UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, DC 20549
______________________________
FORM 10-QSB
(Mark One)
[X] QUARTERLY REPORT UNDER SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT
OF 1934
FOR THE QUARTERLY PERIOD ENDED MARCH 31, 2007
[ ] TRANSITION REPORT UNDER SECTION 13 OR 15(d) OF THE EXCHANGE ACT
FOR THE TRANSITION PERIOD FROM _________ TO _________
Commission File Number 1-33224
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OSAGE BANCSHARES, INC.
- --------------------------------------------------------------------------------
(Exact name of Small Business Issuer as specified in its Charter)
MARYLAND 32-0181888
- ------------------------------- --------------------------
(State or other jurisdiction of (IRS Employer
incorporation or organization) Identification No.)
239 EAST MAIN STREET, PAWHUSKA, OKLAHOMA 74056
- --------------------------------------------------------------------------------
(Address of principal executive offices)
(918) 287-2919
- --------------------------------------------------------------------------------
(Issuer's telephone number)
NOT APPLICABLE
- --------------------------------------------------------------------------------
(Former name, former address and former fiscal year,
if changed since last report)
Check whether the issuer (1) filed all reports required to be filed by
Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such
shorter period that the registrant was required to file such reports), and (2)
has been subject to such filing requirements for the past 90 days.
Yes [X] No [ ]
Indicate by check mark whether the Registrant is a shell company (as
defined in Rule 12b-2 of the Exchange Act). Yes [ ] No [X]
As of April 30, 2007 there were 3,603,590 shares of the Registrant's common
stock, par value $.01 per share, outstanding.
Transitional Small Business Issuer Disclosure Format (check one):
Yes [ ] No [X]
1
OSAGE BANCSHARES, INC.
PAWHUSKA, OKLAHOMA
INDEX
PAGE
----
PART I. FINANCIAL INFORMATION
Item 1. Financial Statements
Consolidated Balance Sheets as of March 31, 2007 (Unaudited) and June 30, 2006 3
Consolidated Statements of Income - (Unaudited) for the three and nine months
ended March 31, 2007 and 2006 4
Consolidated Statements of Cash Flows - (Unaudited) for the nine months ended
March 31, 2007 and 2006 5
Notes to Consolidated Financial Statements (Unaudited) 7
Item 2. Management's Discussion and Analysis or Plan of Operation 10
Item 3. Controls and Procedures 16
PART II. OTHER INFORMATION
Item 6. Exhibits 17
Signatures 18
2
ITEM 1. FINANCIAL STATEMENTS
OSAGE BANCSHARES, INC.
CONSOLIDATED BALANCE SHEETS
ASSETS
MARCH 31, JUNE 30,
2007 2006
------------------ ------------
(unaudited)
Cash and due from banks $ 1,517,747 $ 1,374,110
Interest bearing deposits with banks 157,690 58,906
Federal funds sold 12,017,000 1,022,000
------------- -------------
Cash and cash equivalents 13,692,437 2,455,016
Available-for-sale securities 16,429,677 17,835,601
Held-to-maturity securities 7,282,911 8,220,499
Mortgage loans held for sale -- 155,500
Loans, net of allowance for loan losses of $402,601 and $399,701 at
March 31, 2007 and June 30, 2006, respectively 82,645,142 77,927,235
Premises and equipment 1,321,731 1,155,390
Foreclosed assets held for sale, net 54,850 49,993
Interest receivable 462,619 430,610
Federal Home Loan Bank stock, at cost 1,786,000 1,711,000
Bank owned life insurance 2,142,892 2,086,877
Deferred income taxes 19,590 47,792
Other 183,500 161,892
------------- -------------
Total assets $ 126,021,349 $ 112,237,405
============= =============
LIABILITIES AND STOCKHOLDERS' EQUITY
LIABILITIES
Deposits $ 76,449,222 $ 64,309,734
Federal Home Loan Bank advances 13,000,000 33,350,000
Advances from borrowers held in escrow 604,807 785,813
Accrued interest and other liabilities 468,277 500,279
------------- -------------
Total liabilities 90,522,306 98,945,826
------------- -------------
COMMITMENTS AND CONTINGENCIES -- --
EQUITY RECEIVED FROM CONTRIBUTIONS TO THE ESOP (42,640 SHARES AT
MARCH 31, 2007 AND 21,117 SHARES AT JUNE 30, 2006) 341,229 163,470
STOCKHOLDERS' EQUITY
Preferred stock, $.01 par value (5,000,000 shares authorized;
none outstanding) -- --
Common stock, $.01 par value (20,000,000 shares authorized;
3,603,590 shares issued and outstanding, net of 288,000 and
86,172 allocated and unallocated ESOP shares at March 31, 2007
and June 30, 2006, respectively) 33,156 223,226
Additional paid-in capital 27,220,345 5,290,160
Retained earnings 8,103,231 7,872,151
Accumulated other comprehensive loss (198,918) (257,428)
------------- -------------
Total stockholders' equity 35,157,814 13,128,109
------------- -------------
Total liabilities and stockholders' equity $ 126,021,349 $ 112,237,405
============= =============
See Notes to Consolidated Financial Statements
3
OSAGE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF INCOME
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-----------------------------------------------------------------
2007 2006 2007 2006
------------ ------------ ------------ ------------
(unaudited) (unaudited)
INTEREST INCOME
Loans $ 1,362,466 $ 1,131,220 $ 4,037,712 $ 3,340,988
Available-for-sale securities 205,451 188,887 624,306 518,563
Held-to-maturity securities 81,286 95,869 253,160 310,813
Deposits with other financial institutions 125,865 10,695 172,579 24,094
Other 23,166 20,827 75,204 52,914
------------ ------------ ------------ ------------
Total interest income 1,798,234 1,447,498 5,162,961 4,247,372
------------ ------------ ------------ ------------
INTEREST EXPENSE
Deposits 619,042 375,338 1,680,900 1,095,859
