Ohio State Bancshares (OHSB) 10QSB 2006 Q1 Quarterly report (small business)

UNITED STATES SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-QSB

(Mark One)

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

For the quarterly period ended March 31, 2006

o TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT

For the transition period from                    to                    .

Commission file number:0-28648

Ohio State Bancshares, Inc.

(Exact name of small business issuer as specified in its charter)

Ohio	34-1816546
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification Number)

111 South Main Street, Marion, Ohio 43302

(Address of principal executive offices)

(740) 387-2265

(Issuer’s telephone number)

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  þ     No   o

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).

Yes  o     No   þ

Indicate the number of shares outstanding of each of the issuer’s classes of common equity, as of the latest practicable date.

Common stock, $10.00 par value	185,000 common shares
	outstanding at May 12, 2006

Transitional Small Business Disclosure Format (check one):
Yes  o     No   þ

OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2006

			Page
PART I — FINANCIAL INFORMATION
Item 1.	Financial Statements (Unaudited)
		Condensed Consolidated Balance Sheets		3
		Condensed Consolidated Statements of Income		4
		Condensed Consolidated Statements of Changes in Shareholders’ Equity		5
		Condensed Consolidated Statements of Cash Flows		6
		Notes to the Condensed Consolidated Financial Statements		7
Item 2.	Management’s Discussion and Analysis			10
Item 3.	Controls and Procedures			15
PART II — OTHER INFORMATION
Item 1.	Legal Proceedings			16
Item 2.	Unregistered Sales of Equity Securities and Use of Proceeds			16
Item 3.	Defaults Upon Senior Securities			16
Item 4.	Submission of Matters to a Vote of Security Holders			16
Item 5.	Other Information			16
Item 6.	Exhibits			16
SIGNATURES				17
EX-31.1
EX-31.2
EX-32.1
EX-32.2

OHIO STATE BANCSHARES, INC.

PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED BALANCE SHEETS

	(Unaudited)
	March 31,				December 31,
	2006			��	2005
ASSETS
Cash and due from financial institutions	$	3,068,077			$	4,020,399
Interest-bearing deposits in other financial institutions		843,440				200,542
Federal funds sold		859,000				2,471,000
Cash and cash equivalents		4,770,517				6,691,941
Trading securities		64,552				—
Securities available for sale		32,669,299				34,051,759
Loans, net of allowance of $945,726 and $986,385		96,931,902				94,792,219
Premises and equipment, net		3,081,958				3,121,605
Cash surrender value of life insurance policies		1,629,173				1,618,400
Goodwill		270,500				270,500
Intangible assets		441,724				459,713
Accrued interest receivable		746,321				700,199
Federal Home Loan Bank and other restricted stock		584,540				576,840
Other real estate owned		435,060				435,060
Other assets		901,456				823,122
	$	142,527,002			$	143,541,358
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	11,793,405			$	14,070,105
Interest-bearing		102,980,479				99,603,204
Total		114,773,884				113,673,309
Borrowings		12,137,390				14,408,377
Subordinated debentures		3,000,000				3,000,000
Accrued interest payable		233,999				201,210
Other liabilities		1,008,460				986,940
Total liabilities		131,153,733				132,269,836
Shareholders’ equity
Common stock, $10.00 par value; 500,000 shares authorized; 190,000 shares issued and outstanding		1,900,000				1,900,000
Additional paid-in capital		5,045,227				5,045,227
Retained earnings		4,752,676				4,609,252
Accumulated other comprehensive income		(324,634	)			(282,957	)
Total shareholders’ equity		11,373,269				11,271,522
	$	142,527,002			$	143,541,358

See accompanying notes to the condensed consolidated financial statements.

3.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF INCOME
(Unaudited)

