Wayne Savings Bancshares 10Q 2012 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, 2012

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 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. Yesý Noo

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).ý 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 filero Non-accelerated filer o Smaller reporting company ý

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

Yeso Noý

As of November 8, 2012, the latest practicable date, 2,993,846 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 and Comprehensive Income		3
Condensed Consolidated Statements of Cash Flows		4
Notes to Condensed Consolidated Financial Statements		6

Item 2 Management’s Discussion and Analysis of Financial Condition and Results of Operations		29

Item 3 Quantitative and Qualitative Disclosures About Market Risk		40

Item 4 Controls and Procedures		40


PART II - OTHER INFORMATION

Item 1 Legal Proceedings		41

Item 1A Risk Factors		41

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds		41

Item 3 Defaults Upon Senior Securities		41

Item 4 Mine Safety Disclosures		41

Item 5 Other Information		41

Item 6 Exhibits		42

SIGNATURES		43

Index

Wayne Savings Bancshares, Inc.
Condensed Consolidated Balance Sheets
(In thousands, except share data)

	September 30, 2012			December 31, 2011
	(Unaudited)
ASSETS
Cash and due from banks	$	4,659		$	14,215
Interest-bearing demand deposits		4,429			5,601
Cash and cash equivalents		9,088			19,816

Available-for-sale securities		123,247			130,637
Held-to-maturity securities		2,485			1,679
Loans receivable – net of allowance for loan losses of $3,812 and $3,854 at September 30, 2012 and December 31, 2011, respectively		239,789			232,099
Premises and equipment		7,154			7,165
Federal Home Loan Bank stock		5,025			5,025
Foreclosed assets held for sale - net		59			1,283
Accrued interest receivable		1,537			1,314
Bank-owned life insurance		8,651			7,193
Goodwill		1,719			1,719
Other intangible assets		151			219
Prepaid Federal Deposit Insurance Corporation premiums		661			868
Prepaid federal income taxes		85			54
Other Assets		1,423			1,026
Total assets	$	401,074		$	410,097

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand	$	79,063		$	76,750
Savings and money market		111,718			108,934
Time		136,592			148,164
Total deposits		327,373			333,848

Other short-term borrowings		7,220			5,278
Federal Home Loan Bank advances		21,187			26,597
Accrued interest payable and other liabilities		3,601			3,751
Deferred federal income taxes		1,254			908
Total liabilities		360,635			370,382

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		35,977			35,986
Retained earnings		17,289			16,635
Shares acquired by ESOP		(592	)		(655	)
Accumulated other comprehensive income, net of tax effects		1,989			1,881
Treasury stock, at cost – 984,885 common shares at September 30, 2012 and 974,618 at December 31, 2011		(14,622	)		(14,530	)
Total stockholders’ equity		40,439			39,715
Total liabilities and stockholders’ equity	$	401,074		$	410,097

See accompanying notes to condensed consolidated financial statements.

Index

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Income and Comprehensive Income
For the three and nine months ended September 30, 2012 and 2011
(In thousands, except per share data)
(Unaudited)

	Three months ended					Nine months ended
	September 30, 2012		September 30, 2011			September 30, 2012		September 30, 2011
Interest and Dividend Income
Loans	$	2,964	$	3,067		$	8,895	$	9,379
Securities		788		1,091			2,592		3,330
Dividends on Federal Home Loan Bank stock and other		55		54			171		171
Total interest and dividend income		3,807		4,212			11,658		12,880

Interest Expense
Deposits		500		752			1,654		2,392
Other short-term borrowings		3		3			8		13
Federal Home Loan Bank advances		165		272			515		876
Total interest expense		668		1,027			2,177		3,281

Net Interest Income		3,139		3,185			9,481		9,599

Provision for Loan Losses		225		442			618		634

Net Interest Income After Provision for Loan Losses		2,914		2,743			8,863		8,965

Noninterest Income
Gain on loan sales		108		35			203		60
Trust income		62		81			227		218
Earnings on bank-owned life insurance		75		62			223		176
Service fees, charges and other operating		271		348			824		877
Total noninterest income		516		526			1,477		1,331

Noninterest Expense
Salaries and employee benefits		1,532		1,570			5,061		4,580
Net occupancy and equipment expense		468		461			1,421		1,385
Federal deposit insurance premiums		72		77			225		284
Franchise taxes		100		93			301		281
Provision for impairment on foreclosed assets held for sale		11		223			46		931
Loss (Gain) on sale of foreclosed assets held for sale		—		(8	)		13		(12	)
Amortization of intangible assets		23		22			68		68
Other		634		506			1,705		1,329
Total noninterest expense		2,840		2,944			8,840		8,846

Income Before Federal Income Taxes		590		325			1,500		1,450

Provision for Federal Income Taxes		125		16			259		221

Net Income	$	465	$	309		$	1,241	$	1,229

Other comprehensive income:

Unrealized gains on available-for-sale securities		170		545			166		1,894
Change in defined benefit plan unrecognized net loss		—		—			—		(22	)
Amortization of net loss included in net periodic pension cost		—		—			—		35
Components of other comprehensive income, before tax effect		170		545			166		1,907
Tax expense		58		185			58		648

Other comprehensive income		112		360			108		1,259

Comprehensive income		577		669			1,349		2,488

Basic Earnings Per Share	$	0.16	$	0.10		$	0.42	$	0.42

Diluted Earnings Per Share	$	0.16	$	0.10		$	0.42	$	0.42

Dividends Per Share	$	0.07	$	0.06		$	0.20	$	0.18

See accompanying notes to condensed consolidated financial statements.

