Wayne Savings Bancshares (WAYN) 10-Q 2007 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, 2007

OR

o TRANSITION 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 o

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

Large accelerated filer o Accelerated filer o 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 o  No ý

As of November 13, 2007, the latest practicable date, 3,143,322 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 Balance Sheets	3
	Consolidated Statements of Income	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	12
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 BALANCE SHEETS

(In thousands, except share data)

	September 30,			March 31,
ASSETS	2007			2007
	(Unaudited)
Cash and due from banks	$	2,227		$	2,194
Federal funds sold		2,400			9,000
Interest-earning deposits in other financial institutions		5,286			6,021
Cash and cash equivalents		9,913			17,215
Investment securities available for sale - at fair value		44,167			54,128
Investment securities held to maturity - at amortized cost, approximate
fair value of $518 and $573 at September 30, 2007 and March 31, 2007,
Respectively		512			565
Mortgage-backed securities available for sale - at fair value		73,413			67,856
Mortgage-backed securities held to maturity - at amortized cost, approximate
fair value of $959 and $1,219 at September 30, 2007 and March 31, 2007,
Respectively		955			1,209
Loans receivable - net of allowance for loan losses of $1,605 and $1,523
at September 30, 2007 and March 31, 2007, respectively		245,443			240,049
Office premises and equipment - net		8,113			8,179
Real estate acquired through foreclosure		7			-
Federal Home Loan Bank stock - at cost		4,829			4,829
Cash surrender value of life insurance		6,150			6,034
Accrued interest receivable on loans		1,136			1,100
Accrued interest receivable on mortgage-backed securities		338			314
Accrued interest receivable on investments and interest-bearing deposits		456			667
Prepaid expenses and other assets		1,046			1,065
Goodwill and other intangible assets		2,348			2,402
Prepaid federal income taxes		92			125
Total assets	$	398,918		$	405,737
LIABILITIES AND STOCKHOLDERS’ EQUITY
Deposits	$	322,631		$	333,540
Advances from the Federal Home Loan Bank		39,000			34,500
Advances by borrowers for taxes and insurance		656			616
Accrued interest payable		471			383
Accounts payable on mortgage loans serviced for others		178			197
Other liabilities		1,025			1,071
Deferred federal income taxes		889			997
Total liabilities		364,850			371,304
Commitments		-			-
Stockholders’ equity
Preferred stock (500,000 shares of $.10 par value authorized; no
shares issued)		-			-
Common stock (9,000,000 shares of $.10 par value authorized; 3,978,731
shares issued)		398			398
Additional paid-in capital		36,106			36,106
Retained earnings - substantially restricted		12,292			11,982
Less required contributions for shares acquired by Employee Stock
Ownership Plan		(1,158	)		(1,158	)
Less 835,409 and 784,622 shares of treasury stock at September 30, 2007
and March 31, 2007, respectively - at cost		(13,062	)		(12,419	)
Accumulated comprehensive loss, net of tax benefits		(508	)		(476	)
Total stockholders’ equity		34,068			34,433
Total liabilities and stockholders’ equity	$	398,918		$	405,737

      

See notes to consolidated financial statements.      

     

3

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF INCOME

For the six and three months ended September 30, 2007 and 2006

 (Dollars in thousands, except share data)

(Unaudited)

	Six months					Three months
	ended					ended
	September 30,					September 30,
	2007			2006		2007			2006
Interest income
Loans	$	8,314		$	7,876	$	4,224		$	3,985
Mortgage-backed securities		1,907			1,481		985			782
Investment securities		1,005			1,455		473			712
Interest-bearing deposits and other		266			202		111			99
Total interest income		11,492			11,014		5,793			5,578
Interest expense
Deposits		5,069			4,649		2,538			2,417
Borrowings		823			628		437			345
Total interest expense		5,892			5,277		2,975			2,762
Net interest income		5,600			5,737		2,818			2,816
Provision for losses on loans		55			60		25			30
Net interest income after provision for losses on loans		5,545			5,677		2,793			2,786
Other income
Increase in cash surrender value of life insurance		116			110		58			55
Trust income		96			53		40			26
Gain on disposal of real estate acquired through foreclosure		31			-		31			-
Service fees, charges and other operating		674			694		340			350
Total other income		917			857		469			431
General, administrative and other expense
Employee compensation and benefits		2,783			2,847		1,400			1,449
Occupancy and equipment		983			935		497			477
Federal deposit insurance premiums		19			20		9			10
Franchise taxes		194			198		98			80
Amortization of intangible assets		53			53		26			27
Other operating		992			972		500			495
Total general, administrative and other expense		5,024			5,025		2,530			2,538
Income before income taxes		1,438			1,509		732			679
Federal incomes taxes
Current		459			298		229			90
Deferred		(91	)		134		(44	)		105
Total federal income taxes		368			432		185			195
NET INCOME	$	1,070		$	1,077	$	547		$	484
EARNINGS PER SHARE
Basic	$	0.35		$	0.33	$	0.18		$	0.15
Diluted	$	0.35		$	0.33	$	0.18		$	0.15
DIVIDENDS PER SHARE	$	0.24		$	0.24	$	0.12		$	0.12

      

See notes to consolidated financial statements.      

