Wayne Savings Bancshares (WAYN) 10-Q 2006 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

ý QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended September 30, 2006

OR

oTRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from ____________ to _______________

Commission File No. 0-23433

WAYNE SAVINGS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

Delaware	31-1557791
(State or other jurisdiction of	(I.R.S. Employer
incorporation or organization)	Identification Number)
151 North Market Street
Wooster, Ohio	44691
(Address of principal	(Zip Code)
executive office)

Registrant’s telephone number, including area code: (330) 264-5767

Indicate by check market whether the Registrant: (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports) and (2) has been subject to such filing requirements for the past 90 days.

Yes   ý No ¨

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

Large accelerated filer ¨ Accelerated filer ¨          Non-accelerated filer ý

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

Yes ¨        No ý

As of October 27, 2006, the latest practicable date, 3,304,052 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.

1

Wayne Savings Bancshares, Inc.

INDEX

		Page
PART I -	FINANCIAL INFORMATION
Item 1	Consolidated Statements of Financial Condition	3
	Consolidated Statements of Earnings	4
	Consolidated Statements of Comprehensive Income	5
	Consolidated Statements of Cash Flows	6
	Notes to Consolidated Financial Statements	8
Item 2	Management’s Discussion and Analysis of
	Financial Condition and Results of Operations	13
Item 3	Quantitative and Qualitative Disclosures About Market Risk	23
Item 4	Controls and Procedures	23
PART II -	OTHER INFORMATION
Item 1	Legal Proceedings	24
Item 1A	Risk Factors	24
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	24
Item 3	Defaults Upon Senior Securities	24
Item 4	Submission of Matters to a Vote of Security Holders	24
Item 5	Other Information	25
Item 6	Exhibits	25
SIGNATURES		26

2

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

	September 30,			March 31,
ASSETS	2006			2006
	(Unaudited)
Cash and due from banks	$	2,539		$	2,952
Interest-bearing deposits in other financial institutions		9,487			11,171
Cash and cash equivalents		12,026			14,123
Investment securities available for sale - at market		62,610			67,505
Investment securities held to maturity - at amortized cost, approximate market value
of $686 and $5,796 as of September 30, 2006 and March 31, 2006, respectively		629			5,802
Mortgage-backed securities available for sale - at market		67,018			53,932
Mortgage-backed securities held to maturity - at cost, approximate market value of
$1,497 and $1,805 as of September 30, 2006 and March 31, 2006, respectively		1,489			1,799
Loans receivable - net		236,299			235,312
Office premises and equipment - net		8,388			8,557
Real estate acquired through foreclosure		97			156
Federal Home Loan Bank stock - at cost		4,758			4,623
Cash surrender value of life insurance		5,922			5,811
Accrued interest receivable on loans		1,160			1,075
Accrued interest receivable on mortgage-backed securities		310			250
Accrued interest receivable on investments and interest-bearing deposits		766			700
Prepaid expenses and other assets		1,594			1,526
Goodwill and other intangible assets		2,455			2,508
Prepaid federal income taxes		280			-
Total assets	$	405,801		$	403,679
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	327,476		$	332,570
Advances from the Federal Home Loan Bank		38,900			32,750
Advances by borrowers for taxes and insurance		530			521
Accrued interest payable		338			263
Accounts payable on mortgage loans serviced for others		221			225
Other liabilities		1,600			1,118
Accrued federal income taxes		-			51
Deferred federal income taxes		1,023			665
Total liabilities		370,088			368,163
Commitments		-			-
Stockholders’ equity
Preferred stock (500,000 shares of $.10 par value authorized;
no preferred stock issued)		-			-
Common stock (9,000,000 shares of $.10 par value authorized; 3,954,874 and 3,934,874
shares issued at September 30, 2006 and March 31, 2006, respectively)		395			393
Additional paid-in capital		35,881			35,604
Retained earnings - substantially restricted		11,672			11,394
Less required contributions for shares acquired by Employee Stock Ownership Plan		(1,199	)		(1,239	)
Less 650,822 and 595,322 shares of treasury stock at September 30, 2006 and
March 31, 2006, respectively - at cost		(10,461	)		(9,625	)
Accumulated other comprehensive loss - unrealized losses on securities designated
as available for sale, net of tax effects		(575	)		(1,011	)
Total stockholders’ equity		35,713			35,516
Total liabilities and stockholders’ equity	$	405,801		$	403,679

See accompanying notes to consolidated financial statements.

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Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF EARNINGS

(In thousands, except share data)

(Unaudited)

	Six months				Three months
	ended				ended
	September 30,				September 30,
	2006		2005		2006		2005
Interest income
Loans	$	7,876	$	6,725	$	3,985	$	3,441
Mortgage-backed securities		1,481		979		782		467
Investment securities		1,455		1,533		712		774
Interest-bearing deposits and other		202		242		99		116
Total interest income		11,014		9,479		5,578		4,798
Interest expense
Deposits		4,649		3,346		2,417		1,728
Borrowings		628		502		345		238
Total interest expense		5,277		3,848		2,762		1,966
Net interest income		5,737		5,631		2,816		2,832
Provision for losses on loans		60		-		30		-
Net interest income after provision for losses on loans		5,677		5,631		2,786		2,832
Other income
Gain on sale of loans		-		69		-		44
Increase in cash surrender value of life insurance		110		125		55		63
Service fees, charges and other operating		747		660		376		339
Total other income		857		854		431		446
General, administrative and other expense
Employee compensation and benefits		2,847		3,113		1,449		1,544
Occupancy and equipment		935		901		477		476
Federal deposit insurance premiums		20		22		10		11
Franchise taxes		198		261		80		132
Other operating		1,025		974		522		489
Total general, administrative and other expense		5,025		5,271		2,538		2,652
Earnings before income taxes		1,509		1,214		679		626
Federal incomes taxes
Current		298		229		90		81
Deferred		134		78		105		78
Total federal income taxes		432		307		195		159
NET EARNINGS	$	1,077	$	907	$	484	$	467
EARNINGS PER SHARE
Basic	$	0.33	$	0.27	$	0.15	$	0.14
Diluted	$	0.33	$	0.27	$	0.15	$	0.14
DIVIDENDS PER SHARE	$	0.24	$	0.24	$	0.12	$	0.12

See accompanying notes to consolidated financial statements.

