Wayne Savings Bancshares (WAYN) 10-Q 2010 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

 x          QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d)

OF THE SECURITIES EXCHANGE ACT OF 1934

      For the quarterly period ended                       September 30, 2010                 

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 incorporation or organization)	(I.R.S. Employer Identification Number)

151 North Market Street Wooster, Ohio	44691
(Address of principalexecutive office)	(Zip Code)

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

Indicate by check mark 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 x   No o   

Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§ 232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).  o Yes  o No

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

Large accelerated filero  Accelerated filer o   Non-accelerated filer  o Smaller reporting company x

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

Yes o    No x

As of November 5, 2010, the latest practicable date, 3,004,113 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.

Wayne Savings Bancshares, Inc.

Index

		Page
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	21
Item 3	Quantitative and Qualitative Disclosures About Market Risk	35
Item 4T	Controls and Procedures	35
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	36
Item 1A	Risk Factors	36
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	36
Item 3	Defaults Upon Senior Securities	36
Item 4	Reserved	36
Item 5	Other Information	36
Item 6	Exhibits	37
SIGNATURES		38

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	September 30, 2010			March 31, 2010
	(Unaudited)
ASSETS
Cash and due from banks	$	7,703		$	5,853
Interest-bearing demand deposits		2,961			4,022
Cash and cash equivalents		10,664			9,875
Available-for-sale securities		131,250			119,863
Held-to-maturity securities		622			698
Loans receivable – net of allowance for loan losses of $3,054 and $2,826 at September 30, 2010 and March 31, 2010, respectively		239,787			247,006
Premises and equipment		7,080			7,291
Federal Home Loan Bank stock		5,025			5,025
Foreclosed assets held for sale  -  net		2,538			2,888
Accrued interest receivable		1,527			1,602
Bank-owned life insurance		6,878			6,754
Goodwill		1,719			1,719
Other intangible assets		332			378
Prepaid Federal Deposit Insurance Corporation premiums		1,315			1,541
Other assets		1,877			1,222
Prepaid federal income taxes		13			170
Total assets	$	410,627		$	406,032
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand	$	57,766		$	57,106
Savings and money market		98,103			94,589
Time		159,104			160,239
Total deposits		314,973			311,934
Other short-term borrowings		7,021			7,454
Federal Home Loan Bank advances		45,500			45,500
Accrued interest payable and other liabilities		2,827			2,818
Deferred federal income taxes		1,598			1,331
Total liabilities		371,919			369,037
Commitments and Contingencies		––			––
Stockholders’ Equity
Preferred stock, 500,000 shares of $.10 par value authorized; no shares issued		––			––
Common stock, $.10 par value; authorized 9,000,000 shares; 3,978,731 shares issued		398			398
Additional paid-in capital		36,003			36,012
Retained earnings		15,298			14,332
Shares acquired by ESOP		(762	)		(807	)
Accumulated other comprehensive income, net of tax effects		2,301			1,590
Treasury stock, at cost – 974,618 common shares		(14,530	)		(14,530	)
Total stockholders’ equity		38,708			36,995
Total liabilities and stockholders’ equity	$	410,627		$	406,032

See accompanying notes to condensed consolidated financial statements.

2

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income

For the six and three months ended September 30, 2010 and 2009

(In thousands, except per share data)

(Unaudited)

	Six months ended September 30,					Three months ended September 30,
	2010		2009			2010		2009
Interest and Dividend Income
Loans	$	6,763	$	7,314		$	3,329	$	3,632
Securities		2,430		2,781			1,214		1,378
Dividends on Federal Home Loan Bank stock and other		115		122			58		65
Total interest and dividend income		9,308		10,217			4,601		5,075
Interest Expense
Deposits		1,970		2,621			958		1,239
Other short-term borrowings		15		19			8		9
Federal Home Loan Bank advances		817		995			401		493
Total interest expense		2,802		3,635			1,367		1,741
Net Interest Income		6,506		6,582			3,234		3,334
Provision for Loan Losses		310		545			120		380
Net Interest Income After Provision for Loan Losses		6,196		6,037			3,114		2,954
Noninterest Income
Gain on loan sales		123		113			56		50
Gain (loss) on sale of foreclosed assets held for sale		14		(11	)		—		—
Trust income		96		89			48		52
Earnings on bank-owned life insurance		116		115			58		58
Service fees, charges and other operating		630		696			325		352
Total noninterest income		979		1,002			487		512
Noninterest Expense
Salaries and employee benefits		3,012		2,872			1,488		1,443
Net occupancy and equipment expense		885		938			433		473
Federal deposit insurance premiums		245		457			123		118
Franchise taxes		173		176			86		88
Provision for impairment on foreclosed assets held for sale		76		50			30		50
Loss on disposal of office premises and equipment		—		4			—		4
Amortization of intangible assets		46		48			22		23
Other		1,018		953			532		405
Total noninterest expense		5,455		5,498			2,714		2,604
Income Before Federal Income Taxes		1,720		1,541			887		862
Provision for Federal Income Taxes		403		357			213		210
Net Income	$	1,317	$	1,184		$	674	$	652
Basic Earnings Per Share	$	0.45	$	0.41		$	0.23	$	0.23
Diluted Earnings Per Share	$	0.45	$	0.41		$	0.23	$	0.23
Dividends Per Share	$	0.12	$	0.10		$	0.06	$	0.05

See accompanying notes to condensed consolidated financial statements.

3

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the six and three months ended September 30, 2010 and 2009

(In thousands, except per share data)

(Unaudited)

	Six months Ended September 30,				Three months  ended September 30,
	2010		2009		2010		2009
Net Income	$	1,317	$	1,184	$	674	$	652
Other comprehensive income:
Unrealized holding gains on securities, net of related taxes of $366, $615, $110 and $537 during the respective periods		711		1,193		214		1,043
Comprehensive income	$	2,028	$	2,377	$	888	$	1,695
Accumulated other comprehensive income	$	2,301	$	1,883	$	2,301	$	1,883

See accompanying notes to condensed consolidated financial statements.

