UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C.  20549



FORM 10-QSB



Quarterly Report Under Section 13 or 15(d)

of the Securities Exchange Act of 1934







|For Quarter EndedJune 30, 2003 | Commission File No.0-25905
|------------------------------ | --------------------------





GUARANTY FINANCIAL CORPORATION

(Exact Name of Small Business Issuer as Specified in its Charter)







|Virginia(State or Other Jurisdiction ofIncorporation or Organization) | 54-1786496(I.R.S. EmployerIdentification No.)
|--------------------------------------------------------------------- | ---------------------------------------------





1658 State Farm Blvd., Charlottesville, VA  22911

(Address of Principal Executive Offices)





(434) 970-1100

(Issuers Telephone Number, Including Area Code)



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 the past 90 days.  Yes _X_  No ___



State the number of shares outstanding in each of the issuers classes of common equity, as of the latest practicable date:

1,988,777 shares of Common Stock, par value $1.25 per share,outstanding as of August 1, 2003



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GUARANTY FINANCIAL CORPORATION



QUARTERLY REPORT ON FORM 10-QSB



INDEX



Part I.  Financial Information

Page No.



Item 1

Financial Statements



Consolidated Balance Sheets as of June 30, 2003

(unaudited) and December 31, 2002

3



Consolidated Statements of Operations for the

Three and Six Months Ended June 30, 2003 and

2002 (unaudited)

4



Consolidated Statements of Comprehensive Income (Loss)

for the Three and Six Months Ended June 30, 2003

and 2002 (unaudited)

5



Consolidated Statements of Cash Flows for the

Six Months Ended June 30, 2003 and 2002 (unaudited)

6



Notes to Consolidated Financial Statements (unaudited)

7



Item 2

Managements Discussion and Analysis or Plan of Operation

10



Item 3

Controls and Procedures

16



Part II.  Other Information



Item 1

Legal Proceedings

17



Item 2

Changes in Securities

17



Item 3

Defaults upon Senior Securities

17



Item 4

Submission of Matters to a Vote of Security Holders

17



Item 5

Other Information

17



Item 6

Exhibits and Reports on Form 8-K

17



Signatures

18



2



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Part I.  Financial Information



Item 1   Financial Statements



GUARANTY FINANCIAL CORPORATION

CONSOLIDATED BALANCE SHEETS

(In Thousands)

|                                                 |               |  |              
|------------------------------------------------ | ------------- |  | -------------
|                                                 | June 30,      |  | December 31, 
|                                                 | 2003          |  | 2002         
|ASSETS                                           | (Unaudited)   |  |              
|Cash and cash equivalents                        | $      18,149 |  | $      15,392
|Investment securities                            |               |  |              
|Held-to-maturity                                 | 745           |  | 836          
|Available for sale                               | 0             |  | 3,212        
|Investment in FHLB                               | 532           |  | 947          
|Loans receivable, net                            | 158,479       |  | 163,250      
|Accrued interest receivable                      | 684           |  | 910          
|Real estate owned                                | -             |  | 397          
|Office properties and equipment, net             | 6,220         |  | 7,443        
|Other assets                                     | 5,177         |  | 4,758        
|Total assets                                     | $    189,986  |  | $    197,145 
|                                                 |               |  |              
|LIABILITIES AND STOCKHOLDERS' EQUITY             |               |  |              
|LIABILITIES                                      |               |  |              
|Deposits:                                        |               |  |              
|Interest bearing demand                          | $      31,536 |  | $      28,773
|Non-interest bearing demand                      | 27,091        |  | 24,725       
|Money market accounts                            | 40,511        |  | 34,445       
|Savings accounts                                 | 12,481        |  | 12,812       
|Certificates of deposit                          | 57,739        |  | 70,504       
|                                                 | 169,358       |  | 171,259      
|Bonds payable                                    | 252           |  | 360          
|Advances from Federal Home Loan Bank             | -             |  | -            
|Accrued interest payable                         | 22            |  | 58           
|Payments by borrowers for taxes and insurance    | 229           |  | 127          
|Other liabilities                                | 800           |  | 722          
|Total liabilities                                | 170,661       |  | 172,526      
|                                                 |               |  |              
|Convertible preferred securities                 | -             |  | 6,012        
|                                                 |               |  |              
|STOCKHOLDERS' EQUITY                             |               |  |              
|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, 1,988,777           |               |  |              
|issued and outstanding (1,970,677 in 2002)       | 2,486         |  | 2,463        
|Additional paid-in capital                       | 9,178         |  | 9,034        
|Accumulated comprehensive loss                   | -             |  | (23)         
|Retained earnings                                | 7,661         |  | 7,133        
|Total stockholders' equity                       | 19,325        |  | 18,607       
|Total liabilities and stockholders' equity       | $    189,986  |  | $    197,145 
|                                                 |               |  |              