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Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Six months						Three months
	ended						ended
	September 30,						September 30,
	2006			2005			2006			2005
Net earnings	$	1,077		$	907		$	484		$	467
Other comprehensive income:
Unrealized holding gains (losses) on securities, net of related
taxes (benefits) of $225, $211, $485 and $(156) during the
respective periods		436			410			941			(302	)
Comprehensive income	$	1,513		$	1,317		$	1,425		$	165
Accumulated comprehensive loss	$	(575	)	$	(382	)	$	(575	)	$	(382	)

See accompanying notes to consolidated financial statements.

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Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended September 30,

(In thousands)

(Unaudited)

	2006			2005
Cash flows from operating activities:
Net earnings for the period	$	1,077		$	907
Adjustments to reconcile net earnings to net cash
provided by operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities - net		(52	)		281
Amortization of deferred loan origination fees		(30	)		(74	)
Depreciation and amortization		348			319
Amortization of expense related to ESOP		40			24
Gain on sale of loans		-			(17	)
Proceeds from sale of loans in the secondary market		-			5,669
Loans originated for sale in the secondary market		-			(5,654	)
Provision for losses on loans		60			-
Federal Home Loan Bank stock dividends		(135	)		(108	)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans		(85	)		(216	)
Accrued interest receivable on mortgage-backed securities		(60	)		229
Accrued interest receivable on investments and interest-bearing deposits		(66	)		(47	)
Prepaid expenses and other assets		(68	)		(237	)
Amortization of expense related to amortization of intangibles		53			53
Accrued interest payable		75			41
Accounts payable on mortgage loans serviced for others		(4	)		(37	)
Other liabilities		482			(477	)
Federal income taxes
Current		(331	)		363
Deferred		134			78
Net cash provided by operating activities		1,438			1,097
Cash flows provided by (used in) investing activities:
Purchase of investment securities designated as available for sale		(1,101	)		(5,344	)
Proceeds from maturity of investment securities designated as held to maturity		2,681			89
Proceeds from sale of investment securities designated as held to maturity		2,512			-
Proceeds from maturity of investment securities designated as available for sale		6,430			1,051
Purchase of mortgage-backed securities designated as available for sale		(15,584	)		(5,706	)
Principal repayments on mortgage-backed securities designated as held to maturity		305			530
Principal repayments and sales of mortgage-backed securities designated as available for sale		2,761			13,309
Proceeds from sale of mortgage-backed securities designated as available for sale		-			2,860
Loan principal repayments		30,932			18,325
Loan disbursements		(31,949	)		(30,449	)
Purchase of office premises and equipment - net		(179	)		(135	)
Proceeds from sale of real estate acquired through foreclosure		59			115
Increase in cash surrender value of life insurance		(111	)		(125	)
Net cash used in investing activities		(3,244	)		(5,480	)
Net cash used in operating and investing activities
(balance carried forward)		(1,806	)		(4,383	)

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Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the six months ended September 30,

(In thousands)

(Unaudited)

	2006			2005
Net cash used in operating and investing activities
(balance brought forward)	$	(1,806	)	$	(4,383	)
Cash flows provided by (used in) financing activities:
Net increase (decrease) in deposit accounts		(5,094	)		5,232
Proceeds from Federal Home Loan Bank advances		71,400			17,500
Repayments of Federal Home Loan Bank advances		(65,250	)		(29,000	)
Advances by borrowers for taxes and insurance		9			(20	)
Dividends paid on common stock		(799	)		(815	)
Proceeds from exercise of stock options		279			367
Tax benefits from exercise of stock options		-			27
Purchase of treasury shares		(836	)		(4,656	)
Net cash used in financing activities		(291	)		(11,365	)
Net decrease in cash and cash equivalents		(2,097	)		(15,748	)
Cash and cash equivalents at beginning of period		14,123			29,942
Cash and cash equivalents at end of period	$	12,026		$	14,194
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes	$	630		$	325
Interest on deposits and borrowings	$	5,202		$	3,807
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	-		$	129
Unrealized gains on securities designated as available for sale,
net of related tax effects	$	436		$	410
Recognition of mortgage servicing rights in accordance
with SFAS No. 140	$	-		$	52
Dividends payable	$	396		$	404

See accompanying notes to consolidated financial statements.

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Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2006 and 2005

1.              Basis of Presentation

The accompanying unaudited consolidated financial statements for the six and three months ended September 30, 2006 and 2005 were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the year ended March 31, 2006.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the six and three month periods ended September 30, 2006 are not necessarily indicative of the results which may be expected for the entire fiscal year.

Critical Accounting Policy - The Company’s critical accounting policy relates to the allowance for loan losses. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for loan losses. The allowance for loan losses is based on management’s current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision, and considers all known internal and external factors that affect loan collectability as of the reporting date. Such evaluation, which included a review of all loans on which full collectability may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management has discussed the development and selection of this critical accounting policy with the audit committee of the Board of Directors.

Use of Estimates- 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 reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2. Principles of Consolidation

The accompanying consolidated financial statements include Wayne Savings Bancshares, Inc. and the Company’s wholly-owned subsidiary, Wayne Savings Community Bank (“Wayne Savings” or the “Bank”).

Wayne Savings has eleven banking locations in Wayne, Holmes, Ashland, Medina and Stark counties. All significant intercompany transactions and balances have been eliminated in the consolidation.

