GS Financial (GSLA) 10-Q 2006 Q2 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, DC 20549

FORM 10-Q

(Mark One)

QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the quarterly period ended June 30, 2006

OR

TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES

EXCHANGE ACT OF 1934

For the transition period from to

Commission file number: 0-22269

GS FINANCIAL CORP.

(Exact Name of Registrant as Specified in Its Charter)

Louisiana	72-1341014
(State or Other Jurisdiction of Incorporation or Organization)	(I.R.S. Employer Identification No.)
3798 Veterans Blvd.
Metairie, Louisiana	70002
(Address of Principal Executive Offices)	(Zip Code)

(504) 457-6220

(Registrant’s Telephone Number, Including Area Code)

Not Applicable

(Former name, former address or former fiscal year if changed since last report)

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 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 o

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer. See definition of “accelerated filer and large accelerated filer” in Rule 12b-2 of the Exchange Act. (Check one):

oLarge accelerated filer                   oAccelerated filer                    xNon-accelerated filer

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).     Yes o          No x

Indicate the number of shares outstanding of each of the issuer’s classes of common stock, as of the latest practicable date: As of August 11, 2006, 1,279,806 shares of the Registrant’s common stock were outstanding.

GS FINANCIAL CORP.

TABLE OF CONTENTS
Page
PART I - FINANCIAL INFORMATION
	Item 1	Financial Statements
				Consolidated Statements of Financial Condition	1
				Consolidated Statements of Income	2
				Consolidated Statements of Changes in Stockholders’ Equity	3
				Consolidated Statements of Cash Flows	4
				Notes to Consolidated Financial Statements	5
				Selected Consolidated Financial Data	7
	Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations			8
	Item 3	Quantitative and Qualitative Disclosures about Market Risk			19
	Item 4	Controls and Procedures			20
PART II - OTHER INFORMATION
	Item 1		Legal Proceedings		20
	Item 1a		Risk Factors		20
	Item 2		Unregistered Sales of Equity Securities and use of proceeds		20
	Item 3		Defaults Upon Senior Securities		20
	Item 4		Submission of Matters to a Vote of Security Holders		20
	Item 5		Other Information		20
	Item 6		Exhibits		21
SIGNATURES EXHIBIT INDEX

PART I - FINANCIAL INFORMATION

ITEM 1 - FINANCIAL STATEMENTS

GS Financial Corp.
Condensed Consolidated Statements of Financial Condition
($ in thousands)	6/30/2006 (Unaudited)			12/31/2005 (Audited)
ASSETS
Cash and Cash Equivalents
Cash & Amounts Due from Depository Institutions	$	2,130		$	3,040
Interest-Bearing Deposits from Other Banks		12,208			4,515
Federal Funds Sold		1,885			15,000
Total Cash and Cash Equivalents		16,223			22,555
Securities Available-for-Sale, at Fair Value		64,555			77,344
Loans, Net		84,278			69,657
Accrued Interest Receivable		1,726			1,627
Premises & Equipment, Net		2,297			2,257
Stock in Federal Home Loan Bank, at Cost		1,345			1,833
Foreclosed Assets		-			-
Real Estate Held-for-Investment, Net		471			478
Other Assets		1,846			1,863
Total Assets	$	172,741		$	177,614
LIABILITIES
Deposits
Interest-Bearing Deposits	$	120,803		$	116,798
Noninterest-Bearing Deposits		2,155			2,195
Total Deposits		122,958			118,993
FHLB Advances		23,615			32,106
Other Liabilities		702			1,108
Total Liabilities		147,275			152,207
STOCKHOLDERS' EQUITY
Preferred Stock - $.01 Par Value	$	-		$	-
Authorized - 5,000,000 shares
Issued - 0 shares
Common Stock - $.01 Par Value		34			34
Authorized - 20,000,000 shares
Issued - 3,438,500 shares
Additional Paid-in Capital		34,631			34,565
Unearned ESOP Stock		(120	)		(239	)
Unearned RRP Trust Stock		(698	)		(698	)
Treasury Stock (2,158,694 Shares at June 30, 2006 and 2,154,469 Shares at December 31, 2005)		(32,264	)		(32,193	)
Retained Earnings		24,534			24,136
Accumulated Other Comprehensive Loss		(651	)		(198	)
Total Stockholders' Equity		25,466			25,407
Total Liabilities & Stockholders' Equity	$	172,741		$	177,614
The accompanying notes are an integral part of these financial statements.

1

GS Financial Corp.
Consolidated Statements of Income
(Unaudited)
	For the Three Months Ended June 30,		For the Six Months Ended June 30,
($ in thousands, except per share data)	2006	2005	2006	2005
INTEREST AND DIVIDEND INCOME
Loans, Including Fees	$ 1,661	$ 1,685	$ 3,234	$ 3,523
Investment Securities	964	891	1,867	1,615
Other Interest Income	157	71	393	172
Total Interest and Dividend Income	2,782	2,647	5,494	5,310
INTEREST EXPENSE
Deposits	850	738	1,643	1,453
Advances from Federal Home Loan Bank	320	482	701	990
Interest Expense	1,170	1,220	2,344	2,443
NET INTEREST INCOME	1,612	1,427	3,150	2,867
PROVISION FOR LOAN LOSSES	-	-	-	-
NET INTEREST INCOME AFTER PROVISION FOR LOAN LOSSES	1,612	1,427	3,150	2,867
NON-INTEREST EXPENSE
Salaries and Employee Benefits	784	662	1,510	1,732
Occupancy Expense	127	109	249	216
Other Expenses	276	300	560	640
Total Non-Interest Expense	1,187	1,071	2,319	2,588
NET INCOME BEFORE NON-INTEREST INCOME AND INCOME TAXES	425	356	831	279
NON-INTEREST (LOSS) INCOME
Net (Loss) on Available-for-Sale Securities	(76)	-	(92)	(18)
Other Income	23	24	47	50
Total Non-Interest (Loss) Income	(53)	24	(45)	32
INCOME BEFORE INCOME TAXES	372	380	786	311
INCOME TAX EXPENSE	129	109	267	139
NET INCOME	$ 243	$ 271	$ 519	$ 172
EARNINGS PER SHARE
Basic	$ 0.20	$ 0.23	$ 0.43	$ 0.14
Diluted	$ 0.20	$ 0.23	$ 0.43	$ 0.14
The accompanying notes are an integral part of these financial statements.