See accompanying notes to consolidated financial statements

3



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GUARANTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF OPERATIONS

(In Thousands, Except Per Share Amounts)





|                                                    | Three Months Ended |  | Six Months Ended
|--------------------------------------------------- | ------------------ |  | ----------------
|                                                    | June 30,           |  | June 30,        
|                                                    | 2003               |  | 2002            
|                                                    | (unaudited)        |  | (unaudited)     
|Interest income                                     |                    |  |                 
|Loans                                               | $       2,549      |  | $         2,915 
|Investment securities                               | 58                 |  | 398             
|Total interest income                               | 2,607              |  | 3,313           
|                                                    |                    |  |                 
|Interest expense                                    |                    |  |                 
|Deposits                                            | 404                |  | 922             
|Borrowings                                          | 75                 |  | 199             
|Total interest expense                              | 479                |  | 1,121           
|                                                    |                    |  |                 
|Net interest income                                 | 2,128              |  | 2,192           
|                                                    |                    |  |                 
|Provision for loan losses                           | 979                |  | 25              
|                                                    |                    |  |                 
|Net interest income after provision
for loan losses | 1,149              |  | 2,167           
|                                                    |                    |  |                 
|Non-interest income                                 |                    |  |                 
|Mortgage banking income                             | 441                |  | 153             
|Deposit account fees                                | 166                |  | 189             
|Net gain on sale of branches                        | -                  |  | -               
|Increase in cash surrender value of life insurance  | 54                 |  | 53              
|Investment sales commissions                        | -                  |  | 38              
|Other                                               | 135                |  | 112             
|Total non-interest income                           | 796                |  | 545             
|                                                    |                    |  |                 
|Non-interest expense                                |                    |  |                 
|Personnel                                           | 1,190              |  | 1,142           
|Occupancy                                           | 285                |  | 282             
|Information services                                | 275                |  | 287             
|Marketing                                           | 32                 |  | 29              
|Deposit insurance premiums                          | 7                  |  | 23              
|Other                                               | 417                |  | 328             
|Total non-interest expense                          | 2,206              |  | 2,091           
|                                                    |                    |  |                 
|Income (loss) before income taxes                   | (261)              |  | 621             
|                                                    |                    |  |                 
|Provision for income taxes                          | (107)              |  | 193             
|                                                    |                    |  |                 
|Net income (loss)                                   | $        (154)     |  | $           428 
|                                                    |                    |  |                 
|Basic earnings per common share (loss)              | $       (0.08)     |  | $          0.22 
|                                                    |                    |  |                 
|Diluted earnings per common share (loss)            | $       (0.08)     |  | $          0.22 
|                                                    |                    |  |                 



See accompanying notes to consolidated financial statements.

4



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GUARANTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME (LOSS)

(In Thousands)





|                                                                            | Three Months Ended |  | Six Months Ended
|--------------------------------------------------------------------------- | ------------------ |  | ----------------
|                                                                            | June 30,           |  | June 30,        
|                                                                            | 2003               |  | 2002            
|                                                                            | (unaudited)        |  | (unaudited)     
|                                                                            |                    |  |                 
|Net income (loss)                                                           | $     (154)        |  | $       428     
|Other comprehensive income:                                                 |                    |  |                 
|Unrealized gain on securities available for sale                            | 28                 |  | 830             
|Reclassification adjustment for (gains) losses
included in net income       | -                  |  | -               
|                                                                            |                    |  |                 
|Other comprehensive income, before tax                                      | 28                 |  | 830             
|                                                                            |                    |  |                 
|Income tax (expense) benefit related to items of
other comprehensive income | (10)               |  | (282)           
|                                                                            |                    |  |                 
|Other comprehensive income, net of tax                                      | 18                 |  | 548             
|                                                                            |                    |  |                 
|Comprehensive income (loss)                                                 | $     (136)        |  | $       976     
|                                                                            |                    |  |                 







See accompanying notes to consolidated financial statements.