      

4

Wayne SavingsBancshares, Inc.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

(In thousands)

(Unaudited)

	Six months						Three months
	ended						ended
	September 30,						September 30,
	2007			2006			2007			2006
Net income	$	1,070		$	1,077		$	547		$	484
Other comprehensive income:
Unrealized holding gains (losses) on securities,  net of related
taxes (benefits) of $(16), $225, $416 and $485 during the
respective periods		(32	)		436			807			941
Comprehensive income	$	1,038		$	1,513		$	1,354		$	1,425
Accumulated comprehensive loss	$	(508	)	$	(575	)	$	(508	)	$	(575	)

      

See notes to consolidated financial statements.      

      

5

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the six months ended September 30,

(In thousands)

	2007			2006
	(Unaudited)
Cash flows from operating activities:
Net income for the period	$	1,070		$	1,077
Adjustments to reconcile net income to net cash provided by
operating activities:
Amortization of discounts and premiums on loans,
investments and mortgage-backed securities – net		(33	)		(52	)
Amortization of deferred loan origination fees		(26	)		(30	)
Depreciation and amortization		321			348
Amortization of expense related to ESOP		-			40
Provision for losses on loans		55			60
Federal Home Loan Bank stock dividends		-			(135	)
Increase in cash surrender value of life insurance		(116	)		(111	)
Increase (decrease) in cash due to changes in:
Accrued interest receivable on loans		48			(85	)
Accrued interest receivable on mortgage-backed securities		(24	)		(60	)
Accrued interest receivable on investments and interest-bearing deposits		127			(66	)
Prepaid expenses and other assets		19			(68	)
Amortization of intangible assets		53			53
Accrued interest payable		88			75
Accounts payable on mortgage loans serviced for others		(19	)		(4	)
Other liabilities		(46	)		482
Federal income taxes
Current		33			(331	)
Deferred		(91	)		134
Net cash provided by operating activities		1,459			1,327
Cash flows from investing activities:
Purchase of investment securities designated as available for sale		(6,569	)		(1,101	)
Proceeds from maturity of investment securities designated as held to maturity		53			2,681
Proceeds from sale of investment securities designated as held to maturity		-			2,512
Proceeds from maturity of investment securities designated as available for sale		16,616			6,430
Purchase of mortgage-backed securities designated as available for sale		(16,451	)		(15,584	)
Principal repayments on mortgage-backed securities designated as held to maturity		252			305
Principal repayments and sales of mortgage-backed securities designated as
available for sale		10,795			2,761
Loan principal repayments		25,668			30,932
Loan disbursements		(31,098	)		(31,949	)
Purchase of office premises and equipment - net		(255	)		(179	)
Proceeds from sale of real estate acquired through foreclosure		-			59
Net cash used in investing activities		(989	)		(3,133	)
Net cash provided by (used in) operating and investing activities
(balance carried forward)		470			(1,806	)

      

See notes to consolidated financial statements.      

      

6

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the six months ended September 30,

(In thousands)

	2007			2006
	(Unaudited)
Net cash provided by (used in) operating and investing activities
(balance brought forward)	$	470		$	(1,806	)
Cash flows from financing activities:
Net decrease in deposit accounts		(10,909	)		(5,094	)
Proceeds from Federal Home Loan Bank advances		27,000			71,400
Repayments of Federal Home Loan Bank advances		(22,500	)		(65,250	)
Advances by borrowers for taxes and insurance		40			9
Dividends paid on common stock		(760	)		(799	)
Proceeds from exercise of stock options		-			279
Purchase of treasury shares		(643	)		(836	)
Net cash used in financing activities		(7,772	)		(291	)
Net decrease in cash and cash equivalents		(7,302	)		(2,097	)
Cash and cash equivalents at beginning of period		17,215			14,123
Cash and cash equivalents at end of period	$	9,913		$	12,026
Supplemental disclosure of cash flow information:
Cash paid during the period for:
Federal income taxes	$	535		$	630
Interest on deposits and borrowings	$	5,804		$	5,202
Supplemental disclosure of noncash investing activities:
Transfers from loans to real estate acquired through foreclosure	$	113		$	-
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects	$	(32	)	$	436
Dividends payable	$	377		$	396

See 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, 2007 and 2006

1. Basis of Presentation

The accompanying unaudited consolidated financial statements for the six and three months ended September 30, 2007 and 2006 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, 2007.

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, 2007 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.

8

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2007 and 2006

3. Earnings Per Share

Basic earnings per common share is 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,
	2007		2006		2007		2006
Weighted-average common shares
outstanding (basic)		3,078,585		3,230,084		3,071,966		3,225,249
Dilutive effect of assumed exercise
of stock options		82		12,135		-		11,333
Weighted-average common shares
outstanding (diluted)		3,078,667		3,242,219		3,071,966		3,236,582

None of the outstanding options were included in the diluted earnings per share calculation for the three month period ended September 30, 2007 as the average share price was less than the option exercise prices.  All of  the outstanding options were included in the diluted earnings per share calculation for the six month periods ended in both 2007 and 2006 and for three month period ended September 30, 2006.