	Three Months Ended
	March 31,
	2006		2005
Interest and dividend income
Loans, including fees	$	1,705,537	$	1,592,060
Taxable securities		266,024		208,950
Nontaxable securities		72,273		69,077
Dividends		8,860		5,277
Federal funds sold and other		18,230		41,146
Total interest and dividend income		2,070,924		1,916,510
Interest expense
Deposits		730,463		532,681
Subordinated debentures		55,662		40,162
Federal Home Loan Bank advances and other borrowings		130,596		125,087
Total interest expense		916,721		697,930
Net interest income		1,154,203		1,218,580
Provision for loan losses		36,000		64,000
Net interest income after provision for loan losses		1,118,203		1,154,580
Noninterest income
Fees for customer services		165,464		154,939
Net gains on sales of securities		1,155		—
Other		20,102		22,041
Total noninterest income		186,721		176,980
Noninterest expense
Salaries and employee benefits		579,487		563,865
Occupancy and equipment		233,112		208,172
Office supplies		46,979		54,021
Professional fees		44,721		57,645
Advertising and public relations		28,910		33,341
Taxes, other than income		39,650		47,755
ATM and debit card processing		20,307		33,984
Loan collection and repossessions		9,993		14,447
Intangible asset amortization		17,989		13,325
Other		107,029		157,298
Total noninterest expense		1,128,177		1,183,853
Income before income taxes		176,747		147,707
Income tax expense		33,323		29,054
Net income	$	143,424	$	118,653
Basic and diluted earnings per share	$	.75	$	.62
Weighted average shares outstanding		190,000		190,000

See accompanying notes to the condensed consolidated financial statements.

4.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF CHANGES
IN SHAREHOLDERS’ EQUITY
(Unaudited)

	Three Months Ended
	March 31,
	2006			2005
Balance at beginning of period	$	11,271,522		$	11,222,936
Comprehensive income:
Net income		143,424			118,653
Change in net unrealized gain (loss) on securities available for sale, net of reclassification and tax effects		(41,677	)		(300,205	)
Total comprehensive income (loss)		101,747			(181,552	)
Balance at end of period	$	11,373,269		$	11,041,384

See accompanying notes to the condensed consolidated financial statements.

5.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS

CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
(Unaudited)

	Three Months Ended
	March 31,
	2006			2005
Cash flows from operating activities
Net income	$	143,424		$	118,653
Adjustments to reconcile net income to net cash from operating activities
Net amortization of securities		8,828			17,322
Provision for loan losses		36,000			64,000
Depreciation and amortization		101,698			77,830
Net realized gains on sales of securities		(1,155	)		—
Net gain recognized on trading securities		(552	)		—
Purchases of trading securities		(64,000	)		—
Federal Home Loan Bank stock dividends		(7,700	)		(5,200	)
Increase in cash surrender value of bank owned life insurance		(10,773	)		(10,773	)
Change in deferred loan costs		26,284			11,927
Change in accrued interest receivable		(46,122	)		(153,011	)
Change in accrued interest payable		32,789			35,220
Change in other assets and other liabilities		(30,943	)		(185,852	)
Net cash from operating activities		187,778			(29,884	)
Cash flows from investing activities
Securities available for sale:
Sales		501,155			—
Purchases		(391,262	)		(10,259,272	)
Maturities, prepayments and calls		1,201,746			1,523,922
Loan originations and payments, net		(2,206,367	)		(1,973,618	)
Purchases of premises and equipment		(44,062	)		(202,477	)
Net cash from investing activities		(938,790	)		(10,911,445	)
Cash flows from financing activities
Net change in deposits		1,100,575			(215,806	)
Net cash received from branch acquisitions		—			11,745,892
Proceeds from advance of long-term borrowings		—			2,000,000
Principle repayments of long-term borrowings		(2,270,987	)		(164,549	)
Net cash from financing activities		(1,170,412	)		13,365,537
Net change in cash and cash equivalents		(1,921,424	)		2,424,208
Cash and cash equivalents at beginning of period		6,691,941			4,499,984
Cash and cash equivalents at end of period	$	4,770,517		$	6,924,192
Supplemental cash flow information:
Interest paid	$	883,932		$	638,488
Income taxes paid		65,000			130,000
Supplemental noncash disclosures:
Transfers from loans to other real estate owned and repossessions	$	4,400		$	26,450

See accompanying notes to the condensed consolidated financial statements.

6.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS

NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 1 — SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

These interim financial statements are prepared without audit and reflect all adjustments which, in the opinion of management, are necessary to present fairly the consolidated financial position of Ohio State Bancshares, Inc., and its wholly-owned subsidiary The Ohio State Bank, at March 31, 2006, and its results of operations and cash flows for the periods presented. All such adjustments are normal and recurring in nature. The accompanying consolidated financial statements have been prepared in accordance with the instructions of Form 10-QSB and, therefore, do not purport to contain all necessary financial disclosures required by U.S. generally accepted accounting principles that might otherwise be necessary in the circumstances, and should be read in conjunction with the consolidated financial statements and notes thereto of Ohio State Bancshares, Inc. for the year ended December 31, 2005, included in its 2005 Annual Report. Reference is made to the accounting policies of Ohio State Bancshares, Inc. described in the notes to consolidated financial statements contained in its 2005 Annual Report. Ohio State Bancshares, Inc. has consistently followed these policies in preparing this Form 10-QSB. Income tax expense is based on the effective tax rate expected to be applicable for the entire year.