5



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GUARANTY FINANCIAL CORPORATION

CONSOLIDATED STATEMENTS OF CASH FLOWS

(In Thousands)



|                                                                  | Six Months Ended
|----------------------------------------------------------------- | ----------------
|                                                                  | June 30,        
|                                                                  | 2003            
|Operating Activities                                              | (unaudited)     
|Net Income                                                        | $          824  
|Adjustments to reconcile net income to net cash provided          |                 
|(absorbed) by operating activities:                               |                 
|Provision for loan losses                                         | 1,009           
|Provision for loss on sale of other real estate owned             | -               
|Depreciation and amortization                                     | 263             
|Deferred loan fees                                                | (2)             
|Net amortization of premiums and accretion of discounts           | (10)            
|Gain on sale of loans                                             | (759)           
|Gain on sale of securities available for sale                     | (12)            
|Originations of loans held for sale                               | (33,100)        
|Proceeds from sale of loans                                       | 34,571          
|Gain on sale of other real estate owned                           | (2)             
|Increase in value of bank owned life insurance                    | (109)           
|Gain on sale of Harrisonburg branch                               | (986)           
|Changes in:                                                       |                 
|Accrued interest receivable                                       | 225             
|Other assets                                                      | (215)           
|Accrued interest payable                                          | (36)            
|Prepayments by borrowers for taxes and insurance                  | 102             
|Other liabilities                                                 | 78              
|Net cash provided by operating activities                         | 1,841           
|                                                                  |                 
|Investing activities                                              |                 
|Net (increase) decrease in loans                                  | (2,406)         
|Mortgage-backed securities principal repayments                   | 87              
|Purchase of securities held to maturity                           | -               
|Proceeds from maturity of securities held to maturity             | -               
|Purchase of securities available for sale                         | (135)           
|Proceeds from sale of securities available for sale               | 3,258           
|Proceeds from redemption of FHLB stock                            | 415             
|Proceeds from sale of real estate owned                           | 400             
|Purchase of bank-owned life insurance                             | -               
|Net decrease in cash from sale of branch                          |                 
|Proceeds from sale of loans                                       | 5,446           
|Sale of deposits                                                  | (9,984)         
|Proceeds from sale of office properties, equipment and land       | 1,653           
|Proceeds from sale of office properties and equipment             | 30              
|Purchase of office properties and equipment                       | (436)           
|Net cash provided (absorbed) by investing activities              | (1,672)         
|                                                                  |                 
|Financing activities                                              |                 
|Net increase (decrease) in deposits                               | 8,851           
|Proceeds from FHLB advances                                       | 16,000          
|Repayment of FHLB advances                                        | (16,000)        
|Redemption of Trust Preferred Securities                          | (6,012)         
|Proceeds from issuance of common stock                            | 167             
|Cash dividend paid on common stock                                | (297)           
|Principal payments on bonds payable, including unapplied payments | (121)           
|Net cash provided (absorbed) by financing activities              | 2,588           
|Increase in cash and cash equivalents                             | 2,757           
|Cash and cash equivalents, beginning of period                    | 15,392          
|Cash and cash equivalents, end of period                          | $      18,149   
|                                                                  |                 



See accompanying notes to consolidated financial statements.

6



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GUARANTY FINANCIAL CORPORATION

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the Three and Six Months Ended June 30, 2003 and 2002

(unaudited)





Note 1  Principles of Presentation



The accompanying consolidated financial statements of Guaranty Financial Corporation (Guaranty) have not been audited by independent accountants, except for the balance sheet at December 31, 2002.  These financial statements have been prepared in accordance with the regulations of the Securities and Exchange Commission in regard to quarterly (interim) reporting.  In managements opinion, the financial information presented reflects all adjustments, comprised only of normal recurring accruals that are necessary for a fair presentation of the results for the interim periods.  Significant accounting policies and accounting principles have been consistently applied in both the interim and annual consolidated financial statements.  Certain notes and the related information have been condensed or omitted from the interim financial statements presented in this Quarterly Report on Form 10QSB.  Therefore,
these financial statements should be read in conjunction with Guarantys Annual Report
on Form 10-KSB for the year ended December 31, 2002.  The results for the three and six months ended June 30, 2003, are not necessarily indicative of future financial results.



The accompanying consolidated financial statements include Guarantys accounts and its wholly-owned subsidiaries, Guaranty Capital Trust I and Guaranty Bank, and Guaranty Banks wholly-owned subsidiaries, GMSC, Inc., which was organized as a financing subsidiary, and Guaranty Investments Corporation, which was organized to sell non-deposit investment products. All material intercompany accounts and transactions have been eliminated in consolidation.