4

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the six months ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

	2010			2009
Operating Activities
Net income	$	1,317		$	1,184
Items not requiring (providing) cash
Depreciation and amortization		271			293
Provision for loan losses		310			545
Amortization of premiums and discounts on securities - net		399			(34	)
Amortization of mortgage servicing rights		19			21
Amortization of deferred loan origination fees		(36	)		(56	)
Amortization of intangible assets		46			48
Increase in value of bank owned life insurance		(124	)		(124	)
Amortization expense of stock benefit plan		36			26
Loss on real estate acquired through foreclosure		62			61
Net gain on sale of loans		(123	)		(113	)
Proceeds from sale of loans in secondary market		2,972			4,310
Origination of loans for sale in the secondary market		(2,849	)		(4,263	)
Deferred income taxes		(99	)		(48	)
Changes in
Accrued interest receivable		75			14
Other assets		(291	)		(65	)
Interest payable and other liabilities		20			(395	)
Net cash provided by operating activities		2,005			1,404
Investing Activities
Purchase of  available-for-sale securities		(30,569	)		(14,817	)
Proceeds from maturities of available-for-sale securities		19,859			20,859
Proceeds from maturities of held-to-maturity securities		76			143
Net change in loans		6,600			(1,677	)
Purchase of premises and equipment		(60	)		(249	)
Proceeds from the sale of foreclosed assets		633			255
Net cash provided by (used in) investing activities		(3,461	)		4,514

See accompanying notes to condensed consolidated financial statements.

5

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the six months ended September 30, 2010 and 2009

(In thousands)

(Unaudited)

	2010			2009
Financing Activities
Net change in deposits	$	3,039		$	(8,723	)
Net change in other short-term borrowings		(433	)		(2,624	)
Proceeds from Federal Home Loan Bank advances		10,250			17,300
Repayments of Federal Home Loan Bank advances		(10,250	)		(12,300	)
Advances by borrowers for taxes and insurance		(10	)		(40	)
Cash dividends paid		(351	)		(291	)
Net cash provided by (used in) financing activities		2,245			(6,678	)
Increase (Decrease) in Cash and Cash Equivalents		789			(760	)
Cash and Cash equivalents, Beginning of period		9,875			6,790
Cash and Cash equivalents, End of period	$	10,664		$	6,030
Supplemental Cash Flows Information Cash Paid For:
Interest on deposits and borrowings	$	2,847		$	3,716
Federal Income Taxes	$	345		$	375
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale	$	345		$	653
Unrealized gains on securities designated as available-for-sale,
net of related tax effects	$	711		$	1,193
Dividends payable	$	180		$	150

See accompanying notes to condensed consolidated financial statements.

6

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2010 and for the three and six months ended September 30, 2010 and 2009, 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 condensed 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, 2010.  Reference is made to the accounting pol icies of the Company described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K.

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 three and six months ended September 30, 2010, are not necessarily indicative of the results which may be expected for the entire fiscal year.  The condensed consolidated balance sheet of the Company as of March 31, 2010, has been derived from the consolidated balance sheet of the Company as of that date.

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 collectibility as of the reporting date.  Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably a ssured, 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.

Note 2: Principles of Consolidation

The accompanying condensed 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 full-service offices in Wayne, Holmes, Ashland, Medina and Stark counties.  All significant intercompany transactions and balances have been eliminated in the consolidation.

7

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 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 September 30,		For the three months ended September 30,
	2010	2009	2010	2009
Weighted-average common shares outstanding (basic)	2,921,174	2,911,956	2,921,174	2,911,956
Dilutive effect of assumed exercise of stock options	—	—	—	—
Weighted-average common shares outstanding (diluted)	2,921,174	2,911,956	2,921,174	2,911,956

None of the outstanding options were included in the diluted earnings per share calculation for the three and six months ended September 30, 2010 and 2009, as the average fair value of the shares was less than the option exercise prices.

Note 4: Stock Option Plan

In fiscal 2004, the Company adopted a 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, 2010, 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 FASB ASC 718-10.  FASB ASC 718-10 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 the six months ended September 30, 2010 and 2009.  There was no compensation expense recognized for the stock option plan during the six months ended September 30, 2010 and 2009, as all options were fully vested prior to these periods.

8

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

A summary of the status of the Company’s stock option plan as of and for the six months ended September 30, 2010, and for the years ended March 31, 2010 and 2009, is presented below:

	Six months ended September 30,				Year ended  March 31,
	2010				2010				2009
	Shares		Weighted Average exercise price		Shares		Weighted Average exercise price		Shares			Weighted Average exercise price
Outstanding at beginning of period		94,020	$	13.95		94,020	$	13.95		104,224		$	13.95
Granted		––		––		––		––		––			––
Exercised		––		––		––		––		––			––
Forfeited		––		––		—		—		(10,204	)		13.95
Outstanding at end of period		94,020	$	13.95		94,020	$	13.95		94,020		$	13.95
Options exercisable at period-end		94,020	$	13.95		94,020	$	13.95		94,020		$	13.95

The following information applies to options outstanding at September 30, 2010:

Number outstanding		94,020
Exercise price on all remaining options outstanding	$	13.95
Weighted-average remaining contractual life	3.50 years

Note 5: Regulatory Matters

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At September 30, 2010, the Bank had regulatory approval for $272,000 of retained earnings for dividend declaration.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory–and possibly additional discretionary–actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other fac tors.

9

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of tangible and core capital (as defined) to adjusted total assets (as defined).  As of September 30, 2010, the Bank met all capital adequacy requirements to which it was subject.

As of September 30, 2010, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table below.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios as of September 30, 2010 and March 31, 2010 are presented in the following table.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of September 30, 2010
Tangible capital	$	33,471		8.3	%	$	6,072		1.5	%	$	20,240		5.0	%
Core capital		33,471		8.3			16,192		4.0			24,288		6.0
Risk-based capital		35,865		14.8			19,384		8.0			24,230		10.0
As of March 31, 2010
Tangible capital	$	32,397		8.1	%	$	6,019		1.5	%	$	20,062		5.0	%
Core capital		32,397		8.1			16,050		4.0			24,075		6.0
Risk-based capital		34,685		14.2			19,517		8.0			24,396		10.0

Note 6: Recent Accounting Developments

FASB ASC 860-10 concerning accounting for transfers of financial assets was issued in June 2009 and changes the derecognition guidance for transferors of financial assets, including entities that sponsor securitizations, to align that guidance with the original intent of previous guidance.  FASB ASC 860-10 also eliminates the exemption from consolidation for qualifying special-purpose entities (QSPEs).  As a result, all existing QSPEs need to be evaluated to determine whether the QSPE should be consolidated in accordance with FASB ASC 860-10.

FASB ASC 860-10 is effective as of the beginning of a reporting entity’s first annual reporting period beginning after November 15, 2009 (April 1, 2010, as to the Company), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The recognition and measurement provisions of FASB ASC 860-10 must be applied to transfers that occur on or after the effective date.  Early application is prohibited.  FASB ASC 860-10 also requires additional disclosures about transfers of financial assets that occur both before and after the effective date.  The Company adopted FASB ASC 860-10 effective April 1, 2010, as required, without material effect on the CompanyR 17;s financial position or results of operations.

