for loan losses                                        926            1,159         1,392           1,990

Other income                                            613              375           730             248
Other expenses                                        1,173            1,245         1,607           1,768
----------------------------------------------------------------------------------------------------------

Income before income taxes                              366              289           515             470

Income taxes                                            153              105           201             165
----------------------------------------------------------------------------------------------------------

Net income                                          $   213           $  184        $  314          $  305
----------------------------------------------------------------------------------------------------------

Earnings per share
 Basic                                              $   .17           $  .12        $  .21          $  .18
 Diluted                                            $   .17           $  .12        $  .21          $  .18
----------------------------------------------------------------------------------------------------------
</TABLE>



                                                                              40

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


17.  Selected Quarterly Financial Data (Unaudited)

Condensed  quarterly  financial data is shown as follows:  (Dollars in thousands
except per share data)
<TABLE>
<CAPTION>
Year Ended December 31, 1997
------------------------------------------------------------------------------------------------------------------------
                                                                  First           Second           Third          Fourth
                                                                 Quarter          Quarter         Quarter        Quarter
------------------------------------------------------------------------------------------------------------------------
<S>                                                              <C>              <C>             <C>             <C>   
Total interest income                                            $2,186           $2,374          $2,451          $2,508
Total interest expense                                            1,408            1,537           1,580           1,513
------------------------------------------------------------------------------------------------------------------------

Net interest income                                                 778              837             871             995
Provision for loan losses                                           -                 46              30              46
------------------------------------------------------------------------------------------------------------------------

Net interest income after provision
  for loan losses                                                   778              791             841             949

Other income                                                        222              399             579             668
Other expenses                                                      790              886           1,013           1,154
------------------------------------------------------------------------------------------------------------------------

Income before income taxes                                          210              304             407             463

Income taxes                                                         77              106             141             162
------------------------------------------------------------------------------------------------------------------------

Net income                                                       $  133           $  198          $  266          $  301
------------------------------------------------------------------------------------------------------------------------

Basic and diluted earnings per share                             $  .10           $  .13          $  .18          $  .19
------------------------------------------------------------------------------------------------------------------------

</TABLE>



                                                                              41

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


18.  Condensed          Condensed financial  information is shown for the Parent
     Financial          Company only as follows:
     Information of the 
     Corporation               Condensed Statements of Financial Condition
     (Parent Company
     Only)              
<TABLE>
<CAPTION>
                        December 31,                                              1998              1997 
                                                                                                         
                         Assets                                                                          
<S>                                                                        <C>               <C>         
                        Investment in subsidiaries, at equity              $19,289,414       $11,758,347 
                        Cash                                                    11,612            10,000 
                        Prepaid expenses and other assets                      527,117            40,836 
                                                                                                         
                                                                           $19,828,143       $11,809,183 
                                                                                                         
                          Liabilities and Stockholders' Equity                                           
                                                                                                         
                        Other liabilities                                  $   250,072       $         - 
                                                                                                         
                        Total liabilities                                      250,072                 - 
                                                                                                         
                        Subordinated debt                                    7,113,425                 - 
                                                                                                         
                        Stockholders' Equity                                                             
                          Common stock                                       1,877,159         1,876,729 
                          Additional paid-in capital                         5,724,524         5,724,954 
                          Retained earnings                                  4,862,963         4,207,500 
                                                                                                         
                        Total stockholders' equity                          12,464,646        11,809,183 
                                                                                                         
                                                                           $19,828,143       $11,809,183 

</TABLE>



                                                                              42

<PAGE>



                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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


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

                       Condensed Statements of Operations

<TABLE>
<CAPTION>
                                                                                 Year Ended              Six Months Ended
                                                                                 December 31,               December 31,
                                                                             1998            1997              1996
<S>                                                                    <C>               <C>              <C>           
                        Income                             
                          Dividends received from Bank                 $  361,306        $135,259           $46,200
                                                           
                        Total income                                      361,306         135,259            46,200
                                                           
                        Interest expense                                 (319,324)            -                   -
                        Noninterest expenses                              (19,305)         (7,028)          (52,582)
                                                           