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 no options outstanding at September 30, 2007.  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 with respect to authorized common stock.  As of September 30, 2007, 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.

The Company accounts for the stock plan in accordance with 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.  There were no options granted during each of the six and three month periods ended September 30, 2007 and 2006.  There was no compensation expense recognized for the stock option plan during the three or six month periods ended September 30, 2007 and 2006, as all options were fully vested prior to these periods.

9

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2007 and 2006

4.             Stock Option Plan (continued)

A summary of the status of the Company’s stock option plans as of and for the six months ended September 30, 2007 and for the years ended March 31, 2007 and 2006, is presented below:

	Six months ended				Year ended
	September 30,				March 31,
	2007				2007					2006
			Weighted-					Weighted-					Weighted-
			average					average					average
			exercise					exercise					exercise
	Shares		price		Shares			price		Shares			price
Outstanding at beginning of period		114,224	$	13.95		179,148		$	13.92		214,204		$	13.84
Granted		-		-		-			-		-			-
Exercised		-		-		(60,924	)		13.86		(27,556	)		13.32
Forfeited		-		-		(4,000	)		13.95		(7,500	)		13.95
Outstanding at end of period		114,224	$	13.95		114,224		$	13.95		179,148		$	13.92
Options exercisable at period-end		114,224	$	13.95		114,224		$	13.95		179,148		$	13.92

The following information applies to options outstanding at September 30, 2007:

Number outstanding	114,224
Exercise price on all remaining options outstanding	$13.95
Weighted-average remaining contractual life	6.5 years

5.             Recent Accounting Developments

In March 2006, the Financial Accounting Standards Board (“FASB”) issued Statement of Financial Accounting Standards (“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.

10

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the six and three month periods ended September 30, 2007 and 2006

5. Recent Accounting Developments (continued)

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.  Management adopted SFAS No. 156 effective April 1, 2007, as required, without material effect on the Company’s consolidated statements of financial condition 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.  Management adopted FIN 48 effective April 1, 2007, as required, without material effect on the Company’s consolidated statements of financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability.  This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset.  Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data.  This Statement is effective for fiscal years beginning after November 15, 2007, or April 1, 2008 as to the Company, and interim periods within that fiscal year.  The adoption of this Statement is not expected to have a material adverse effect on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”  This Statement allows companies the choice to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or April 1, 2008 as to the Company, and interim periods within that fiscal year.  Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements.”  The Company is currently evaluating the impact the adoption of SFAS No. 159 will have on the financial statements.

11

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,
	2007							2006
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net1	$	242,817	$	8,314		6.85	%	$	236,034	$	7,876		6.67	%
Mortgage-backed
securities2		72,405		1,907		5.27			60,714		1,481		4.88
Investment securities		47,009		1,005		4.28			69,376		1,455		4.19
Interest-bearing deposits3		11,759		266		4.52			10,427		202		3.87
Total interest-
earning assets		373,990		11,492		6.15			376,551		11,014		5.85
Non-interest-earning assets		21,827							22,782
Total assets	$	395,817						$	399,333
Interest-bearing liabilities:
Deposits	$	324,064		5,069		3.13		$	332,611		4,649		2.80
Borrowings		34,074		823		4.83			28,078		628		4.47
Total interest-
bearing liabilities		358,138		5,892		3.29			360,689		5,277		2.93
Non-interest bearing
Liabilities		3,544							2,913
Total liabilities		361,682							363,602
Stockholders’ equity		34,135							35,731
Total liabilities and
stockholders’ equity	$	395,817						$	399,333
Net interest income			$	5,600						$	5,737
Interest rate spread4						2.86	%						2.92	%
Net yield on interest-
earning assets5						2.99	%						3.05	%
Ratio of average interest-
earning assets to average
interest-bearing liabilities						104.43	%						104.40	%

________________________________________________

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.

12

Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL

CONDITION AND RESULTS OF OPERATIONS

Average Balance Sheet – (continued)

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 three months ended September 30,
	2007							2006
	Average				Average			Average				Average
	Balance		Interest		Rate			Balance		Interest		Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net1	$	245,545	$	4,224		6.88	%	$	236,649	$	3,985		6.74	%
Mortgage-backed
securities2		73,258		985		5.38			62,906		782		4.97
Investment securities		44,034		473		4.30			67,751		712		4.20
Interest-bearing deposits3		10,090		111		4.40			10,186		99		3.88
Total interest-
earning assets		372,927		5,793		6.21			377,492		5,578		5.91
Non-interest-earning assets		21,727							22,706
Total assets	$	394,654						$	400,198
Interest-bearing liabilities:
Deposits	$	321,686		2,538		3.16		$	331,448		2,417		2.92
Borrowings		35,914		437		4.87			30,158		345		4.58
Total interest-
bearing liabilities		357,600		2,975		3.33			361,606		2,762		3.06
Non-interest bearing
liabilities		3,065							2,767
Total liabilities		360,665							364,373
Stockholders’ equity		33,989							35,825
Total liabilities and
stockholders’ equity	$	394,654						$	400,198
Net interest income			$	2,818						$	2,816
Interest rate spread4						2.88	%						2.85	%
Net yield on interest-
earning assets5						3.02	%						2.98	%
Ratio of average interest-
earning assets to average
interest-bearing liabilities						104.29	%						104.40	%