2

GS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CHANGES IN STOCKHOLDERS' EQUITY
(Unaudited)
($ in thousands)		Common Stock		Additional Paid-in Capital		Treasury Stock			Unearned ESOP Stock			Unearned RRP Trust Stock			Retained Earnings			Accumulated Other Comprehensive Income (Loss)			Total Stockholders' Equity
Balances At December 31, 2004	$	34	$	34,425	$	(32,119	)	$	(521	)	$	(865	)	$	28,286		$	(296	)	$	28,944
Comprehensive Income:
Net Income		-		-		-			-			-			172			-			172
Other Comprehensive Income (Loss)
Unrealized net holding losses on securities, net of taxes		-		-		-			-			-			-			(233	)		(233	)
Total Comprehensive Income (Loss)		-		-		-			-			-			172			(233	)		(61	)
Distribution of RRP Stock		-		1		-			-			4			-			-			5
ESOP Compensation Earned				112		-			141			-			-			-			253
Purchase of Treasury Stock		-		-		(74	)		-			-			-			-			(74	)
Dividends Declared		-		-		-			-			-			(242	)		-			(242	)
Balances at June 30, 2005	$	34	$	34,538	$	(32,193	)	$	(380	)	$	(861	)	$	28,216		$	(529	)	$	28,825
Balances At December 31, 2005	$	34	$	34,565	$	(32,193	)	$	(239	)	$	(698	)	$	24,257		$	(198	)	$	25,407
Comprehensive Income:
Net Income		-		-		-			-			-			519			-			519
Other Comprehensive Income (Loss)
Unrealized net holding losses on securities, net of taxes		-		-		-			-			-			-			(453	)		(453	)
Total Comprehensive Income (Loss)		-		-		-			-			-			519			(453	)		66
Distribution of RRP Stock		-		-		-			-			-			-			-			-
ESOP Compensation Earned		-		66		-			119			-			-			-			185
Purchase of Treasury Stock		-		-		(71	)		-			-			-			-			(71	)
Dividends Declared		-		-		-			-			-			(242	)		-			(242	)
Balances at June 30, 2006	$	34	$	34,631	$	(32,264	)	$	(120	)	$	(698	)	$	24,534		$	(651	)	$	25,466
The accompanying notes are an integral part of these financial statements.

3

GS FINANCIAL CORP.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)
	Six Months Ended June 30,
($ in thousands)	2006			2005
CASH FLOWS FROM OPERATING ACTIVITIES
Net Income	$	519		$	172
Adjustments to Reconcile Net Income to Net Cash Provided by Operating Activities
Depreciation		83			77
Discount Accretion Net of Premium Amortization		(20	)		(32	)
Provision for Loan Losses		-			-
Non-Cash Dividend - FHLB Stock		(20	)		(39	)
Net Loan Fees		2			1
Mutual Fund Dividends Reinvested		-			(143	)
ESOP Shares Expense		185			253
RRP Expense		63			57
Loss on Disposal and Write-down of Property and Equipment		-			4
Loss on Sale of Investments		92			18
Deferred Income Tax Provision		267			112
Changes in Operating Assets and Liabilities
Increase in Accrued Interest Receivable		(99	)		(157	)
Increase in Prepaid Income Taxes		(267	)		(16	)
Increase in Other Assets		(55	)		(23	)
Increase (Decrease) in Accrued Interest - FHLB Advances		29			(19	)
Decrease in Accrued Income Tax		-			(65	)
Increase in Other Liabilities		(335	)		268
Net Cash Provided by Operating Activities		444			468
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from Maturities of Investment Securities		3,279			2,804
Proceeds from Sales of Investment Securities		-			19,331
Purchases of Investment Securities		(19,162	)		(12,077	)
Investment in Mutual Funds, Net		28,031			(104	)
Loan Originations and Principal Collections, Net		(14,382	)		4,099
Capitalized REO Expenses		-			(4	)
Purchases of Premises and Equipment		(116	)		(109	)
Proceeds from Disposal of Property and Equipment		-			1
Proceeds from Sale of FHLB Stock		508			-
Net Cash (Used in) Provided by Investing Activities		(1,842	)		13,941
CASH FLOWS FROM FINANCING ACTIVITIES
Purchase of Treasury Stock		(71	)		(74	)
Decrease in Advances from Federal Home Loan Bank		(8,490	)		(3,872	)
Payment of Cash Stock Dividends		(242	)		(242	)
Increase (Decrease) in Deposits		3,965			(6,863	)
Decrease in Deposits for Escrows		(96	)		(46	)
Net Cash Used In Financing Activities		(4,934	)		(11,097	)
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS		(6,332	)		3,312
CASH AND CASH EQUIVALENTS - Beginning of Period		22,555			7,024
CASH AND CASH EQUIVALENTS - End of Period	$	16,223		$	10,336
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
Cash Paid During the Period For:
Interest Expense	$	2,373		$	2,424
Income Taxes		-			109
Loans Transferred to Foreclosed Real Estate During the Period		-			155
The accompanying notes are an integral part of these financial statements.

4

GS FINANCIAL CORP.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

NOTE 1 - BASIS OF PRESENTATION

The consolidated financial statements include the accounts of GS Financial Corp. (the “Company”) and its subsidiary, Guaranty Savings Bank (the “Bank”). All significant intercompany balances and transactions have been eliminated. Certain financial information for prior periods has been reclassified to conform with the current presentation.

In preparing the consolidated financial statements, the Company is required to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. Actual results could differ from those estimates. The consolidated financial statements reflect all adjustments which are, in the opinion of management, necessary for a fair statement of the financial condition, results of operations, changes in stockholders’ equity and cash flows for the interim periods presented. These adjustments are of a normal recurring nature and include appropriate estimated provisions.

Pursuant to rules and regulations of the Securities and Exchange Commission, certain financial information and disclosures have been condensed or omitted in preparing the consolidated financial statements presented in this quarterly report on Form 10-Q. The results of operations for the three and six month periods ended June 30, 2006 are not necessarily indicative of the results to be expected for the year ending December 31, 2006. These unaudited financial statements should be read in conjunction with the Company’s 2005 annual report on Form 10-K.

NOTE 2 - EARNINGS PER SHARE

Earnings per share are computed using the weighted average number of shares outstanding as prescribed in Statement of Financial Accounting Standard (“SFAS”) 128. The components used in this computation were as follows:

	Three Months Ended June 30				Six Months Ended June 30
($ in thousands, except per share data)	2006		2005		2006		2005
Numerator:
Net Income	$	243	$	271	$	519	$	172
Effect of Dilutive Securities		-		-		-		-
Numerator for Diluted Earnings Per Share	$	243	$	271	$	519	$	172
Denominator
Weighted-Average Shares Outstanding		1,214,190		1,181,065		1,215,707		1,181,834
Effect of Potentially Dilutive Securities and Contingently Issuable Shares		5,839		12,353		-		15,802
Denominator for Diluted Earnings Per Share		1,220,029		1,193,418		1,215,707		1,197,636
Earnings Per Share
Basic	$	0.20	$	0.23	$	0.43	$	0.14
Diluted		0.20		0.23		0.43		0.14
Cash Dividends Per Share	$	0.10	$	0.20	$	0.20	$	0.20

NOTE 3 - EMPLOYEE STOCK OWNERSHIP PLAN

The GS Financial Employee Stock Ownership Plan (“ESOP”) purchased 275,080 shares of the Company’s common stock on April 1, 1997 financed by a loan from the Company. The loan is secured by those shares not yet allocated to plan participants. At June 30, 2006, there were 23,922 unallocated shares and the balance of the loan was $140,000. The Bank bears the cost of the ESOP as compensation expense, which is based on the principal and interest payments on the corresponding debt as well as the market value of the stock. Compensation expense related to the ESOP was $99,000 and $192,000 for the three and six month periods ended June 30, 2006, respectively, compared to $112,000 and $225,000 for the same time periods ended June 30, 2005.

5

NOTE 4 - STOCK OPTION PLAN

On October 15, 1997, the stockholders approved the adoption of the GS Financial Corp. 1997 Stock Option Plan for the benefit of directors, officers and other key employees. Under this plan, 343,850 shares of common stock have been reserved for issuance pursuant to the exercise of stock options, of which 275,076 shares have become fully vested and exerciseable. To date no options have been exercised.