Amounts in the year 2002 financial statements have been reclassified to conform to the year 2003 presentation.  These reclassifications had no effect on previously reported net income.



Note 2  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.



Note 3  Earnings Per Share



Basic earnings per share is based on net
income divided by the weighted average number of common
shares outstanding during the period.  Diluted
earnings per share shows the dilutive effect of
additional common shares issuable under stock option
plans.  The basic and diluted earnings per share for the three and six months ended June 30, 2003 and 2002, have been determined by dividing net income by the weighted average number of shares of common stock outstanding during these periods.  The following table indicates the weighted average shares outstanding for each period.



|                                 | Three Months Ended |  | Six Months Ended
|-------------------------------- | ------------------ |  | ----------------
|                                 | June 30,           |  | June 30,        
|                                 | 2003               |  | 2002            
|Basic shares                     | 1,984,684          |  | 1,962,777       
|Dilutive effect of stock options | 18,782             |  | 18,778          
|Diluted shares                   | 2,003,466          |  | 1,981,555       
|                                 |                    |  |                 

7



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Note 4  Loans



The loan portfolio is comprised of the following:

|                            |  |                |  |             
|--------------------------- |  | -------------- |  | ------------
|                            |  | June 30,       |  | December 31,
|                            |  | 2003           |  | 2002        
|                            |  | (In thousands)
|Mortgage loans:             |  |                |  |             
|Residential                 |  | $      31,793  |  | $     20,119
|Commercial                  |  | 6,945          |  | 7,894       
|Construction and land loans |  | 39,306         |  | 38,480      
|Total real estate loans     |  | 78,044         |  | 66,493      
|Commercial business loans   |  | 64,860         |  | 76,651      
|Consumer loans              |  | 17,695         |  | 22,238      
|Total loans receivable      |  | 160,599        |  | 165,382     
|Adjustments:                |  |                |  |             
|Allowance for losses        |  | (2,219)        |  | (2,242)     
|Deferred costs              |  | 99             |  | 110         
|Total loans receivable, net |  | $     158,479  |  | $    163,250
|                            |  |                |  |             



Note 5  Allowance for Loan Loss



The following is a summary of transactions in the allowance for loan loss:





|                                 |  | June 30,          |  | December 31,       
|-------------------------------- |  | ----------------- |  | -------------------
|                                 |  | 2003              |  | 2002               
|                                 |  | (In thousands)   
|Balance at January 1             |  | $           2,242 |  | $             2,512
|Provision charged to expense     |  | 1,009             |  | 100                
|Recoveries added to the reserve  |  | 8                 |  | 3                  
|Loans charged-off                |  | (1,040)           |  | (373)              
|Balance at the end of the period |  | $           2,219 |  | $             2,242
|                                 |  |                   |  |                    

8



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Note 6  Investments



The investment portfolio was comprised of the following:





|                    |                                     |  | June 30,         |  | December 31,    
|------------------- | ----------------------------------- |  | ---------------- |  | ----------------
|                    |                                     |  | 2003             |  | 2002            
|                    |                                     |  | (In thousands)  
|Held to maturity:   |                                     |  |                  | 
|                    | Mortgage-backed securities          |  | $            345 |  | $            433
|                    | U.S. Government obligations         |  | 400              |  | 403             
|Available for sale: |                                     |  |                  | 
|                    | Corporate Bonds                     |  | -                |  | 3,212           
|Other:              |                                     |  |                  |  |                 
|                    | Federal Home Loan Bank stock        |  | 532              |  | 947             
|                    | Federal Reserve Bank & other stocks |  | 557              |  | 422             
|                    |                                     |  | $         1,834  |  | $         5,417 
|                    |                                     |  |                  |  |                 



Note 7  Trust Preferred Securities



On May 19, 2003, the Company redeemed 100% of Guaranty Capital Trusts 7% preferred
securities, resulting in a reduction in liabilities of $6.0 million and annualized savings of $420,000 in interest expense in future periods.  Subsequent to the redemption of the preferred securities, the Bank and the holding company remain well capitalized.





Note 8  Stock Option Plan



Guaranty has a non-compensatory stock option plan (the Plan) designed to provide long-term incentives to key employees. All options are exercisable upon date of vesting.