_________________________________________________

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)

Discussion of Financial Condition Changes from March 31, 2007 to September 30, 2007

At September 30, 2007, the Company had total assets of $398.9 million, a decrease of $6.8 million, or 1.7%, from March 31, 2007 levels.

Liquid assets, consisting of cash, federal funds sold, interest-bearing deposits and investment securities, decreased by $17.3 million, or 24.1%, during the six months ended September 30, 2007, to $54.6 million.  Investment securities decreased by $10.0 million, due primarily to maturities totaling $16.7 million, partially offset by purchases of $6.6 million.  Cash and cash equivalents decreased by $17.3 million, including a reduction of federal funds sold of $6.6 million.  The decrease in federal funds sold is directly related to the reduction in deposit balances, as management chose to use such funds to redeem certain higher rate certificates of deposit as part of its efforts to reduce the Company’s cost of funds by using lower rate advances rather than certificates of deposit with higher rates due to competitive pressures in the Company’s market area.

Mortgage-backed securities increased by $5.3 million, or 7.7%, during the six months ended September 30, 2007.  Management utilized funds from principal repayments and proceeds from maturities of investment securities to purchase $16.5 million of mortgage-backed securities during the period.  The purchases were partially offset by $11.0 million in principal repayments coupled with a decrease in market value of $110,000.

At September 30, 2007, loans receivable increased by $5.4 million, or 2.2%, compared to March 31, 2007, as the Bank originated and retained $31.1 million of loans and received payments of $25.7 million.  The lending division has focused on the origination of shorter-term and adjustable-rate commercial and commercial real estate loans.  The Company believes that investing in shorter-term and adjustable-rate commercial loans positions the Company more favorably from an interest rate risk management perspective.  The composition of the loan portfolio has changed during the six months ended September 30, 2007, due to a net increase of $3.6 million in non-residential real estate loans, and an increase of $699,000 in consumer loans, which were offset by a decrease in commercial loans of $739,000 and a decrease of $2.0 million in one- to four-family residential loans.

	September 30, 2007				March 31, 2007
	(Dollars in thousands)
Mortgage loans:
One- to four-family residential1	$	142,294	56.64	%	$	144,311	57.88	%
Residential construction loans		2,257	.90			2,019	.81
Multi-family residential		9,060	3.61			8,938	3.58
Non-residential real estate/land2		65,476	26.06			61,873	24.82
Total mortgage loans		219,087	87.21			217,141	87.09
Other loans:
Consumer loans3		6,159	2.45			5,460	2.19
Commercial business loans		25,991	10.34			26,730	10.72
Total other loans		32,150	12.79			32,190	12.91
Total loans before net items		251,237	100.00	%		249,331	100.00	%
Less:
Loans in process		3,766				7,334
Deferred loan origination fees		423				425
Allowance for loan losses		1,605				1,523
Total loans receivable, net	$	245,443			$	240,049
Mortgage-backed securities, net4	$	74,368			$	69,065

¹ Includes equity loans collateralized by second mortgages in the aggregate amount of $17.9 million and $19.2 million as of September 30, 2007 and March 31, 2007, respectively.  Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

² Includes land loans of $205,000 and $204,000 as of September 30, 2007 and March 31, 2007, respectively.

³ Includes second mortgage loans of $348,000 and $425,000 as of September 30, 2007 and March 31, 2007, respectively.

⁴ Includes the carrying values of mortgage-backed securities both designated as available for sale and held to maturity.

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, 2007 to September 30, 2007 (continued)

Loans past due 30-89 days increased to $1.2 million at September 30, 2007, compared to $0.3 million at March 31, 2007.  Management believes that the increase is due mainly to local economic conditions and these conditions have been considered as part of management’s analysis of the allowance for loan losses and the provision for losses on loans made during the period as discussed under results of operations below.

Non-performing loans amounted to $840,000 at September 30, 2007, compared with $950,000 in non-performing loans at March 31, 2007.  Such loans as of September 30, 2007 consisted entirely of residential mortgage loans compared to March 31, 2007, when non-performing loans were comprised of $683,000 in residential mortgage loans and a $267,000 commercial business loan, which is sixty days past due as of September 30, 2007.  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, 2007 and March 31, 2007.