10

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

FASB ASC 860-10 also improves how enterprises account for and disclose their involvement with variable interest entities (VIE’s), which are special-purpose entities, and other entities whose equity at risk is insufficient or lacks certain characteristics.  Among other things, FASB ASC 860-10 changes how an entity determines whether it is the primary beneficiary of a variable interest entity (VIE) and whether that VIE should be consolidated.  FASB ASC 860-10 requires an entity to provide significantly more disclosures about its involvement with VIEs.  As a result, the Company must comprehensively review its involvements with VIEs and potential VIEs, including entities previously considered to be qualifying special purpose entities, to determine the effect on its consolidated financial statements and related disclosures.  FASB ASC 860-10 is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009 (April 1, 2010, as to the Company), and for interim periods within the first annual reporting period.  Earlier application is prohibited.  The Company adopted FASB ASC 860-10 effective April 1, 2010, as required, without material effect on the Company’s financial position or results of operations.

FASB Accounting Standards Update (ASU) 2010-06 on Fair Value Measurements and Disclosures (Topic 820), issued in January 2010, concerns improved disclosures about fair value measurements.  The guidance requires the separate reporting of significant transfers in and out of Level 1 and Level 2 fair value measurements and the reasons for the transfers.  The guidance also requires separate disclosure about purchases, sales, issuances and settlements in the activity in Level 3.  The guidance is effective for interim and annual reporting periods beginning after December 15, 2009, except for the disclosures about purchases, sales, issuances and settlements in the roll-forward of activity in Level 3 fair value measurements.  Those disclosures are effective for fiscal years beginning after December 15, 2 010 (April 1, 2011 for the Company), and for interim periods within those fiscal years.  The Company adopted the guidance in ASU 2010-06 effective January 1, 2010, as required, without material effect on the Company’s financial condition or results of operations.

FASB Accounting Standards Update (ASU) 2010-20 “Receivables: Disclosures about the Credit Quality of Financing Receivables and the Allowance for Credit Losses” (Topic 310), issued on July 21, 2010, concerns improved disclosures regarding the credit quality in a financial institution’s loan portfolio.  The guidance requires additional disaggregation of the credit portfolio by portfolio segment and class of receivable, a revised roll forward of the allowance for credit losses, presentation of the credit portfolio by credit quality indicators, an aging schedule of past due receivables, disclosure of troubled debt restructurings and purchases and sales of receivables by portfolio segment.   The period-end disclosures are effective for periods ending on or after December 15, 2010 (December 31, 201 0 for the Company).  The activity disclosures are effective for periods beginning on or after December 15, 2010 (January 1, 2011 for the Company).  The adoption of FASB ASU 2010-20 is not expected to have a material effect on the Company’s financial condition or results of operations.

11

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 7: Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Available-for-sale Securities:
September 30, 2010:
U.S. government agencies	$	2,213	$	116	$	1	$	2,328
Mortgage-backed securities of government sponsored entities		98,990		3,083		31		102,042
Private-label collateralized mortgage obligations		2,893		45		36		2,902
State and political subdivisions		23,003		991		16		23,978
Totals	$	127,099	$	4,235	$	84	$	131,250
March 31, 2010:
U.S. government agencies	$	2,489	$	122	$	1	$	2,610
Mortgage-backed securities of government sponsored entities		90,146		2,938		134		92,950
Private-label collateralized mortgage obligations		3,659		8		216		3,451
State and political subdivisions		20,495		464		107		20,852
Totals	$	116,789	$	3,532	$	458	$	119,863

12

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Held-to-maturity Securities:
September 30, 2010:
U.S. government agencies	$	158	$	––	$	1	$	157
Mortgage-backed securities of government sponsored entities		436		14		––		450
State and political subdivisions		28		2		––		30
	$	622	$	16	$	1	$	637
March 31, 2010:
U.S. government agencies	$	162	$	––	$	1	$	161
Mortgage-backed securities of government sponsored entities		500		11		––		511
State and political subdivisions		36		3		––		39
	$	698	$	14	$	1	$	711

13

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 2010 by contractual maturity, are shown below.  Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One to five years	$	2,844	$	2,963	$	28	$	30
Five to ten years		5,530		5,914		––		––
After ten years		16,842		17,429		158		157
		25,216		26,306		186		187
Mortgage-backed securities of government sponsored entities		98,990		102,042		436		450
Private-label collateralized mortgage obligations		2,893		2,902		—		—
Totals	$	127,099	$	131,250	$	622	$	637

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $57.2 million and $57.9 million at September 30, 2010 and March 31, 2010, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost.  The total fair value of these investments at September 30, 2010 and March 31, 2010, was $10.5 million and $31.8 million, which represented approximately 8% and 26%, respectively, of the Company’s aggregate available-for-sale and held-to-maturity investment portfolio.  These declines resulted primarily from changes in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these government agency, mortgage-backed and state and political subdivision securities are temporary at September 30, 2010.

Should the impairment of any of these government agency, mortgage-backed and state and political subdivision securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.  The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

14

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2010
	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(In thousands)
U.S. government agencies	$	—	$	—	$	339	$	2	$	339	$	2
Mortgage-backed securities of government sponsored entities		8,648		31		—		—		8,648		31
Private-label collateralized mortgage obligations		753		36		—		—		753		36
State and political subdivisions		—		—		771		16		771		16
Total temporarily impaired securities	$	9,401	$	67	$	1,110	$	18	$	10,511	$	85

March 31, 2010
	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(In thousands)
U.S. government agencies	$	—	$	—	$	349	$	2	$	349	$	2
Mortgage-backed securities of government sponsored entities		21,282		134		—		—		21,282		134
Private-label collateralized mortgage obligations		3,129		216		—		—		3,129		216
State and political subdivisions		6,628		95		433		12		7,061		107
Total temporarily impaired securities	$	31,039	$	445	$	782	$	14	$	31,821	$	459

15

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 8: Fair Value Measurements

The Company accounts for fair value measurements in accordance with FASB ASC 820-10.  FASB ASC 820-10 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

FASB ASC 820-10 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  FASB ASC 820-10 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

Level 1 Quoted prices in active markets for identical assets or liabilities

Level 2 Observable inputs other than Level 1 prices, such as quoted prices for similar assets or liabilities; quoted prices in markets that are not active; or other inputs that are observable or can be corroborated by observable market data for substantially the full term of the assets or liabilities

Level 3 Unobservable inputs that are supported by little or no market activity and that are significant to the fair value of the assets or liabilities

Following is a description of the valuation methodologies used for assets measured at fair value on a recurring basis and recognized in the Company’s balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

Where quoted market prices are available in an active market, securities are classified within Level 1 of the valuation hierarchy.  If quoted market prices are not available, then fair values are estimated by using pricing models that contain market pricing and information, quoted prices of securities with similar characteristics or discounted cash flows that use credit adjusted discount rates.  Level 2 securities include U.S. Government agencies, mortgage-backed securities, certain collateralized mortgage obligations and certain municipal securities.  In certain cases where Level 1 or Level 2 inputs are not available, securities are classified within Level 3 of the hierarchy and include other less liquid securities.