The following table summarizes options outstanding:



|                                           | Six Months Ended
June 30, 2003 | Year Ended
December 31, 2002     
|------------------------------------------ | ------------------------------ | ---------------------------------
|                                           | Shares                         | Weighted 
average
exercise
price
|Options outstanding at
beginning of period | 76,012                         | $10.02                           
|Granted                                    | 17,500                         | 13.47                            
|Forfeited                                  | (562)                          | 8.30                             
|Exercised                                  | (18,100)                       | 9.20                             
|Options outstanding at end
of period       | 74,850                         | 11.03                            
|Options exercisable at end
of period       | 74,850                         |                                  

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



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



Six Months Ended

Year Ended

June 30, 2003

December 31, 2003

Net income (loss)

As reported

$ 824,407

$ 1,763,442

Pro forma

784,230

1,677,417

Net income (loss) per share (basic)

As reported

$ 0.42

$ 0.89



Pro forma

0.40

0.85



Net income (loss) per share (diluted)

As reported

$ 0.41

$ 0.89



Pro forma

0.39

0.85





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 quarter ended June 30, 2003: a risk free interest rate range of 2.69% - 2.95%, depending on the date of grant, dividend yield of 2%, expected weighted average term of 5.0 years, and a volatility of 30%.

9



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ITEM 2

MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION



Guaranty Financial Corporation (Guaranty) is a single bank holding company organized under Virginia law that provides financial services through its primary operating subsidiary, Guaranty Bank (the Bank).  The Bank is a full service commercial bank offering a wide range of banking and related financial services, including time and demand deposits, as well as commercial, industrial, residential construction, residential and commercial mortgage and consumer loans.  Guaranty Investments Corporation, a subsidiary of the Bank, provides a full range of investment services and, through a contractual arrangement with BI Investments Group, LLC, sells mutual funds, stocks, bonds and annuities.



Managements discussion and analysis is presented to aid the reader in understanding and evaluating the financial condition and results of operations of Guaranty.  The analysis focuses on the consolidated financial statements, the footnotes thereto, and the other financial data herein.  Highlighted in the discussion are material changes from prior reporting periods and any identifiable trends affecting Guaranty.  Amounts are rounded for presentation purposes, while the percentages presented are computed based on unrounded amounts.



Analysis of Financial Condition



Total assets decreased 3.6% to $190.0 million at June 30, 2003,
from $197.1 million at December 31, 2002.  Cash and cash equivalents increased $2.8
million or 17.9%, to $18.1 million at June 30, 2003, from $15.4 million at December 31, 2002.  Net
loans were $158.5 million at June 30, 2003, a decrease of $4.8 million, or 2.9%, from net
loans of $163.2 million at December 31, 2002.  Total deposits at June 30, 2003,
were $169.4 million compared to $171.3 million at December 31, 2002.  Guaranty held no
FHLB borrowings at June 30, 2003 or December 31, 2002.  Total stockholders equity
at June 30, 2003, increased by over $700,000 to $19.3 million from $18.6 million at December 31, 2002.



The factors causing the fluctuations in the major balance sheet categories are further discussed in the following sections.



Loans



Net loans receivable decreased 2.9% to $158.5 million at
June 30, 2003, from $163.2 million at December 31, 2002. Commercial loans and real estate loans, excluding construction and land loans,
decreased $12.7 million, as the result of the continued repositioning of the loan portfolio,
along with one significant charge-off during the second quarter.  A $4.8 million decrease
in consumer loans, resulting from the sale of loans associated with the Harrisonburg branch, was
offset by originations and increased outstanding balances on consumer loans,
netting a $4.5 million reduction in consumer loans.  Residential mortgage loans outstanding increased $1.6
million from December 31, 2002 to June 30, 2003.  During the most recent quarter,
Guaranty originated and sold $21.1 million in residential mortgage loans in the secondary
market, bringing the total sold for the year to $33.1 million.  Residential mortgage loans
held for sale were $433,000 at June 30, 2003, compared to $332,000 at December 31, 2002.



Investments



Total investments declined by 76.4% to $1.3 million at June 30, 2003, compared to $5.4 million at December 31, 2002. This change was due to the sale of
corporate securities in order to improve liquidity without incurring investment losses.

10



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Real Estate Owned



Real estate owned decreased to zero at June 30, 2003, from $397,000 at December 31, 2002. During the first half of 2003, Guaranty
liquidated all of its other real estate holdings, without incurring losses on the sales of the properties.



Office Properties and Equipment



Guarantys investment in office properties
and equipment decreased to $6.2 million at June 30, 2003, from $7.4 million at December 31, 2002.  This decrease was primarily due to the sale of the Harrisonburg branch in January 2003.