	September 30,			March 31,
	2007			2007
	(Dollars in thousands)
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential	$	915		$	270
Nonresidential		-			-
Land		-			-
Non-mortgage loans:
Commercial business loans		264			-
Consumer loans		3			11
	$	1,182		$	281
Non-performing loans:
Mortgage loans:
One- to four-family residential1	$	840		$	683
All other mortgage loans		-			-
Non-mortgage loans:
Commercial business loans		-			267
Consumer		-			-
Total non-performing loans		840			950
Total real estate acquired through foreclosure		7			-
Total non-performing assets	$	847		$	950
Total non-performing loans to net
loans receivable		0.34	%		0.40	%
Total non-performing loans to total assets		0.21	%		0.23	%
Total non-performing assets to total assets		0.21	%		0.23	%

_________________________________

¹ Includes home equity lines of credit.

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, 2007 to September 30, 2007 (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, 2007				March 31, 2007
		(Dollars in thousands)
Loans receivable, net		$	245,443		$	240,049
Average loans receivable, net		$	242,817		$	237,429
Allowance balance (at beginning of period)		$	1,523		$	1,484
Charge-offs:
Mortgage loans:
One- to four-family			-			(31	)
Residential construction			-			-
Multi-family residential			-			-
Non-residential real estate and land			-			(31	)
Other loans:
Consumer			-			(21	)
Commercial			-			-
Gross charge-offs			-			(83	)
Recoveries:
Mortgage loans:
One- to four-family			13			1
Residential construction			-			-
Multi-family residential			-			-
Non-residential real estate and land			-			-
Other loans:
Consumer			14			21
Commercial			-			-
Gross recoveries			27			22
Net (charge-offs) recoveries			27			(61	)
Provision charged to operations			55			100
Allowance for loans losses balance (at end
of period)		$	1,605		$	1,523
Allowance for loan losses as a percent of loans
receivable, net at end of period			0.65	%		0.63	%
Net loans charged off as a percent of average
loans receivable, net			0.00	%		0.03	%
Ratio of allowance for loan losses to non-
performing loans at end of period			191.07	%		160.32	%

Deposits totaled $322.6 million at September 30, 2007, a decrease of $10.9 million, or 3.3%, from $333.5 million at March 31, 2007.  Certificates of deposit decreased by $8.6 million, savings accounts decreased by $5.0 million and NOW accounts decreased by $600,000.  These decreases were partially offset by an increase in money market deposits of $3.3 million.  The Company continues to experience a shift in depositor preference from low cost liquid deposit accounts to higher cost money market and retail certificate accounts.  Management exercised discipline during the period, particularly the July to September quarter, with regard to the pricing of retail certificates.  In general, management attempts to benchmark retail certificate of deposit pricing to the cost of alternate sources of funds, including Federal Home Loan Bank advances and brokered deposits.  Exceptions are made to maintain customer relationships with significant value to the Bank while allowing rate sensitive certificate of deposit shoppers to move to other alternatives.  The local deposit market has been negatively affected by national and online competitors offering higher rates to address liquidity concerns in national markets.

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, 2007 to September 30, 2007 (continued)

Borrowings totaled $39.0 million at September 30, 2007 as compared with $34.5 million at March 31, 2007.  The Company increased its borrowings to compensate for the loss of  higher cost retail certificates of deposit and lower cost passbook savings accounts as discussed above.

Stockholders’ equity decreased by $365,000, or 1.1%, during the six months ended September 30, 2007, due primarily to the purchase of treasury stock of $643,000, dividends of $760,000 and an increase in unrealized losses on available for sale securities of $32,000, which were partially offset by net income of $1.1 million.

Comparison of Operating Results for the Six Month Periods Ended September 30, 2007 and 2006

General

Net income totaled $1,070,000 for the six months ended September 30, 2007, a decrease of $7,000, or 0.6%, compared to net income of $1,077,000 for the six months ended September 30, 2006.  The decrease in net income was primarily attributable to a decrease in net interest income of $137,000 or 2.4%, partially offset by a decrease in federal income taxes of $64,000, or 14.8%, an increase in other income of $60,000, or 7.0%, a decrease in general, administrative and other expense of $1,000 and a decrease of $5,000, or 8.3%, in the provision for losses on loans.

Interest Income

Interest income increased by $478,000, or 4.3%, to $11.5 million for the six months ended September 30, 2007, compared to the same period in 2006.  This increase was due to an increase in the weighted-average yield on interest-earning assets to 6.15% in the 2007 period from 5.85% for the six month period ended September 30, 2006.  This increase was offset by a $2.6 million decrease in the average balance of interest-earning assets outstanding to $374.0 million for the six months ended September 30, 2007, from $376.6 million for the comparable period ended September 30, 2006. The yield increase was primarily due to a change in the composition of loans, mainly due to the increase in higher rate nonresidential real estate, commercial, and land loans.

Interest income on loans increased by $438,000, or 5.6%, for the six months ended September 30, 2007, compared to the same period in 2006, due primarily an increase in the average balance of loans outstanding period to period of $6.8 million, or 2.9%, to $242.8 million for the 2007 period, coupled with an increase in the weighted-average yield of 18 basis points to 6.85% for the six months ended September 30, 2007.