Index

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
For the nine months ended September 30, 2012 and 2011
(In thousands)
(Unaudited)

	2012			2011

Operating Activities
Net income	$	1,241		$	1,229
Items not requiring (providing) cash
Depreciation and amortization		411			398
Provision for loan losses		618			634
Amortization of premiums and discounts on securities – net		1,565			1,075
Amortization of mortgage servicing rights		38			32
Amortization of deferred loan origination fees		(92	)		(48	)
Amortization of intangible assets		68			68
Increase in value of bank owned life insurance		(215	)		(188	)
Amortization expense of stock benefit plan		53			55
Provision for impairment on foreclosed assets held for sale		46			931
Loss (gain) on sale of foreclosed assets held for sale		13			(12	)
Gain on sale of loans		(203	)		(60	)
Proceeds from sale of loans in secondary market		4,530			1,548
Origination of loans for sale in the secondary market		(4,327	)		(1,488	)
Deferred income taxes		291			(269	)
Changes in
Accrued interest receivable		(223	)		(307	)
Other assets		(466	)		281
Prepaid federal deposit insurance premiums		207			261
Interest payable and other liabilities		125			(555	)
Net cash provided by operating activities		3,680			3,585

Investing Activities
Purchase of available-for-sale securities		(32,049	)		(33,630	)
Purchase of held-to-maturity securities		(867	)		—
Proceeds from maturities of available-for-sale securities		38,042			28,760
Proceeds from maturities of held-to-maturity securities		58			38
Net change in loans		(8,217	)		7,025
Purchase of Bank owned life insurance		(1,243	)		—
Purchase of premises and equipment		(400	)		(679	)
Proceeds from the sale of foreclosed assets		1,165			870
Net cash provided by (used in) investing activities	$	(3,511	)	$	2,384

See accompanying notes to condensed consolidated financial statements.

Index

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
For the nine months ended September 30, 2012 and 2011
(In thousands)
(Unaudited)

	2012			2011

Financing Activities
Net change in deposits	$	(6,475	)	$	7,949
Net change in other short-term borrowings		1,942			(2,120	)
Proceeds from Federal Home Loan Bank and Federal Reserve advances		14,710			—
Repayments of Federal Home Loan Bank and Federal Reserve advances		(20,120	)		(10,410	)
Advances by borrowers for taxes and insurance		(305	)		(438	)
Cash dividends paid		(557	)		(528	)
Treasury stock purchases		(92	)		—
Net cash used in financing activities		(10,897	)		(5,547	)

Increase (decrease) in Cash and Cash Equivalents		(10,728	)		422

Cash and Cash Equivalents, Beginning of period		19,816			11,800

Cash and Cash Equivalents, End of period	$	9,088		$	12,222

Supplemental Cash Flows Information
Interest paid on deposits and borrowings	$	2,189		$	3,311

Federal income taxes paid	$	—		$	745

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale	$	—		$	1,187

Unrealized gains on securities designated as available-for-sale,
net of related tax effects	$	108		$	1,252

Dividends payable	$	209		$	180

See accompanying notes to condensed consolidated financial statements.

Index

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, 2012 and for the three and nine months ended September 30, 2012 and 2011, 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 nine month fiscal period ended December 31, 2011. Reference is made to the accounting policies 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 nine months ended September 30, 2012, 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 December 31, 2011, has been derived from the consolidated balance sheet of the Company as of that date.

Critical Accounting Policies – The Company’s critical accounting policies relate to the allowance for loan losses and goodwill. 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 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. The Company recorded all assets and liabilities acquired in prior purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using the straight-line method, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

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.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

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.

Note 3:

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, 2012:
U.S. government agencies	$	157	$	1	$	—	$	158
Mortgage-backed securities of government sponsored entities		91,630		2,547		62		94,115
Private-label collateralized mortgage obligations		1,184		46		—		1,230
State and political subdivisions		26,235		1,549		40		27,744

Totals	$	119,206	$	4,143	$	102	$	123,247

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Available-for-sale securities:
December 31, 2011:
U.S. government agencies	$	1,559	$	26	$	1	$	1,584
Mortgage-backed securities of government sponsored entities		98,816		2,636		124		101,328
Private-label collateralized mortgage obligations		1,693		48		—		1,741
State and political subdivisions		24,694		1,315		25		25,984

Totals	$	126,762	$	4,025	$	150	$	130,637

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Held-to-maturity Securities:
September 30, 2012:
U.S. government agencies	$	133	$	1	$	1	$	133
Mortgage-backed securities of government sponsored entities		1,486		49		—		1,535
State and political subdivisions		866		—		26		840

	$	2,485	$	50	$	27	$	2,508

December 31, 2011:
U.S. government agencies	$	145	$	—	$	—	$	145
Mortgage-backed securities of government sponsored entities		1,527		16		—		1,543
State and political subdivisions		7		—		—		7

	$	1,679	$	16	$	—	$	1,695

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at September 30, 2012 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	$	1,556	$	1,625	$	—	$	—
Five to ten years		7,774		8,162		—		—
After ten years		17,062		18,115		999		973

		26,392		27,902		999		973

Mortgage-backed securities of government sponsored entities		91,630		94,115		1,486		1,535
Private-label collateralized mortgage obligations		1,184		1,230		—		—

Totals	$	119,206	$	123,247	$	2,485	$	2,508

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $59.6 million and $53.9 million at September 30, 2012 and December 31, 2011, 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, 2012 and December 31, 2011, was $13.6 million and $17.7 million, which represented approximately 11% and 14%, 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 an 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, 2012.