Advances from Federal Home Loan Bank 161,857 336,370 898,142 906,285
------------ ------------ ------------ ------------
Total interest expense 780,899 711,708 2,579,042 2,002,144
------------ ------------ ------------ ------------
NET INTEREST INCOME 1,017,335 735,790 2,583,919 2,245,228
Provision for loan losses -- -- 10,000 12,000
------------ ------------ ------------ ------------
Net interest income after provision for loan
losses 1,017,335 735,790 2,573,919 2,233,228
------------ ------------ ------------ ------------
NONINTEREST INCOME
Service charges on deposit accounts 89,120 95,062 284,740 300,961
Other service charges and fees 20,821 16,573 53,104 46,666
Gain on sale of mortgage loans -- 1,196 11,710 35,419
Net loan servicing fees 13,545 8,648 33,914 23,485
Other income 40,544 34,052 111,254 91,035
------------ ------------ ------------ ------------
Total noninterest income 164,030 155,531 494,722 497,566
------------ ------------ ------------ ------------
NONINTEREST EXPENSE
Salaries and employee benefits 436,188 425,798 1,277,317 1,213,279
Net occupancy expense 67,012 63,924 196,007 204,048
Deposit insurance premium 2,206 2,119 6,226 6,469
Other operating expenses 215,680 200,367 597,866 598,494
------------ ------------ ------------ ------------
Total noninterest expense 721,086 692,208 2,077,416 2,022,290
------------ ------------ ------------ ------------
INCOME BEFORE INCOME TAXES 460,279 199,113 991,225 708,504
PROVISION FOR INCOME TAXES 168,134 70,299 351,025 251,703
------------ ------------ ------------ ------------
NET INCOME $ 292,145 $ 128,814 $ 640,200 $ 456,801
============ ============ ============ ============
BASIC EARNINGS PER SHARE $ 0.09 $ 0.04 $ 0.19 $ 0.14
============ ============ ============ ============
DILUTED EARNINGS PER SHARE $ 0.09 $ 0.04 $ 0.19 $ 0.14
============ ============ ============ ============
CASH DIVIDENDS PAID PER SHARE $ 0.06 $ 1.13 $ 0.36 $ 1.36
============ ============ ============ ============
See Notes to Consolidated Financial Statements
4
OSAGE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
NINE MONTHS ENDED
MARCH 31,
------------------------------
2007 2006
----------- -----------
(unaudited)
OPERATING ACTIVITIES
Net income $ 640,200 $ 456,801
Items not requiring (providing) cash
Depreciation 68,565 78,875
Provision for loan losses 10,000 12,000
Amortization 63,884 92,341
Restricted stock plan and options expense 103,014 103,013
Deferred income taxes (7,660) (20,445)
Gain on sale of mortgage loans (11,710) (35,419)
Gain on sale of foreclosed assets held for sale (9,021) (4,210)
Dividends on available-for-sale mutual funds (466,253) (349,243)
Stock dividends on Federal Home Loan Bank stock (75,000) (52,600)
Increase in cash surrender value of bank owned life insurance (56,015) (55,487)
Originations of loans held for delivery against commitments (1,342,090) (4,298,620)
Proceeds from nonrecourse sale of loans held for delivery against
commitments 1,502,166 4,316,549
Allocation of employee stock ownership plan shares 177,759 94,073
Tax benefits of employee benefit plans 32,307 --
Changes in
Interest receivable (32,009) (78,643)
Other assets (56,763) (26,614)
Accrued interest and other liabilities (32,002) (66,744)
----------- -----------
Net cash provided by operating activities 509,372 165,627
----------- -----------
INVESTING ACTIVITIES
Net increase in loans (4,814,856) (7,947,030)
Purchases of premises and equipment (234,906) (11,612)
Purchase of Federal Home Loan Bank stock -- (451,200)
Proceeds from sale of foreclosed assets 91,113 25,647
Purchases of available-for-sale securities -- (5,937,220)
Proceeds from maturities and paydowns of held-to-maturity
securities 939,187 2,606,509
Proceeds from maturities and paydowns of available-for-sale
securities 1,943,355 2,243,958
----------- -----------
Net cash used in investing activities (2,076,107) (9,470,948)
----------- -----------
See Notes to Consolidated Financial Statements
5
OSAGE BANCSHARES, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS
(CONTINUED)
NINE MONTHS ENDED
MARCH 31,
--------------------------------
2007 2006
------------ -----------
(Unaudited)
FINANCING ACTIVITIES
Net decrease in demand, money market, NOW and savings deposits $ (1,323,760) $(1,409,366)
Net increase in certificates of deposit 13,463,248 2,183,582
Net increase (decrease) in Federal Home Loan Bank short-term
borrowings (20,850,000) 9,150,000
Proceeds from Federal Home Loan Bank advances 2,000,000 3,000,000
Repayments of Federal Home Loan Bank advances (1,500,000) (3,000,000)
Net decrease in advances from borrowers held in escrow (181,006) (114,666)
Proceeds from sale of common stock, net 21,496,833 --
Receipt of funds from Osage Federal MHC 86,996 --
Payment of dividends (net of restricted stock dividends) (409,120) (886,169)
Proceeds from exercise of stock options (net of tax benefits) 27,607 75,782
Shares purchased and withheld for restricted stock plans (6,642) (223,356)
------------ -----------
Net cash provided by financing activities 12,804,156 8,775,807
------------ -----------
INCREASE IN CASH AND CASH EQUIVALENTS 11,237,421 (529,514)
CASH AND CASH EQUIVALENTS, BEGINNING OF PERIOD 2,455,016 2,224,045
------------ -----------
CASH AND CASH EQUIVALENTS, END OF PERIOD $ 13,692,437 $ 1,694,531
============ ===========
SUPPLEMENTAL CASH FLOWS INFORMATION
Real estate and other assets acquired in settlement of loans $ 96,949 $ 111,161
Interest paid $ 2,542,797 $ 2,000,029
Income taxes paid $ 355,773 $ 319,344
Mutual fund dividends reinvested $ 466,253 $ 349,243
6
OSAGE BANCSHARES, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
(UNAUDITED)