The Company accounts for the plan under the recognition and measurement principles of APB Opinion No. 25, Accounting for Stock Issued to Employees, and related Interpretations. Under this Opinion, the Company recognizes no compensation expense with respect to fixed awards of stock options. All options granted under the plan have an exercise price equal to the market value of the underlying common stock on the date of the grant. As such, the options have no intrinsic value on the award date, which is also the measurement date for compensation expense.

SFAS No. 123, Accounting for Stock-Based Compensation, as amended by SFAS No. 148, established a fair value-based method of accounting for stock-based compensation. As provided for in SFAS No. 123, the Company has elected to continue to follow APB Opinion No. 25 and related interpretations to measure and recognize stock-based compensation expense. Because all of the options that have been granted vested prior to 2005, net income and earnings per share for the three and six month periods ended June 30, 2006 and 2005 would not have been affected if the Company had applied the fair value recognition provisions of SFAS No. 123,to measure and recognize stock based compensation expense.

NOTE 5 - RECOGNITION AND RETENTION PLAN

On October 15, 1997 the Company established the Recognition and Retention Plan and Trust (“RRP”) as an incentive to retain personnel of experience and ability in key positions. Stockholders approved a total of 137,540 shares of stock to be granted pursuant to the RRP. The Company acquired a total of 137,500 shares of common stock for issuance under the RRP. The Company is accruing this expense over the ten-year vesting period based on the price of the stock ($12.50/share) when the plan was modified in September, 1998. As of June 30, 2006 of the 129,159 shares awarded, 6,627 shares have been forfeited due to termination of employment or service as a director and 99,580 had been earned and issued. Compensation expense related to the RRP was $32,000 and $63,000 for the three and six month periods ended June 30, 2006, respectively, compared to $24,000 and $33,000 for the same time periods ended June 30, 2005.

6

GS FINANCIAL CORP.
SELECTED CONSOLIDATED FINANCIAL DATA
(Unaudited)
	Three Months Ended									Six Months Ended
($ in thousands, except per share data)	June 30, 2006			March 31, 2006			June 30, 2005			June 30, 2006			June 30, 2005
SUMMARY OF INCOME
Interest Income	$	2,782		$	2,712		$	2,647		$	5,494		$	5,310
Interest Expense		1,170			1,173			1,220			2,344			2,443
Net Interest Income		1,612			1,539			1,427			3,150			2,867
Provision for Loan Losses		-			-			-			-			-
Net Interest Income After Provision for Loan Losses		1,612			1,539			1,427			3,150			2,867
Non-Interest (Loss) Income		(53	)		7			24			(45	)		32
Non-Interest Expense		1,187			1,132			1,071			2,319			2,588
Net Income Before Taxes		372			414			380			786			311
Income Tax Expense		129			138			109			267			139
Net Income		243			276			271			519			172
SELECTED BALANCE SHEET DATA
Total Assets	$	172,741		$	176,758		$	189,403
Loans Receivable, Net		84,278			74,802			87,903
Investment Securities		64,555			78,466			84,406
Deposit Accounts		122,958			125,163			123,860
Borrowings		23,615			25,250			35,817
Stockholders' Equity		25,466			25,419			28,825
SELECTED AVERAGE BALANCES
Total Assets	$	175,107		$	177,854		$	189,725		$	176,492		$	192,229
Loans Receivable, Net		80,461			70,278			89,617			75,354			90,641
Investment Securities		73,985			77,406			85,190			75,695			83,899
Deposit Accounts		124,163			121,369			123,189			122,768			124,898
Borrowings		24,183			29,516			36,504			26,872			37,468
Stockholders’ Equity		25,438			25,456			28,980			25,446			28,890
KEY RATIOS (1)
Return on average assets		0.56	%		0.62	%		0.57	%		0.59	%		0.18	%
Return on average shareholders' equity		3.82	%		4.34	%		3.74	%		4.08	%		1.19	%
Net Interest Margin		3.80	%		3.49	%		3.09	%		3.65	%		3.06	%
Average loans to average deposits		68.54	%		57.90	%		72.75	%		61.99	%		72.57	%
Average Interest-earning assets to interest-bearing liabilities		117.96	%		114.68	%		116.36	%		117.79	%		116.02	%
Efficiency ratio		73.64	%		73.55	%		73.81	%		73.62	%		89.27	%
Non-interest expense to average assets		2.72	%		2.55	%		2.26	%		2.65	%		2.69	%
Allowance for loan losses to total loans		6.35	%		7.10	%		1.04	%
Stockholders' equity to total assets		14.74	%		14.38	%		15.22	%
COMMON SHARE DATA
Earnings (Loss) Per Share
Basic	$	0.20		$	0.23		$	0.23		$	0.43		$	0.14
Diluted		0.20			0.23			0.23			0.43			0.14
Dividends Paid Per Share		0.10			0.10			0.10			0.20			0.20
Book Value Per Share		20.97			20.92			21.87
Average Shares Outstanding
Basic		1,214,190			1,215,069			1,156,784			1,215,707			1,181,834
Diluted		1,220,029			1,215,069			1,184,520			1,215,707			1,210,629

(1)  Amounts are annualized where appropriate

7

ITEM 2 - MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS

The purpose of this discussion and analysis is to provide information necessary to gain an understanding of the financial condition, changes in financial condition and results of operations of GS Financial Corp. (“GS Financial” or the “Company”), and its subsidiary during the first and second quarters of 2006 and 2005. Virtually all of the Company’s operations are dependent on the operations of its subsidiary, Guaranty Savings Bank (“Guaranty” or the “Bank”). Prior to June 15, 2006 the subsidiary was known as Guaranty Savings and Homestead Association. The subsidiary had its name legally changed but remains a state-charted savings association. This discussion is presented to highlight and supplement information presented elsewhere in this quarterly report on Form 10-Q, particularly the consolidated financial statements and related notes in Item 1. This discussion and analysis should be read in conjunction with accompanying tables and the Company’s 2005 annual report on Form 10-K.

FORWARD-LOOKING STATEMENTS

In addition to the historical information, this discussion includes certain forward-looking statements as that term is defined by the Private Securities Litigation Reform Act of 1995. Such statements include, but may not be limited to comments regarding (a) the potential for earnings volatility from changes in the estimated allowance for loan losses over time, (b) the expected growth rate of the loan portfolio, (c) future changes in the mix of deposits, (d) the results of net interest income simulations run by the Company to measure interest rate sensitivity, (e) the performance of Guaranty’s net interest income and net interest margin assuming certain future conditions, and (f) changes or trends in certain expense levels.

Forward-looking statements are based on numerous assumptions, certain of which may be referred to specifically in connection with a particular statement. Some of the more important assumptions include:

· expectations about overall economic strength and the performance of the economies in Guaranty’s market area,

· expectations about the movement of interest rates, including actions that may be taken by the Federal Reserve Board in response to changing economic conditions,

· reliance on existing or anticipated changes in laws or regulations affecting the activities of the banking industry and other financial service providers

· expectations regarding the nature and level of competition, changes in customer behavior and preferences, and Guaranty’s ability to execute its plans to respond effectively, and

· expectations regarding the ability of Guaranty’s market area to recover economically from the damages caused by Hurricane Katrina.

Because it is uncertain whether future conditions and events will confirm these assumptions, there is a risk that the Company’s future results will differ materially from what is stated or implied by such forward-looking statements. The Company cautions the reader to consider this risk.