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 gross unrealized losses and fair value of the Company’s investments, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

September 30, 2012

		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		$	—	$	—	$	67	$	1	$	67	$	1
Mortgage-backed securities of government sponsored entities			7,656		29		2,923		33		10,579		62
State and political subdivisions			2,247		38		754		28		3,001		66
Total temporarily impaired securities		$	9,903	$	67	$	3,744	$	62	$	13,647	$	129

December 31, 2011

		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		$	—	$	—	$	313	$	1	$	313	$	1
Mortgage-backed securities of government sponsored entities			16,624		124		—		—		16,624		124
State and political subdivisions			—		—		759		25		759		25
Total temporarily impaired securities		$	16,624	$	124	$	1,072	$	26	$	17,696	$	150

Note 4:

Credit Quality of Loans and the Allowance for Loan Losses

Loans

Loans that management has the intent and ability to hold for the foreseeable future or until maturity or payoffs are reported at their outstanding principal balances adjusted for unearned income, charge-offs, the allowance for loan losses, any unamortized deferred fees or costs on originated loans and unamortized premiums or discounts on purchased loans.

For loans amortized at cost, interest income is accrued based on the unpaid principal balance. Loan origination fees, net of certain direct origination costs, as well as premiums and discounts, are deferred and amortized as a level yield adjustment over the respective term of the loan.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

The accrual of interest on mortgage and commercial loans is discontinued at the time the loan is 90 days past due unless the credit is well-secured and in process of collection. Past due status is determined based on contractual terms of the loan. In all cases, loans are placed on nonaccrual or charged off at an earlier date if collection of principal or interest is considered doubtful.

All interest accrued but not collected for loans that are placed on nonaccrual or charged off is reversed against interest income. The interest on these loans is accounted for on the cash-basis or cost-recovery method, until qualifying for return to accrual. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current for a period of six months and future payments are reasonably assured.

Allowance for Loan Losses

The allowance for loan losses is established as losses are estimated to have occurred through a provision for loan losses charged to income. Loan losses are charged against the allowance when management believes the uncollectability of a loan balance is confirmed. Subsequent recoveries, if any, are credited to the allowance.

The allowance for loan losses is evaluated on a regular basis by management and is based upon management’s periodic review of the collectability of the loans in light of historical experience, the nature and volume of the loan portfolio, adverse situations that may affect the borrower’s ability to repay, estimated value of any underlying collateral and prevailing economic conditions. This evaluation is inherently subjective as it requires estimates that are susceptible to significant revision as more information becomes available.

The allowance consists of allocated and general components. The allocated component relates to loans that are classified as impaired. For those loans that are classified as impaired, an allowance is established when the discounted cash flows (or collateral value or observable market price) of the impaired loan is lower than the carrying value of that loan. The general component covers nonclassified loans and is based on historical charge-off experience and expected loss given default derived from the Company’s internal risk rating process. Other adjustments may be made to the allowance for pools of loans after an assessment of internal or external influences on credit quality that are not fully reflected in the historical loss or risk rating data.

A loan is considered impaired when, based on current information and events, it is probable that the Company will be unable to collect the scheduled payments of principal or interest when due according to the contractual terms of the loan agreement. Factors considered by management in determining impairment include payment status, collateral value and the probability of collecting scheduled principal and interest payments when due. Loans that experience insignificant payment delays and payment shortfalls generally are not classified as impaired. Management determines the significance of payment delays and payment shortfalls on a case-by-case basis, taking into consideration all of the circumstances surrounding the loan and the borrower, including the length of the delay, the reasons for the delay, the borrower’s prior payment record and the amount of the shortfall in relation to the principal and interest owed. Impairment is measured on a loan-by-loan basis for commercial and construction loans by either the present value of expected future cash flows discounted at the loan’s effective interest rate, the loan’s obtainable market price or the fair value of the collateral if the loan is collateral dependent. Large groups of smaller balance homogenous loans are collectively evaluated for impairment. Accordingly, the Company does not separately identify individual consumer and residential loans for

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

impairment measurements, unless such loans are the subject of a restructuring agreement due to financial difficulties of the borrower.

The risk characteristics of each portfolio segment are as follows:

Residential Real Estate Loans

For residential mortgage loans that are secured by one-to-four family residences and are generally owner-occupied, the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded. Home equity loans are typically secured by a subordinate interest in one-to-four family residences. Repayment can also be impacted by changes in property values on residential properties. Risk is mitigated by the fact that the loans are of smaller individual amounts and spread over a large number of borrowers.

All Other Mortgage Loans

All other mortgage loans consist of residential construction loans, non-residential real estate loans, land loans and multi-family real estate loans.

Residential construction loan proceeds are disbursed in increments as construction progresses and as inspections warrant. Construction loans are typically structured as permanent one-to-four family loans originated by the Company with a 12-month construction phase. Accordingly, upon completion of the construction phase, there is no change in interest rate or term to maturity of the original construction loan, nor is a new permanent loan originated. These loans are generally owner-occupied and the Company generally establishes a maximum loan-to-value ratio and requires private mortgage insurance if that ratio is exceeded.

Non-residential real estate loans are negotiated on a case by case basis. Loans secured by non-residential real estate generally involve a greater degree of risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by non-residential real estate is typically dependent upon the successful operation of the related real estate project. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

The Company also originates a limited number of land loans secured by individual improved and unimproved lots for future residential construction. In addition, the Company originated loans to commercial customers with land held as the collateral.

Multi-family real estate loans generally involve a greater degree of credit risk than one-to-four family residential mortgage loans and carry larger loan balances. This increased credit risk is a result of several factors, including the concentration of principal in a limited number of loans and borrowers, the effects of general economic conditions on income producing properties, and the increased difficulty of evaluating and monitoring these types of loans. Furthermore, the repayment of loans secured by multi-family real estate is typically dependent upon the successful operation of the related real estate property. If the cash flow from the project is reduced, the borrower’s ability to repay the loan may be impaired.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Commercial Business Loans

Commercial business loans carry a higher degree of risk than one-to-four family residential loans. Such lending typically involves large loan balances concentrated in a single borrower or groups of related borrowers for rental or business properties. In addition, the payment experience on loans secured by income-producing properties is typically dependent on the success of the operation of the related project and thus is typically affected by adverse conditions in the real estate market and in the economy. The Company originates commercial loans generally in the $50,000 to $1,000,000 range with the majority of these loans being under $500,000. Commercial loans are generally underwritten based on the borrower’s ability to pay and assets such as buildings, land and equipment are taken as additional loan collateral. Each loan is evaluated for a level of risk and assigned a rating from “1” (the highest quality rating) to “7” (the lowest quality rating).