16

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at September 30, 2010 and March 31, 2010:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2010
U.S. government agencies	$	2,328	$	––	$	2,328	$	––
Mortgage-backed securities of government sponsored entities		102,042		––		102,042		––
Private-label collateralized mortgage obligations		2,902		—		2,902		—
State and political subdivisions	$	23,978	$	––	$	23,978	$	––
March 31, 2010
U.S. government agencies	$	2,610	$	––	$	2,610	$	––
Mortgage-backed securities of government sponsored entities		92,950		––		92,950		––
Private-label collateralized mortgage obligations		3,451		—		3,451		—
State and political subdivisions	$	20,852	$	––	$	20,852	$	––

17

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Following is a description of the valuation methodologies used for assets measured at fair value on a nonrecurring basis and recognized in the Company’s balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Impaired Loans

Impaired loans consisted primarily of loans secured by nonresidential real estate and secured commercial loans.  Management has determined fair value measurements on impaired loans primarily through evaluation of appraisals performed.

Foreclosed Assets Held for Sale

Assets acquired through, or in lieu of, loan foreclosure are held for sale and are initially recorded at fair value (based on current appraised value) at the date of foreclosure, establishing a new cost basis.  Subsequent to foreclosure, valuations are periodically performed by management and the assets are carried at the lower of carrying amount or fair value less cost to sell.  Management has determined fair value measurements on other real estate owned primarily through evaluations of appraisals performed, and current and past offers for the other real estate under evaluation.

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at September 30, 2010 and March 31, 2010.

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2010
Impaired loans	$	190	$	––	$	––	$	190
Foreclosed assets		137		––		––		137
March 31, 2010
Impaired loans	$	3,738	$	––	$	––	$	3,738
Foreclosed assets		2,888		––		––		2,888

18

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The following table presents estimated fair values of the Company’s financial instruments.  The fair values of certain of these instruments were calculated by discounting expected cash flows, which involves significant judgments by management and uncertainties.  Fair value is the estimated amount at which financial assets or liabilities could be exchanged in a current transaction between willing parties, other than in a forced or liquidation sale.  Because no market exists for certain of these financial instruments and because management does not intend to sell these financial instruments, the Company does not know whether the fair values shown below represent values at which the respective financial instruments could be sold individually or in the aggregate.

	September 30, 2010				March 31, 2010
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
Financial assets
Cash and cash equivalents	$	10,664	$	10,664	$	9,875	$	9,875
Available-for-sale securities		131,250		131,250		119,863		119,863
Held-to-maturity securities		622		637		698		711
Loans, net of allowance for loan losses		239,787		248,263		247,006		252,806
Federal Home Loan Bank stock		5,025		5,025		5,025		5,025
Interest receivable		1,527		1,527		1,602		1,602
Financial liabilities
Deposits		314,973		315,316		311,934		306,778
Other short-term borrowings		7,021		7,021		7,454		7,454
Federal Home Loan Bank advances		45,500		46,865		45,500		46,419
Advances from borrowers for taxes and insurance		528		528		539		539
Interest payable		168		168		213		213

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents, Interest Receivable and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Loans

The fair value of loans is estimated by discounting the future cash flows using the current rates at which similar loans would be made to borrowers with similar credit ratings and for the same remaining maturities.  Loans with similar characteristics were aggregated for purposes of the calculations.

19

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Held-to-maturity securities

The fair value of held-to-maturity securities was estimated by using pricing models that contain market pricing and information, quoted prices of securities with similar characteristics or discounted cash flows that use credit adjusted discount rates.

Deposits

Deposits include savings accounts, checking accounts and certain money market deposits.  The carrying amount approximates fair value.  The fair value of fixed-maturity time deposits is estimated using a discounted cash flow calculation that applies the rates currently offered for deposits of similar remaining maturities.

Interest Payable, Other Short-Term Borrowings and Advances From Borrowers for Taxes and Insurance

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

Rates currently available to the Company for debt with similar terms and remaining maturities are used to estimate the fair value of existing debt.

Commitments to Originate Loans, Letters of Credit and Lines of Credit

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.  Fair values of commitments were not material at September 30, 2010 and March 31, 2010.

20

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Discussion of Financial Condition Changes from March 31, 2010, to September 30, 2010

At September 30, 2010, the Company had total assets of $410.6 million, an increase of $4.6 million, or 1.1%, over total assets at March 31, 2010.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, increased by $12.2 million, or 9.4%, to $141.9 million at September 30, 2010.  The increase was primarily due to an increase of $11.4 million, or 9.5%, in available-for-sale securities and an increase in cash and cash equivalents of $789,000, or 8.0%.

Total securities increased by $11.3 million, or 9.4%, during the six month period ended September 30, 2010.  The increase was primarily due to purchases of $30.6 million and an increase in the fair value of available-for-sale investment securities of $1.1 million, partially offset by maturities and principal repayments of $19.9 million.  Purchases were mainly funded by proceeds from principal payments received from the loan and securities portfolios.

Net loans receivable decreased by $7.2 million, or 2.9% at September 30, 2010 compared to March 31, 2010.  The Bank originated $25.4 million of loans, received payments of $29.6 million, originated and sold $2.8 million of 30-year fixed-rate mortgage loans into the secondary market and increased the allowance for loan losses, net of charge-offs, by $228,000.The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity, while the continuing difficult economic environment continues to limit the demand for new loans by credit worthy borrowers.  As part of an overall strategy to manage liquidity and interest rate risk, management has adopted a strategy of im mediately selling certain newly originated 30-year fixed-rate mortgage loans into the secondary market to limit the accumulation of interest rate risk on the balance sheet and to keep the secondary market channel open as a backup source of liquidity.  Similarly, in order to further limit the accumulation of interest rate risk on the balance sheet, the Company focuses on the origination of shorter-term and adjustable-rate secured commercial loans and limits the origination and retention of long term fixed-rate residential mortgages.  To the extent that loan demand is insufficient in the current period, investments in the securities portfolio are made to provide future cash flows to fund loan demand in future periods while also limiting the interest rate risk exposure of the Company.