NOTE 2 — SECURITIES AVAILABLE FOR SALE

Securities at March 31, 2006 and December 31, 2005 were as follows:

	March 31, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Treasury	$	100,556	$	725	$	—		$	101,281
U.S. government sponsored entities		16,795,735		—		(312,879	)		16,482,856
Mortgage-backed		8,426,591		—		(237,032	)		8,189,559
State and municipal		7,312,795		130,998		(59,087	)		7,384,706
Corporate		525,492		—		(14,595	)		510,897
Total debt securities	$	33,161,169	$	131,723	$	(623,593	)	$	32,669,299

	December 31, 2005
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Treasury	$	100,579	$	2,234	$	—		$	102,813
U.S. government sponsored entities		17,397,029		2,752		(293,781	)		17,106,000
Mortgage-backed		8,631,902		—		(208,310	)		8,423,592
State and municipal		7,821,810		136,188		(53,396	)		7,904,602
Corporate		529,162		—		(14,410	)		514,752
Total debt securities	$	34,480,482	$	141,174	$	(569,897	)	$	34,051,759

(continued)

7.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2 — SECURITIES AVAILABLE FOR SALE (Continued)

Sales of available for sale securities were as follows:

	Three Months Ended
	March 31,
	2006		2005
Proceeds	$	501,155	$	—
Gross gains		1,155		—
Gross losses		—		—

Securities with carrying values of $16,506,000 and $17,619,000 at March 31, 2006 and December 31, 2005 were pledged to secure public deposits and for other purposes.

NOTE 3 — LOANS

Loans at March 31, 2006 and December 31, 2005 were as follows:

	March 31,			December 31,
	2006			2005
Commercial	$	9,645,784		$	9,614,236
Installment		17,506,268			18,529,276
Residential and non-commercial real estate		43,476,261			41,745,373
Commercial real estate		26,970,034			25,556,701
Other		25,185			52,638
		97,623,532			95,498,224
Net deferred loan costs		254,096			280,380
Allowance for loan losses		(945,726	)		(986,385	)
	$	96,931,902		$	94,792,219

Activity in the allowance for loan losses for the three months ended March 31, 2006 and 2005 was as follows:

	2006			2005
Balance — January 1	$	986,385		$	961,404
Loans charged-off		(89,839	)		(79,214	)
Recoveries		13,180			21,806
Provision for loan losses		36,000			64,000
Balance — March 31	$	945,726		$	967,996

(Continued)

8.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION; ITEM 1. FINANCIAL STATEMENTS
NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 3 — LOANS (Continued)

Impaired loans were as follows.

	March 31,		December 31,
	2006		2005
Balance of impaired loans with allocated allowance	$	550,492	$	550,492
Amount of allowance allocated		159,991		159,991

The average balance of impaired loans for the three month period ending March 31, 2006 and 2005 was $550,492 and $156,555 with no interest income recognized in those periods.

Nonperforming loans were as follows:

	March 31,		December 31,
	2006		2005
Loans past due over 90 days still on accrual	$	25,566	$	7,772
Loans on nonaccrual		1,046,896		1,151,297

Nonperforming loans include both smaller balance homogeneous loans that are collectively evaluated for impairment and individually classified impaired loans.

9.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION;

ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

INTRODUCTION

The following discussion focuses on the consolidated financial condition of Ohio State Bancshares, Inc. (“Corporation”) and its wholly owned subsidiary, The Ohio State Bank (“Bank”), formerly The Marion Bank, at March 31, 2006, compared to December 31, 2005, and the consolidated results of operations for the three months ended March 31, 2006, compared to the same period in 2005. The purpose of this discussion is to provide the reader with a more thorough understanding of the consolidated financial statements than what could be obtained from an examination of the financial statements alone. This discussion should be read in conjunction with the interim consolidated financial statements and related footnotes.

