Ohio State Bancshares (OHSB) 10QSB 2006 Q3 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 September 30, 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 183,939 common shares
outstanding at November 2, 2006

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

OHIO STATE BANCSHARES, INC.
FORM 10-QSB
QUARTER ENDED SEPTEMBER 30, 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		16
PART II — OTHER INFORMATION
Item 1. Legal Proceedings		17
Item 2. Unregistered Sales of Equity Securities and Use of Proceeds		17
Item 3. Defaults Upon Senior Securities		17
Item 4. Submission of Matters to a Vote of Security Holders		17
Item 5. Other Information		17
Item 6. Exhibits		17
SIGNATURES		18
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)
	September 30,			December 31,
	2006			2005
ASSETS
Cash and due from financial institutions	$	4,364,042		$	4,020,399
Interest-bearing deposits in other financial institutions		830,443			200,542
Federal funds sold		2,467,000			2,471,000
Cash and cash equivalents		7,661,485			6,691,941
Trading securities		118,116			—
Securities available for sale		29,313,799			34,051,759
Loans, net of allowance of $955,130 and $986,385		96,944,193			94,792,219
Premises and equipment, net		3,908,848			3,121,605
Cash surrender value of life insurance policies		1,670,264			1,618,400
Goodwill		270,500			270,500
Intangible assets		407,745			459,713
Accrued interest receivable		834,190			700,199
Federal Home Loan Bank and other restricted stock		620,240			576,840
Other real estate owned		435,060			435,060
Other assets		1,124,717			823,122
	$	143,309,157		$	143,541,358
LIABILITIES AND SHAREHOLDERS’ EQUITY
Deposits
Noninterest-bearing	$	10,978,360		$	14,070,105
Interest-bearing		103,046,482			99,603,204
Total		114,024,842			113,673,309
Borrowings		13,790,149			14,408,377
Subordinated debentures		3,000,000			3,000,000
Accrued interest payable		284,724			201,210
Other liabilities		1,040,646			986,940
Total liabilities		132,140,361			132,269,836
Shareholders’ equity
Common stock, $10.00 par value; 500,000 shares authorized; 190,000 shares issued		1,900,000			1,900,000
Additional paid-in capital		5,045,227			5,045,227
Retained earnings		4,946,155			4,609,252
Treasury stock, at cost; 5,261 shares		(478,773	)		—
Accumulated other comprehensive income		(243,813	)		(282,957	)
Total shareholders’ equity		11,168,796			11,271,522
	$	143,309,157		$	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				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006			2005
Interest and dividend income
Loans, including fees	$	1,815,033	$	1,677,871	$	5,281,580		$	4,923,510
Taxable securities		248,150		252,980		772,159			714,431
Nontaxable securities		60,804		71,929		198,819			212,663
Dividends		9,238		7,352		25,766			18,168
Federal funds sold and other		25,295		25,939		56,369			90,430
Total interest and dividend income		2,158,520		2,036,071		6,334,693			5,959,202
Interest expense
Deposits		892,837		651,022		2,440,466			1,773,085
Subordinated debentures		63,537		48,563		177,982			133,353
Federal Home Loan Bank and other borrowings		138,981		143,941		378,268			403,587
Total interest expense		1,095,355		843,526		2,996,716			2,310,025
Net interest income		1,063,165		1,192,545		3,337,977			3,649,177
Provision for loan losses		52,000		127,000		126,500			295,000
Net interest income after provision for loan losses		1,011,165		1,065,545		3,211,477			3,354,177
Noninterest income
Fees for customer services		195,208		206,520		544,840			561,617
Net gains (losses) on sales of securities		—		—		(5,680	)		1,169
Other		21,590		25,941		54,676			59,702
Total noninterest income		216,798		232,461		593,836			622,488
Noninterest expense
Salaries and employee benefits		536,625		582,197		1,666,570			1,714,006
Occupancy and equipment		232,666		224,350		690,851			633,263
Office supplies		41,321		45,058		138,193			144,204
Professional fees		39,328		90,837		142,998			192,917
Advertising and public relations		30,209		34,771		91,070			93,900
Taxes, other than income		38,726		35,552		116,704			117,137
ATM and debit card processing		27,782		13,543		67,057			70,489
Loan collection and repossessions		19,859		22,530		53,103			46,589
Intangible asset amortization		16,990		19,987		51,968			53,300
Other		90,141		125,681		285,841			399,277
Total noninterest expense		1,073,647		1,194,506		3,304,355			3,465,082
Income before income taxes		154,316		103,500		500,958			511,583
Income tax expense		33,436		16,817		90,159			100,928
Net income	$	120,880	$	86,683	$	410,799		$	410,655
Basic and diluted earnings per share	$	0.65	$	0.46	$	2.19		$	2.16
Weighted average shares outstanding		184,739		190,000		187,176			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					Nine Months Ended
	September 30,					September 30,
	2006		2005			2006			2005
Balance at beginning of period	$	10,797,306	$	11,431,162		$	11,271,522		$	11,222,936
Cash dividends ($.40 per share)		—		—			(73,896	)		(76,000	)
Purchase of 5,261 shares of treasury stock		—		—			(478,773	)		—
Comprehensive income:
Net income		120,880		86,683			410,799			410,655
Change in net unrealized gain (loss) on securities available for sale, net of tax effects and reclassifications on realized gains		250,610		(121,430	)		39,144			(161,176	)
Total comprehensive income (loss)		371,490		(34,747	)		449,943			249,479
Balance at end of period	$	11,168,796	$	11,396,415		$	11,168,796		$	11,396,415