Consumer Loans

Consumer loans entail greater credit risk than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that depreciate rapidly, such as automobiles, mobile homes, boats, and recreational vehicles. In such cases, repossessed collateral for a defaulted consumer loan may not provide an adequate source of repayment for the outstanding loan and the remaining deficiency often does not warrant further substantial collection efforts against the borrower. In particular, amounts realizable on the sale of repossessed automobiles may be significantly reduced based upon the condition of the automobiles and the lack of demand for used automobiles.

The following presents by portfolio segment, the activity in the allowance for loan losses for the three and nine months ended September 30, 2012 and September 30, 2011:

Three months ended September 30, 2012	One-to-four family residential			All other mortgage loans			Commercial business loans		Consumer loans		Unallocated		Total
	(In thousands)
Beginning balance	$	1,082		$	2,362		$	143	$	5	$	—	$	3,592
Provision charged to expense		92			117			14		2		—		225
Losses charged off		(21	)		(1	)		—		—		—		(22	)
Recoveries		2			1			14		—		—		17
Ending balance	$	1,155		$	2,479		$	171	$	7	$	—	$	3,812

Three months ended September 30, 2011	One-to-four family residential			All other mortgage loans		Commercial business loans		Consumer loans		Unallocated		Total
	(In thousands)
Beginning balance	$	1,076		$	1,840	$	295	$	10	$	—	$	3,221
Provision charged to expense		(53	)		487		8		—		—		442
Losses charged off		(34	)		—		—		—		—		(34	)
Recoveries		—			—		—		—		—		—
Ending balance	$	989		$	2,327	$	303	$	10	$	—	$	3,629

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Nine months ended September 30, 2012	One-to-four family residential			All other mortgage loans			Commercial business loans			Consumer loans			Unallocated		Total
	(In thousands)
Beginning balance	$	1,128		$	2,547		$	169		$	10		$	—	$	3,854
Provision charged to expense		95			534			(12	)		1			—		618
Losses charged off		(109	)		(603	)		—			(4	)		—		(716	)
Recoveries		41			1			14			—			—		56
Ending balance	$	1,155		$	2,479		$	171		$	7		$	—	$	3,812

Nine months ended September 30, 2011	One-to-four family residential			All other mortgage loans		Commercial business loans		Consumer loans		Unallocated			Total
	(In thousands)
Beginning balance	$	1,199		$	1,603	$	253	$	8	$	2		$	3,065
Provision charged to expense		(125	)		709		50		2		(2	)		634
Losses charged off		(87	)		—		—		—		—			(87	)
Recoveries		2			15		—		—		—			17
Ending balance	$	989		$	2,327	$	303	$	10	$	—		$	3,629

The following tables present the balance in the allowance for loan losses and the recorded investment in loans based on the portfolio segment and impairment method as of September 30, 2012 and December 31, 2011:

September 30, 2012	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans		Unallocated		Total
Allowance Balances:
	(in thousands)
Ending balance: individually evaluated for impairment	$	340	$	1,802	$	39	$	—	$	—	$	2,181
Ending balance: collectively evaluated for impairment		815		677		132		7		—		1,631
Total allowance for loan losses	$	1,155	$	2,479	$	171	$	7	$	—	$	3,812

Loan Balances:

Ending balance: individually evaluated for impairment	$	4,321	$	7,398	$	39	$	—			$	11,758
Ending balance: collectively evaluated for impairment		152,433		70,704		12,198		1,677				237,012
Ending balance	$	156,754	$	78,102	$	12,237	$	1,677			$	248,770

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

December 31, 2011	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans		Unallocated		Total
Allowance Balances:
	(in thousands)
Ending balance: individually evaluated for impairment	$	320	$	1,941	$	53	$	—	$	—	$	2,314
Ending balance: collectively evaluated for impairment		808		606		116		10		—		1,540
Total allowance for loan losses	$	1,128	$	2,547	$	169	$	10	$	—	$	3,854

Loan Balances:

Ending balance: individually evaluated for impairment	$	3,744	$	6,955	$	92	$	—			$	10,791
Ending balance: collectively evaluated for impairment		149,320		65,251		10,434		2,257				227,262
Ending balance	$	153,064	$	72,206	$	10,526	$	2,257			$	238,053

Total loans in the above tables do not include deferred loan origination fees of $508,000 and $409,000 or loans in process of $4.7 million and $1.7 million for September 30, 2012 and December 31, 2011, respectively.

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of September 30, 2012 and December 31, 2011:

September 30, 2012	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
			(In thousands)
Rating *
Pass (Risk 1-4)	$	151,183	$	67,840	$	12,037	$	1,677
Special Mention (Risk 5)		2,964		2,908		117		—
Substandard (Risk 6)		2,607		7,354		83		—

Total	$	156,754	$	78,102	$	12,237	$	1,677

December 31, 2011	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
			(In thousands)
Rating *
Pass (Risk 1-4)	$	145,061	$	61,970	$	10,268	$	2,257
Special Mention (Risk 5)		2,979		3,281		166		—
Substandard (Risk 6)		5,024		6,955		92		—

Total	$	153,064	$	72,206	$	10,526	$	2,257

* Ratings are generally assigned to consumer and residential mortgage loans on a “pass” or “fail” basis, where “fail” results in a substandard classification. Commercial loans, both secured by real estate or other assets or unsecured are analyzed in accordance with an analytical matrix codified in the Bank’s loan policy that produces a risk rating as described below.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Risk 1 is unquestioned credit quality for any credit product. Loans are secured by cash and near cash collateral with immediate access to proceeds.