The Company undertakes no obligation to update any forward-looking statement included in this quarterly report, whether as a result of new information, future events or developments, or for any other reason.

FINANCIAL CONDITION

LOANS AND ALLOWANCE FOR LOAN LOSSES

Total loans increased $14.6 million, or 19.4%, from year-end 2005 to the end of the second quarter of 2006. Average loans for the second quarter of 2006 were $86.2 million, down $3.4 million (3.9%) compared to the second quarter of 2005. Year-to-date average loans at June 30, 2006 totaled $81.1 million, down $9.5 million (10.5%) from the same time period in 2005. Table 1, which is based on regulatory reporting codes, shows loan balances at June 30, 2006 and at the end of the four prior quarters and average loans outstanding during each quarter.

8

TABLE 1. COMPOSITION OF LOAN PORTFOLIO
	2006				2005
($ in thousands)		June 30		March 31		December 31		September 30		June 30
Real estate loans - residential	$	40,862	$	37,829	$	36,800	$	38,502	$	39,266
Real estate loans - commercial and other		32,163		27,902		24,794		30,433		32,926
Real estate loans - construction		14,259		12,120		11,282		13,534		13,836
Consumer loans		545		737		669		562		646
Commercial business loans		2,161		1,779		1,819		2,784		2,142
Total Loans	$	89,990	$	80,367	$	75,364	$	85,815	$	88,816
Average Total Loans During Period	$	86,165	$	75,991	$	80,613	$	86,978	$	89,617

Over the past several years the Company has been able to develop significant new business in the growing commercial lending market including loans secured by commercial real estate and multi-family residential property. At June 30, 2006, these loans made up approximately 43% of the entire loan portfolio. During the last quarter of 2004 and extending into 2005, management performed a review of the Company’s underwriting practices in this area. This review was initiated as a result of concerns over the portion of the portfolio that was delinquent more than 90 days and the number of relatively large loan account balances outstanding with certain individual borrowers. As a result of its review, the Company updated and strengthened its commercial loan policies and procedures. While this review was being performed, the number of commercial loan originations decreased. The decrease in new loan originations in 2005 also reflects the slowdown in business activity in the fourth quarter of 2005 as well as reduced new originations in general during 2005 as the Bank completed its search for a new President. The Bank recently hired two new commercial loan officers and a new mortgage lender. The loan growth in the first two quarters of 2006 reflects the beginning of an economic recovery in the Bank’s market area subsequent to Hurricane Katrina and the efforts of the Bank’s new lenders.

All loans carry a degree of credit risk. Management’s evaluation of this risk ultimately is reflected in the estimate of probable loan losses that is reported in the Company’s financial statements as the allowance for loan losses. Changes in this ongoing evaluation over time are reflected in the provision for loan losses charged to operating expense. At June 30, 2006 the allowance for loan losses was $5.7 million, or 6.3%, of total loans. Table 2 presents an analysis of the activity in the allowance for loan losses for the past five quarters.

TABLE 2. SUMMARY OF ACTIVITY IN THE ALLOWANCE FOR LOAN LOSSES
	2006						2005
($ in thousands)		Second Quarter			First Quarter			Fourth Quarter			Third Quarter			Second Quarter
Beginning Balance	$	5,713		$	5,713		$	920		$	920		$	920
Provision for Losses		-			-			4,793			-			-
Loans Charged Off		-			-			-			-			-
Recoveries of loans previously charged off		-			-			-			-			-
Ending Balance		5,713		$	5,713		$	5,713		$	920		$	920
Ratios
Charge-offs to average loans		0.00	%		0.00	%		0.00	%		0.00	%		0.00	%
Provision for loan losses to charge-offs		n/a			n/a			n/a			n/a			n/a
Allowance for loan losses to charge-offs (annualized)		n/a			n/a			n/a			n/a			n/a
Allowance for loan losses to ending loans		6.35	%		7.11	%		7.58	%		1.07	%		1.04	%

Tables 3 and 4 set forth the Company’s delinquent loans and nonperforming assets at June 30, 2006 and at the end of the preceding four quarters. The balances presented in Table 3 are total principal balances outstanding on the loans rather than the actual principal past due. Nonperforming assets consist of loans on non-accrual status and foreclosed assets. There were no loans 90 days delinquent and still accruing interest at the end of any of the five quarters presented.

9

TABLE 3. DELINQUENT LOANS
	2006						2005
($ in thousands)		June 30			March 31			December 31			September 30			June 30
30-89 Days	$	1,699		$	3,052		$	9,296		$	8,668		$	5,205
90+ Days		362			1,436			931			1,773			559
Total	$	2,061		$	4,488		$	10,227		$	10,441		$	5,764
Ratios
Loans delinquent 90 days to total loans		0.40	%		1.79	%		1.24	%		2.07	%		0.63	%
Total delinquent loans to total loans		2.29	%		5.58	%		13.57	%		12.17	%		6.49	%
Allowance for loan losses to 90+ day delinquent loans		1,578.17	%		397.84	%		613.75	%		51.89	%		164.58	%
Allowance for loan losses to total delinquent loans		277.20	%		127.29	%		55.87	%		8.81	%		15.96	%

TABLE 4. NONPERFORMING ASSETS
	2006						2005
($ in thousands)		June 30			March 31			December 31			September 30			June 30
Loans accounted for on a nonaccrual basis	$	362		$	1,436		$	3,582		$	187		$	559
Foreclosed assets		-			-			-			159			159
Total nonperforming assets	$	362		$	1,436		$	3,582		$	346		$	718
Ratios
Nonperforming assets to loans plus foreclosed assets		0.40	%		1.79	%		4.75	%		0.40	%		0.81	%
Nonperforming assets to total assets		0.21	%		0.81	%		1.87	%		0.19	%		0.38	%
Allowance for loan losses to nonperforming assets		1,578.17	%		397.84	%		159.52	%		265.90	%		128.13	%

INVESTMENT IN SECURITIES

At June 30, 2006, the Company’s total securities available-for-sale were $64.6 million, compared to $77.3 million at December 31, 2005 and $84.4 million at June 30, 2005. Mutual fund investments made up 32.3% of the portfolio at June 30, 2006, compared to 63.7% at year-end 2005 and 58.7% at June 30, 2005. At June 30, 2006, collateralized mortgage obligations made up 29.3% of the portfolio, compared to 29.1% at December 31, 2005 and 34.6% at June 30, 2005. U.S. Agency Securities comprised 30.8% of the investment portfolio at June 30, 2006, compared with 6.4% at December 31, 2005 and 5.9% as of June 30, 2005. During the six month period ended June 30, 2005, the Company sold its entire $19.3 million portfolio of FHLMC stock at a loss of approximately $18,000. During the second quarter of 2006 the Bank sold some of its investments in mutual funds, for the purposes of diversifying its investment portfolio and funding new loans, at a loss of approximately $92,000.

At June 30, 2006, the net unrealized losses on the Company’s entire securities portfolio was $982,000, or 1.50% of amortized cost, compared to net unrealized losses of $300,000, or .39% of amortized cost at December 31, 2005. These losses consist primarily of losses on collateralized mortgage obligations and mortgage backed securities as the rising interest rate environment in 2006 has most adversely affected longer-term investments with fixed coupon payments. Management believes that these losses are temporary in nature and will reverse themselves when interest rates become more favorable for those types of investments.