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)

	Nine Months Ended
	September 30,
	2006			2005
Cash flows from operating activities
Net income	$	410,799		$	410,655
Adjustments to reconcile net income to net cash from operating activities
Net amortization of securities		20,997			50,128
Provision for loan losses		126,500			295,000
Depreciation and amortization		300,655			267,268
Net realized (gains) losses on sales of securities		5,680			(1,169	)
Net loss recognized on trading securities		884			—
Purchases of trading securities		(119,000	)		—
Federal Home Loan Bank stock dividends		(23,400	)		(17,000	)
Increase in cash surrender value of bank owned life insurance		(41,864	)		(32,319	)
Gain on sale of other real estate owned		—			(13,095	)
Change in deferred loan costs		96,868			46,004
Change in accrued interest receivable		(133,991	)		(133,185	)
Change in accrued interest payable		83,514			25,250
Change in other assets and other liabilities		(258,129	)		(196,660	)
Net cash from operating activities		469,513			700,877
Cash flows from investing activities
Securities available for sale:
Purchases		(391,262	)		(11,416,832	)
Maturities, prepayments and calls		3,001,027			2,372,415
Sales		2,160,827			298,800
Purchases of Federal Home Loan Bank stock		(20,000	)		(15,700	)
Loan originations and payments, net		(2,385,267	)		(1,647,840	)
Proceeds from sale of other real estate owned		—			93,095
Purchase of bank owned life insurance		(10,000	)		(30,000	)
Purchases of premises and equipment		(1,035,930	)		(502,480	)
Net cash from investing activities		1,319,395			(10,848,542	)
Cash flows from financing activities
Net change in deposits		351,533			(1,386,650	)
Net cash received from branch acquisition		—			11,745,892
Proceeds from advance of long-term borrowings		5,500,000			7,200,000
Principal repayments of long-term borrowings		(6,118,228	)		(4,109,689	)
Repurchase of common stock for treasury		(478,773	)		—
Cash dividends paid		(73,896	)		(76,000	)
Net cash from financing activities		(819,364	)		13,373,553
Net change in cash and cash equivalents		969,544			3,225,888
Cash and cash equivalents at beginning of period		6,691,941			4,499,984
Cash and cash equivalents at end of period	$	7,661,485		$	7,725,872
Supplemental cash flow information:
Interest paid	$	2,913,202		$	2,260,553
Income taxes paid		270,000			230,000
Supplemental noncash disclosures:
Transfers from loans to other real estate owned and repossessions	$	9,925		$	144,875

See accompanying notes to the condensed consolidated financial statements.

6.