1. OSAGE BANCSHARES, INC.
REORGANIZATION
On January 17, 2007, Osage Federal MHC (the "MHC") completed its
reorganization into stock form and Osage Bancshares, Inc. (the
"Company") succeeded to the business of the MHC's former federal
mid-tier holding company subsidiary, Osage Federal Financial, Inc.,
which ceased to exist. Each outstanding share of common stock of Osage
Federal Financial, Inc. was converted into 1.5739 shares of common
stock of the Company. As part of the transaction, the Company sold a
total of 2,513,880 shares to the public at $10 per share, including
201,828 shares purchased by the Company's employee stock ownership plan
with funds borrowed from the Company. The Company, which is a
state-chartered corporation, owns 100% of Osage Federal Bank.
Offering costs were deferred and deducted from the proceeds of the
shares sold in the stock offering. If the offering had not been
completed, all costs would have been charged to expense. At March 31,
2007, approximately $1,624,000 in such costs had been incurred.
At March 31, 2007, the consolidated financial statements of the Company
included those of the Bank. All intercompany items have been
eliminated. Prior to consummation of the reorganization, the Company
had no assets or liabilities. For periods prior to January 17, 2007,
the Company's financial statements consist of those of Osage Federal
Financial, Inc.
BASIS OF PRESENTATION
The accompanying unaudited consolidated financial statements were
prepared in accordance with instructions for Form 10-QSB and therefore,
do not include all disclosures necessary for a complete presentation of
the balance sheet, statements of income and statements of cash flows in
conformity with accounting principles generally accepted in the United
States of America. However, all adjustments (all of which are of a
normal recurring nature) which are, in the opinion of management,
necessary for the fair presentation of the interim financial statements
have been included. The balance sheet of the Company as of June 30,
2006 has been derived from the audited balance sheet of the Company as
of that date. The statements of income for periods presented are not
necessarily indicative of the results which may be expected for the
entire year.
Certain information and note disclosures normally included in the
Company's annual financial statements prepared in accordance with
accounting principles generally accepted in the United States of
America have been condensed or omitted. These condensed financial
statements should be read in conjunction with the financial statements
and notes thereto included in the Company's Annual Report on Form
10-KSB for the year ended June 30, 2006 filed with the Securities and
Exchange Commission.
2. RECENT ACCOUNTING PRONOUNCEMENTS
In May 2005, the Financial Accounting Standards Board ("FASB") issued
Statement on Financial Accounting Standards ("SFAS") No. 154,
"Accounting Changes and Error Corrections - a replacement of APB
Opinion No. 20 and FASB Statement No.3". SFAS 154 changes the
7
requirements for the accounting for, and reporting of, a change in
accounting principle. SFAS 154 requires that a voluntary change in
accounting principle be applied retrospectively with all prior period
financial statements presented using the accounting principle. SFAS 154
is effective for accounting changes and corrections of errors in fiscal
years beginning after December 15, 2005. The Company adopted SFAS 154
effective July 1, 2006. Since there have been no material accounting
changes or errors for the nine months ended March 31, 2007, the
adoption did not have a material impact on the Company's results of
operations or financial condition.
In June 2006, the FASB issued FASB Interpretation No. 48, "Accounting
for Uncertainty in Income Taxes, an Interpretation of FASB Statement
No. 109" ("FIN 48"). FIN 48 clarifies the accounting for uncertainty in
income taxes recognized in an enterprise's financial statements and
prescribes a recognition threshold and measurement attribute for
financial statement recognition and measurement of a tax position taken
or expected to be taken in a tax return. This Interpretation also
provides related guidance on underecognition, classification, interest
and penalties, accounting in interim periods and disclosure. FIN 48 is
effective for the Company beginning July 1, 2007. The Company is
currently evaluating the impact of this Interpretation.
In September 2006, the SEC issued Staff Accounting Bulletin ("SAB") No.
108, "Considering the Effects of Prior Year Misstatements when
Quantifying Misstatements in Current Year Financial Statements" ("SAB
108"). SAB 108 provides guidance on how prior year misstatements should
be considered when quantifying misstatements in current year financial
statements for purposes of assessing materiality. SAB 108 requires that
a registrant assess the materiality of a current period misstatement by
determining how the current period's balance sheet would be affected in
correcting a misstatement without considering the year(s) in which the
misstatement originated and how the current period's income statement
is misstated, including the reversing effect of prior year
misstatements. SAB 108 is effective for fiscal years ending after
November 15, 2006. The cumulative effect of applying SAB 108 may be
recorded by adjusting current year beginning balances of the affected
assets and liabilities with a corresponding adjustment to the current
year opening balance in retained earnings if certain criteria are met.