Other Assets



Other assets increased to $5.2 million at June 30, 2003 from $4.8 million at December 31, 2002.  The primary reason for
the increase in other assets was the increase in prepaid taxes relating to first quarter net income.



Deposits



Balances in deposit accounts were $169.4 million at
June 30, 2003, a decrease of $1.9 million, or 1.1%, from total deposits of $171.3
million at December 31, 2002.  The sale of the deposits associated with the
Harrisonburg branch resulted in a decline of $10 million in deposits.  Offsetting
the decrease associated with the sale, Guaranty has been successful in attracting low cost
deposits and money market accounts and in retaining existing relationships.  Certificates of deposit comprise 34.0% of total deposits at June 30, 2003, compared to 41.2% at December 31, 2002.



FHLB Borrowings



Guaranty had no borrowings
outstanding from the Federal Home Loan Bank (FHLB) at June 30, 2003 or
December 31, 2002.  At June 30, 2003, Guarantys available but unused borrowings with the FHLB were approximately $24.3 million.



Stockholders Equity



Stockholders equity at June 30, 2003, increased by 3.9% to $19.3 million from $18.6 million at December 31, 2002.  The primary factors for the increase were the six
 months net income of $824,000 and the issuance of shares in connection with open market purchases and employees exercising their stock options which increased capital by $167,000, offset by cash dividend payments to shareholders of $297,000.

11



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Results of Operations



Net Income



Guaranty reported a net loss of $154,000 ($.08 per diluted share) for the three months ended June 30
, 2003, compared with a net income of $428,000 ($.22 per share) for the three months ended June 30
, 2002.  The primary reason for the fluctuation was a significant charge-off that Guaranty incurred during the second quarter of 2003 as the consequence of substantial fraudulent activity by one commercial borrower.  Guaranty reported net income of $824,000 ($.41 per diluted share) for the six months ended June 30
, 2003, compared with a net income of $834,000 ($.42 per share) for the six months ended June 30
, 2002.



Net Interest Income



Net interest income decreased to $2.1 million for the three months ended June 30
, 2003, from the $2.2 million reported during the same period the prior year.  The primary cause for the decline in net interest income was due to the decline in average earning assets and lower interest rates earned on loan balances for the most recent quarter.  Average earning assets for the three months ended June 30
, 2003, were $172.8 million compared to $194.2 million for the same period in 2002.  Average loans outstanding decreased to $163.5 million from $165.1 million and average investments outstanding declined to $2.5 million from $23.8 million when comparing the three month period ended June 30
, 2003 to the three month period ended June 30
, 2002.  For these same periods, average certificates of deposit balances decreased by $36.5 million to $58.4 million.  The cost of interest bearing deposits declined by 130 basis points primarily due to lower interest rates being paid on certificates of deposit.  The following table summarizes the factors determining net interest income (dollars in thousands).



|                                     |  | Three Months   | Three Months  | Six Months    | Six Months    
|------------------------------------ |  | -------------- | ------------- | ------------- | --------------
|                                     |  | Ended          | Ended         | Ended         | Ended         
|                                     |  | June 30
, 2003 | June 30, 2002 | June 30, 2003 | June 30
, 2002
|                                     |  |                |               |               |               
|Average Interest Earning Assets      |  | $ 172,805      | $ 194,151     | $ 172,584     | $ 197,627     
|                                     |  |                |               |               |               
|Average Yield                        |  | 6.05%          | 6.84%         | 6.13%         | 6.92%         
|                                     |  |                |               |               |               
|                                     |  |                |               |               |               
|Average Interest Bearing Liabilities |  | $ 145,527      | $ 172,811     | $ 139,567     | $ 176,564     
|                                     |  |                |               |               |               
|Average Cost                         |  | 1.45%          | 2.60%         | 1.70%         | 2.87%         
|                                     |  |                |               |               |               
|                                     |  |                |               |               |               
|Interest Spread                      |  | 4.60%          | 4.24%         | 4.43%         | 4.06%         
|                                     |  |                |               |               |               
|Interest Margin                      |  | 4.83%          | 4.53%         | 4.69%         | 4.36%         
|                                     |  |                |               |               |               