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

NOTES TO THE 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 September 30, 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 September 30, 2006 and December 31, 2005 were as follows:

	September 30, 2006
			Gross		Gross
	Amortized		Unrealized		Unrealized			Fair
	Cost		Gains		Losses			Value
U.S. Treasury	$	100,509	$	1,413	$	—		$	101,922
U.S. government sponsored entities		15,246,511		—		(217,757	)		15,028,754
Mortgage-backed		7,420,241		—		(202,139	)		7,218,102
State and municipal		6,397,853		114,306		(54,229	)		6,457,930
Corporate		518,097		—		(11,006	)		507,091
Total debt securities	$	29,683,211	$	115,719	$	(485,131	)	$	29,313,799

	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 THE CONDENSED CONSOLIDATED FINANCIAL STATEMENTS
(Unaudited)

NOTE 2 — SECURITIES(Continued)

Sales of available for sale securities were as follows:

	Three Months Ended				Nine Months Ended
	September 30,				September 30,
	2006		2005		2006			2005
Proceeds	$	—	$	—	$	2,160,827		$	298,800
Gross gains		—		—		22,111			1,169
Gross losses		—		—		(27,791	)		—

Securities with carrying values of $17,513,000 and $17,619,000 at September 30, 2006 and December 31, 2005 were pledged to secure public deposits and for other purposes.

NOTE 3 — LOANS

Loans at September 30, 2006 and December 31, 2005 were as follows:

	September 30,			December 31,
	2006			2005
Commercial	$	11,203,093		$	9,614,236
Installment		15,607,250			18,529,276
Residential and non-commercial real estate		37,629,154			37,194,365
Commercial real estate		33,231,977			30,107,709
Other		44,337			52,638
		97,715,811			95,498,224
Net deferred loan costs		183,512			280,380
Allowance for loan losses		(955,130	)		(986,385	)
	$	96,944,193		$	94,792,219

Activity in the allowance for loan losses was as follows:

	Three Months Ended						Nine Months Ended
	September 30,						September 30,
	2006			2005			2006			2005
Balance — beginning of period	$	938,960		$	967,724		$	986,385		$	961,404
Loans charged-off		(49,388	)		(121,230	)		(194,191	)		(324,778	)
Recoveries		13,558			13,606			36,436			55,474
Provision for loan losses		52,000			127,000			126,500			295,000
Balance — September 30	$	955,130		$	987,100		$	955,130		$	987,100

(Continued)

8.

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

NOTE 3 — LOANS (Continued)

Impaired loans were as follows.

	September 30,		December 31,
	2006		2005
Balance of impaired loans with allocated allowance	$	1,170,794	$	550,492
Amount of allowance allocated		135,294		159,991

The average balance of impaired loans for the nine month periods ending September 30, 2006 and September 30, 2005 was $751,740 and $213,981 with $7,840 and $0 of interest income recognized in the 2006 and 2005 periods. No cash-basis interest income was realized in the 2006 and 2005 periods.

Nonperforming loans were as follows:

	September 30,		December 31,
	2006		2005
Loans past due over 90 days still on accrual	$	748,242	$	7,772
Loans on nonaccrual		1,400,558		1,151,297

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

NOTE 4 — DEPOSITS

Interest-bearing deposits were as follows.

	September 30,		December 31,
	2006		2005
Demand and money market	$	25,914,162	$	21,742,739
Savings		16,596,686		18,301,064
Time:
In denominations under $100,000		31,324,270		32,359,147
In denominations of $100,000 or more		29,211,364		27,200,254
Total interest-bearing deposits	$	103,046,482	$	99,603,204

Occasionally, in order to meet liquidity or asset/liability needs, the Bank will accept time deposits from out-of-market investors. These time deposits totaled $7,349,000 and $6,318,000 at September 30, 2006 and December 31, 2005.

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. at September 30, 2006, compared to December 31, 2005, and the consolidated results of operations for the three and nine months ended September 30, 2006, compared to the same periods 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 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 $890,000 at September 30, 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 have decreased slightly by $232,000, or 0.16%, since December 31, 2005. The most significant fluctuations occurred in securities available for sale, loans, and deposits. Further discussion of the major fluctuations in assets and liabilities can be found in the following paragraphs.