The Company is currently evaluating the impact of SAB 108 and does not
expect that the bulletin will have a material impact on the Company's
condensed consolidated financial statements.
In September 2006, the FASB issued SFAS No. 157, "Fair Value
Measurements" ("SFAS 157"). SFAS 157 defines fair value, establishes a
framework for measuring fair value in GAAP and requires enhanced
disclosures about fair value measurements. SFAS 157 does not require
any new fair value measurements. SFAS 157 is effective for the Company
beginning July 1, 2007. The Company is currently evaluating the impact
of this pronouncement.
In February 2007, the FASB issued SFAS No. 159, "The Fair Value Option
for Financial Assets and Financial Liabilities-Including and amendment
of FASB Statement No. 115" ("SFAS 159"). SFAS 159 expands the use of
fair value accounting but does not affect existing standards which
require assets or liabilities to be carried at fair value. Under SFAS
159, a company may elect to use fair value to measure its financial
assets and liabilities. If the use of fair value is elected, any
upfront costs and fees related to the item must be recognized in
earnings and cannot be deferred. The fair value election is irrevocable
and generally made on an instrument-by-instrument basis, even if a
company has similar instruments that it elects not to measure based on
fair value. At the adoption date, unrealized gains and losses on
existing items for which fair value has been elected are reported as a
cumulative adjustment to retained earnings. Subsequent to the adoption
of SFAS 159, changes in fair value are recognized in earnings. SFAS is
effective for the Company beginning July 1, 2008. The Company is
currently determining whether fair value accounting is
8
appropriate for any of its eligible items and cannot estimate the
impact, if any, which SFAS 159 will have on its financial statements.
3. EARNINGS PER SHARE
Earnings per share (EPS) are presented based upon the outstanding
shares of Osage Bancshares, Inc., and assume the shares issued in the
January 17, 2007 conversion were outstanding the entire periods
presented.
EPS were computed as follows for the three months and nine months ended
March 31:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
-------------------------------------------------
2007 2006 2007 2006
-------------------------------------------------
Net income $ 292,145 $ 128,814 $ 640,200 $ 456,801
-------------------------------------------------
Average common shares outstanding 3,320,562 3,283,209 3,297,677 3,283,209
-------------------------------------------------
Average common diluted shares outstanding 3,338,879 3,294,240 3,335,650 3,303,350
-------------------------------------------------
Basic earnings per share $0.09 $0.04 $0.19 $0.14
-------------------------------------------------
Fully diluted earnings per share $0.09 $0.04 $0.19 $0.14
-------------------------------------------------
4. OTHER COMPREHENSIVE INCOME
Other comprehensive income is comprised of the following:
THREE MONTHS ENDED NINE MONTHS ENDED
MARCH 31, MARCH 31,
--------------------------------------------------------------
2007 2006 2007 2006
--------------------------------------------------------------
(Unaudited)
NET INCOME $ 292,145 $ 128,814 $ 640,200 $ 456,801
----------- ---------- --------- ---------
OTHER COMPREHENSIVE INCOME (LOSS)
Unrealized gain (loss) on
available-for-sale securities, net of
income taxes 19,998 (44,275) 58,510 (97,119)
----------- ---------- --------- ---------
COMPREHENSIVE INCOME $ 312,143 $ 84,539 $ 698,710 $ 359,682
=========== ========== ========= =========
5. CASH DIVIDENDS PAID PER SHARE
For the quarter ended March 31, 2007, cash dividends paid per share
represent the cash dividends paid on 3,603,590 shares of Osage
Bancshares, Inc. stock. For the other periods, cash dividends paid per
share include cash dividends paid to all shareholders of Osage Federal
Financial, Inc. other than Osage Federal MHC.
9
ITEM 2.
MANAGEMENT'S DISCUSSION AND ANALYSIS
OR PLAN OF OPERATION
GENERAL
The following discussion and analysis is intended to assist in
understanding the financial condition and results of operations of the Company.
FORWARD-LOOKING STATEMENTS
When used in this discussion and elsewhere in this Quarterly Report on
Form 10-QSB, the words or phrases "will likely result," "are expected to," "will
continue," "is anticipated," "estimate," "project," or similar expressions are
intended to identify "forward-looking statements" within the meaning of the
Private Securities Litigation Reform Act of 1995. The Company cautions readers
not to place undue reliance on any such forward-looking statements, which speak
only as of the date made, and advises readers that various factors, including
regional and national economic conditions, substantial changes in level of
market interest rates, credit and other risks of lending and investment
activities and competitive and regulatory factors could affect the Company's
financial performance and could cause the Company's actual results for future
periods to differ materially from those anticipated or projected. The Company
does not undertake and specifically disclaims any obligation to update any
forward-looking statements to reflect occurrence of anticipated or unanticipated
events or circumstances after the date of such statements.
CRITICAL ACCOUNTING POLICIES, JUDGMENTS AND ESTIMATES
The accounting and reporting policies of the Company conform with
accounting principles generally accepted in the United States and general
practices within the financial services industry. The preparation of financial
statements in conformity with accounting principles generally accepted in the
United States of America requires management to make estimates and assumptions
that affect the amounts reported in the financial statements and the
accompanying notes. Actual results could differ from those estimates. The
Company believes that the determination of the allowance for loan losses
involves a higher degree of judgment and complexity than its other significant
accounting policies. The allowance for loan losses is calculated with the
objective of maintaining an allowance level believed by management to be
sufficient to absorb estimated loan losses. Management's determination of the
adequacy of the allowance is based on periodic evaluations of the loan portfolio
and other relevant factors. However, this evaluation is inherently subjective as
it requires material estimates, including, among others, expected default
probabilities, loss given default, expected commitment usage, the amounts and
timing of expected future cash flows on impaired loans, value of collateral,
estimated losses, and general amounts for historical loss experience. The
process also considers economic conditions, uncertainties in estimating losses
and inherent risks in the loan portfolio. All of these factors may be
susceptible to significant change. To the extent actual outcomes differ from
management estimates, additional provisions for loan losses may be required that
would adversely impact earnings in future periods.