21

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

	September 30, 2010				March 31, 2010
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)	$	159,513	65.27	%	$	159,140	62.96	%
Residential construction loans		552	0.23			2,097	0.83
Multi-family residential		8,807	3.60			9,010	3.56
Non-residential real estate/land(2)		64,831	26.53			70,167	27.76
Total mortgage loans		233,703	95.63			240,415	95.11
Other loans:
Consumer loans(3)		2,804	1.15			3,402	1.35
Commercial business loans		7,875	3.22			8,943	3.54
Total other loans		10,679	4.37			12,345	4.89
Total loans before net items		244,382	100.00	%		252,760	100.00	%
Less:
Loans in process		1,127				2,507
Deferred loan origination fees		414				421
Allowance for loan losses		3,054				2,826
Total loans receivable, net	$	239,787			$	247,006
Mortgage-backed securities, net(4)	$	105,380			$	96,901

_________________________________

(1) Includes equity loans collateralized by second mortgages in the aggregate amount of $16.6 million at September 30, 2010, and $16.5 million at March 31, 2010.  Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

(2) Includes land loans of $2.2 million and $2.7 million at September 30, 2010 and  March 31, 2010, respectively.

(3) Includes second mortgage loans of $1.0 million and $1.1 million as of September 30, 2010 and  March 31, 2010, respectively.

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

Non-performing loans amounted to $4.9 million at September 30, 2010 compared to $4.3 million at March 31, 2010.  At September 30, 2010, non-performing loans consisted primarily of residential mortgage loans of approximately $3.4 million, a nonresidential property loan with a balance of $1.3 million, land loans totaling $191,000 and consumer loans totaling $6,000.  At March 31, 2010, non-performing loans consisted of $2.8 million in residential loans, a nonresidential property loan with a balance of $1.3 million, land loans totaling $191,000 and consumer loans totaling $23,000.  Foreclosed assets held for sale amounted to $2.5 million at September 30, 2010, compared to $2.9 million at March 31, 2010, a decrease of 12.1%.  The decline in the balance of foreclosed assets is mainly due to the disposal of four properties totaling $619,000 while only acquiring five properties totaling $345,000.  In addition, provision for impairment on foreclosed assets held for sale totaled $76,000 for the period.  Despite the difficult real property markets in the Company’s market area, transactions are being executed.  Management has been actively working to maximize current net proceeds compared to estimates of expected future carrying costs and potential future values.  Total non-performing and impaired assets amounted to $10.0 million at September 30, 2010, compared to $9.4 million at March 31, 2010.

22

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

The following table sets forth information regarding our past due, nonaccrual and impaired loans and foreclosed assets held for sale as of September 30, 2010 and March 31, 2010.

	September 30, 2010			March 31, 2010
	(Dollars in thousands)
Past due loans 30-89 days:
Mortgage loans:
One-to-four family residential	$	568		$	260
All other mortgage loans		661			3,255
Non-mortgage loans:
Commercial business loans		102			—
Consumer loans		—			—
	$	1,331		$	3,515
Non-performing loans:
Mortgage loans:
One-to-four family residential	$	3,344		$	2,805
All other mortgage loans		1,511			1,511
Non-mortgage loans:
Commercial business loans		—			—
Consumer		6			3
Total non-performing loans(1)		4,861			4,319
Loans deemed impaired(2)		2,569			2,185
Total non-performing and impaired loans		7,430			6,504
Total foreclosed assets held for sale		2,538			2,888
Total non-performing and impaired assets	$	9,968		$	9,392
Total non-performing and impaired loans to net loans receivable		3.10	%		2.63	%
Total non-performing and impaired loans to total assets		1.81	%		1.60	%
Total non-performing and impaired assets to total assets		2.43	%		2.31	%

(1) Nonperforming loans include $3.1 million and $1.4 million which are deemed impaired at September 30, 2010 and March 31, 2010, respectively.

(2) Includes loans deemed impaired of $980,000 at September 30, 2010, and $778,000 at March 31, 2010, that are currently performing.

23

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

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

	For the six months ended September 30, 2010			For the year ended March 31, 2010
	(Dollars in thousands)
Loans receivable, gross	$	242,841		$	249,832
Average loans receivable, net	$	246,620		$	252,020
Allowance balance (at beginning of period)	$	2,826		$	2,484
Provision for losses		310			1,643
Charge-offs:
Mortgage loans:
One-to-four family		(78	)		(452	)
Non-residential real estate and land		(5	)		(830	)
Other loans:
Consumer		—			—
Commercial		—			(148	)
Gross charge-offs		(83	)		(1,330	)
Recoveries:
Mortgage		—			28
Consumer		1			1
Gross recoveries		1			29
Net charge-offs		(82	)		(1,301	)
Allowance for loan losses balance (at end of period)	$	3,054		$	2,826
Allowance for loan losses as a percent of loans receivable, gross at end of period		1.26	%		1.13	%
Net loans charged off as a percent of average loans receivable, net		0.03	%		0.52	%
Ratio of allowance for loan losses to non-performing loans at end of period		62.83	%		65.43	%

24

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Deposits totaled $315.0 million at September 30, 2010, an increase of $3.0 million, or 1.0%, over $311.9 million at March 31, 2010.  Savings and money market accounts increased by $3.5 million and demand deposit accounts increased by $660,000 while time deposits decreased by $1.1 million.  Management continued to exercise discipline during the period 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 defend customer relationships with significant value to the Bank while allowing rate sensitive certificate of deposit accounts to move to other alternatives.

Other short-term borrowings, in the form of repurchase agreements with customers, totaled $7.0 million at September 30, 2010, and $7.5 million at March 31, 2010.  The interest rate paid on these borrowings is 0.40% for both periods.

Advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) totaled $45.5 million at both September 30, 2010, and March 31, 2010.  The Company primarily uses advances from the FHLB for short term cash management purposes and to extend liability duration for interest rate risk management purposes.  Repricing risk associated with advances is mitigated through the laddering of advance maturities over time.  The weighted average cost of FHLB advances was 3.69% at September 30, 2010, compared to 4.00% at March 31, 2010.  The decrease in the rate paid is due to decreases in market interest rates.