Trading Securities

During the nine months ending September 30, 2006, the Corporation purchased $119,000 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.

Securities Available For Sale

Securities available for sale have decreased $4,738,000, or 13.91%, since December 31, 2005. Throughout 2006, securities that matured were not replaced while others were sold to meet liquidity needs of the Corporation. This is due to loan demand and a current interest rate environment where the yield of most debt securities is relatively low when compared to the Corporations total and marginal cost of funds.

Loans

Loans have increased $2,152,000, or 2.27%, since December 31, 2005. Most of this growth has been in the form of commercial and commercial real estate loans which have increased $4,713,000 since December 31, 2005. This growth is primarily from Delaware County, Ohio, and is where the Corporation is planning to build two new retail branches in the coming year. Offsetting some of this growth is a decrease in Installment loans of $2,922,000. These loans are primarily consumer automobile loans. Automobile loan demand for the Corporation is down due to lower volume in local auto sales and manufacturer lending incentives offered directly to new car customers.

Total Deposits

Total deposits have increased $352,000 since December 31, 2005. Although this change is relatively small, fluctuation within this total has been more significant. Noninterest-bearing deposits have decreased 21.97% and interest-bearing deposits have increased 3.46% since December 31, 2005. Within interest-bearing deposits, the two largest increases came from public fund deposits (local government, schools, and libraries) and out-of-market investors (brokered deposits). These two sources of funds increased by $2,961,000 combined since December 31, 2005. Both public fund and brokered deposits are funding sources that are often more volatile and demand higher yields. Although the Corporation believes the asset/liability and liquidity management programs in place are adequate to cover the risks associated with these more volatile funds, the Corporation is making plans to establish new retail branches in high growth areas to obtain access to more traditional sources of deposits.

11.

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

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.

NINE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO NINE MONTHS ENDED SEPTEMBER 30, 2005

Net income for the nine months ended September 30, 2006 was relatively unchanged compared to the same period in 2005. There were significant fluctuations in net interest income, provision for loan losses, and noninterest expenses that offset each other. The next few paragraphs will discuss the major fluctuations in income.

Net Interest Income

Net interest income is the largest component of 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 $311,000, or 8.53%, for the nine months ended September 30, 2006 compared to the same period in 2005. The Corporation is subject to depressed net interest income in periods of rising short-term interest rates because interest-bearing liabilities, such as the subordinated debentures and deposit accounts, reprice faster than most interest-earning assets. The asset/liability management process, which is monitored by executive management and the Board of Directors, uses computer modeling to forecast the exposure of potential interest rate movements on the Corporation’s net interest income. This exposure is currently within pre-established risk tolerance limits. When short-term interest rates stop rising and/or the yield curve moves away from what is called a flat or inverted environment, net interest income should improve.

The following table shows the average balances and net yields on interest-earning assets for the nine months ended September 30, 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 investment to a tax equivalent yield.

	Year-to-date			Year-to-date
	2006			2005
(A) Average interest-earning assets	$	131,004,000		$	133,094,000
(B) Annualized net interest income		4,451,000			4,866,000
Net Yield on interest-earning assets (B÷A)		3.40	%		3.66	%

12.

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

Provision For Loan Losses

Provision for loan losses is down $168,000 for the nine months ended September 30, 2006 versus the same period in 2005. This reduction is due to fewer loans being charged off over the nine month period ended September 30, 2006 and stable specific reserves on classified loans despite the increase in classified loan totals. A loan grading system is utilized for the commercial and real estate loan portfolios which set aside allowance reserves for individually graded loans that meet a certain scope or demonstrate delinquencies. A general allowance reserve is then established for other non-graded loans or pools of smaller-balance homogeneous loans based on historic loss data.

The following schedule is a breakdown of the allowance for loan losses allocated by type of loan.

	September 30, 2006		December 31, 2005
Commercial	$	74,190	$	148,790
Real Estate		305,770		248,369
Installment		432,027		463,846
Unallocated		143,143		125,380
Total	$	955,130	$	986,385

At September 30, 2006, a single loan for $413,000 is contained in both impaired and loans past due over 90 days still on accrual within note 3 of this quarterly report. This loan is secured by residential real estate and has no specific allowance reserves allocated toward it. Management believes that no losses will be realized due to the current listing price of the collateral and support from an independent appraisal.