COMPARISON OF FINANCIAL CONDITION AT MARCH 31, 2007 AND JUNE 30, 2006
Our total assets increased by $13.8 million to $126.0 million at March
31, 2007 from $112.2 million at June 30, 2006 primarily due to the $21.5 million
of equity raised during our conversion. Cash and cash equivalents rose $11.2
million, from $2.5 million at June 30, 2006 to $13.7 million at March 31, 2007.
This reflects the investment of part of the equity proceeds into federal funds
sold. Our loans receivable, net grew $4.7 million or 6.1% in the same time
period. Loans receivable, net increased to
10
$82.6 million at March 31, 2007 from $77.9 million at June 30, 2006. This
increase in loans receivable, net primarily resulted from a $3.3 million, or
45.5%, increase in loans secured by nonresidential real estate. One- to
four-family loans also increased by $2.5 million, while construction loans
declined $1.3 million. There were no loans held for sale at March 31, 2007,
compared to $156,000 at June 30, 2006. Total securities decreased to $23.7
million at March 31, 2007 from $26.1 million at June 30, 2006, as a result of
normal paydowns.
Our total liabilities decreased $8.4 million, or 8.5% mostly due to a
decrease in Federal Home Loan Bank advances. These advances were $13.0 million
at March 31, 2007, a decrease of $20.4 million, or 61.0%, from $33.4 million at
June 30, 2006. This decrease resulted from using deposit funding and part of the
equity raised during the conversion to pay off short-term borrowings. Total
deposits were $76.4 million at March 31, 2007, a $12.1 million, or 18.9%
increase from $64.3 million at June 30, 2006. Certificates of deposit increased
$13.5 million from June 30, 2006. Approximately $7.3 million of this increase
was from additional public funds deposits. In addition, our rate promotion for
shorter-term certificates of deposit has been effective in attracting these
types of deposits. Other deposit categories were down slightly from June 30,
2006.
Stockholders' equity increased $22.0 million to $35.2 million at March
31, 2007 from $13.1 million at June 30, 2006, primarily due to the $21.5 million
of equity raised during the conversion. Net income was $640,000 for the period.
The Company paid regular cash dividends of $409,000 (net of restricted stock
dividends of $14,000), in the period ending March 31, 2007. Expenses of the
stock option plan and restricted stock plan increased stockholders' equity by
$103,000, and stock options exercised added $28,000.
COMPARISON OF OPERATING RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2007 AND
2006
GENERAL. Net income for the three months ended March 31, 2007 was
$292,000 ($0.09 per diluted share), a $163,000, or 126.8%, increase compared to
net income of $129,000 ($0.04 per diluted share) for the three months ended
March 31, 2006. The increase in net income resulted mainly from an increase in
net interest income, partially offset by an increase in both noninterest expense
and the provision for income taxes.
INTEREST INCOME. Total interest income increased by $351,000, or 24.2%,
to $1.8 million for the three months ended March 31, 2007 from $1.4 million for
the same period in 2006 primarily due to an increase in the balance of earning
assets. The average balance of total interest-earning assets for the three
months ended March 31, 2007 was $111.5 million, an increase of $10.8 million
from the average balance of $100.7 million for the three months ended March 31,
2006. The yield on earning assets for the period increased 30 basis points, and
was 6.12% compared to a yield of 5.73% in the same period in 2006.
The primary factor for the increase in interest income was a $231,000,
or 20.4% increase in interest from loans. Average loans increased $11.4 million,
or 16.1%, from $70.5 million in 2006 to $81.9 million in 2007. There was a 25
basis point increase in the average yield on loans to 6.75% for the 2007 period
from 6.50% in the 2006 period, reflecting a higher mix of non-residential real
estate loans. These loans typically have a higher yield than fixed rate 1- to
4-family loans. Our variable rate mortgages have repriced to higher rates as
well, helping to improve the yield.
Our average investment portfolio and cash investments totaled $35.5
million for the three months ended March 31, 2007, a $5.1 million or 16.8%
increase from the same period in 2006. The yield on these investments improved
to 4.72% compared to 3.95% in 2006. This yield increase is attributable to a
higher mix of short-term interest rate balances (primarily federal funds sold)
as well as repricing on existing adjustable-rate securities.
11
INTEREST EXPENSE. Total interest expense increased $69,000, or 9.7%, to
$781,000 for the three months ended March 31, 2007 from $712,000 for the three
months ended March 31, 2006. The increase in interest expense resulted from a 40
basis point increase in the average cost of interest-bearing liabilities
partially offset by a $1.7 million, or 2.0%, decrease in the average balance, to
$85.6 million for the 2007 period compared to $87.3 million for the 2006 period.