TABLE 5. COMPOSITION OF INVESTMENT PORTFOLIO
	June 30, 2006				December 31, 2005				June 30, 2005
($ in thousands)		Amortized Cost		Market Value		Amortized Cost		Market Value		Amortized Cost		Market Value
U.S. Treasury Securities	$	500	$	501	$	500	$	506	$	500	$	517
U.S. Agency Securities		19,985		19,836		4,988		4,943		4,988		5,043
Mortgage Backed Securities		4,048		4,097		94		100		124		133
Collateralized Mortgage Obligations		19,611		18,910		22,741		22,496		29,056		29,164
Mutual funds		21,286		21,211		49,320		49,299		50,539		49,549
Total Investments	$	65,430	$	64,555	$	77,643	$	77,344	$	85,207	$	84,406

10

DEPOSITS

At June 30, 2006, deposits were 3.4%, or $4.0 million, above the level at December 31, 2005 and down $902,000, or 0.7% from the level at the end of the second quarter of the previous year. Average deposits totaled $124.2 million in the second quarter of 2006, up $2.8 million (2.3%) from the first quarter of 2006 and up $1.0 million (0.8%) from the second quarter of 2005.

Table 6 presents the composition of average deposits for the quarters ended June 30, 2006, March 31, 2006 and June 30, 2005.

TABLE 6. DEPOSIT COMPOSITION
	Second Quarter 2006				First Quarter 2006				Second Quarter 2005
($ in thousands)		Average Balances	% of Deposits			Average Balances	% of Deposits			Average Balances	% of Deposits
Noninterest bearing demand deposits	$	1,975	1.6	%	$	1,960	1.6	%	$	799	0.6	%
NOW account deposits		17,490	14.1			11,925	9.8			7,738	6.3
Savings deposits		28,704	23.1			31,122	25.6			30,648	24.9
Time deposits		75,994	61.2			76,362	63.0			84,004	68.2
Total	$	124,163	100.0	%	$	121,369	100.0	%	$	123,189	100.0	%

BORROWINGS

At June 30, 2006, the Company’s borrowings from the Federal Home Loan Bank decreased $8.5 million, or 26.5%, from December 31, 2005 and $12.2 million, or 34.1%, from June 30, 2005. Average advances for the second quarter of 2006 were $24.2 million, a decrease of $5.4 million, or 18.4%, from the first quarter of 2006 and a decrease of $12.4 million, or 34.0%, from the prior year’s second quarter. The decreases were due to regularly scheduled principal payments that were not offset by new borrowings because of the Company’s current liquidity position. These balances are expected to be reduced further throughout the remainder of 2006 as there are $6.6 million in scheduled principal payments for the last six months of 2006.

STOCKHOLDERS’ EQUITY AND CAPITAL ADEQUACY

At June 30, 2006, stockholders’ equity totaled $25.5 million, an increase of $59,000 from December 31, 2005. This increase was due to net income of $519,000 and capitalized stock compensation costs of $185,000 being partially offset by an increase in unrealized losses on investment securities of $453,000 and cash dividends paid of $242,000.

Since 1998, the Company has been regularly repurchasing shares of its common stock when shares have been available at prices and amounts deemed prudent by management. Due to the highly capitalized condition of the Company, management believed in the past that these purchases, most of which were at a discount to book value, were an effective way to reduce capital while still enhancing shareholder value. These shares have not been retired and could potentially serve as a source of capital funding should the need arise in the future. Table 7 summarizes the repurchase of the shares of its common stock by year.

TABLE 7. SUMMARY OF STOCK REPURCHASES
Year Ended December 31,	Shares		Cost ($000	)		Average Price Per Share
1998	491,054	$	8,324		$	16.95
1999	299,000		3,653			12.22
2000	679,600		8,590			12.64
2001	305,684		4,612			15.09
2002	142,201		2,516			17.69
2003	216,181		4,109			19.01
2004	16,842		315			18.70
2005	3,907		74			19.06
Six months ended June 30, 2006	4,225		71			17.01
Total Stock Repurchases	2,158,694	$	32,264		$	14.95

11

The ratios in Table 8 indicate that the Bank remained well capitalized for regulatory compliance purposes at June 30, 2006. The regulatory capital ratios of Guaranty Savings Bank exceed the minimum required ratios, and the Bank has been categorized as “well-capitalized” in the most recent notice received from its primary regulatory agency.

TABLE 8. REGULATORY CAPITAL AND CAPITAL RATIOS
		2006		2005
($ in thousands)		June 30			December 31			June 30
Tier 1 regulatory capital	$	24,577		$	23,772		$	27,371
Tier 2 regulatory capital		1,015			905			500
Total regulatory capital	$	25,592		$	24,677		$	27,871
Adjusted total assets	$	171,779		$	176,144		$	188,914
Risk-weighted assets	$	81,877		$	72,399		$	78,007
Ratios
Tier 1 capital to total assets		14.31	%		13.47	%		14.49	%
Tier 1 capital to risk-weighted assets		30.02	%		32.83	%		35.09	%
Total capital to risk-weighted assets		31.26	%		34.08	%		35.73	%
Shareholders' equity to total assets		14.31	%		14.30	%		15.22	%

LIQUIDITY AND CAPITAL RESOURCES

The objective of liquidity management is to ensure that funds are available to meet cash flow requirements of depositors and borrowers, while at the same time meeting the operating, capital and strategic cash flow needs of the Company and the Bank, all in the most cost-effective manner. The Company develops its liquidity management strategies and measures and monitors liquidity risk as part of its overall asset/liability management process, making use of the quantitative modeling tools to project cash flows under a variety of possible scenarios.

On the liability side, liquidity management focuses on growing the base of more stable core deposits at competitive rates, while at the same time ensuring access to economical wholesale funding sources. The sections above on Deposits and Borrowings discuss changes in these liability-funding sources in the first three and six months of 2006.

Liquidity management on the asset side primarily addresses the composition and maturity structure of the loan and investment securities portfolios and their impact on the Company’s ability to generate cash flows from scheduled payments, contractual maturities and prepayments, their use as collateral for borrowings and possible sales on the secondary market.

Cash generated from operations is another important source of funds to meet liquidity needs. The consolidated statements of cash flows present operating cash flows and summarize all significant sources and uses of funds for the first six months of 2006 and 2005. The Company reported net income of $519,000 for the six months ended June 30, 2006, and generated a net cash increase of $445,000 from operations. Certain adjustments are made to net income to reach the level of cash provided by operating activities. Some of these adjustments include non-cash expenses (depreciation, employee compensation made in the form of stock, and deferred tax provisions) and revenues (mutual fund dividends reinvested in principal, accretion of discounts, and dividends received in the form of stock).

In addition, management monitors its liquidity position by tracking certain financial data. Table 9 illustrates some of the factors that the Company uses to measure liquidity. The Company remains very liquid, though some liquidity is being utilized to fund loan growth.