Risk 2 is very low risk with strong credit and repayment sources. Borrower is well capitalized in a stable industry, financial ratios exceed peers and financial trends are positive.

Risk 3 is very favorable risk with highly adequate credit strength and repayment sources. Borrower has good overall financial condition and adequate capitalization.

Risk 4 is acceptable, average risk with adequate credit strength and repayment sources. Collateral positions must be within Bank policies.

Risk 5 or “Special Mention,” also known as “watch,” has potential weakness that deserves Management’s close attention. This risk includes loans where the borrower has developed financial uncertainties or are resolving them. Bank credits have been secured or negotiations will be ongoing to secure further collateral.

Risk 6 or “Substandard” loans are inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This risk category contains loans that exhibit a weakening of the borrower’s credit strength with limited credit access and all non-performing loans.

Risk 7 or “Doubtful” loans are significantly under protected by the current net worth and paying capacity of the borrower or of the collateral pledged. This risk category contains loans that are likely to experience a loss of some magnitude, but where the amount of the expected loss is not known with enough certainty to allow for an accurate calculation of a loss amount for charge off. This category is considered to be temporary until a charge off amount can be reasonably determined.

The following tables present the Bank’s loan portfolio aging analysis for September 30, 2012 and December 31, 2011:

September 30, 2012	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days& Accruing
					(In thousands)

One-to-four family residential loans	$	560	$	15	$	1,164	$	1,739	$	155,015	$	156,754	$	—
All other mortgage loans		1,563		—		1,772		3,335		74,767		78,102		—
Commercial business loans		30		—		2		32		12,205		12,237		—
Consumer loans		7		8		4		19		1,658		1,677		—

Total	$	2,160	$	23	$	2,942	$	5,125	$	243,645	$	248,770	$	—

December 31, 2011	30-59 Days Past Due		60-89 Days Past Due		Greater Than 90 Days		Total Past Due		Current		Total Loans Receivable		Total Loans > 90 Days & Accruing
					(In thousands)

One-to-four family residential loans	$	1,513	$	280	$	844	$	2,637	$	150,427	$	153,064	$	—
All other mortgage loans		903		—		1,905		2,808		69,398		72,206		—
Commercial business loans		17		—		35		52		10,474		10,526		—
Consumer loans		17		9		—		26		2,231		2,257		—

Total	$	2,450	$	289	$	2,784	$	5,523	$	232,530	$	238,053	$	—

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Non-accrual loans were comprised of the following at:

	September 30,		December 31,
	2012		2011
	Nonaccrual		Nonaccrual
	(In thousands)

One-to-four family residential loans	$	2,085	$	2,433
All other mortgage loans		3,691		3,271
Commercial business loans		39		92
Consumer loans		7		12

Total	$	5,822	$	5,808

A loan is considered impaired, in accordance with the impairment accounting guidance (ASC 310-10-35-16), when based on current information and events, it is probable the Bank will be unable to collect all amounts due from the borrower in accordance with the contractual terms of the loan. Impaired loans include nonperforming commercial loans but also include loans modified in troubled debt restructurings where concessions have been granted to borrowers experiencing financial difficulties. These concessions could include a reduction in the interest rate on the loan, payment extensions, forgiveness of principal, forbearance or other actions intended to maximize collection. Information with respect to the Company’s impaired loans at September 30, 2012 and December 31, 2011 in combination with activity for the three and nine month periods ended September 30, 2012 and September 30, 2011 is presented below:

	As of September 30, 2012						Three months ended September 30, 2012				Nine months ended September 30, 2012
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(in thousands)
Loans without a specific valuation allowance
One-to-four family residential loans	$	3,050	$	3,050	$	—	$	3,024	$	21	$	3,144	$	90
All other mortgage loans		2,587		2,587		—		2,324		3		2,179		58

Loans with a specific valuation allowance
One-to-four family residential loans		1,271		1,271		340		1,210		2		889		35
All other mortgage loans		4,811		4,811		1,802		4,723		25		4,998		64
Commercial business loans		39		39		39		43		1		66		1

Total:
One-to-four family residential loans	$	4,321	$	4,321	$	340	$	4,234	$	23	$	4,033	$	125
All other mortgage loans		7,398		7,398		1,802		7,047		28		7,177		122
Commercial business loans		39		39		39		43		1		66		1
	$	11,758	$	11,758	$	2,181	$	11,324	$	52	$	11,276	$	248

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

	As of December 31, 2011						Three months ended September 30, 2011				Nine months ended September 30, 2011
	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized		Average Investment in Impaired Loans		Interest Income Recognized
	(in thousands)
Loans without a specific valuation allowance
One-to-four family residential loans	$	3,238	$	3,238	$	—	$	2,945	$	22	$	3,061	$	50
All other mortgage loans		1,771		1,771		—		1,922		29		1,841		34
Commercial business loans		—		—		—		—		—		26		—

Loans with a specific valuation allowance
One-to-four family residential loans		506		506		320		382		13		310		18
All other mortgage loans		5,184		5,184		1,941		5,047		5		4,106		54
Commercial business loans		92		92		53		221		—		166		—

Total:
One-to-four family residential loans	$	3,744	$	3,744	$	320	$	3,327	$	35	$	3,371	$	68
All other mortgage loans		6,955		6,955		1,941		6,969		34		5,947		88
Commercial business loans		92		92		53		221		—		192		—
	$	10,791	$	10,791	$	2,314	$	10,517	$	69	$	9,510	$	156

The interest income recognized in the above tables reflects interest income recognized and is not materially different from the cash basis method.