The increase in the average cost of interest-bearing liabilities was most
notably due to a change in the mix of liabilities. Average interest-bearing
deposits were up $14.0 million between the two quarters, with certificates of
deposit accounting for a $15.0 million increase. For the same time periods,
passbook savings balances increased $778,000, while money market savings and
interest-bearing checking balances decreased $1.1 million and $673,000,
respectively. During the early part of the current year, we held $5.2 million of
subscribers' funds as passbook savings deposits at a rate of .8%. This increased
average deposit balances by approximately $1.0 million. We continue to see
transfers of funds from checking and money market accounts into higher-yielding
certificates of deposits. Our advertising campaign, called "You Pick `Em",
allows our customers to choose a certificate at a specific rate, with a term
from 6 to 15 months. Average rates on certificates are up 92 basis points
between the two periods.
Interest expense on FHLB advances decreased $175,000 for the three
months ended March 31, 2007 compared to the three months ended March 31, 2006,
reflecting a decrease in the average balance of advances to $14.4 million for
the 2007 period from $30.1 million for the 2006 period, while the average cost
increased only 3 basis points between the same periods. Because of the inverted
yield curve, and because we paid off our short-term borrowings, the cost of
these borrowings at March 31, 2007 are 4.45%, which is an improvement over the
average rates for the quarters ended March 31, 2007 and 2006.
NET INTEREST INCOME. Net interest income increased by $281,000, or
38.3%, to $1,017,000 for the three months ended March 31, 2007 from $736,000 for
the three months ended March 31, 2006. The net interest rate spread was 2.42%
for both periods, while the net interest margin improved to 3.46% from 2.91% for
the same periods. The net interest margin increase reflects the equity we
received during our conversion, partially offset by increases in certificates of
deposit rates.
PROVISION FOR LOAN LOSSES. No provision for loan losses was recorded in
the quarters ended March 31, 2007 or 2006, nor were there any net charge-offs
for either of the periods. Based on our stratification of the loan portfolios
using historical loss factors and other data, management believes that the
recorded allowance would cover both known and inherent losses in the portfolio
that were both probable and estimable.
The evaluation of the level of loan loss allowance is inherently
subjective as it requires estimates that are susceptible to significant revision
as more information becomes available or as future events change. The level of
the allowance is based on estimates and the ultimate losses may vary from these
estimates. The allowance for loan losses was $403,000 at March 31, 2007 and
$385,000 at March 31, 2006, and as a percentage of total loans outstanding was
0.48% and 0.52% at March 31, 2007 and 2006, respectively. The decrease in this
ratio is mainly reflective of the increase in total loans outstanding.
Management assesses the allowance for loan losses monthly. While
management uses available information to estimate losses on loans, loan loss
provisions may be necessary based on changes in economic conditions. In
addition, regulatory agencies, as an integral part of their examination process,
periodically review the allowance for loan losses and may require the Bank to
recognize additional provisions based on their judgment of information available
to them at the time of their examination. The allowance for loan losses as of
March 31, 2007 was maintained at a level that represented management's best
estimate of losses in the loan portfolio to the extent they were both probable
and reasonably
12
estimable. However, there can be no assurance that the allowance of loan losses
will be sufficient to offset any future loan losses.
NONINTEREST INCOME. Noninterest income increased to $164,000 for the
three months ended March 31, 2007 from $156,000 for the three months ended March
31, 2006. Service charges on deposit accounts decreased $6,000, while
interchange income from debit cards increased $4,000 during the same periods,
and net loan servicing fees increased $5,000.
NONINTEREST EXPENSE. Noninterest expense was $721,000 for the three
months ended March 31, 2007, increasing $29,000 from $692,000 for the three
months ended March 31, 2006. Salaries and benefits increased $10,000, or 2.4%.
With the stock conversion, the number of shares held by the Employee Stock
Ownership Plan (ESOP) increased, resulting in $20,000 of increased expense for
the quarter ended March 31, 2007. For the same periods, restricted stock plan
expense decreased $35,000. Dividends on unvested restricted stock plan shares,
including the $1.00 ($.635 after adjusting for the reorganization) special
dividend paid in January 2006, accounted for most of this decrease. Employee
salaries increased $13,000 because of normal salary increases, and employee
insurance costs increased $6,000. Other operating expenses increased by $15,000,
with advertising accounting for $10,000 of this increase. We instituted a new
advertising program entitled "bank more", stressing customer service, internet
banking, and being a hometown bank. The FDIC has adopted a new risk-based
deposit insurance assessment system that will require all FDIC-insured
institutions to pay quarterly premiums beginning in 2007. Annual premiums will
range from 5 and 7 basis points for well-capitalized banks with the highest
examination ratings, going up to 43 basis points for undercapitalized
institutions. The Bank will be able to offset the premium with an estimated
assessment credit of $82,000 for premiums paid prior to 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$98,000, or 139.2%, reflecting an increase in taxable income. The effective tax
rate was 37% for the three months ended March 31, 2007, and 35% for the three
months ended March 31, 2006.
COMPARISON OF OPERATING RESULTS FOR THE NINE MONTHS ENDED MARCH 31, 2007 AND
2006
GENERAL. Net income for the nine months ended March 31, 2007 was
$640,000 ($0.19 per diluted share), a $183,000, or 40.1%, increase compared to
net income of $457,000 ($0.14 per diluted share) for the nine months ended March
31, 2006. The increase in net income resulted mainly from an increase in net
interest income, partially offset by a decrease in noninterest income, and an
increase in noninterest expense and provision for income taxes.
INTEREST INCOME. Total interest income increased by $916,000, or 21.6%,
to $5.2 million for the nine months ended March 31, 2007 from $4.2 million for
the same period in 2006 primarily due to an increase in the balance of earning
assets. The average balance of total interest-earning assets for the nine months
ended March 31, 2007 was $113.6 million, an increase of $13.4 million from the
average balance of $100.2 million for the nine months ended March 31, 2006. The
yield on earning assets for the period increased 41 basis points, and was 6.06%
compared to a yield of 5.65% in the same period in 2006.