TABLE 9. KEY LIQUIDITY INDICATORS
		2006		2005
($ in thousands)		June 30			December 31			June 30
Cash and cash equivalents	$	16,223		$	22,555		$	10,336
Total loans		89,990			75,364			88,816
Total deposits		122,958			118,993			123,860
Deposits $100,000 and over		21,189			16,301			19,449
Ratios
Total loans to total deposits		73.19	%		63.33	%		71.71	%
Deposits $100,000 and over to total deposits		17.23	%		13.70	%		15.70	%

12

RESULTS OF OPERATIONS

NET INTEREST INCOME

Net interest income for the second quarter of 2006 increased $66,000, or 4.3%, from the first quarter of 2006, despite a decrease of average earning assets of 1.4% between these periods. Second quarter net interest income for 2006 was up $185,000, or 13.0%, on average earning assets that were down 6.6% compared with the second quarter of 2005. The improved margins are primarily the result of the Bank’s asset mix shifting from lower-yielding investments to higher-yielding loans.

During the second quarter of 2006, interest income from earning assets was up $68,000, or 2.5%, from the first quarter of 2006. This increase was due to the Company’s increased investment in loans as well as an increase in market yields on short-term assets. The Company’s average investment in loans was up $10.2 million in the second quarter of 2006 compared to the first quarter of 2006 and average yield decreased 57 basis points, netting to a $88,000 increase in interest income. This increase and an increase of $63,000 in interest income from investments caused by a favorable yield environment was partially offset by a $81,000 decrease in interest income from Federal funds sold and demand deposits caused by a reduction in the balances maintained in these liquid assets.

Second quarter interest income for 2006 was up $134,000, or 3.7%, from the second quarter of 2005. Interest income on loans decreased by $24,000 in the second quarter of 2006 compared to the same period in 2005, with the decrease in average balances causing a $66,000 reduction which was partially offset by $42,000 in income created by increased yields. Increases in income from both investments and liquid assets were caused by significant increases in average rate, which were partially offset by the reductions in average balances.

During the second quarter of 2006, interest expense was down $5,000, or 0.4%, from the first quarter of 2006 and $51,000, or 4.2%, from the second quarter of 2005. While rates on deposit products have increased compared to both prior periods, the decrease in overall interest expense was the result of contractual paydowns on borrowings from the FHLB reducing the related interest expense.

The average cost on interest bearing deposits increased to 2.79% for the second quarter of 2006, from 2.67% in the first quarter of 2006 and 2.41% in the second quarter of 2005. These changes in rates contributed $44,000 and $151,000 of increases in interest expense from the first quarter of 2006 and the second quarter of 2005, respectively. The changes in deposit balances contributed an increase of $12,000 of interest expense from the first quarter of 2006 and a decrease of $40,000 compared to the second quarter of 2005, which combined with the changes in rates resulted in decreases in total expenses for the period.

Average borrowings were down $5.3 million for the second quarter of 2006 compared to the first quarter of 2006, and $12.3 million compared to the second quarter of 2005. These decreases in the average balances accounted for $54,000 and $163,000 in reduced interest expenses for each respective period.

Net interest income for the first six months of 2006 increased $283,000, or 9.9%, from the first six months of 2005 on average earning assets that were $13.5 million (7.2%) lower. Table 12 shows the components of the Company’s net interest margin for the first six months of 2006 and 2005. Net interest margin was 3.65% for the six months ended June 30, 2006 and 3.06% for the prior year’s period. The yield on average earning assets increased 70 basis points and the total interest cost of funding earning assets increased 17 basis points compared to the first six months of 2005.

Interest income from loans in the first six months of 2006 decreased by $289,000 from the same period in 2005. This was caused by a decrease in average balances, as the Bank incurred significant loan paydowns late in 2005 subsequent to Hurricane Katrina. The 27 basis point yield increase was able to offset $93,000 of the decrease caused by loan volume for the six month period ended June 30, 2006. The decrease in interest income from loans was more than offset by the increases in income from investment securities, Federal funds sold and demand deposits, all of which were driven by increases in short-term interest rates.

Interest expense was $100,000 lower for the first six months of 2006 from the first six months of 2005. The average cost of interest bearing deposits increased 40 basis points from 2.34% for the six months ended June 30, 2005 up to 2.74% for the same period in 2006. The average cost of borrowings during the first six months was nearly unchanged, at 5.26% in 2006 compared to 5.28% in 2005. The overall decrease in the first six months of 2006 compared with the same period in 2005 was primarily due to the decrease in outstanding borrowings.

13

TABLE 10. SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
	Second Quarter 2006							First Quarter 2006							Second Quarter 2005
($ in thousands)		Average Balance			Interest	Average Yield/ Cost			Average Balance			Interest	Average Yield/ Cost			Average Balance			Interest	Average Yield/ Cost
ASSETS
INTEREST-EARNING ASSETS
Loans	$	86,175		$	1,661	7.73	%	$	75,991		$	1,573	8.30	%	$	89,617		$	1,685	7.52	%
U.S. Treasury securities		502			11	8.79			505			9	6.82			520			9	7.02
U.S. Agency securities		15,826			200	5.07			6,129			78	5.12			5,022			64	5.08
Mortgage-backed securities		1,952			29	5.96			91			1	6.04			199			1	2.39
Collateralized mortgage obligations		19,810			323	6.54			21,666			304	5.63			29,815			390	5.23
Mutual funds		35,895			401	4.48			49,015			511	4.18			49,634			427	3.44
Total investment in securities		73,985			964	5.23			77,406			903	4.68			85,190			891	4.18
FHLB stock		1,485			18	4.86			1,833			20	4.40			2,464			17	2.74
Federal funds sold and demand deposits		11,023			139	5.06			19,906			217	4.36			7,617			54	2.84
Total interest-earning assets		172,668			2,782	6.46	%		175,136			2,713	6.12	%		184,888			2,647	5.73	%
NONINTEREST-EARNING ASSETS
Other assets		8,152							8,431							5,757
Allowance for loan losses		(5,713	)						(5,713	)						(920	)
Total assets	$	175,107						$	177,854						$	189,725
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW account deposits		17,490			72	1.65	%	$	11,799		$	47	1.59	%	$	7,738		$	24	1.22	%
Savings deposits		28,704			89	1.24			31,122			96	1.24			30,648			95	1.24
Time deposits		75,995			689	3.64			76,362			650	3.41			84,004			619	2.95
Total interest-bearing deposits		122,189			850	2.79			119,283			793	2.67			122,390			738	2.41
Borrowings		24,195			320	5.30			29,516			381	5.08			36,504			482	5.28
Total interest-bearing liabilities		146,384			1,170	3.20	%		148,799			1,174	3.14	%		158,894			1,220	3.07	%
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits		1,974							2,086							799
Other liabilities		1,311							1,513							1,052
Shareholders' equity		25,438							25,456							28,980
Total liabilities and shareholders' equity		175,107						$	177,854						$	189,725
Net interest income and margin				$	1,612	3.74	%				$	1,539	3.52	%				$	1,427	3.09	%
Net interest-earning assets and spread	$	26,284				3.24	%	$	26,337				2.97	%	$	25,994				2.66	%
Cost of funding interest-earning assets						2.66	%						2.69	%						2.64	%