Stockholders’ equity increased by $1.7 million, or 4.6%, during the six months ended September 30, 2010, mainly due to the addition of net income of $1.3 million and an increase in accumulated other comprehensive income of $711,000,  partially offset by declared dividends of $360,000.

Comparison of Operating Results for the Three Month Periods Ended September 30, 2010 and 2009

General

Net income for the three months ended September 30, 2010 totaled $674,000, an increase of $22,000, or 3.4%, compared to $652,000 for the three month period ended September 30, 2009.  The increase in net income was primarily due to a decrease in interest expense of $374,000 and a decrease in provision for loan losses of $260,000, partially offset by a decrease in interest income of $474,000 and an increase in noninterest expense of $110,000.

25

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Average Balance Sheet

The following table sets 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,
	2010							2009
	Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)	$	241,765	$	3,329		5.51	%	$	253,295		$	3,632		5.74	%
Investment securities(2)		129,805		1,214		3.74			114,532			1,378		4.81
Interest-earning deposits(3)		13,543		58		1.71			10,966			65		2.37
Total interest-earning assets		385,113		4,601		4.78			378,793			5,075		5.36
Noninterest-earning assets		25,208							23,254
Total assets	$	410,321						$	402,047
Interest-bearing liabilities:
Deposits	$	315,966	$	958		1.21	%	$	305,283		$	1,239		1.62	%
Other short-term borrowings		7,485		8		0.43			8,884			9		0.41
Borrowings		44,075		401		3.64			47,791			493		4.13
Total interest-bearing liabilities		367,526		1,367		1.49			361,958			1,741		1.92
Noninterest bearing  liabilities		4,145							4,046
Total liabilities		371,671							366,004
Stockholders’ equity		38,650							36,043
Total liabilities and stockholders’ equity	$	410,321						$	402,047
Net interest income			$	3,234							$	3,334
Interest rate spread(4)						3.29	%							3.44	%
Net yield on interest-earning assets(5)						3.36	%							3.52	%
Ratio of average interest-earning assets to average  interest-bearing liabilities						104.79	%							104.65	%

_________________________________________

(1) Includes non-accrual loan balances.

(2) Includes mortgage-backed securities both designated as available-for-sale and held-to-maturity.

(3)  Includes  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.

26

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest Income

Interest income decreased by $474,000 or 9.3%, to $4.6 million for the three months ended September 30, 2010, compared to the same period in 2009.  The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.78% in the 2010 period from 5.36% for the 2009 period, partially offset with an increase of $6.3 million in the average balance of interest-earning assets outstanding to $385.1 million for the 2010 period compared to an average balance of $378.8 million for the 2009 period.The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2009 period to the 2010 period through prepayments, new loan originations and reinvestment of securities cashflows at lower yields.

Interest income on loans decreased by $303,000, or 8.3%, for the three month period ended September 30, 2010, compared to the same period in 2009, due to a reduction in the average balance of loans outstanding and a decrease in the portfolio yield.  The average balance of loans outstanding decreased $11.5 million, or $4.6%, to $241.8 million for the 2010 period compared to $253.3 million for the 2009 period.  Loan prepayments have increased due to the low interest rate environment and loan originations have decreased due to lack of demand from qualified borrowers resulting from the continued difficult economic conditions in 2010.   The yield on the loan portfolio decreased from 5.74% for the three months ended September 30, 2009 to 5.51% for the three months ended September 30, 2010, again due to red uced origination yields and the amortization and prepayment of higher yielding assets due to the low level of market interest rates.

Interest income on securities decreased by $164,000, or 11.9%, during the three months ended September 30, 2010, compared to the same period in 2009.  This decrease was due primarily to a decrease of 107 basis points in the weighted-average rate to 3.74% for the 2010 period, compared to 4.81% for the 2009 period, partially offset by an increase in the average balance of $15.3 million, or 13.3%.  As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide portfolio cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income decreased by $7,000 to $58,000 for the three month period ending September 30, 2010 compared to the 2009 period.   The weighted-average yield decreased by 66 basis points to 1.71% as a result of reductions in short term market interest rates. The decrease was partially offset by the increase in the average balance of $2.6 million to $13.5 million in the 2010 period, compared to $11.0 million in the 2009 period.

Interest Expense

Interest expense totaled $1.4 million for the three month period ended September 30, 2010, a decrease of $374,000, or 21.5%, compared to $1.7 million for the three month period ended September 30, 2009.  The decrease was mainly due to a 43 basis point decrease in the weighted-average cost of funds to 1.49% for the 2010 period compared to 1.92% for the 2009 period, partially offset by a $5.6 million increase in the average balance of total interest-bearing liabilities for the 2010 period compared to the 2009 period.

Interest expense on deposits totaled $958,000 for the three months ended September 30, 2010, a decrease of $281,000, or 22.7%, compared to $1.2 million for the three months ended September 30, 2009.  The decrease was mainly due to a 41 basis point decrease in the weighted-average cost of deposits, to 1.21% for the 2010 period compared to 1.62% for the 2009 period, partially offset by an increase in the average

27

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

balance of $10.7 million, or 3.5%, to $316.0 million for the 2010 period compared to $305.3 million for the 2009 period.  The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors.

Interest expense on other short-term borrowings totaled $8,000 for the three month period ended September 30, 2010, a decrease of $1,000, from the 2009 period.  The decrease was mainly due to a decrease in the average balance of $1.4 million, or 15.7%, partially offset by a 2 basis point increase in the weighted-average cost of funds for the 2010 period compared to the 2009 period.

Interest expense on Federal Home Loan Bank advances totaled $401,000 for the three month period ended September 30, 2010, a decrease of $92,000 compared to the expense of $493,000 for the 2009 period.  The decrease was mainly due to a decline in the weighted-average cost of 49 basis points to 3.64%, as a portion of maturing higher cost advances were repriced to lower current market interest rates, and a decrease of $3.7 million, or 7.8%, in the average balance of advances outstanding.  A portion of maturing advances were paid off through an increase in retail deposits as noted above.  Management will continue to reserve FHLB borrowing capacity as a possible substitute for higher cost retail deposits and as a means of extending liability duration to manage interest rate risk on the balance sheet.

Net Interest Income

Net interest income totaled $3.2 million for the three month period ended September 30, 2010, a decrease of $100,000, or 3.0%, compared to the three month period ended September 30, 2009.  The interest rate spread decreased 15 basis points to 3.29% for the 2010 period, compared to 3.44% for the 2009 period.  The net interest margin decreased 16 basis points to 3.36% for the three month period ended September 30, 2010, compared to 3.52% for the three month period ended September 30, 2009.  The decrease in the interest rate spread was due to a shift in asset composition to lower yielding investment securities and cash equivalents from higher yielding loans and mortgage-backed securities as discussed above.