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Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2006 and 2005

3. Earnings Per Share

Basic earnings per common share are computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s Employee Stock Ownership Plan (“ESOP”) that are unallocated and not committed to be released. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company’s stock option plan. The computations are as follows:

	For the six months ended				For the three months ended
	September 30,				September 30,
	2006		2005		2006		2005
Weighted-average common shares
outstanding (basic)		3,230,084		3,365,102		3,225,249		3,273,901
Dilutive effect of assumed exercise
of stock options		12,135		18,808		11,333		14,354
Weighted-average common shares
outstanding (diluted)		3,242,219		3,383,910		3,236,582		3,288,255

All outstanding options were included in the diluted earnings per share calculation for the three and six month periods ending September 30, 2006 and 2005.

4.              Stock Option Plan

The Company maintains a 1993 incentive Stock Option Plan that provided for the issuance of 196,390 shares of authorized common stock, as adjusted, with 2,567 options outstanding at September 30, 2006. In fiscal 2004, the Company adopted a new Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options of authorized common stock. As of September 30, 2006, all options under the 2004 Plan have been granted and (excluding forfeited options), are subject to exercise at the discretion of the grantees, and will expire in fiscal 2014 unless otherwise exercised or forfeited.

In the fourth quarter of fiscal 2005, the Company adopted the provisions of SFAS No. 123(R), “Share Based Payment.” SFAS No. 123(R) requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost is then recognized over the vesting period. Subsequent to the adoption of SFAS No. 123(R), the Company modified 163,265 stock option awards under the 2004 Stock Option Plan, eliminating the reload options contained therein and immediately vesting these awards. Pursuant to SFAS No. 123(R), the modification represented a new grant. Accordingly, in accordance with the modified prospective application method under SFAS No. 123(R), the Company recognized compensation costs representing the fair value of the option awards at the date of modification.

There were no options granted during each of the six months ended September 30, 2006 and 2005.

9

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2006 and 2005

4.              Stock Option Plan (continued)

A summary of the status of the Company’s stock option plans as of and for the years ended March 31, 2006 and 2005, and the six months ended September 30, 2006 is presented below:

	Six months ended								Year ended
	September 30,								March 31,
	2006					2006					2005
				Weighted-					Weighted-					Weighted-
				average					average					average
				exercise					exercise					exercise
	Shares			price		Shares			price		Shares			price
Outstanding at beginning of period		179,148		$	13.92		214,204		$	13.84		214,204		$	13.84
Granted		-			-		-			-		163,265			13.95
Exercised		(20,000	)		13.95		(27,556	)		13.32		-			-
Forfeited		-			-		(7,500	)		13.95		(163,265	)		13.95
Outstanding at end of period		159,148		$	13.91		179,148		$	13.92		214,204		$	13.84
Options exercisable at period-end		159,148		$	13.91		179,148		$	13.92		214,204		$	13.84
Fair value of options granted				$	-				$	-				$	4.07

The following information applies to options outstanding at September 30, 2006:

Number outstanding	159,148
Range of exercise prices	$11.67 - $13.95
Weighted-average exercise price	$13.91
Weighted-average remaining contractual life	7.5 years

The fair value of options granted in fiscal 2005 has been based on the Black Scholes options pricing model using a dividend yield of 4.5% and an expected volatility of 27.3%. All options granted in fiscal 2005 have expected lives of nine years.

5.              Recent Accounting Developments

In February 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“SFAS”) No. 155, “Accounting for Certain Hybrid Instruments - an amendment of FASB Statements No. 133 and 140,” to simplify and make more consistent the accounting for certain financial instruments. Specifically, SFAS No. 155 amends SFAS No. 133, “Accounting for Derivative Instruments and Hedging Activities,” to permit fair value remeasurement for any hybrid financial instrument with an embedded derivative that otherwise would require bifurcation, provided that the whole instrument is accounted for on a fair value basis. SFAS No. 155 amends SFAS No. 140, “Accounting for Transfers and Servicing of Financial Assets and Extinguishment of Liabilities,” to allow a qualifying special purpose entity to hold a derivative instrument that pertains to a beneficial interest other than another derivative financial instrument.

SFAS No. 155 is effective for all financial instruments acquired or issued after the beginning of an entity’s first fiscal year that begins after September 15, 2006, or April 1, 2007 as to the Corporation, with earlier application allowed. The Corporation is currently evaluating SFAS No. 155, but does not expect it to have a material effect on the Corporation’s financial position or results of operations.

10

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2006 and 2005

5.              Recent Accounting Developments (continued)

In March 2006, the FASB issued SFAS No. 156, “Accounting for Servicing of Financial Assets - an amendment of SFAS No. 140,” to simplify the accounting for separately recognized servicing assets and servicing liabilities. Specifically, SFAS No. 156 amends SFAS No. 140 to require an entity to take the following steps:

· Separately recognize financial assets as servicing assets or servicing liabilities, each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts;

· Initially measure all separately recognized servicing assets and liabilities at fair value, if practicable; and

· Separately present servicing assets and liabilities subsequently measured at fair value in the statement of financial condition and additional disclosures for all separately recognized servicing assets and servicing liabilities.

Additionally, SFAS No. 156 permits, but does not require, an entity to choose either the amortization method or the fair value measurement method for measuring each class of separately recognized servicing assets and servicing liabilities. SFAS No. 156 also permits a servicer that uses derivative financial instruments to offset risks on servicing to use fair value measurement when reporting both the derivative financial instrument and related servicing asset or liability.

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or April 1, 2007 as to the Company. The Company is currently evaluating SFAS No. 156, but does not expect it to have a material effect on the Company’s financial condition or results of operations.

In September 2006, the FASB issued SFAS No. 158, “Employers Accounting for Defined Benefit Pension and Other Postretirement Plans: An Amendment of FASB Statements No. 87, 88, 106 and 132R.” The Statement requires recognition of the funded status of postretirement benefit plans in the consolidated statement of financial condition. An employer must recognize an asset or liability in its statement of financial condition for the difference between the fair value of the plan assets and the projected benefit obligations. Changes in the plan’s funded status must be recognized, in the year of change, in comprehensive income.

Additionally, the Statement will require entities to measure the funded status of the plan as of the date of the year-end statement of financial condition, with a few exceptions.