12



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Provision for Loan Losses



Guaranty recorded a provision of $979,000 and $25,000 for the three months ended June 30, 2003 and 2002, respectively. During the
second quarter of 2003, a $1.025 million charge-off was realized as the consequence of substantial fraudulent activity by one
commercial borrower. The loss was due to fraudulent activities related to cash and financial management by the borrower which caused
the borrower to be insolvent. The loan held by Guaranty was secured by equipment, inventory, receivables and marketable securities.
The remaining portion of the increased provision is related to a separate commercial credit currently in workout stage. The
combination of these two factors resulted in an increased provision to the allowance for loan losses in the amount of $949,000. This
provision negatively impacted after-tax net income for the second quarter of 2003 by $626,000. The Companys allowance for loan
losses currently equals 1.38% of the loan portfolio. The allowance for loan losses is maintained at a level considered by management
to be adequate to absorb future loan losses currently inherent in the loan portfolio. Management believes that the allowance for
loan losses is adequate to cover loan losses inherent in the loan portfolio at June 30, 2003, and that loans classified as special
mention, substandard, doubtful and loss have been adequately reserved. Although management believes that it uses the best
information available to make such determinations, future adjustments to the allowance for loan losses may be necessary, and net
income could be significantly affected, if circumstances differ substantially from assumptions used in making the initial
determinations.



Guaranty charged-off $1.0 million in loans during the second quarter of 2003. At June 30, 2003, the Company had $89,000 of loans
that were 90 days or more past due and still accruing interest, compared to $832,000 at June 30, 2002. Loans totaling $1.6 million
were considered to be non-accrual as of June 30, 2003, compared to zero as of June 30, 2002. The increase in the non-accrual balance
represents two loans which are in various stages of workout.



Non-interest Income



Non-interest income was $796,000 for the three months
ended June 30, 2003, compared to $545,000 for the same period a year ago.  This change was
primarily due to increased mortgage banking income, which amounted to $441,000 for the
quarter ended June 30, 2003, compared to $153,000 for the same period a year ago.



Fees on deposit accounts decreased to $166,000 for the most recent quarter compared to $189,000
for the same period a year ago, due to the elimination of certain deposit related charges for the benefit of customers.  Guaranty did not realize any investment sales commissions for the quarter ended June 30
, 2003, compared to $38,000 for the quarter ended June 30, 2002, due to reduced sales volume, as the investment sales
function was undergoing a management realignment during the first half of 2003.



Non-interest Expense



Non-interest expense was $2.2 million for the quarter ended June 30, 2003, a $115,000 increase over the amount reported for the same period last year.  Non interest
expense was negatively impacted during the second quarter of 2003 by the accelerated amortization of $80,000 of expenses associated with Guaranty Capital Trusts Trust Preferred securities.  In the first quarter of 2003, Guarantys Board of Directors made the decision to call the Trust Preferred securities effective May 19, 2003.  In addition, personnel expense increased $48,000 as the result of increased commissions relating to mortgage banking activity.



Income Tax Expense



Guaranty recognized an
income tax benefit of $107,000 for the three months ended June 30, 2003, compared to income tax expense of $193,000 for the same period
in 2002.  The net decrease in income tax expense between periods was a result of fluctuations in the level of taxable income. Guarantys effective tax rate is lower than the standard corporate tax rate of 34% due to non-taxable income from bank owned insurance.



13



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Liquidity and Capital Resources



Liquidity is the ability to meet present and future financial obligations either through the sale of existing assets or through the acquisition of additional funds through asset and liability management.  Guarantys primary sources of funds are deposits, borrowings and amortization, prepayments and maturities of outstanding loans.  While scheduled payments from the amortization of loans 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 through its borrowings.



Guaranty uses its sources of funds primarily to meet its on-going operating expenses, to pay deposit withdrawals and to fund loan commitments.  During the most recent quarter, net loans increased by approximately $1.9 million and certificates of deposit declined by approximately $2.2 million.  These decreases were a result of strategic decisions.  Guaranty has been very targeted in its lending approach and has desired to reduce its funding reliance on certificates of deposit.  At June 30
, 2003, total approved loan commitments outstanding were approximately $13.5 million.  At the same date, commitments under unused lines of credit were approximately $53.3 million.  Certificates of deposit scheduled to mature in one year or less at June 30
, 2003, were $48.3 million.  Management believes that a significant portion of maturing deposits will remain with Guaranty.  If these certificates of deposit do not remain with Guaranty, it may have to seek other sources of funding that may be at higher rates or reduce assets.