When used in this Form 10-QSB or in future filings by the Corporation with the Securities and Exchange Commission, in press releases or other public or shareholder communications, or in oral statements made with the approval of an authorized executive officer, the words or phrases “will likely result,” “are expected to,” “will continue,” “is anticipated,” “estimate,” “project,” “believe,” or similar expressions are intended to identify “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. The Corporation wishes to caution readers not to place undue reliance on any such forward-looking statements, which speak only as of the date made, and to advise readers that various factors, including regional and national economic conditions, changes in levels of market interest rates, credit risks of lending activities and competitive and regulatory factors, could affect the Corporation’s financial performance and could cause the Corporation’s actual results for future periods to differ materially from those anticipated or projected. The Corporation does not undertake, and specifically disclaims, any obligation to publicly release the result of any revisions which may be made to any forward-looking statements to reflect occurrence of anticipated or unanticipated events or circumstances after the date of such statements.

The Corporation is not aware of any trends, events or uncertainties that will have or are reasonably likely to have a material effect on the liquidity, capital resources or operations except as discussed herein.

CRITICAL ACCOUNTING ESTIMATES

Allowance for loan losses: The allowance for loan losses is a valuation allowance, determined by management, which represents probable incurred credit losses in the loan portfolio. Unexpected fluctuations in local unemployment rates, consumer bankruptcies, and the amount of past due loans can have a significant impact on this accounting estimate.

Supplemental Defined Benefit Plan: The Corporation provides a supplemental defined benefit plan for the current CEO and two former officers. All three plans call for fixed payments but the timing and number of payments will depend on actual mortality. The Corporation carries the present value of these deferred payments as a liability. The balance of this was $865,000 at March 31, 2006 and is combined with other liabilities on the consolidated balance sheet. The amount of annual expense related to fund the deferred liability depends on management’s estimates of appropriate discount rate and expected lives of individuals covered.

10.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

FINANCIAL CONDITION

Total assets of the Corporation had a slight decrease of $1,014,000, or 0.71%, since December 31, 2005. The most significant fluctuations occurred in cash and cash equivalents and borrowings. Further discussion of the major fluctuations in assets and liabilities can be found in the following paragraphs.

Cash and Cash Equivalents

Cash and cash equivalents have decreased $1,921,000, or 28.71%, since December 31, 2005. The major reason for this was cash needed to retire borrowings as they matured in 2006. See the Condensed Consolidated Statements of Cash Flows for a more detailed review of the Corporation’s sources and uses of cash.

Trading Securities

During the three months ending March 31, 2006, the Corporation purchased $64,000 of new securities classified as trading assets. These assets are made up of debt and equity mutual funds and were purchased to offset gains and losses in a non-qualified deferred compensation plan established in late 2005. These trading securities are the property of the Corporation; however, the future earnings of compensation deferred in the plan are tied to the performance of these securities. For more information about this new plan see exhibit 10.5 and note 9 of exhibit 13 of the Corporations 10-KSB filed March 30, 2006.

Borrowings

Borrowings in the form of Federal Home Loan Bank advances decreased $2,271,000, or 15.76%, since December 31, 2005. This decrease was the result of regularly scheduled maturities that were not replaced or renewed. A flat, and sometimes inverted, interest rate yield curve during the first quarter of 2006 caused the spread between new advances and interest-earning assets of the Corporation to be less than desirable. If these conditions continue, and liquidity allows, the Corporation will continue to retire borrowings as they mature.

RESULTS OF OPERATIONS

The operating results of the Corporation are affected by general economic conditions, the monetary and fiscal policies of federal agencies and the regulatory policies of agencies that regulate financial institutions. The Corporation’s cost of funds is influenced by interest rates on competing investments and general market rates of interest. Lending activities are influenced by consumer and business demand, which, in turn, is affected by the interest rates at which such loans are made, general economic conditions and the availability of funds for lending activities.

The Corporation’s net income is primarily dependent upon its net interest income, which is the difference between interest income generated on interest-earning assets and interest expense incurred on interest-bearing liabilities. Provisions for loan losses, service charges, gains on the sale of assets and other income, noninterest expense and income taxes also affect net income.

Net income for the three months ended March 31, 2006 was $143,000, or $25,000 more than the same period in 2005. The increase in earnings was primarily due to decreases in noninterest expenses and the provision for loan losses partially offset by a decrease in net interest income. The next few paragraphs will discuss the major fluctuations in income.

11.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

Net Interest Income

Net interest income is the largest component of the Corporation’s income and is affected by the interest rate environment and the volume and composition of interest-earning assets and interest-bearing liabilities. Net interest income decreased by $65,000, or 5.28%, for the three months ended March 31, 2006 compared to the same period in 2005. The decrease in net interest income is attributable to a decrease in the net yield on interest-earning assets. This decrease is a result of the Corporation’s liabilities repricing faster than the Corporation’s assets in a rising interest rate environment. From March 31, 2005 through March 31, 2006, the federal funds rate, a target rate that dramatically affects the Corporation’s cost of funds, rose 200bps. The following table shows the average balances and net yields on interest-earning assets for the three months ended March 31, 2006 and 2005. This net yield is for illustrative purposes only since an actual net yield on interest-earning asset calculation would involve some adjustments such as converting tax-free investments to a tax equivalent yield.