The recognition provisions of this Statement are effective for fiscal years ending after December 31, 2006, or March 31, 2007, as to the Company. The Statement is to be applied as of the end of the year adopted. Retrospective application is prohibited.

The provisions that may require an entity to change the plan measurement date are effective for fiscal years ending after December 31, 2008, or March 31, 2009, as to the Company.

Management is currently evaluating the requirements of SFAS No. 158 but does not expect it to have a material effect on its consolidated statement of financial condition and results of operations.

11

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2006 and 2005

5.              Recent Accounting Developments (continued)

In September 2006, the SEC staff issued Staff Accounting Bulletin (“SAB”) No. 108, “Considering the Effects of Prior Year Misstatements when Quantifying Misstatements in Current Year Financial Statements.”  SAB 108 was issued to provide consistency between how registrants quantify financial statement misstatements.

Historically, there have been two widely-used methods for quantifying the effects of financial statement misstatements.  These methods are referred to as the “roll-over” and “iron curtain” method.  The roll-over method quantifies the amount by which the current year income statement is misstated.  Exclusive reliance on an income statement approach can result in the accumulation of errors on the balance sheet that may not have been material to any individual income statement, but which may misstate one or more balance sheet accounts.  The iron curtain method quantifies the error as the cumulative amount by which the current year balance sheet is misstated.   Exclusive reliance on a balance sheet approach can result in disregarding the effects of errors in the current year income statement that results from the correction of an error existing in previously issued financial statements. We currently use the roll-over method for quantifying identified financial statement misstatements.

SAB 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the company’s financial statements and the related financial statement disclosures.  This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. 

SAB 108 allows registrants to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used, or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of April 1, 2006, with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

Management is currently evaluating the requirements of SAB 108 but does not expect it to have a material adverse effect on the Company’s consolidated statement of financial position or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.” The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.” Specifically, FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken on a tax return. FIN 48 also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure, and transition of uncertain tax positions. FIN 48 is effective for fiscal years beginning after December 15, 2006, or April 1, 2007 as to the Company. The Company is currently evaluating the requirements of FIN 48 but does not expect it to have a material adverse effect on the Company’s consolidated statement of financial position or results of operations.

12

Wayne Savings Bancshares, Inc.

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

Average Balance Sheet

The following tables set forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated and the average yields earned and rates paid. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

	For the six months ended September 30,
			2006							2005
	Average				Average Yield/			Average				Average Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net1	$	236,034	$	7,876		6.67	%	$	215,902	$	6,725		6.23	%
Mortgage-backed
securities2		60,714		1,481		4.88			55,971		979		3.50
Investment securities		69,376		1,455		4.19			77,412		1,533		3.96
Interest-bearing deposits3		10,427		202		3.87			16,335		242		2.96
Total interest-
earning assets		376,551		11,014		5.85			365,620		9,479		5.19
Non-interest-earning assets		22,782							25,169
Total assets	$	399,333						$	390,789
Interest-bearing liabilities:
Deposits	$	332,611		4,649		2.80		$	323,406		3,346		2.07
Borrowings		28,078		628		4.47			27,234		502		3.69
Total interest-
bearing liabilities		360,689		5,277		2.93			350,640		3,848		2.19
Non-interest bearing
liabilities		2,913							1,692
Total liabilities		363,602							352,332
Stockholders’ equity		35,731							38,457
Total liabilities and
stockholders’ equity	$	399,333						$	390,789
Net interest income			$	5,737						$	5,631
Interest rate spread4						2.92	%						3.00	%
Net yield on interest-
earning assets5						3.05	%						3.08	%
Ratio of average interest-
earning assets to average
interest-bearing liabilities						104.40	%						104.27	%

__________________________________

¹ Includes non-accrual loan balances.

² Includes mortgage-backed securities designated as available for sale.

³ Includes federal funds sold and interest-bearing deposits in other financial institutions.

⁴ Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities

⁵ Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

13

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Average Balance Sheet - (continued)

	For the three months ended September 30,
			2006							2005
	Average				Average Yield/			Average				Average Yield/
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net1	$	236,649	$	3,985		6.74	%	$	218,695	$	3,441		6.29	%
Mortgage-backed
securities2		62,906		782		4.97			53,284		467		3.51
Investment securities		67,751		712		4.20			78,075		774		3.97
Interest-bearing deposits3		10,186		99		3.88			15,053		116		3.08
Total interest-
earning assets		377,492		5,578		5.91			365,107		4,798		5.26
Non-interest-earning assets		22,706							24,609
Total assets	$	400,198						$	389,716
Interest-bearing liabilities:
Deposits	$	331,448		2,417		2.92		$	325,465		1,728		2.12
Borrowings		30,158		345		4.58			25,076		238		3.80
Total interest-
bearing liabilities		361,606		2,762		3.06			350,541		1,966		2.24
Non-interest bearing
liabilities		2,767							2,018
Total liabilities		364,373							352,559
Stockholders’ equity		35,825							37,157
Total liabilities and
stockholders’ equity	$	400,198						$	389,716
Net interest income			$	2,816						$	2,832
Interest rate spread4						2.85	%						3.02	%
Net yield on interest-
earning assets5						2.98	%						3.10	%
Ratio of average interest-
earning assets to average
interest-bearing liabilities						104.40	%						104.16	%

_____________________________________________

¹ Includes non-accrual loan balances.

² Includes mortgage-backed securities designated as available for sale.

³ Includes federal funds sold and interest-bearing deposits in other financial institutions.

⁴ Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities

⁵ Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

14

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from March 31, 2006 to September 30, 2006

At September 30, 2006, we had total assets of $405.8 million, an increase of $2.1 million, or .5%, from March 31, 2006 levels.