Provision for Loan Losses

Management recorded a $120,000 provision for loan losses for the three month period ended September 30, 2010, a decrease of $260,000 compared to the $380,000 provision for the three month period ended September 30, 2009.  The provision for loan losses is based on management’s assessment of portfolio performance indicators, primarily the continuing increase in delinquent loans, non-performing loans and charge-offs, and economic conditions in the Company’s market area, characterized by continuing high levels of unemployment and foreclosure activity, partially offset by a decrease in the size of the loan portfolio.  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, 2010.

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income, gain on sale of foreclosed assets and gain on the sale of loans decreased by

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

$25,000, or 4.9%, for the three month period ended September 30, 2010, compared to the three month period ended September 30, 2009.  The decrease was primarily due to a reduction in service fees, charges and other operating income of $27,000 and a decrease in trust income of $4,000, partially offset by an increase in gain on sale of residential mortgage loans of $6,000. The decrease in service fees on deposit accounts is due to a decrease in overdraft and monthly statement fees as customers better manage their deposit accounts to avoid such fees and the effect of an overall reduction in the level of economic activity in the Company’s market area.

Noninterest Expense

Noninterest expense increased by $110,000, or 4.2%, to $2.7 million for the three months ended September 30, 2010, compared to the three months ended September 30, 2009.  The increase was primarily due to a $127,000 increase in other operating expenses.  The majority of the increase in other operating expenses is related to an increase of $35,000 in marketing expense, an increase in professional expenses, mainly legal costs related to foreclosure activity, of $24,000, and increased appraisal expense of $22,000.  Compensation and benefits expenses increased by $45,000, mainly due to annual merit compensation increases that took effect in April and increased pension costs.  The above increases were partially offset by a decrease of $40,000 in occupancy and equipment expense, mainly due to manageme nt’s exercise of careful control over expenditures for the purchases of equipment and reduced ATM costs as a result of contract negotiations in fiscal 2010, a reduction of $20,000 in the provision for impairment on foreclosed assets held-for-sale and the absence of $4,000 of expenses related to the disposal of office premises and equipment  in the 2009 period that did not recur in the 2010 period.

Federal Income Taxes

Federal income tax expense was $213,000 for the three month period ended September 30, 2010, an increase of $3,000, or 1.4%, compared to the three month period ended September 30, 2009.  The slight increase was primarily due to a $25,000 increase in pretax income resulting from the factors discussed above.  The effective tax rate was 24.0% for the 2010 period compared to 24.4% for the 2009 period.  The decrease in the effective tax rate is mainly due to a slight increase in the proportion of tax exempt income generated by municipal securities and bank owned life insurance.

Comparison of Operating Results for the Six Month Periods Ended September 30, 2010 and 2009

General

Net income for the six months ended September 30, 2010 totaled $1.3 million, an increase of $133,000, or 11.2%, compared to $1.2 million for the six month period ended September 30, 2009.  The increase in net income was primarily due to a decrease in interest expense of $833,000 and a decrease in provision for loan losses of $235,000, partially offset by a decrease in interest income of $909,000 and an increase in the provision for federal income taxes of $46,000.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Average Balance Sheet

The following table sets 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,
	2010							2009
	Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)	$	246,620	$	6,763		5.48	%	$	252,720		$	7,314		5.79	%
Investment securities(2)		126,915		2,430		3.83			115,109			2,781		4.83
Interest-earning deposits(3)		13,447		115		1.71			13,052			122		1.87
Total interest-earning assets		386,982		9,308		4.81			380,881			10,217		5.36
Noninterest-earning assets		22,275							23,206
Total assets	$	409,257						$	404,087
Interest-bearing liabilities:
Deposits	$	315,272	$	1,970		1.25	%	$	307,149		$	2,621		1.71	%
Other short-term borrowings		7,377		15		0.41			9,361			19		0.41
Borrowings		44,330		817		3.69			47,599			995		4.18
Total interest-bearing liabilities		366,979		2,802		1.53			364,109			3,635		2.00
Noninterest bearing  liabilities		4,153							4,298
Total liabilities		371,132							368,407
Stockholders’ equity		38,125							35,680
Total liabilities and stockholders’ equity	$	409,257						$	404,087
Net interest income			$	6,506							$	6,582
Interest rate spread(4)						3.28	%							3.36	%
Net yield on interest-earning assets(5)						3.36	%							3.46	%
Ratio of average interest-earning assets to average  interest-bearing liabilities						105.45	%							104.61	%

_______________________________________________________

(1) Includes non-accrual loan balances.

(2) Includes mortgage-backed securities both designated as available-for-sale and held to maturity.

(3) Includes  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.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest Income

Interest income decreased by $909,000 or 8.9%, to $9.3 million for the six months ended September 30, 2010, compared to the same period in 2009.  The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.81% in the 2010 period from 5.36% for the 2009 period, partially offset with an increase of $6.1 million in the average balance of interest-earning assets outstanding to $387.0 million for the 2010 period compared to an average balance of $380.9 million for the 2009 period.The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2009 period to the 2010 period through prepayments, new loan originations and reinvestment of securities cashflows at lo wer yields.

Interest income on loans decreased by $551,000, or 7.5%, for the six month period ended September 30, 2010, compared to the same period in 2009, primarily due to a reduction in the weighted-average rate on loans from 5.79% for the six months ended September 30, 2009 to 5.48% for the six months ended September 30, 2010.  As discussed earlier, the yield decrease was due to lower overall market rates for new loan originations and the refinancing of existing loans, combined with a decrease in the average balance of loans outstanding of $6.1 million, or 2.4%, to $246.6 million for the 2010 period compared to $252.7 million for the 2009 period.  Loan prepayments have increased due to the low interest rate environment and loan demand from qualified borrowers has been significantly reduced by the continued difficult econom ic conditions in 2010.

Interest income on securities decreased by $351,000, or 12.6%, during the six months ended September 30, 2010, compared to the same period in 2009.  This decrease was due primarily to a decrease of 100 basis points in the weighted-average rate to 3.83% for the 2010 period, compared to 4.83% for the 2009 period, partially offset by an increase in the average balance of $11.8 million, or 10.3%.  As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide cash flow to meet loan demand in future periods.