The primary factor for the increase in interest income was a $697,000,
or 20.9% increase in interest from loans. Average loans increased $12.0 million,
or 17.3%, from $69.0 million in 2006 to $81.0 million in 2007. There was a 19
basis point increase in the average yield on loans to 6.64% for the 2007 period
from 6.45% in the 2006 period, reflecting slightly higher long-term interest
rates, repricing of variable-rate loans, and a change in the mix of loans.
Our average investment portfolio and cash investments totaled $30.9
million for the nine months ended March 31, 2007, a $1.2 million or 3.9%
increase from the same period in 2006. The yield on these
13
investments improved to 4.53% compared to 3.83% in 2006. This yield increase is
attributable to a higher mix of short-term investments as well as repricing on
existing adjustable-rate securities.
INTEREST EXPENSE. Total interest expense increased $577,000, or 28.8%,
to $2.6 million for the nine months ended March 31, 2007 from $2.0 million for
the nine months ended March 31, 2006. The increase in interest expense resulted
from a 60 basis point increase in the average cost of interest-bearing
liabilities combined with a $6.8 million, or 8.1%, increase in the average
balance, to $91.5 million for the 2007 period compared to $84.7 million for the
2006 period. The increase in the average cost of interest-bearing liabilities
was most notably due the change in mix of our deposits. Average interest-bearing
deposits were up $9.8 million between the two periods, with certificates of
deposit accounting for an $11.6 million increase. For the same time periods,
interest-bearing checking and money market savings account balances decreased
$1.2 million each. We are seeing transfers of funds from checking and money
market accounts into higher-yielding certificates of deposits. Our advertising
campaign called "You Pick `Em" allows our customers to choose a certificate at a
specific rate, with a term from 6 to 15 months. Average rates on certificates
are up 72 basis points between the two periods.
Interest expense on FHLB advances decreased $8,000 for the nine months
ended March 31, 2007, or .9%, compared to the nine months ended March 31, 2006,
reflecting a decrease in the average balance of advances to $24.2 million for
the 2007 period from $27.2 million for the 2006 period, offset by a 50 basis
point increase in the average cost. These rates increased mainly because of
higher rates on our short-term advances. As of March 31, 2007, we have no
short-term advances.
NET INTEREST INCOME. Net interest income increased by $339,000, or
15.1%, to $2.6 million for the nine months ended March 31, 2007 from $2.2
million for the nine months ended March 31, 2006. The net interest rate spread
decreased to 2.30% for the 2007 period from 2.50% for the 2006 period, while the
net interest margin increased to 3.04% from 2.99% for the same periods. The
decrease in spread reflects the inversion of the yield curve, which means that
short-term market rates are at or above long-term rates. The improvement in the
net interest margin reflects the equity received during the conversion.
PROVISION FOR LOAN LOSSES. The provision for loan losses was $10,000
for the nine month period ended March 31, 2007, a $2,000 decline from the
$12,000 provision for the period ended March 31, 2006. There were $7,000 of net
charge-offs in the nine months ended March 31, 2007 and $21,000 in the same
period in 2006. Based on our stratification of the loan portfolios using
historical loss factors and other data, management believes that the recorded
allowance would cover both known and inherent losses in the portfolio that were
both probable and estimable.
NONINTEREST INCOME. Noninterest income decreased to $495,000 for the
nine months ended March 31, 2007 from $498,000 for the nine months ended March
31, 2006. Gains on sales of mortgage loans were down $24,000 due to lower loan
volumes sold, and service charges declined $16,000 due to lower insufficient
check charges. Interchange income from debit cards increased $12,000 during the
same periods, and net loan servicing fees increased $10,000.
NONINTEREST EXPENSE. Noninterest expense was $2.1 million for the nine
months ended March 31, 2007, increasing $55,000 from $2.0 million for the nine
months ended March 31, 2006. Salaries and benefits increased $64,000, or 5.3%.
Expense for the ESOP increased $35,000, which is a function of the average price
of our stock. It is also higher because of a higher number of shares held after
the stock conversion. Restricted stock plan expense decreased $34,000. Dividends
on unvested restricted stock plan shares, including the $1.00 ($.635 after
adjusting for the reorganization) special dividend paid in January 2006,
accounted for most of this decrease. Salaries increased $21,000 due to normal
raises, and employee insurance increased $20,000. Audit and other SEC filing
expenses decreased $19,000, while costs for data processing and debit card
services increased $20,000, as we added internet banking and
14
other technological upgrades. The FDIC has adopted a new risk-based deposit
insurance assessment system that will require all FDIC-insured institutions to
pay quarterly premiums beginning in 2007. Annual premiums will range from 5 and
7 basis points for well-capitalized banks with the highest examination ratings,
going up to 43 basis points for undercapitalized institutions. The Bank will be
able to offset the premium with an estimated assessment credit of $82,000 for
premiums paid prior to 1996.
PROVISION FOR INCOME TAXES. The provision for income taxes increased
$99,000, or 39.5%, reflecting an increase in taxable income. The effective tax
rate was 35% for the nine months ended March 31, 2007, and 36% for the nine
months ended March 31, 2006.