Liquid assets, consisting of cash, interest-bearing deposits and investment securities, decreased by $12.2 million, or 13.9%, to $75.3 million at September 30, 2006, due primarily to sales and maturities of $11.6 million of investment securities. In addition to maturities of available for sale investment securities totaling $6.4 million, investment securities held to maturity decreased $5.2 million due to the maturity of a $2.5 million corporate bond, coupled with management’s decision to sell another $2.5 million corporate bond due to deterioration of the credit rating to sub-investment level. Additionally, the interest-bearing deposits in other financial institutions decreased $1.7 million.

Mortgage-backed securities increased by $12.8 million, or 22.9%, during the six months ended September 30, 2006. Due to a decline in loan demand, management elected to use proceeds from sales and maturities of investment securities to fund purchases of mortgage-backed securities.

At September 30, 2006 loans receivable increased by $987,000, compared to March 31, 2006, as the Bank originated and retained $31.9 million of loans and received payments of $30.9 million. Rather than reinvest funds from repayments on loans in long-term, fixed-rate residential loans, the lending division has originated shorter-term and adjustable-rate commercial loans. The Company believes that investing in shorter-term and adjustable-rate commercial loans positions the Company favorably in an increasing interest rate environment. The composition of the loan portfolio has changed during the six months ended September 30, 2006, due to a net decrease of $4.3 million in residential and construction mortgage loans, offset by increases in nonresidential real estate loans of $3.8 million and a net increase in commercial loans of $1.1 million in connection with the Bank’s increased emphasis on commercial lending.

	September 30, 2006				March 31, 2006
	(Dollars in thousands)
Mortgage loans:
One-to four-family residential(1)	$	146,758	61.14	%	$	149,134	62.40	%
Residential construction loans		2,844	1.18			4,675	1.96
Multi-family residential		7,729	3.22			7,930	3.32
Non-residential real estate/land(2)		54,599	22.74			50,778	21.25
Total mortgage loans		211,930	88.28			212,517	88.93
Other loans:
Consumer loans(3)		5,464	2.28			4,901	2.05
Commercial business loans		22,683	9.44			21,550	9.02
Total other loans		28,147	11.72			26,451	11.07
Total loans before net items		240,077	100.00	%		238,968	100.00	%
Less:
Loans in process		1,804				1,729
Deferred loan origination fees		486				443
Allowance for loan losses		1,488				1,484
Total loans receivable, net	$	236,299			$	235,312
Mortgage-backed securities, net(4)	$	68,507			$	55,731

_________________________

⁽¹⁾ Includes equity loans collateralized by second mortgages in the aggregate amount of $20.3 million and $20.9 million as of September 30, 2006 and March 31, 2006, respectively. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

⁽²⁾ Includes land loans of $258,000 and $674,000 as of September 30, 2006 and March 31, 2006, respectively.

⁽³⁾ Includes second mortgage loans of $550,000 and $783,000 as of September 30, 2006 and March 31, 2006, respectively.

⁽⁴⁾Includes mortgage-backed securities designated as available for sale.

15

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from March 31, 2006 to September 30, 2006 (continued)

Non-performing loans amounted to $872,000 at September 30, 2006, as compared with $772,000 in non-performing loans at March 31, 2006. Such loans consisted, on both dates, of primarily residential mortgage loans. Historically, the Company generally has not recognized significant losses on non-performing loans secured by residential mortgages. The following table sets forth information regarding our past due, nonaccrual and impaired loans and real estate acquired through foreclosure as of September 30, 2006 and March 31, 2006.

	September 30,			March 31,
	2006			2006
	(Dollars in thousands)
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential	$	487		$	553
Nonresidential		-			-
Land		-			-
Non-mortgage loans:
Commercial business loans		25			72
Consumer loans		21			1
		533			626
Non-performing loans:
Mortgage loans:
One- to four-family residential		860			725
All other mortgage loans		-			-
Non-mortgage loans:
Commercial business loans		-			47
Consumer		12			-
Total non-performing loans		872			772
Total real estate acquired through foreclosure		97			156
Total non-performing assets	$	969		$	928
Total non-performing loans to net
loans receivable		0.37	%		0.33	%
Total non-performing loans to total assets		0.21	%		0.19	%
Total non-performing assets to total assets		0.24	%		0.23	%

16

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from March 31, 2006 to September 30, 2006 (continued)

The following table sets forth the analysis of the allowance for loan losses for the periods indicated.

	For the six months ended				For the year ended
	September 30, 2006					March 31, 2006
		(Dollars in thousands)
Loans receivable, net		$	236,299			$	235,312
Average loans receivable, net		$	236,034			$	222,944
Allowance balance (at beginning of period)		$	1,484			$	1,374
Charge-offs:
Mortgage loans:
One- to four-family			(46	)			(73	)
Residential construction			-				-
Multi-family residential			-				-
Non-residential real estate and land			(15	)			-
Other loans:
Consumer			(6	)			(75	)
Commercial			-				(10	)
Gross charge-offs			(67	)			(158	)
Recoveries:
Mortgage loans:
One- to four-family			-				14
Residential construction			-				-
Multi-family residential			-				-
Non-residential real estate and land			-				-
Other loans:
Consumer			11				35
Commercial			-				8
Gross recoveries			11				57
Net charge-offs			(56	)			(101	)
Provision charged to operations			60				211
Allowance for loans losses balance (at end
of period)		$	1,488			$	1,484
Allowance for loan losses as a percent of loans
receivable, net at end of period			0.63	%			0.63	%
Net loans charged off as a percent of average
loans receivable, net			0.02	%			0.05	%
Ratio of allowance for loan losses to non-
performing loans at end of period			170.64	%			192.23	%

Deposits totaled $327.5 million at September 30, 2006, a decrease of $5.1 million, or 1.5%, from $332.6 million at March 31, 2006, due primarily to general market competition. Savings deposits decreased by $12.7 million and Commercial Repurchase Agreements decreased by $1.1 million. These decreases were offset by an increase in NOW accounts of $5.9 million, money market growth of $1.7 million and certificates of deposit growth of $1.0 million.

Borrowings totaled $38.9 million at September 30, 2006 as compared with $32.8 million at March 31, 2006. The Company increased borrowings due to funding requirements to offset the decrease in deposits during the September 30, 2006 six month period.