Dividends on Federal Home Loan Bank stock and other income decreased by $7,000 for the six month period ending September 30, 2010 compared to the 2009 period.   The weighted-average yield decreased by 16 basis points to 1.71% as a result of reductions in short term market interest rates. The decrease was partially offset by the increase in the average balance of $395,000 to $13.4 million in the 2010 period, compared to $13.1 million in the 2009 period.

Interest Expense

Interest expense totaled $2.8 million for the six month period ended September 30, 2010, a decrease of $833,000, or 22.9%, compared to $3.6 million for the six month period ended September 30, 2009.  The decrease was mainly due to a 47 basis point decrease in the weighted-average cost of funds to 1.53% for the 2010 period compared to 2.00% for the 2009 period, partially offset by an increase in the average balance of $2.9 million, or 0.8%, for the 2010 period compared to the 2009 period.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest expense on deposits totaled $2.0 million for the six months ended September 30, 2010, a decrease of $651,000, or 24.8%, compared to $2.6 million for the six months ended September 30, 2009.  The decrease resulted from a 46 basis point decrease in the weighted-average cost of deposits, to 1.25% for the 2010 period compared to 1.71% for the 2009 period, partially offset with an increase in the average balance of $8.1 million, or 2.6%, to $315.3 million for the 2010 period compared to $307.1 million for the 2009 period.  The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors.

Interest expense on other short-term borrowings decreased by $4,000 for the six month period ended September 30, 2010, from the similar 2009 period.  The decrease was primarily due to a decrease in the average balance of $2.0 million, or 21.2%. The weighted-average cost of funds remained unchanged at 0.41% for the 2010 and 2009 periods.

Interest expense on Federal Home Loan Bank advances totaled $817,000 for the six month period ended September 30, 2010, a decrease of $178,000 compared to the expense of $995,000 for the 2009 period.  The decrease was primarily due to a decline in the weighted-average cost of 49 basis points to 3.69%, as a portion of maturing higher cost advances were repriced to lower current market interest rates, and a decrease of $3.3 million, or 6.9%, in the average balance of advances outstanding.  A portion of maturing advances were paid off through an increase in retail deposits as noted above.  Management will continue to reserve FHLB borrowing capacity as a possible substitute for higher cost retail deposits and as a means of extending liability duration to manage interest rate risk on the balance sheet.

Net Interest Income

Net interest income totaled $6.5 million for the six month period ended September 30, 2010, a decrease of $76,000, or 1.2%, compared to the six month period ended September 30, 2009.  The interest rate spread decreased 8 basis points to 3.28% for the 2010 period, compared to 3.36% for the 2009 period.  The net interest margin decreased 10 basis points to 3.36% for the six month period ended September 30, 2010, compared to 3.46% for the six month period ended September 30, 2009.  The decrease in the interest rate spread was due to a shift in asset composition to lower yielding investment securities and cash equivalents from higher yielding loans and mortgage-backed securities as discussed above.

Provision for Loan Losses

Management recorded a $310,000 provision for loan losses for the six month period ended September 30, 2010, a decrease of $235,000 compared to the $545,000 provision for the six month period ended September 30, 2009.  The provision for loan losses is based on management’s assessment of portfolio performance indicators, primarily the continuing increase in delinquent loans, non-performing loans and charge-offs, and economic conditions in the Company’s market area, characterized by continuing high levels of unemployment and foreclosure activity, partially offset by a decrease in the size of the loan portfolio.  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, 2010.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income, gain on sale of foreclosed assets and gain on the sale of loans decreased by $23,000, or 2.3%, for the six month period ended September 30, 2010, compared to the six month period ended September 30, 2009.  The decrease was mainly due to a reduction in service fees, charges and other operating income of $66,000, or 9.5%.  The decrease in service fees on deposit accounts is mainly due to a decrease in overdraft and monthly statement fees as customers better manage their deposit accounts to avoid such fees and an overall decrease in economic activity in the Company’s market area.  The above decreases were partially offset by a gain on sale of foreclosed assets held for sa le of $14,000 in the 2010 period compared to a loss of $11,000 in the 2009 period, increased gains on the sale of residential mortgages of $10,000 and an increase in trust income of $7,000.  The increase in gains from the sale of loans is the result of increased origination activity due to the low level of market interest rates and management’s strategy, as discussed above, of selling certain 30 year fixed rate residential mortgages with longer maturities to limit the accumulation of interest rate risk on the balance sheet and to provide an additional source of liquidity.  The increase in trust income is mainly due to an increase in the market value of managed assets during the 2010 period compared to the 2009 period, as most trust fees are tied to the market value of customer accounts.

Noninterest Expense

Noninterest expense decreased by $43,000, or 0.8%, to $5.5 million for the six months ended September 30, 2010, compared to the six months ended September 30, 2009.  The decrease was primarily due to a $212,000 decrease in federal deposit insurance expense, as a special assessment imposed on all insured institutions by the Federal Deposit Insurance Corporation during the 2009 period was not repeated in the 2010 period.  Additionally, occupancy and equipment decreased $53,000 mainly due to reduced ATM costs as a result of contract negotiations in fiscal 2010.

Salaries and employee benefits increased $140,000 compared to the prior year mainly due to annual merit increases in compensation, increased pension expense and a reduced deferral of compensation costs as loan originations are down for the 2010 six month period compared to the 2009 six month period.  Other operating expenses increased by $66,000 compared to the 2009 period mainly due to an increase in loan appraisal expenses, an increase in marketing expense and a $26,000 increase in the provision for impairment on foreclosed assets held-for-sale over the prior year period as offering prices were reduced to reflect real property market conditions in the Company’s market area.

Federal Income Taxes

Federal income tax expense was $403,000 for the six month period ended September 30, 2010, an increase of $46,000, or 12.9%, compared to the six month period ended September 30, 2009.  The increase was primarily due to a $179,000 increase in pretax income.  The effective tax rate was 23.4% for the 2010 period compared to 23.2% for the 2009 period.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

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.

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Wayne Savings Bancshares, Inc.

 Part I

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, 2010.

ITEM 4T                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, 2010.

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

(a)           Not applicable

(b)           Not applicable

(c)           Not applicable

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Reserved

Not applicable.

ITEM 5. Other Information

Not applicable.

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Wayne Savings Bancshares, Inc.

PART II

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

37

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 8, 2010	By:	/s/Phillip E. Becker
		Phillip E. Becker President and Chief Executive Officer
Date:  November 8, 2010	By:	/s/H. Stewart Fitz Gibbon III
		H. Stewart Fitz Gibbon III Executive Vice President and Chief Financial Officer

38