	Quarter-to-Date						Year-to-Date
Troubled Debt Restructurings	Number of loans		Pre- modification Unpaid Principal Balance		Post- modification Unpaid Principal Balance		Number of loans		Pre- modification Unpaid Principal Balance		Post- modification Unpaid Principal Balance
	(dollars in thousands)
September 30, 2012
One-to-four family residential loans		—	$	—	$	—		2	$	538	$	538

September 30, 2011
One-to-four family residential loans		1	$	141	$	141		1	$	141	$	141
All other mortgage loans		—		—		—		1		323		323
Commercial business loans		1		42		42		2		179		179

The Troubled Debt Restructured (“TDR”) classifications which occurred in the year-to-date September 30, 2012 period were due to an effective interest rate below the market interest rate of similar debt. Each TDR has been individually evaluated for impairment with the appropriate specific valuation allowance included in the allowance for loan losses calculation. There were no TDR classifications which defaulted during the nine month periods ended September 30, 2012 and 2011. The Company considers TDRs that become 90 days or more past due under modified terms as subsequently defaulted.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 5:

Goodwill and Intangible Assets

The composition of goodwill and other intangible assets, all of which is core deposit intangible, at September 30, 2012 and December 31, 2011:

	September 30, 2012			December 31, 2011
	(In thousands)
Goodwill	$	1,719		$	1,719
Other intangible assets – gross		974			974
Other intangible assets – amortization		(823	)		(755	)


Total	$	1,870		$	1,938

The Company recorded amortization relative to intangible assets totaling $68,000 for both of the nine month periods ended September 30, 2012 and September 30, 2011. The Company anticipates $91,000 of amortization for each of fiscal 2012, 2013 and $37,000 for 2014. Such amortization is derived using the straight line method for the core deposit asset over ten years. Pursuant to FASB ASC 350, the Company is required to annually test goodwill and other intangible assets for impairment. The Company’s testing of goodwill and other intangible assets at March 31, 2012 indicated there was no impairment in the carrying value of these assets.

Note 6:

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 three months ended September 30,				For the nine months ended September 30,
	2012		2011		2012		2011
Weighted-average common shares outstanding (basic)		2,935,469		2,930,075		2,937,589		2,930,075
Dilutive effect of assumed exercise of stock options		—		—		—		—
Weighted-average common shares outstanding (diluted)		2,935,469		2,930,075		2,937,589		2,930,075

None of the outstanding options were included in the diluted earnings per share calculation for the three and nine months ended September 30, 2012 and 2011, as the average fair value of the shares was less than the option exercise prices.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 7:

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, 2012, 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 August of 2013 unless otherwise exercised or forfeited. The Company accounts for the stock option 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 nine months ended September 30, 2012 and 2011. There was no compensation expense recognized for the stock option plan during the nine months ended September 30, 2012 and 2011, as all options were fully vested prior to these periods.

A summary of the status of the Company’s stock option plan as of and for the nine months ended September 30, 2012, and for the year ended December 31, 2011 is presented below:

	Nine months ended September 30,					Year ended December 31,
	2012					2011
	Shares			Weighted Average exercise price		Shares			Weighted Average exercise price
Outstanding at beginning of period	63,408			$13.95		83,816			$13.95
Granted		—			—		—			—
Exercised		—			—		—			—
Forfeited		(4,500	)		13.95		(20,408	)		13.95

Outstanding at end of period		58,908		$	13.95		63,408		$	13.95

Options exercisable at period-end		58,908		$	13.95		63,408		$	13.95

The following information applies to options outstanding at September 30, 2012:

Number outstanding		58,908
Exercise price on all remaining options outstanding		$13.95
Weighted-average remaining contractual life		1.00 years

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 8:

Regulatory Matters

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 factors.

The Bank must give notice to the Federal Reserve Bank of Cleveland prior to declaring a dividend to the Company and is subject to existing regulatory guidance where, in general, a dividend is permissible without regulatory approval if the institution is considered to be “well capitalized” and the dividend does not exceed current year to date net income plus the change in retained earnings for the previous two calendar years.

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, 2012, the Bank met all capital adequacy requirements to which it was subject.

As of September 30, 2012, the Bank was classified 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 September 30, 2012 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of September 30, 2012 and December 31, 2011 are presented in the following table.

	Actual					For Capital Adequacy Purposes					Minimum To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of September 30, 2012
Total risk-based capital (to risk-weighted assets)	$	37,335		16.0	%	$	18,667		8.0	%	$	23,333		10.0	%
Tier I capital (to risk-weighted assets)		34,427		14.8			9,333		4.0			14,000		6.0
Tier I capital (to average assets)		34,427		8.6			16,010		4.0			20,013		5.0

As of December 31, 2011
Tangible capital	$	35,132		8.7	%	$	6,074		1.5	%	$	20,248		5.0	%
Core capital		35,132		8.7			16,198		4.0			24,297		6.0
Risk-based capital		38,070		16.2			18,802		8.0			23,503		10.0

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

Note 9:

Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, included in stockholders’ equity, are as follows:

	September 30, 2012			December 31, 2011
	(In thousands)

Net unrealized gain on securities available-for-sale	$	4,041		$	3,876
Net unrealized loss for unfunded status of defined benefit plan liability		(1,026	)		(1,026	)

		3,015			2,850
Tax effect		(1,026	)		(969	)
Net-of-tax amount	$	1,989		$	1,881

Note 10:

Fair Value Measurements

Fair value is 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. Fair value measurements must maximize the use of observable inputs and minimize the use of unobservable inputs. There is a hierarchy of 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

Recurring Measurements

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

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

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.