                        Income (loss) before undistributed 
                           net income of the Bank                          22,677         128,231           (6,382)
                        Undistributed net income                          993,602         769,484                -
                                                           
                        Net income (loss)                              $1,016,279        $897,715          $(6,382)
</TABLE>




                                                                              43

<PAGE>


                                                  Guaranty Financial Corporation
                                                                  and Subsidiary

                                      Notes to Consolidated Financial Statements
                                                                     (continued)

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

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

                       Condensed Statements of Cash Flows

<TABLE>
<CAPTION>

                                                                                           Year Ended               Six Months Ended
                                                                                           December 31,                December 31,
                                                                                      1998             1997               1996
<S>                                                                               <C>               <C>               <C>
                        Operating activities
                         Net income (loss)                                        $1,016,279        $ 897,715         $  (6,382)
                         Adjustments
                            Undistributed earnings of
                              the Bank                                              (993,602)        (769,484)                -
                            (Increase) decrease in prepaid
                              and other assets                                      (486,281)          49,844           (21,701)
                            (Decrease) increase in other
                              liabilities                                            250,072         (182,086)           37,686
                            Other                                                      1,229            4,011            (9,603)
                        
                        Net cash absorbed by operating
                          activities                                                (212,303)               -                 -
                        
                        Investing activities
                          Dividends received from Bank                               361,306          135,259            46,200
                          Investment in the Bank                                           -       (4,470,978)                -
                          Investment in Guaranty
                            Capital Trust                                         (6,900,000)               -                 -
                        
                        Net cash provided (absorbed) by
                          investing activities                                    (6,538,694)      (4,335,719)           46,200
                        
                        Financing activities
                          Cash dividends paid on
                            common stock                                            (360,816)        (135,259)          (46,200)
                          Issuance of subordinate debt                             7,113,425                -                 -
                          Issuance of common stock                                         -        4,470,978                 -
                        
                        Net cash provided (absorbed)
                          by financing activities                                  6,752,609        4,335,719           (46,200)
                        
                        Increase in cash                                               1,612                -                 -
                        
                        Cash, beginning of period                                     10,000           10,000            10,000
                        
                        Cash, end of period                                      $    11,612       $   10,000          $ 10,000
</TABLE>




                                                                              44



<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 30, 1999          By:  /s/ Thomas P. Baker  
                                  ---------------------------------------------
                                    Thomas P. Baker
                                    President, Chief Executive Officer
                                    and Director


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

<TABLE>
<CAPTION>

               Signature                                      Title                                 Date

<S>                                          <C>                                               <C>
/s/ Thomas P. Baker                                 President, Chief Executive                 March 30, 1999
-------------------------------------                Officer and Director      
            Thomas P. Baker                     (Principal Executive Officer)   
                                                 

/s/ L. Benjamin Johnson, II                  Vice President and Controller (Principal          March 29, 1999
-------------------------------------                    Financial and    
        L. Benjamin Johnson, III                      Accounting Officer) 
                                                  

/s/ Douglas E. Canton                                Chairman of the Board                     March 30, 1999
-------------------------------------
            Douglas E. Caton


/s/ Harry N. Lewis                                Vice Chairman of the Board                   March 30, 1999
-------------------------------------
             Harry N. Lewis


-------------------------------------                      Director                            March __, 1999
            Henry J. Browne


-------------------------------------                      Director                            March __, 1999
         Jason I. Eckford, Jr.


-------------------------------------                      Director                            March __, 1999
          Robert P. Englander

/s/ John R. Metz
-------------------------------------                      Director                            March 30, 1999
              John R. Metz


-------------------------------------                      Director                            March __, 1999
           James R. Sipe, Jr.

/s/ Oscar W. Smith Jr.
-------------------------------------                      Director                            March 30, 1999
          Oscar W. Smith, Jr.

/s/ John B. Syer
-------------------------------------                      Director                            March 30, 1999
              John B. Syer

</TABLE>





<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, 1998,  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,  1998,
                           incorporated herein by reference.

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

         21                Subsidiaries of the Registrant.

         27                Financial Data Schedule (filed electronically only).