14

TABLE 11. SUMMARY OF CHANGES IN NET INTEREST MARGIN
	Second Quarter 2006 Compared to:
	First Quarter of 2006									Second Quarter of 2005
	Due to Change in						Total			Due to Change in						Total
							Increase									Increase
($ in thousands)	Volume			Rate			(Decrease)			Volume			Rate			(Decrease)
INTEREST INCOME
Loans	$	196		$	(108	)	$	88		$	(66	)	$	42		$	(24	)
U.S. Treasury securities		-			2			2			-			2			2
U.S. Agency securities		123			(1	)		122			137			(1	)		136
Mortgage-backed securities		28			-			28			26			2			28
Collateralized mortgage obligations		(30	)		50			20			(164	)		98			(66	)
Mutual funds		(147	)		38			(109	)		(154	)		129			(25	)
Total investment in securities		(26	)		89			63			(155	)		230			75
FHLB stock		(4	)		2			(2	)		(12	)		13			1
Federal funds sold and demand deposits		(110	)		30			(80	)		42			40			82
Total interest income		56			13			69			(191	)		325			134
INTEREST EXPENSE
NOW account deposits	$	23		$	2		$	25		$	40		$	8		$	48
Savings deposits		(7	)		-			(7	)		(6	)		-			(6	)
Time deposits		(4	)		42			38			(74	)		143			69
Total interest-bearing deposits		12			44			56			(40	)		151			111
Borrowings		(54	)		16			(38	)		(163	)		1			(162	)
Total interest expense		(42	)		60			18			(203	)		152			(51	)
Change in net interest income		98			(47	)		51			12			173			185

15

TABLE 12. SUMMARY OF AVERAGE BALANCE SHEETS, NET INTEREST INCOME AND INTEREST RATES
	Six Months Ended June 30, 2006								Six Months Ended June 30, 2005
($ in thousands)	Average Balance			Interest		Average Yield/ Cost			Average Balance			Interest		Average Yield/ Cost
ASSETS
INTEREST-EARNING ASSETS
Loans	$	81,067		$	3,234		8.04	%	$	90,641		$	3,523		7.77	%
U.S. Treasury securities		504			17		6.80			599			20		6.72
U.S. Agency securities		10,988			278		5.10			2,635			66		5.00
Mortgage-backed securities		1,022			30		5.92			215			5		4.83
Collateralized mortgage obligations		20,737			629		6.12			27,311			741		5.43
Mutual funds		42,420			913		4.34			49,668			783		3.15
FHLMC stock		-			-					3,471			-		-
Total investment in securities		75,671			1,867		4.98			83,899			1,615		3.85
FHLB stock		1,659			38		4.62			2,456			39		3.17
Federal funds sold and demand deposits		15,464			354		4.62			10,361			133		2.57
Total interest-earning assets		173,861			5,493		6.37	%		187,357			5,310		5.67	%
NONINTEREST-EARNING ASSETS
Other assets		8,344								5,792
Allowance for loan losses		(5,713	)							(920	)
Total assets	$	176,492							$	192,229
LIABILITIES AND SHAREHOLDERS' EQUITY
INTEREST-BEARING LIABILITIES
NOW account deposits	$	14,645		$	119		1.64	%	$	8,180		$	51		1.24	%
Savings deposits		29,913			185		1.25			31,484			195		1.24
Time deposits		76,168			1,337		3.54			84,359			1,207		2.86
Total interest-bearing deposits		120,726			1,641		2.74			124,023			1,453		2.34
Borrowings		26,872			701		5.26			37,468			990		5.28
Total interest-bearing liabilities		147,598			2,342		3.20	%		161,491			2,443		3.03	%
NONINTEREST-BEARING LIABILITIES AND SHAREHOLDERS' EQUITY
Demand deposits		2,029								875
Other liabilities		1,419								973
Shareholders' equity		25,446								28,890
Total liabilities and shareholders' equity	$	176,492							$	192,229
Net interest income and margin				$	3,150		3.65	%				$	2,867		3.06	%
Net interest-earning assets and spread	$	26,263					3.17	%	$	25,866					2.64	%
Cost of funding interest-earning assets							2.72	%							2.61	%

16

TABLE 13. SUMMARY OF CHANGES IN NET INTEREST MARGIN
	First Six Months 2006 Compared to:
	First Six Months of 2005
	Due to Change in						Total Increase
($ in thousands)	Volume			Rate			(Decrease)
INTEREST INCOME (LOSS)
Loans	$	(382	)	$	93		$	(289	)
U.S. Treasury securities		(3	)		-			(3	)
U.S. Agency securities		211			1			212
Mortgage-backed securities		24			1			25
Collateralized mortgage obligations		(199	)		87			(112	)
Mutual funds		(156	)		286			130
Total investment in securities		(123	)		375			252
FHLB stock		(18	)		17			(1	)
Federal funds sold and demand deposits		117			104			221
Total interest income (loss)		(406	)		589			183
INTEREST EXPENSE
NOW account deposits	$	53		$	15		$	68
Savings deposits		(10	)		-			(10	)
Time deposits		(144	)		274			130
Total interest-bearing deposits		(101	)		289			188
Borrowings		(276	)		(13	)		(289	)
Total interest expense		(377	)		276			(101	)
Change in net interest income		(29	)		313			284

PROVISION FOR LOAN LOSSES

The Company made no provision for losses in the first or second quarter of 2006 or 2005.

For a more detailed discussion of changes in the allowance for loan losses, nonperforming assets and general credit quality, see the earlier section on Loans and Allowance for Loan Losses. The future level of the allowance for loan losses will reflect management’s ongoing evaluation of credit risk, based on established internal policies and practices.

NON-INTEREST INCOME

Non-interest income decreased $77,000 for the second quarter of 2006 compared to the same time period in 2005 and also decreased $77,000 for the first six months of 2006 compared to the first six months of 2005. Non-interest income before securities transactions was down $1,000, or 4%, for the second quarter of 2006 compared to the same time period of 2005 and down $3,000, or 6%, for the first six months of 2006 compared to the first six months of 2005. Losses from the sale of securities totaled $92,000 in the first six months of 2006 compared to losses of $18,000 for the first six months of 2005. The major categories of non-interest income for the three and six months ended June 30, 2006 and 2005 are presented in Table 14.

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TABLE 14. NON-INTEREST INCOME
	Three Months Ended								Six Months Ended
($ in thousands)	June 30, 2006			June 30, 2005		Percentage Increase (Decrease)			June 30, 2006			June 30, 2005			Percentage Increase (Decrease)
Service charges on deposit accounts		3		$	5		40	%		6		$	12			(50	%)
ATM fees		1			2		(50	)		2			4			(50	)
Early closing penalties		1			2		(50	)		3			3			-
Income from real estate held for investment		13			13		-			26			26			-
Miscellaneous		5			2		150			10			5			100
Total noninterest income before securities transactions		23			24		(4	)		47			50			(6	)
Securities transactions		(76	)		-		(a	)		(92	)		(18	)		(a	)
Total noninterest income		(53	)	$	24		(a	)		(45	)	$	32			(a	)
(a) Not meaningful

NON-INTEREST EXPENSE

Non-interest expense for the second quarter of 2006 totaled $1.2 million, a $116,000 (11%) increase from the second quarter of 2005. For the first six months of 2006, non-interest expenses were $2.3 million, a $269,000 (10%) decrease from 2005. Included in these expenses for the first half of 2005 is a charge of $428,000 related to retirement benefits to be paid to the Company’s former President and Chief Executive Officer. Without this charge, non-interest expenses would have been approximately $156,000 above that of the year earlier quarter. Non-interest expense for the three and six months ended June 30, 2006 and 2005 are presented in Table 15 below.