Interest income on mortgage-backed securities increased by $426,000, or 28.8%, during the six months ended September 30, 2007, compared to the same period in 2006.  This was primarily due to an increase of $11.7 million, or 19.3%, in the average balance outstanding and a 39 basis point increase in the weighted-average yield to 5.27%.  The increase in the average balance was mainly due to reinvestment of lower yielding maturing investment securities.

17

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, 2007 and 2006 (continued)

Interest Income (continued)

Interest income on investment securities decreased by $450,000, or 30.9%, during the six-months ended September 30, 2007, compared to the same period in 2006, reflecting a decrease in the average balance outstanding of $22.4 million, or 32.2%, to $47.0 million for the 2007 period from $69.4 million during the comparable 2006 period, partially offset by an increase in the weighted-average yield to 4.28% from 4.19% for the six month period in 2006.  The decrease in the average balance was due to management’s decision to reinvest maturing proceeds in higher yielding loans and mortgage-backed securities.

Interest income on interest-bearing deposits increased by $64,000, or 31.7%, for the six months ended September 30, 2007, compared to the same period in 2006, due primarily to an increase in the average balance outstanding of $1.3 million, or 12.8%, coupled with an increase in the weighted-average yield of 65 basis points, to 4.52% for the 2007 period from 3.87% for the six months ended September 30, 2006.

Interest Expense

Interest expense totaled $5.9 million for the six months ended September 30, 2007, an increase of $615,000, or 11.7%, over the six months ended September 30, 2006.  The increase resulted from a 36 basis point increase in the weighted-average cost of funds to 3.29% for the 2007 period, partially offset by a decrease in the average balance of deposits and borrowings outstanding of $2.6 million to $358.1 million for the six month period ended September 30, 2007.

Interest expense on deposits totaled $5.1 million for the six months ended September 30, 2007, an increase of $420,000, or 9.0%, compared to the six months ended September 30, 2006, as a result of a 33 basis point increase in the weighted-average cost of deposits to 3.13% for the 2007 period, which was partially offset by a decrease in the average balance outstanding of $8.5 million, or 2.6%, to $324.1 million for the 2007 period.

Interest expense on borrowings totaled $823,000 for the six months ended September 30, 2007, an increase of $195,000, or 31.1%, over the 2006 period, primarily due to an increase in the average balance outstanding of $6.0 million, or 21.4%, coupled with an increase in the weighted-average yield of 36 basis points, to 4.83% for the six months ended September 30, 2007.

As discussed under the analysis of financial condition above, management selectively used lower cost FHLB advances and cash balances to redeem certain higher rate certificates of deposit as an alternative to offering higher rates to compete with competitors in the Company’s area for retail deposits.

Net Interest Income

Net interest income totaled $5.6 million for the six months ended September 30, 2007, a decrease of $137,000, or 2.4%, compared to the six month period ended September 30, 2006.  The average interest rate spread decreased to 2.86% for the six months ended September 30, 2007 from 2.92% for the six months ended September 30, 2006.  The net interest margin decreased to 2.99% for the six months ended September 30, 2007 from 3.05% for the six months ended September 30, 2006.  The average interest rate spread decreased mainly due to the cost of deposits increasing at a higher rate than the yield on loans, as maturing certificates of deposit renewed from older, lower rates into higher current rates.  Management has allowed runoff in the retail certificate of deposit portfolio, through a limited response to competitive pricing pressure to limit the increase in the cost of deposits.

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, 2007 and 2006 (continued)

Provision for Losses on Loans

Management recorded a $55,000 provision for losses on loans for the six month period ended September 30, 2007 and $60,000 for the comparable period in 2006.  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, 2007.

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, trust income, service fees and charges on deposit accounts, increased by $60,000, or 7.0%, for the six months ended September 30, 2007,  compared to the six months ended September 30, 2006.  The increase was primarily due to an increase in trust income of $43,000, including a $14,000 one-time estate administration fee, for the six months ended September 30, 2007,  a $31,000 gain on sale of real estate acquired through foreclosure and an increase of $6,000 in cash surrender value of life insurance.  These increases were offset by a $20,000 decrease in service fees.

General, Administrative and Other Expense

General, administrative and other expense decreased by $1,000 for the six months ended September 30, 2007, compared to the six months ended September 30, 2006.  The two areas of increase were occupancy and equipment expense of $48,000 and other operating expense of $20,000 for the six months ended September 30, 2007.  These increases were offset by a decrease of $64,000 in employee compensation and benefits.

The occupancy and equipment expense increase was due primarily to a non-capital furniture and equipment expense increase of $29,000, an increase of $17,000 in repair costs, an increase of $15,000 in ATM expenses and $9,000 of increased travel expense.  These increases were offset by a $27,000 decrease in depreciation expense.

The increase in other operating expense was mainly due to an increase of $41,000 in internet banking costs as the number of customers and activity levels increased.  We also had a $29,000 increase in costs related to a direct marketing campaign. These increases were offset by decreases of $20,000 in legal expense and a decrease in charitable contributions and organizational dues of $17,000.