17

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Discussion of Financial Condition Changes from March 31, 2006 to September 30, 2006 (continued)

Stockholders’ equity increased by $197,000, or 0.6%, during the six months ended September 30, 2006, due mainly to earnings of $1.1 million, a decrease in the unrealized losses on available for sale securities of $436,000 and proceeds from stock options exercised of $279,000, offset by the treasury stock purchase of $836,000 and dividends paid of $799,000.

Comparison of Operating Results for the Six Month Periods Ended September 30, 2006 and 2005

General

Net earnings totaled $1.1 million for the six months ended September 30, 2006, an increase of $170,000, or 18.7%, compared to the net earnings of $907,000 for the six months ended September 30, 2005. The increase in net earnings was primarily attributable to a decrease in general, administrative and other expense of $246,000, or 4.7%, and an increase in net interest income after provision for losses on loans of $46,000, or 0.8%, which were partially offset by an increase in federal income taxes of $125,000, or 40.7%.

Interest Income

Interest income increased by $1.5 million, or 16.2%, to $11.0 million for the six months ended September 30, 2006, compared to the same period in 2005. This increase was mainly due to an increase in the weighted-average yield on interest-earning assets to 5.85% from 5.19% for the six-month period ended September 30, 2005. Additionally, the average balance of interest-earning assets outstanding increased by $10.9 million to $376.6 million for the six months ended September 30, 2006, from $365.6 million for the comparable period ended September 30, 2005. The yield increase is primarily due to the Federal Reserve raising the prime rate by 2.0% over the past year and the corresponding impact on the Company’s interest-earning assets, particularly investment securities and interest-bearing deposits.

Interest income on loans increased by $1.2 million, or 17.1%, for the six months ended September 30, 2006, compared to the same period in 2005, due primarily an increase in the average balance of loans outstanding period to period of $20.1 million, or 9.3%, to $236.0 million for the 2006 period, coupled with an increase in the weighted-average yield of 44 basis points to 6.67% for the six months ended September 30, 2006.

Interest income on mortgage-backed securities increased by $502,000, or 51.3%, during the six months ended September 30, 2006, compared to the same period in 2005, due primarily to an increase of 138 basis points in the weighted-average yield to 4.88% in the 2006 period as compared to 3.50% for the comparable 2005 period. The slowdown of prepayments caused premium amortization to decrease, resulting in an increase in interest income on mortgage-backed securities. In addition to the increased weighted-average rate, the average balance increased by $4.7 million, or 8.5% over the six months ended September 30, 2006 compared to the same period in 2005.

Interest income on investment securities decreased by $78,000, or 5.1%, during the six-months ended September 30, 2006, compared to the same period in 2005, reflecting a decrease in the average balance of $8.0 million, or 10.4%, to $69.4 million from $77.4 million during the comparable 2005 period, offset by an increase in the weighted-average yield to 4.19% from 3.96% for the six month period in 2005.

Interest income on interest-bearing deposits decreased by $40,000, or 16.5%, for the six months ended September 30, 2006, compared to the same period in 2005, due primarily to a decrease in the average balance outstanding of $5.9 million, or 36.2%, offset by an increase in the weighted-average yield of 91 basis points to 3.87% for the 2006 period from 2.96% for the six months ended September 30, 2005.

18

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Six Month Periods Ended September 30, 2006 and 2005 (continued)

Interest Expense

Interest expense totaled $5.3 million for the six months ended September 30, 2006, an increase of $1.4 million, or 37.1%, over the six months ended September 30, 2005. The increase resulted from a 74 basis point increase in the weighted-average cost of funds to 2.93% for the 2006 period, coupled with an increase in the average balance of deposits and borrowings outstanding of $10.0 million, or 2.9%, to $360.7 million for the six-month period ended September 30, 2006.

Interest expense on deposits totaled $4.6 million for the six months ended September 30, 2006, an increase of $1.3 million, or 38.9%, compared to the six months ended September 30, 2005, as a result of a 73 basis point increase in the weighted-average cost of deposits to 2.80% for the 2006 period, coupled with an increase in the average balance outstanding of $9.2 million, or 2.8%, to $332.6 million for the 2006 period.

Interest expense on borrowings totaled $628,000 for the six months ended September 30, 2006, an increase of $126,000, or 25.1%, over the 2005 period, primarily due to an increase in the weighted-average yield of 78 basis points to 4.47% for the six months ended September 30, 2006, coupled with an increase in the average balance outstanding of $844,000, or 3.1%.

Net Interest Income

Net interest income totaled $5.7 million for the six months ended September 30, 2006, an increase of $106,000, or 1.9%, over the six month period ended September 30, 2005. The average interest rate spread decreased to 2.92% for the six months ended September 30, 2006 from 3.00% for the six months ended September 30, 2005. The net interest margin decreased to 3.05% for the six months ended September 30, 2006 from 3.08% for the six months ended September 30, 2005.

Provision for Losses on Loans

Management recorded a $60,000 provision for losses on loans for the six-month period ended September 30, 2006. The Company did not record any provision for losses on loans for the six month period ended September 30, 2005. This increase was primarily due to the shift in the composition of the loan portfolio discussed above. To the best of management’s knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of September 30, 2006.

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, gain on sale of loans, service fees and charges on deposit accounts increased by $3,000, or 0.4%, for the six months ended September 30, 2006, as compared with the six months ending September 30, 2005. Gain on sale of loans was down $69,000 due to management’s decision to retain mortgage loans originated in the portfolio instead of selling them into the secondary market. The decrease in cash surrender value of life insurance of $15,000, or 12.0%, was due to a decrease in the average balance on these policies. These decreases were offset by an increase of $87,000, or 13.2%, in service fees, charges and other operating income which was mainly comprised of general depositor service charges and an increase in trust income.