TABLE 15. NON-INTEREST EXPENSE
	Three Months Ended								Six Months Ended
($ in thousands)		June 30, 2006			June 30, 2005		Percentage Increase (Decrease	)		June 30, 2006			June 30, 2005		Percentage Increase (Decrease	)
Employee compensation	$	522		$	490		7	%	$	997		$	1,381		(28	%)
Employee benefits		262			172		51			513			351		46
Total personnel expense		784			662		18			1,510			1,732		(13	)
Net occupancy expense		127			109		17			249			216		15
Ad Valorem taxes		33			109		(70	)		116			218		(47	)
Data processing costs		51			31		65			102			78		(31	)
Advertising		7			19		(63	)		21			44		(52	)
ATM server expenses		6			7		(14	)		12			13		(8	)
Professional fees		65			48		35			99			114		(13	)
Deposit insurance and supervisory fees		25			30		(17	)		49			57		(14	)
Printing and office supplies		31			17		82			59			28		111
Telephone		9			9		-			22			28		(21	)
Dues and subscriptions		17			9		88			33			19		74
Other operating expenses		32			21		55			47			41		12
Total non-interest expense	$	1,187			1,071		11	%	$	2,319		$	2,588		(10	%)
Efficiency Ratio		73.57	%		73.81	%				73.59	%		89.27	%

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Personnel costs, which represent the largest component of non-interest expense, increased $122,000, or 18%, to $784,000 in the second quarter of 2005 compared to $662,000 in the second quarter of 2005. The increase relates to the hiring of officer-level personnel in the commercial and mortgage lending areas. Personnel costs decreased $222,000, or 13%, to $1.5 million in the first half of 2006 compared to $1.7 million the half of 2005. This decrease was the result of the charge for retirement benefits discussed above. Without this charge, personnel expense would have been $1.3 million in 2005, or $206,000 (16%) less than the comparable period in 2006.

Ad valorem taxes decreased $76,000, or 70% in the second quarter of 2006 compared to the second quarter of 2005 and decreased $102,000, or 51% for the first half of 2006 compared to the first half of 2005. The reduction was due to no taxes being assessed on the Bank’s hurricane-damaged office in New Orleans for 2006, a reduction in taxes based on a reduction in prior year asset size, and an adjustment to the tax accrual in 2006 to adjust for an over-accrual in 2005.

Professional fees increased $17,000, or 35%, in the second quarter of 2006 compared to the second quarter of 2005 and decreased $15,000, or 13%, during the first half of 2006 compared to the first half of 2005. The overall decrease relates to fees paid in 2005 associated with the departure of the Company’s former Chief Executive Officer.

Data processing costs increased $20,000, or 65%, in the second quarter of 2006 compared to the same period for 2005 and $24,000, or 31% for the first half of 2006 compared to the first half of 2005. The increase relates to both increases in the fee structure of the Bank’s third-party processor as well as increased utilization of the processor’s services.

The following table presents GS Financial’s consolidated results of operations under generally accepted accounting principles (GAAP) and the results of operations excluding the charge for retirement benefits discussed earlier (referred to as Non-GAAP). Management views the $428,000 in costs recorded in the first quarter of 2005 upon the retirement of the Company’s former President to be non-recurring in nature. Currently, the only employment agreement in place is with the current Company president, and it only applies if he is displaced subsequent to a change in control. Management believes the non-GAAP presentation is useful to investors because it provides information of the Company’s underlying operations and performance trends. Specifically, these measures permit evaluation and comparison of the results of ongoing business operations that management uses to assess the performance of the Bank’s operations. While management considers the non-GAAP presentation to be useful, it should not be considered an alternative to GAAP.

TABLE 16. GAAP TO NON-GAAP RECONCILIATION
($ in thousands, except per share data)		GAAP			Post-Retirement Benefits and Related Interest			Non-GAAP
Six Months Ended June 30, 2006
Noninterest expense	$	2,319			-		$	2,319
Income tax provision		267			-			267
Net Income		519			-			519
Earnings per share - Basic		0.43			-			0.43
Earnings per share - Diluted		0.43			-			0.43
Efficiency Ratio		73.59	%		-			73.59	%
Six Months Ended June 30, 2005
Noninterest expense	$	2,588		$	(428	)	$	2,160
Income tax provision		139			145			284
Net Income		172			282			454
Earnings per share - Basic		0.14			0.24			0.38
Earnings per share - Diluted		0.14			0.23			0.37
Efficiency Ratio		89.27	%		(14.76	%)		74.51	%

Item 3 - Quantitative and Qualitative Disclosures about Market Risk

Quantitative and qualitative disclosures about market risk are presented at December 31, 2005 in the Company’s Annual Report on Form 10-K, filed with the SEC on March 31, 2006. Management believes there have been no material changes in the Company’s market risk since December 31, 2005.

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Item 4 - Controls and Procedures

Our management evaluated, with the participation of our Chief Executive Officer and Chief Financial Officer, the effectiveness of our disclosure controls and procedures (as defined in Rules 13a-15(e) or 15d-15(e) under the Securities Exchange Act of 1934) as of the end of the period covered by this report. Based on such evaluation, our Chief Executive Officer and Chief Financial Officer have concluded that our disclosure controls and procedures are designed to ensure that information required to be disclosed by us in the reports that we file or submit under the Securities Exchange Act of 1934 is recorded, processed, summarized and reported within the time periods specified in the SEC’s rules and regulations and are operating in an effective manner.

No change in our internal control over financial reporting (as defined in Rules 13a-15(f) or 15(d)-15(f) under the Securities Exchange Act of 1934) occurred during the most recent fiscal quarter that has materially affected, or is reasonably likely to affect, our internal control over financial reporting.

Part II - Other Information

Item 1 - Legal Proceedings

There are no matters required to be reported under this item.

Item 1a. Risk Factors

There have been no material changes from the risk factors disclosed in the Company’s Annual Report on Form 10-k for the year ended December 31, 2005.

Item 2 - Changes in Securities, Use of Proceeds and Issuer Purchases of Equity Securities

(a) Not applicable

(b) Not applicable

(c) Not applicable

Item 3 - Defaults Upon Senior Securities

There are no matters required to be reported under this item.

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

There are no matters required to be reported under this item.

Item 5 - Other Information

There are no matters required to be reported under this item.

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Item 6 - Exhibits

3.1*	Articles of Incorporation of GS Financial Corp.
3.2*	Bylaws of GS Financial Corp.
4.1*	Stock Certificate of GS Financial Corp.
10.1**	GS Financial Corp. Stock Option Plan
10.2**	GS Financial Corp. Recognition and Retention Plan and Trust Agreement for Employees and Non-Employee Directors
31.1	Rule 13a-14(a) Certification of Chief Executive Officer
31.2	Rule 13a-14(a) Certification of Chief Financial Officer
32.0	Certification pursuant to 18 U.S.C. Section 1350

* Incorporated herein by reference from the Registration Statement on Form SB-2 (Registration number 333-18841) filed by the Registrant with the SEC on December 26, 1996, as subsequently amended.

** Incorporated herein by reference from the definitive proxy statement, dated September 16, 1997, filed by the Registrant with the SEC (Commission File No. 000-22269)

SIGNATURES

Pursuant to the requirements of Section 13 or 15(d) of the Securities and Exchange Act of 1934, the Registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

GS FINANCIAL CORP.

Date:	August 14, 2006	By:	/s/ Stephen E. Wessel
			Stephen E. Wessel President and Chief Executive Officer
Date:	August 14, 2006	By:	/s/ J. Andrew Bower
			J. Andrew Bower Chief Financial Officer

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