	1st Quarter			1st Quarter
	2006			2005
(A) Average interest-earning assets	$	132,881,000		$	129,669,000
(B) Annualized net interest income		4,681,000			4,942,000
Net Yield on interest-earning assets (B÷A)		3.52	%		3.81	%

Provision for Loan Losses

The provision for loan losses decreased $28,000 for the three months ended March 31, 2006 versus the same period in 2005. The reason for this include a decrease in bankruptcy filings received for 2006, a slight decrease in nonaccrual loans, and the continued decline of the Bank’s installment portfolio. The installment portfolio is primarily made up of consumer auto loans and has typically contributed to approximately 75% of the gross charged-off loans and is 50% of the specific allocations making up the total reserve for loan losses. Installment loans have decreased 16.00% and 5.52% since March 31, 2005 and December 31, 2005.

Noninterest Expense

Noninterest expense decreased $56,000, or 4.70%, for the three months ended March 31, 2006 versus the same period in 2005. The difference was mainly due to the branch acquisitions and name change occurring early in 2005 partially offset by an increase in occupancy and equipment of $25,000.

In early 2005, the Corporation changed the name of the Bank and acquired two banking branches from another financial institution. These factors temporarily increased overhead and are the primary reasons for the decrease in office supplies, professional fees, advertising, ATM and debit card processing and other noninterest expenses.

Significant capital expenditures, approximately $570,000, were made throughout 2005 in order to improve customer service and security. This along with the purchase of two new banking offices contributed to the $25,000, or 11.98%, increase in occupancy and equipment expenses.

12.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

CAPITAL RESOURCES

The Bank is subject to regulatory capital requirements administered by federal banking agencies. Capital adequacy guidelines and prompt corrective action regulations involve quantitative measures of assets, liabilities and certain off-balance-sheet items calculated under regulatory accounting practices. Capital amounts and classifications are also subject to qualitative judgments by regulators about components, risk weightings and other factors, and regulators can lower classifications in certain cases. Failure to meet various capital requirements can initiate regulatory action having a direct material affect on the operations of the Bank.

The prompt corrective action regulations provide five classifications, including well capitalized, adequately capitalized, undercapitalized, significantly undercapitalized and critically undercapitalized, although these terms are not used to represent overall financial condition. If adequately capitalized, regulatory approval is required to accept brokered deposits. If undercapitalized, capital distributions are limited, as is asset growth and expansion, and plans for capital restoration are required. The minimum requirements are:

	Capital to risk-
	weighted assets						Tier 1 capital
	Total			Tier 1			to average assets
Well capitalized		10	%		6	%		5	%
Adequately capitalized		8	%		4	%		4	%
Undercapitalized		6	%		3	%		3	%

At March 31, 2006 and December 31, 2005, the actual capital ratios for the Bank were:

	March 31,			December 31,
	2006			2005
Total capital to risk-weighted assets		13.2	%		13.1	%
Tier 1 capital to risk-weighted assets		12.2			12.1
Tier 1 capital to average assets		8.6			8.3

At March 31, 2006 and December 31, 2005, the Bank was categorized as well capitalized.

Subsequent to March 31, 2006, the Corporation has purchased 5,000 shares, or 2.63% of outstanding shares, and will carry them as treasury shares. The Corporation does not expect this action to impact capital at the Bank.

13.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION;
ITEM 2. MANAGEMENT’S DISCUSSION AND ANALYSIS

LIQUIDITY

Liquidity management focuses on the ability to have funds available to meet the loan and depository transaction needs of the Bank’s customers and the Corporation’s other financial commitments. Cash and cash equivalent assets (which include deposits this Bank maintains at other banks, federal funds sold and other short-term investments) and cash flows expected from the securities portfolio within 90 days at March 31, 2006 and December 31, 2005 are listed below. These assets provide the primary source of funds for loan demand and deposit balance fluctuations. Additional sources of liquidity are securities classified as available for sale and access to Federal Home Loan Bank advances, as the Bank is a member of the Federal Home Loan Bank of Cincinnati.