LIQUIDITY AND CAPITAL RESOURCES
We are required to have enough investments that qualify as liquid
assets in order to maintain sufficient liquidity to ensure a safe and sound
banking operation. Liquidity may increase or decrease depending upon the
availability of funds and comparative yields on investments in relation to the
return on loans. Historically, we have maintained liquid assets above levels
believed to be adequate to meet the requirements of normal operations, including
potential deposit outflows. Cash flow projections are regularly reviewed and
updated to assure that adequate liquidity is maintained.
Our liquidity, represented by cash and cash equivalents, is a product
of our operating, investing and financing activities. Our primary sources of
funds are deposits, scheduled payments, prepayments and maturities of
outstanding loans and mortgage-backed securities, maturities of investment
securities and other short-term investments and funds provided from operations.
While scheduled payments from the amortization of loans and mortgage-backed
securities and maturing investment securities and short-term investments are
relatively predictable sources of funds, deposit flows and loan prepayments are
greatly influenced by general interest rates, economic conditions and
competition. In addition, we invest excess funds in short-term interest-earning
assets, which provide liquidity to meet lending requirements. We also generate
cash through borrowings. We utilize FHLB advances to leverage our capital base
and provide a portion of the funding needed to manage the interest rate risk
presented by our core business of attracting and retaining retail deposits to
fund mortgage and consumer loans.
Liquidity management is both a daily and long-term function of
business management. Excess liquidity is generally invested in short-term
investments such as overnight deposits, mutual funds, and collateralized
mortgage obligations. On a longer term basis, we maintain a strategy of
investing in various loan products. We use our sources of funds primarily to
meet our ongoing commitments, to pay maturing certificates of deposit and
savings withdrawals, to fund loan commitments and to maintain our portfolio of
mortgage-backed securities and investment securities. At March 31, 2007, the
total approved loan origination commitments outstanding amounted to $3.7
million. At the same date, construction loans in process were $1.7 million. We
also had $391,000 of unfunded commitments on lines of credit on that date. We
had no commitments to sell loans to Freddie Mac or any others. Certificates of
deposit scheduled to mature in one year or less at March 31, 2007, totaled $41.1
million. Management's policy is to maintain deposit rates at levels that are
competitive with other local financial institutions. Based on the competitive
rates and on historical experience, management believes that a significant
portion of maturing deposits will remain with Osage Federal. In addition, at
March 31, 2007, our total collateralized borrowing limit was $48.4 million of
which we had $13.0 million outstanding, giving us the ability at March 31, 2007
to borrow an additional $35.4 million from the FHLB of Topeka as a funding
source to meet commitments and for liquidity purposes.
15
ITEM 3. CONTROLS AND PROCEDURES
The Company's management evaluated, with the participation of the Company's
Chief Executive Officer and Chief Financial Officer, the effectiveness of the
Company's disclosure controls and procedures, as of the end of the period
covered by this report. Based on that evaluation, the Chief Executive Officer
and Chief Financial Officer concluded that the Company's disclosure controls and
procedures are effective to ensure that information required to be disclosed by
the Company in the reports that it files or submits under the Securities
Exchange Act of 1934 is recorded, processed, summarized and reported within the
time periods specified in the Securities and Exchange Commission's rules and
forms.
There were no changes in the Company's internal control over financial reporting
that occurred during the Company's last fiscal quarter that have materially
affected, or are reasonably likely to materially affect, the Company's internal
control over financial reporting.
16
PART II. OTHER INFORMATION
ITEM 6. EXHIBITS
The following exhibits are either being filed with or incorporated by
reference in this quarterly report on Form 10-QSB:
NUMBER DESCRIPTION
------ -----------
3(i) Articles of Incorporation *
3(ii) Bylaws *
4 Form of Common Stock Certificate **
10.1 Executive Salary Continuation Plan and Split Dollar Agreements with Mark S.
White***
10.2 Executive Salary Continuation Plan and Split Dollar Agreements with Richard
Trolinger***
10.3 Executive Salary Continuation Plan and Split Dollar Agreements with Martha
Hayes***
10.4 Executive Salary Continuation Plan and Split Dollar Agreements with Sue Allen
Smith***
10.5 Director Supplemental Income Plan and Split Dollar Agreements with
Mark A. Formby***
10.6 Director Supplemental Income Plan and Split Dollar Agreements with
Harvey Payne***
10.7 Director Supplemental Income Plan and Split Dollar Agreements with
Gary Strahan***
10.8 Osage Bancshares, Inc. 2004 Stock Option Plan****
10.9 Osage Federal Bank 2004 Restricted Stock Plan****
31.1 Rule 13a-14(a)/15d-14(a) Certification of Chief Executive Officer
31.2 Rule 13a-14(a)/15d-14(a) Certification of Chief Financial Officer
32 Section 1350 Certification
_______________
* Incorporated by reference from Pre-Effective Amendment No. 1 to the
Registrant's Registration Statement on Form S-1 (File No. 333-137377).
** Incorporated by reference from the Registrant's Registration Statement
on Form S-1 (File No. 333-137377)
*** Incorporated by reference from the Quarterly Report on Form 10-QSB of
Osage Federal Financial, Inc.for the Quarter Ended March 31, 2005.
**** Incorporated by reference to the Registrant's Registration Statement
on Form S-8 (File No. 333-140308).
17
SIGNATURES
In accordance with the requirements of the Exchange Act, the registrant caused
this report to be signed on its behalf by the undersigned, thereunto duly
authorized.
OSAGE BANCSHARES, INC.
Date: May 11, 2007 /s/ Mark S. White
------------------------------------
Mark S. White, President
(Duly Authorized Representative)
Date: May 11, 2007 /s/ Sue Allen Smith
------------------------------------
Sue Allen Smith, Vice President
(Principal Financial Officer)
18