Noninterest Expense

Noninterest expense decreased $161,000, or 4.64%, for the nine months ended September 30, 2006 versus the same period in 2005. The difference was mainly due to the branch acquisitions, name change, and an executive matter occurring in 2005, partially offset by an increase in occupancy and equipment in 2006.

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, ATM and debit card processing, and other noninterest expenses.

The executive matter, related to an executive officer who resigned July 27, 2005, resulted in increased noninterest expense due to outside research, legal consultation, and compensation paid to the executive. The Board of Directors and Management do not believe the Corporation is exposed to any future contingent liabilities and does not expect any further expenses related to this matter. These expenses were located in salaries and employee benefits and professional fees for approximately $40,000 and $50,000.

Significant capital expenditures, including the purchase of two new banking offices, were made throughout 2005 in order to improve customer service and security. In the third quarter of 2006, expenses of $22,000 were recognized in the dissolution of a land purchase contract in Delaware County, Ohio. These events contributed to the $58,000, or 9.09%, increase in occupancy and equipment expenses. Management is currently searching for a new site that will be better suited for the Corporation’s needs to replace the terminated land contract.

13.

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

Federal Income Tax Expense

Federal income tax expense decreased $11,000, or 10.67%, for the nine months ended September 30, 2006 versus the same period in 2005. This decrease is due to a decrease in income before income taxes and a change in the effective tax rate. The effective tax rate for the nine month period ending September 30, 2006 and September 30, 2005 was 18.0% and 19.7%. The Corporation’s effective tax rate is lower than its statutory 34.0% rate primarily due to interest on municipal securities and increases in the cash surrender value of bank owned life insurance which are both exempt from federal income tax.

THREE MONTHS ENDED SEPTEMBER 30, 2006 COMPARED TO THREE MONTHS ENDED SEPTEMBER 30, 2005

Net income for the three months ended September 30, 2006 was $121,000, or $34,000 more than the same period in 2005. This was primarily due to a decrease in noninterest expenses of $121,000 and a decrease in provision for loan losses of $75,000 partially offset by a decrease in net interest income of $130,000. All these and other material fluctuations in income between the three months ended and nine months ended September 30, 2005 and 2006 are similar in nature, and discussed in the previous section.

CAPITAL RESOURCES

The Corporation’s subsidiary, The Marion 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	%

14.

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

At September 30, 2006 and December 31, 2005, the actual capital ratios for the Bank were:

	September 30,			December 31,
	2006			2005
Total capital to risk-weighted assets		13.7	%		13.1	%
Tier 1 capital to risk-weighted assets		12.7			12.1
Tier 1 capital to average assets		9.0			8.3

At September 30, 2006 and December 31, 2005, the Bank was categorized as well capitalized. In April and May of 2006, the Corporation purchased a total of 5,261 shares, or 2.77% of outstanding shares, and will carry them as treasury shares. The Corporation does not expect this action to impact capital at the Bank.

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 September 30, 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.

	September 30,		December 31,
	2006		2005
Cash and cash equivalent assets	$	7,661,000	$	6,692,000
Security portfolio cashflows expected to be received within 90 days		1,367,000		1,530,000
	$	9,028,000	$	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 plans to build two full service branches in Delaware County, Ohio. Delaware County is the fastest growing county in Ohio and, according to U.S. Census data; Delaware County has the highest median household income in the State of Ohio. In April of 2006, the Bank closed on one property 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. Management is currently searching for a suitable second site.

15.

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 September 30, 2005 that materially affected, or are reasonably likely to materially affect, the Corporation’s internal control over financial reporting.

16.

OHIO STATE BANCSHARES, INC.
FORM 10-QSB
Quarter ended September 30, 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

17.

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:November 2, 2006
	(Signature) Gary E. Pendleton President and Chief Executive Officer
Date:November 2, 2006
	(Signature) Todd M. Wanner Senior Vice President and Chief Financial Officer

18.

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

19.