	March 31,		December 31,
	2006		2005
Cash and cash equivalent assets	$	4,771,000	$	6,692,000
Security portfolio cashflows expected to be received within 90 days		786,000		1,530,000
	$	5,557,000	$	8,222,000

Taking into account the capital adequacy, profitability and reputation maintained by the Corporation, available liquidity sources are considered adequate to meet current and projected needs. See the Condensed Consolidated Statements of Cash Flows for a more detailed review of the Corporation’s sources and uses of cash.

EXPANSION PLANS

As previously disclosed, the Corporation is dedicated to continued growth outside of Marion County. Part of this expansion plan was the Bank’s name change in early 2005 creating a more uniform regional identity and the two branch acquisitions. Also, the Bank was in contract on two undeveloped commercial lots in Delaware County, where plans are to build full service branches. Delaware County is the fastest growing county in Ohio and one of the 15 fastest growing counties in the United States. According to U.S. Census data, Delaware County has the highest median household income in the State of Ohio. Subsequent to March 31, 2006, the Bank closed on one of these properties located along U.S. Route 23 in Lewis Center, Ohio. The property is 1.92 acres with a cost of approximately $850,000. The Bank intends to start construction over the next several months on a 7,800 square feet facility that will be a full service branch and act as a regional headquarters for further expansion.

14.

OHIO STATE BANCSHARES, INC.
PART I — FINANCIAL INFORMATION;

ITEM 3. CONTROLS AND PROCEDURES

Any control system, no matter how well designed and operated, can provide only reasonable (not absolute) assurance that its objectives will be met. Furthermore, no evaluation of controls can provide absolute assurance that all control issues and instances of fraud, if any, have been detected.

Disclosure Controls and Procedures

The Corporation’s management, with the participation of the Corporation’s Chief Executive Officer and Chief Financial Officer, has evaluated the effectiveness of its disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act)) as of the end of the period covered by this report. Based on such evaluation, the Corporation’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Corporation’s disclosure controls and procedures are effective in recording, processing, summarizing and reporting, on a timely basis, information required to be disclosed by the Corporation in the reports that it files or submits under the Exchange Act.

Internal Control Over Financial Reporting

There have not been any changes in the Corporation’s internal control over financial reporting (as such term is defined in Rules 13a-15(f) and 15d-15(f) under the Exchange Act) as of March 31, 2006 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

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OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED MARCH 31, 2006

PART II — OTHER INFORMATION

Item 1 -	Legal Proceedings:
	There are no matters required to be reported under this item.

Item 2 -	Unregistered Sales of Equity Securities and Use of Proceeds:
	There are no matters required to be reported under this item.

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.

Item 6 -	Exhibits:
	(a)	Exhibit 31.1 – Section 302 Certification of the Chief Executive Officer
	(b)	Exhibit 31.2 – Section 302 Certification of the Chief Financial Officer
	(c)	Exhibit 32.1 – Section 906 Certification of the Chief Executive Officer
	(d)	Exhibit 32.2 – Section 906 Certification of the Chief Financial Officer

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OHIO STATE BANCSHARES, INC.

SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized.

	OHIO STATE BANCSHARES, INC.(Registrant)
Date: May 10, 2006	/s/ Gary E. Pendleton(Signature)
	Gary E. Pendleton
	President and Chief Executive Officer
Date: May 10, 2006	/s/ Todd M. Wanner(Signature)
	Todd M. Wanner
	Vice President and Chief Financial Officer

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OHIO STATE BANCSHARES, INC.

Index to Exhibits

EXHIBIT NUMBER			DESCRIPTION	DATE FILED
	3.1	(a)	Amended Articles of Incorporation of the Corporation	03/29/2000
	3.1	(b)	Amendment to Articles of Incorporation	03/30/2006
	3.2		Code of Regulations of the Corporation	03/29/2000
	10.1		Lease Agreement Between Henney and Cooper, Inc. and The Marion Bank for Branch on Richland Road in Marion, Ohio	03/24/1997
	10.2		Executive Indexed Salary Continuation Plan Agreement for President	03/24/1997
	10.3		Supplemental Executive Retirement Plan for President	09/21/2004
	10.4		Executive Change of Control Agreements	09/21/2004
	10.5		Executive Deferred Compensation Plan	03/30/2006
	31.1		Section 302 Certification of the Chief Executive Officer	Attached
	31.2		Section 302 Certification of the Chief Financial Officer	Attached
	32.1		Section 906 Certification of the Chief Executive Officer	Attached
	32.2		Section 906 Certification of the Chief Financial Officer	Attached

18.