19

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Six Month Periods Ended September 30, 2006 and 2005 (continued)

General, Administrative and Other Expense

General, administrative and other expense decreased by $246,000, or 4.7%, to $5.0 million for the six months ended September 30, 2006 compared to the six months ended September 30, 2005. Employee compensation and benefits expense decreased by $266,000, or 8.5%, due primarily to management’s successful efforts to reduce the number of full time equivalent employees from 128 at September 30, 2005 to 114 at September 30, 2006. The majority of this reduction occurred through attrition. Additionally, during the six-month period ended September 30, 2006, management undertook an initiative to enhance the Bank’s sales culture at the branch manager level. In connection with this initiative several employees left the Bank and the Bank incurred approximately $84,000 in severance costs. Franchise taxes were reduced by $63,000, or 24.1%, due primarily to the effects of the treasury stock repurchase programs from prior years. These decreases were offset by an increase of $51,000, or 5.2%, in other operating expense mainly due to an increase in internet banking expenses, and a $34,000, or 3.8%, increase in occupancy and equipment expense which was due primarily to data processing expenses needed to facilitate growth in internet banking, the implementation of check imaging technology and increased building maintenance, insurance and taxes at our branches.

Federal Income Taxes

Federal income tax expense was $432,000 for the six months ended September 30, 2006, an increase of $125,000, or 40.7%, compared to the same period in 2005, primarily due to the $295,000, or 24.3%, increase in earnings before taxes. The difference in the effective tax rate from the 34% statutory rate was mainly due to the beneficial effects of income from the cash surrender value on life insurance and other tax-exempt obligations.

Comparison of Operating Results for the Three Month Periods Ended September 30, 2006 and 2005

General

Net earnings totaled $484,000 for the quarter ended September 30, 2006, an increase of $17,000, or 3.6%, compared to the net earnings of $467,000 for the quarter ended September 30, 2005. The increase in net earnings was primarily attributable to a decrease in general, administrative and other expense of $114,000, or 4.3%, offset by a decrease in net interest income after provision for losses on loans of $46,000, or 1.6%, an increase in federal income taxes of $36,000, or 22.6% and a decrease in other operating income of $15,000, or 3.4%.

Interest Income

Interest income increased by $780,000, or 16.3%, to $5.6 million for the three months ended September 30, 2006, compared to the same period in 2005. This increase was mainly due to an increase in the weighted-average yield on interest-earning assets to 5.91% for the 2006 period from 5.26% for the three-month period ended September 30, 2005. The increase in yield was primarily due to the Federal Reserve raising the prime rate by 2.0% over the past year and the corresponding impact on the Company’s interest-earning assets, particularly investment securities and interest-bearing deposits.

Interest income on loans increased by $544,000, or 15.8%, for the three months ended September 30, 2006, compared to the same period in 2005, due primarily to an increase in the average balance of loans outstanding period to period of $18.0 million, or 8.2%, to $236.6 million for the 2006 period, coupled with an increase in the weighted-average yield of 45 basis points to 6.74%.

20

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended September 30, 2006 and 2005 (continued)

Interest Income (continued)

Interest income on mortgage-backed securities increased by $315,000, or 67.5%, during the three months ended September 30, 2006, compared to the same period in 2005, due primarily to an increase of 146 basis points in the weighted-average yield to 4.97% for the 2006 period as compared to 3.51% for the comparable 2005 period. The slowdown of prepayments caused premium amortization to decrease, resulting in an increase in interest income on mortgage-backed securities. In addition to the increased weighted-average rate, the average balance outstanding increased by $9.6 million, or 18.1%.

Interest income on investment securities decreased by $62,000, or 8.0%, during the three months ended September 30, 2006, compared to the same period in 2005, reflecting a decrease in the average balance outstanding of $10.3 million, or 13.2%, to $67.8 million in the 2006 period from $78.1 million during the comparable 2005 period, offset by an increase in the weighted-average yield of 23 basis points to 4.20%.

Interest income on interest-bearing deposits decreased by $17,000, or 14.7%, for the three months ended September 30, 2006, due primarily to a decrease in the average balance outstanding of $4.9 million, or 32.3%, offset by an increase in the weighted-average yield of 80 basis points to 3.88% from 3.08% for the quarter ended September 30, 2005.

Interest Expense

Interest expense totaled $2.8 million for the three months ended September 30, 2006, an increase of $796,000, or 40.5%, compared to the three months ended September 30, 2005. The increase resulted from an 82 basis point increase in the average cost of funds to 3.06% for the 2006 period, coupled with an increase in the average balance of deposits and borrowings outstanding of $11.1 million, or 3.2%, to $361.6 million for the three-month period ended September 30, 2006.

Interest expense on deposits totaled $2.4 million for the three months ended September 30, 2006, an increase of $689,000, or 39.9%, compared to the three months ended September 30, 2005, as a result of an increase in the weighted-average cost of deposits of 80 basis points to 2.92% for the 2006 period, coupled with an increase in the average balance outstanding of $6.0 million, or 1.8%, to $331.4 million for the 2006 period.

Interest expense on borrowings totaled $345,000 for the three months ended September 30, 2006, an increase of $107,000, or 45.0%, over the 2005 period, primarily due to an increase in the weighted-average yield of 78 basis points to 4.58% for the three months ended September 30, 2006, and an increase in the average balance outstanding of $5.1 million, or 20.3%.

Net Interest Income

Net interest income totaled $2.8 million for the three months ended September 30, 2006, a decrease of $16,000, or 0.6%, from the three month period ended September 30, 2005. The average interest rate spread decreased to 2.85% for the three months ended September 30, 2006 from 3.02% for the three months ended September 30, 2005. The net interest margin decreased to 2.98% for the three months ended September 30, 2006 from 3.10% for the three months ended September 30, 2005. The interest rate spread decrease was primarily a result of the Bank’s cost of funds increasing at a higher rate, due to competition for deposits in our local market area and changes in consumer preferences toward higher yielding certificates of deposit, than the loan portfolio’s adjustable rates repricing upward and higher yielding new loans being added.