The decrease in compensation and benefits of $64,000 was mainly due to the $84,000 of severance costs incurred in September 2006 due to management’s decision to restructure the Bank’s branch organization to enhance sales and customer service which were partially offset by the annual merit increases awarded to employees, a $15,000 decrease in stock compensation expense due to a decline in the fair value of the Company’s shares and a $6,000 decrease in employee education expense. These decreases were offset mainly by an increase in benefit costs of $29,000 and an increase of $19,000 in retirement plan expense.

Federal Income Taxes

Federal income tax expense was $368,000 for the six months ended September 30, 2007, a decrease of $64,000, or 14.8%, compared to the same period in 2006, primarily due to the $71,000, or 4.7%, decrease 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.

19

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, 2007 and 2006

General

Net income totaled $547,000 for the three months ended September 30, 2007, an increase of $63,000, or 13.0%, compared to net income of $484,000 for the three months ended September 30, 2006.  The increase in net income was primarily attributable to a decrease in total general, administrative and other expenses of $8,000, or 0.3%, a decrease in federal income taxes of $10,000, or 5.1%, an increase in other income of $38,000, or 8.8%, and a decrease in the provision for loan losses of $5,000, or 16.7%.

Interest Income

Interest income increased by $215,000, or 3.9%, to $5.8 million for the three months ended September 30, 2007, compared to the same period in 2006.  This increase was due to an increase in the weighted-average yield on interest-earning assets to 6.21% in the 2007 period from 5.91% for the three month period ended September 30, 2006.  This increase was offset by a $4.6 million decrease in the average balance of interest-earning assets outstanding to $372.9 million for the three months ended September 30, 2007, from $377.5 million for the comparable period ended September 30, 2006. The yield increase was primarily due to a change in the composition of loans, mainly due to the increase in higher rate nonresidential real estate and land loans.

Interest income on loans increased by $239,000, or 6.0%, for the three months ended September 30, 2007, compared to the same period in 2006, due primarily an increase in the average balance of loans outstanding period to period of $8.9 million, or 3.8%, to $245.5 million for the 2007 period, coupled with an increase in the weighted-average yield of 14 basis points to 6.88% for the three months ended September 30, 2007.

Interest income on mortgage-backed securities increased by $203,000, or 26.0%, during the three months ended September 30, 2007, compared to the same period in 2006.  This was primarily due to an increase of $10.4 million, or 16.5%, in the average balance outstanding and a 41 basis point increase in the weighted-average yield to 5.38%.  The increase in the average balance was mainly due to reinvestment of lower yielding maturing investment securities.

Interest income on investment securities decreased by $239,000, or 33.6%, during the three months ended September 30, 2007, compared to the same period in 2006, reflecting a decrease in the average balance outstanding of $23.7 million, or 35.0%, to $44.0 million for the 2007 period from $67.8 million during the comparable 2006 period, partially offset by an increase in the weighted-average yield to 4.30% from 4.20% for the three month period in 2006.  The decrease in the average balance was due to management’s decision to reinvest maturing proceeds in higher yielding loans and mortgage-backed securities.

Interest income on interest-bearing deposits increased by $12,000, or 12.1%, for the three months ended September 30, 2007, compared to the same period in 2006, due primarily to an increase in the weighted-average yield of 52 basis points, to 4.40% for the 2007 period from 3.88% for the three months ended September 30, 2006.

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, 2007 and 2006 (continued)

Interest Expense

Interest expense totaled $3.0 million for the three months ended September 30, 2007, an increase of $213,000, or 7.7%, over the three months ended September 30, 2006.  The increase resulted from a 27 basis point increase in the weighted-average cost of funds to 3.33% for the 2007 period, partially offset by a decrease in the average balance of deposits and borrowings outstanding of $4.0 million to $357.6 million for the three month period ended September 30, 2007.

Interest expense on deposits totaled $2.5 million for the three months ended September 30, 2007, an increase of $121,000, or 5.0%, compared to the three months ended September 30, 2006, as a result of a 24 basis point increase in the weighted-average cost of deposits to 3.16% for the 2007 period, which was partially offset by a decrease in the average balance outstanding of $9.8 million, or 2.9%, to $321.7 million for the 2007 period.

Interest expense on borrowings totaled $437,000 for the three months ended September 30, 2007, an increase of $92,000, or 26.7%, over the 2006 period, primarily due to an increase in the average balance outstanding of $5.8 million, or 19.1%, coupled with an increase in the weighted-average yield of 29 basis points, to 4.87% for the three months ended September 30, 2007.  As discussed under the analysis of financial condition above, management selectively used lower cost FHLB advances and cash balances to redeem certain higher rate certificates of deposit as an alternative to offering higher rates to compete with competitors in the Company’s area for retail deposits.

As discussed under the analysis of financial condition above, management selectively used lower cost FHLB advances and cash balances to redeem certain higher rate certificates of deposit as an alternative to offering higher rates to compete with competitors in the Company’s area for retail deposits.