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, 2012 and December 31, 2011:

			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, 2012
U.S. government agencies	$	158	$	—	$	158	$	—
Mortgage-backed securities of government sponsored entities		94,115		—		94,115		—
Private-label collateralized mortgage obligations		1,230		—		1,230		—
State and political subdivisions		27,744		—		27,744		—


December 31, 2011
U.S. government agencies	$	1,584	$	—	$	1,584	$	—
Mortgage-backed securities of government sponsored entities		101,328		—		101,328		—
Private-label collateralized mortgage obligations		1,741		—		1,741		—
State and political subdivisions		25,984		—		25,984		—

Nonrecurring Measurements

Certain assets and liabilities may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets and liabilities are not measured at fair value on an ongoing basis; however, they are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment.

Collateral-dependent Impaired Loans, Net of ALLL

The estimated fair value of collateral-dependent impaired loans is based on the appraised fair value of the collateral, less estimated cost to sell. Collateral-dependent impaired loans are classified within Level 3 of the fair value hierarchy.

The Company considers the appraisal or evaluation as the starting point for determining fair value and then considers other factors and events in the environment that may affect the fair value. Appraisals of the

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as necessary. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by estimated costs to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral.

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, 2012 and December 31, 2011.

			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, 2012
Collateral-dependent impaired loans	$	412	$	—	$	—	$	412
Foreclosed assets		59		—		—		59
December 31, 2011
Collateral-dependent impaired loans	$	3,468	$	—	$	—	$	3,468
Foreclosed assets		1,283		—		—		1,283

Unobservable (Level 3) Inputs

The following table presents quantitative information about unobservable inputs used in recurring and nonrecurring Level 3 fair value measurements in thousands.

	Fair Value at 9/30/12		Valuation Technique		Unobservable Inputs		Range (Weighted Average)

Collateral-dependent impaired loans	$	412		Market comparable properties		Selling Cost		10	%
Foreclosed assets		59		Market comparable properties		Selling Cost		10	%

There were no changes in the inputs or methodologies used to determine fair value at September 30, 2012 as compared to December 31, 2011

Index

Wayne Savings Bancshares, Inc.
Notes to 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.

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
September 30, 2012	(In thousands)
Financial assets
Cash and cash equivalents	$	9,088	$	9,088	$	—	$	—
Held-to-maturity securities		2,485		—		2,508		—
Loans, net of allowance for loan losses		239,789		—		—		252,344
Federal Home Loan Bank stock		5,025		—		5,025		—
Interest receivable		1,537		—		1,537		—


Financial liabilities
Deposits		327,373		—		319,248		—
Other short-term borrowings		7,220		—		7,220		—
Federal Home Loan Bank advances		21,187		—		22,190		—
Advances from borrowers for taxes and insurance		636		—		636		—
Interest payable		54		—		54		—

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

			Fair Value Measurements Using
	Carrying Amount		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)

December 31, 2011	(In thousands)
Financial assets
Cash and cash equivalents	$	19,816	$	19,816	$	—	$	—
Held-to-maturity securities		1,679		—		1,695		—
Loans, net of allowance for loan losses		232,099		—		—		239,983
Federal Home Loan Bank stock		5,025		—		5,025		—
Interest receivable		1,314		—		1,314		—

Financial liabilities
Deposits		333,848		—		332,222		—
Other short-term borrowings		5,278		—		5,278		—
Federal Home Loan Bank advances		26,597		—		27,717		—
Advances from borrowers for taxes and insurance		941		—		941		—
Interest payable		66		—		66		—

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.

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.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

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, 2012 and December 31, 2011.

Note 11:

Recent Accounting Developments

FASB Accounting Standards Update (ASU) 2011-03 “Reconsideration of Effective Control for Repurchase Agreements” (Topic 860), issued on April 29, 2011, concerns the improvement of accounting for repurchase agreements (repos) and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity by amending the criteria for determining effective control of collateral. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is not permitted. The adoption of FASB ASU 2011-03 did not have a material effect on the Company’s financial condition or results of operations.

FASB Accounting Standards Update (ASU) 2011-04 “Fair Value Measurement” (Topic 820), issued on May 12, 2011, concerns the establishment of a global standard for applying fair value measurement and clarifies three points in topic 820. First, only non-financial assets should be valued via a determination of their best use. Second, an instrument in shareholder’s equity should be measured from the perspective of an investor or trader who owns that instrument. Third, data will need to be provided and methods disclosed for assets valued in level 3 of the fair value hierarchy. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is not permitted. The adoption of FASB ASU 2011-04 did not have a material effect on the Company’s financial condition or results of operations.

Index

Wayne Savings Bancshares, Inc.
Notes to Consolidated Financial Statements

FASB Accounting Standards Update (ASU) 2011-05 “Comprehensive Income” (Topic 220), issued on June 16, 2011, concerns the presentation of comprehensive income in financial statements. An entity has the option to present the total comprehensive income, the components of net income and the components of other comprehensive income either in a single continuous statement of comprehensive income or in two separate but consecutive statements. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is permitted. The adoption of FASB ASU 2011-05 did not have a material effect on the Company’s financial condition or results of operations.

FASB Accounting Standards Update (ASU) 2011-08 Intangibles – Goodwill and Other” (Topic 350), issued on September 15, 2011, concerns the cost and complexity of performing the first step of the two step goodwill impairment test. The amendments in this update permit an entity to first assess qualitative factors to determine whether it is more likely than not that the fair value of a reporting unit is less than its carrying amount as a basis for determining whether it is necessary to perform the two-step goodwill impairment test described in the original ASU topic 350. The guidance is effective for fiscal quarters and years beginning on or after December 15, 2011 (January 1, 2012 for the Company). Early adoption is permitted. The adoption of FASB ASU 2011-08 did not have a material effect on the Company’s financial condition or results of operations.