21

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Comparison of Operating Results for the Three Month Periods Ended September 30, 2006 and 2005 (continued)

Provision for Losses on Loans

Management recorded a $30,000 provision for losses on loans for the three-month period ended September 30, 2006. The Company did not record any provision for losses on loans for the three month period ending September 30, 2005. This increase was primarily due to the shift in the composition of the loan portfolio discussed above. To the best of management’s knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of September 30, 2006.

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, gain on sale of loans, service fees, and charges on deposit accounts decreased by $15,000, or 3.4%, for the three months ended September 30, 2006 as compared with the quarter ended September 30, 2005. Gain on sale of loans was down $44,000 due to management’s decision to retain mortgage loans originated in the portfolio instead of selling them in the secondary market. The cash surrender value of life insurance decreased by $8,000, or 12.7%, due to a decrease in average balance on these policies. These decreases were offset by an increase of $37,000, or 10.9%, in service fees, charges and other operating income, which was mainly comprised of general depositor service charges coupled with an increase in trust income.

General, Administrative and Other Expense

General, administrative and other expense decreased by $114,000, or 4.3%, to $2.5 million for the three months ended September 30, 2006 compared to the three months ended September 30, 2005. Employee compensation and benefits expense decreased by $95,000, or 6.2%, mainly due to management’s successful efforts to reduce the number of full time equivalent employees from 128 at September 30, 2005 to 114 at September 30, 2006. The majority of this reduction occurred through attrition. Additionally, during the three-month period ended September 30, 2006, management undertook an initiative to enhance the Bank’s sales culture at the branch manager level. In connection with this initiative several employees left the Bank and the Bank incurred approximately $84,000 in severance costs. Franchise taxes were reduced by $52,000, or 39.4%, as a result of the treasury stock repurchase programs from prior years. These decrease were offset by an increase of $33,000, or 6.8%, in other operating expense due primarily to data processing expenses needed to facilitate growth in internet banking, the implementation of check imaging technology and increased building maintenance, insurance and taxes at our branches.

Federal Income Taxes

Federal income tax expense was $195,000 for the three months ended September 30, 2006, an increase of $36,000, or 22.6%, compared to the same period in 2005, primarily due to the $53,000, or 8.5%, increase in earnings before taxes. The difference in the effective tax rate from the 34% statutory rate is mainly due to the beneficial effects of income from the cash surrender value on life insurance and other tax-exempt obligations.

22

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS (CONTINUED)

Forward-Looking Statements

This document contains forward-looking statements, which can be identified by the use of words such as “estimate,” “project,” “believe,” “intend,” “anticipate,” “plan,” “seek,” “expect” and similar expressions. These forward-looking statements include: statements of goals, intentions and expectations, statements regarding prospects and business strategy, statements regarding asset quality and market risk, and estimates of future costs, benefits and results.

These forward-looking statements are subject to significant risks, assumptions and uncertainties, including, among other things, the following: (1) general economic conditions, (2) competitive pressure among financial services companies, (3) changes in interest rates, (4) deposit flows, (5) loan demand, (6) changes in legislation or regulation, (7) changes in accounting principles, policies and guidelines, (8) litigation liabilities, including costs, expenses, settlements and judgments, and (9) other economic, competitive, governmental, regulatory and technological factors affecting our operations, pricing, products and services.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements. We have no obligation to update or revise any forward-looking statements to reflect any changed assumptions, any unanticipated events or any changes in the future.

ITEM 3QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

Management believes there has been no material change in the Company’s market risk since the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2006.

ITEM 4         CONTROLS AND PROCEDURES

(a) Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report. Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or our consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

(b)Changes in internal controls.

There has been no change made in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Wayne Savings Bancshares, Inc.

PART II

ITEM 1.      Legal Proceedings

Not applicable

ITEM 1A.Risk Factors

Not applicable

ITEM 2.      Unregistered Sales of Equity Securities and Use of Proceeds

(a) Not applicable

(b) Not applicable

(c) The following table sets forth certain information regarding repurchases by the Company for the quarter ended September 30, 2006.

					Total # of		Maximum # of shares
	Total		Average		shares purchased		which may still be
	# of shares		price paid		as part of the		purchased as part
Period	purchased		per share		announced plan		of the announced plan
July 1-31, 2006		-	$	-		-		140,105
August 1-31, 2006		39,500	$	15.14		39,500		100,605
September 1-30, 2006		16,000	$	14.86		16,000		84,605

Notes to the Table:

On June 6, 2005, the Company announced the completion of the repurchase program and the authorization by the Board of Directors of a new program for the repurchase of 352,433 shares, or 10% of the Company’s outstanding shares.

ITEM 3.       Defaults Upon Senior Securities

Not applicable

ITEM 4.       Submission of Matters to a Vote of Security Holders

The Company held its Annual Meeting of Stockholders on July 27, 2006. Two matters were presented to the shareholders for a vote: The stockholders elected two directors for terms expiring in 2009 by the following votes:

	For	Withheld
Kenneth R. Lehman	2,329,236	197,721
James C. Morgan	2,329,440	197,516

The following directors terms continued after the meeting: Phillip E. Becker, Daniel R. Buehler, Terry A. Gardner, Russell L. Harpster and Frederick J. Krum.

The stockholders ratified the selection of Grant Thornton LLP as the Company’s auditors for the fiscal year ending March 31, 2007, by the following vote:

For: 2,485,350 Against: 27,593 Abstain: 14,013

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Wayne Savings Bancshares, Inc.

PART II (CONTINUED)

ITEM 5.                  Other Information

Not applicable

ITEM 6.                  Exhibits

EX-31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
EX-31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350
EX-32	Written Statement of Chief Executive Officer and Chief Financial Officer furnished pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

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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.

Date:     November 7, 2006	By:	/s/ Phillip E. Becker
		Phillip E. Becker
		President and Chief Executive Officer
Date:     November 7, 2006	By:	/s/ H. Stewart Fitz Gibbon III
		H. Stewart Fitz Gibbon III
		Executive Vice President and
		Chief Financial Officer

26