Net Interest Income

Net interest income totaled $2.8 million for the three months ended September 30, 2007, an increase of $2,000 compared to the three month period ended September 30, 2006.  The average interest rate spread increased to 2.88% for the three months ended September 30, 2007 from 2.85% for the three months ended September 30, 2006.  The net interest margin increased to 3.02% for the three months ended September 30, 2007 from 2.98% for the three months ended September 30, 2006.  The slight increase in the average interest rate spread was due to a shift in asset composition from lower yielding investment securities and overnight deposits to higher yielding loans and mortgage-backed securities.  This was offset by the increase in cost of borrowings and the cost of deposits increasing at a higher rate than the yield on loans, as maturing certificates of deposit renewed from older, lower rates into higher current rates.  Management has allowed runoff in the retail certificate of deposit portfolio, through a limited response to competitive pricing pressure to limit the increase in the cost of deposits.

Provision for Losses on Loans

Management recorded a $25,000 provision for losses on loans for the three month period ended September 30, 2007, a decrease of $5,000 from the comparable period in 2006.  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, 2007.

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, 2007 and 2006 (continued)

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, trust income, service fees and charges on deposit accounts, increased by $38,000, or 8.8%, for the three months ended September 30, 2007, compared to the three months ended September 30, 2006.  The increase was primarily due to a $31,000 gain on sale of real estate acquired through foreclosure, an increase in trust income of $14,000 and a $3,000 increase in cash surrender value of life insurance for the three months ended September 30, 2007.  These increases were mainly offset by an increase in the mortgage servicing asset amortization of $9,000.

General, Administrative and Other Expense

General, administrative and other expense decreased by $8,000, or 0.3%, to $2.5 million for the three months ended September 30, 2007, compared to the three months ended September 30, 2006.  The increase was due primarily to increases in occupancy and equipment expense of $20,000, franchise tax expense of $18,000 and other operating expense of $5,000 for the three months ended September 30, 2007.  These increases were offset by a decrease of $49,000 in compensation and benefits

The occupancy and equipment expense increase was due primarily to the non-capital furniture and equipment expense of $18,000 coupled with an increase of $9,000 in ATM expenses due to increased volume.  These increases were offset by a $13,000 decrease in depreciation expense.

The increase in other operating expense was mainly due to an increase of $18,000 in internet banking, as the usage increased, and a reduction of fraudulent and non-sufficient checks of $13,000 for the three months ended September 30, 2007 as compared to the same period in 2006.

The decrease in compensation and benefits of $49,000 was mainly due to a reduction in compensation in September 2006 due to management’s decision to restructure the Bank’s sales culture partially offset by the annual merit increases awarded to employees.  The Company also had an $8,000 decrease in stock compensation expense due to a decline in the fair value of the Company’s shares. These decreases in compensation and benefits expense were offset by a $7,000 increase in retirement plan contributions expense and an increase of $11,000 in healthcare costs.

Federal Income Taxes

Federal income tax expense was $185,000 for the three months ended September 30, 2007, a decrease of $10,000, or 5.1%, compared to the same period in 2006.  The effect of increased earnings before taxes was more than offset by increased beneficial effects from income from the cash surrender value of life insurance and other tax-exempt obligations.  The effective tax rate was 25.3% and 28.7% for the three month periods ended September 30, 2007 and 2006, respectively.  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.

22

Wayne Savings Bancshares, Inc.

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 3 QUANTITATIVE 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, 2007.

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

There have been no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2007.

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, 2007.

					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, 2007		-	$	-		-		112,967
August  1-31, 2007		21,287	$	12.50		70,485		91,680
September 1-30, 2007		29,500	$	12.76		99,985		62,180

Notes to the Table:

On December 28, 2006, the Company announced the near completion of the repurchase program announced June 6, 2005 and the authorization by the Board of Directors of a new program for the repurchase of 162,165 shares, or 5% of the Company’s then outstanding shares.

ITEM 3. Defaults Upon Senior Securities

Not applicable

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

On July 26, 2007, the Annual Meeting of the Company’s Stockholders was held.  Three directors were elected to terms expiring in fiscal 2010 by the following votes:

Russell L. Harpster	For:	2,412,598	Withheld:	108,240
Terry A. Gardner	For:	2,447,575	Withheld:	73,264
Frederick J. Krum	For:	2,423,178	Withheld:	97,661

One other matter was submitted to the stockholders for ratification, for which the following votes were cast:

Ratification of the appointment of Grant Thornton LLP as independent auditors of the Company for the fiscal year ended March 31, 2008.

For:  2,473,738 Against: 13,229 Abstain: 29,337

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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 13, 2007	By:	/s/Phillip E. Becker
			Phillip E. Becker
			President and Chief  Executive Officer
Date:	November 13, 2007	By:	/s/H. Stewart Fitz Gibbon III
			H. Stewart Fitz Gibbon III
			Executive Vice President and
			Chief Financial Officer

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