The redemption of the trust preferred securities in the second quarter of 2003 negatively impacted Guarantys regulatory capital ratios, although the Bank and Guaranty remain well-capitalized.  At June 30
, 2003, regulatory capital was in excess of amounts required by Federal Reserve regulations to be considered well capitalized as shown in the following table  for Guaranty Bank:



|                          |  | Actual Percentage |  |  | Percent Required |  | Excess Percentage
|------------------------- |  | ----------------- |  |  | ---------------- |  | -----------------
|Leverage Ratio            |  | 10.07%            |  |  | 4.00%            |  | 6.07%            
|                          |  |                   |  |  |                  |  |                  
|Tier 1 Risk Based Capital |  | 12.12%            |  |  | 4.00%            |  | 8.12%            
|                          |  |                   |  |  |                  |  |                  
|Total Risk Based Capital  |  | 13.37%            |  |  | 8.00%            |  | 5.37%            





Contractual Obligations



The following table summarizes Guarantys
contractual cash obligations and commercial commitments, including maturing certificates of deposit, as of June 30
, 2003 and the effect such obligations may have on liquidity and cash flows in future periods.





|Contractual Obligations              
|-------------------------------------
|                                     
|(Dollars in thousands)               
|Certificate of deposit maturities (1)
|Undisbursed credit lines             
|Commitments to extend credit         
|Standby letters of credit            
|Total obligations                    



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



14



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Regulatory Issues



The Written Agreement with the Federal Reserve Bank and the Bureau of Financial Institutions of the Commonwealth of Virginia related to various operating policies and procedures dated October 26, 2000, was terminated effective October 18, 2002.





Critical Accounting Policies, Estimates and Judgments

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



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





Forward Looking Statements



Certain statements in this quarterly report on
Form 10-QSB may include forward-looking statements within the meaning
of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the
Securities Exchange Act of 1934, as amended.  These forward-looking statements
 are generally identified by the use of words such as believe, expect, anticipate, should, planned, estimated, and potential.  These statements are based on Guarantys current expectations.  A variety of factors could cause Guarantys actual results to differ materially from the anticipated results or other expectations expressed in such forward-looking statements.  The risks and uncertainties that may affect the operations, performance, development, and results of Guarantys business include interest rate movements, competition from both financial and
non-financial institutions, the timing and occurrence (or nonoccurrence) of transactions and events that
may be subject to circumstances beyond Guarantys control, and general economic conditions.

15



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ITEM 3.  Controls and Procedures



Disclosure Controls and Procedures



The Company maintains disclosure controls and procedures that are designed to provide assurance that information required to be disclosed by the Company in the reports that it files or submits under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods required by the Securities and Exchange Commission.  As of the end of the period covered
 by this report, an evaluation of the effectiveness of the design and operating of the Companys disclosure controls and procedures was carried out under the supervision and with the participation of management, including the Companys Chief Executive Officer and Chief Financial Officer.  Based on and as of the date of such evaluation, the aforementioned officers concluded that the Companys disclosure controls and procedures were effective.

16



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Part II.  Other Information



Item 1

Legal Proceedings

Not Applicable



Item 2

Changes in Securities and Use of Proceeds

Not Applicable



Item 3

Defaults Upon Senior Securities

Not Applicable



Item 4

Submission of Matters to a Vote of Security Holders

The Company held its
Annual Meeting of Shareholders on April 17, 2003 in Keswick, Virginia.  The shareholders were asked to vote on the election of three directors.



The votes cast for or withheld for the election of the directors were as follows:

|NAME               | FOR       | WITHHELD
|------------------ | --------- | --------
|                   |           |         
|Douglas E. Caton   | 1,798,308 | 42,777  
|John R. Metz       | 1,804,808 | 36,277  
|James R. Sipe, Jr. | 1,822,145 | 18,940  



Item 5

Other Information

Not Applicable



Item 6

(a)

Exhibits



31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32

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



(b)

Reports on Form 8-K

The Company filed a Current Report on Form 8-K with the Securities and Exchange Commission on April 24, 2003.  The Form 8-K reported Items 7 and 12 (under Item 9) and attached as an exhibit and incorporated by reference a press release that reported the Companys financial results for the quarter ended March 31, 2003.



17



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SIGNATURES



In accordance with the requirements 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:  August 14, 2003

By:

/s/ William E. Doyle, Jr.



William E. Doyle, Jr.

President and Chief Executive Officer







Date:  August 14, 2003

By:

/s/ Tara Y. Harrison



Tara Y. Harrison

Vice President and Chief Financial Officer

18



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EXHIBIT INDEX





Exhibit No.

Description



31.1

Certification of Chief Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



31.2

Certification of Chief Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.



32

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



19