FASB ASU 2011-12, Comprehensive Income (Topic 220), Deferral of the effective Date for Amendments to the Presentation of Reclassification of Items Out of Accumulated Other Comprehensive Income in Accounting Standards Update No. 2011-12, issued in December 2011 is a deferral of only those changes in update 2011-05 that relates to the presentation of reclassification adjustments out of accumulated other comprehensive income. All other requirements in Update 2011-05 are not affected by this update, including the requirements to report comprehensive income either in a single continuous financial statement or in two separate but consecutive financial statements. Public entities should apply these requirements for fiscal years, and interim periods within those years, beginning after December 15, 2011. This standard did not have a material impact on the Company’s consolidated financial statements.

Note 12:

Transfer and Assumption Agreement

On July 2, 2012, the Bank entered into a Transfer and Assumption Agreement with Thomasville National Bank (“TNB”), the national bank subsidiary of Thomasville Bancshares, Inc. headquartered in Thomasville, Georgia. The agreement provides for the transfer of the Bank’s trust business to TNB. As of September 30, 2012, the Bank’s Trust Department held approximately $44.0 million in trust account assets.

Under terms of the agreement, TNB will maintain a trust office in a Wayne Savings branch or office in Wooster, Ohio. The Bank and TNB will also enter into an office support and referral agreement under which the Bank will be compensated for, among other services, the use of facilities and equipment required for the operation of the TNB trust office. The costs of exiting the trust business include a one-time expense of approximately $334,000 that was recognized during the quarter ended June 30, 2012. Closing of the transaction is expected to occur on November 15, 2012 and the Bank expects to surrender its trust license to the Ohio Division of Financial Institutions (“ODFI”) after the ODFI confirms that the Bank has met the conditions for ceasing to conduct trust business. The Bank received no consideration and there is no gain or loss on the transfer other than the one-time expense noted above.

The strategic rationale for this transaction is to partner with a stronger provider of trust services, who will absorb the operating expense overhead and assume the fiduciary risk associated with post-closing management of the trust accounts.

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Strategic Initiatives

As part of an ongoing strategic planning process, which includes annual plan updates and regular progress reviews by the Board of Directors, the Company is engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon. These initiatives include the development of a comprehensive marketing and sales program to increase top line revenue of the Company through loans and fee income generating activities, a comprehensive review of the branch facilities and staff to identify opportunities for cost effective reductions to improve operational efficiency, evaluation of alternative approaches for the delivery of trust services to ensure profitable operation of the department (which resulted in the transfer and assumption agreement discussed in note 12 to the financial statements above) and evaluation of information technology solutions to improve internal efficiency and customer service. A comprehensive review of the Company’s branch facilities conducted during 2011 and updated during 2012 yielded no opportunities for consolidation of branch facilities that would not reduce the Company’s current or future profitability as compared to alternatives included in the Company’s strategic plan.

Discussion of Financial Condition Changes from December 31, 2011 to September 30, 2012

At September 30, 2012, the Company had total assets of $401.1 million, a decrease of $9.0 million, or 2.2%, from total assets at December 31, 2011.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, decreased by $18.1 million, or 12.0%, to $132.3 million at September 30, 2012 compared to $150.5 million at December 31, 2011. The decrease was primarily due to a decrease of $10.7 million in cash and cash equivalents and a decrease of $7.4 million, or 5.7%, in available-for-sale securities. The decrease in available-for-sale securities was due to scheduled payments and “prepayments” on loans securitized within mortgage-backed securities that reduced the available-for-sale securities portfolio of the Bank. Increased payments on loans, also known as “prepayments,” occur in low interest rate environments where borrowers can exercise an option to refinance existing loans either with or without a prepayment penalty. These decreases were partially offset by a $7.7 million increase in net loans. Increased loan balances were the result of management’s ongoing efforts to enhance the development of the commercial business loan program combined with historically low residential mortgage rates resulting in increased origination activity.

Total securities decreased by $6.6 million, or 5.0%, during the nine month period ended September 30, 2012. The decrease was primarily due to principal repayments of $38.1 million and amortization of premiums of $1.6 million partially offset with purchases of $32.9 million for the nine month period. Purchases were mainly funded by proceeds from principal payments received from the securities portfolio.

Net loans receivable increased by $7.7 million, or 3.3%, at September 30, 2012 compared to December 31, 2011. The Bank originated $51.4 million of loans, received payments of $33.1 million, originated and sold $4.3 million of 30-year fixed-rate mortgage loans into the secondary market, and made a provision for loan losses of $618,000.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 executed a strategy of immediately selling certain newly originated 30-year fixed-rate mortgage loans into the secondary

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

market to limit the interest rate risk exposure on the balance sheet and to utilize the secondary market as a backup source of liquidity. Similarly, in order to further limit the overall 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 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 cash flows to fund loan demand in future periods, while also limiting the interest rate risk exposure of the Company. Investments generally contribute to higher risk based capital ratios, compared to loans, as the investments the Company purchases are risk weighted less than the loan originations. As loan volume increases relative to investment volume, risk based capital ratios will decline.

The following table sets forth certain information regarding the Company’s loan portfolio for the periods indicated.

	September 30, 2012				December 31, 2011
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential⁽¹⁾	$	156,754	63.01	%	$	153,064	64.30	%
Residential construction loans		2,238	0.90			753	0.32
Multi-family residential		9,644	3.88			8,589	3.61
Non-residential real estate/land⁽²⁾		66,220	26.62			62,864	26.40
Total mortgage loans		234,856	94.41			225,270	94.63
Other loans:
Consumer loans⁽³⁾		1,677	0.67			2,257	0.95
Commercial business loans		12,237	4.92			10,526	4.42
Total other loans		13,914	5.59			12,783	5.37
Total loans before net items		248,770	100.00	%		238,053	100.00	%
Less:
Loans in process		4,661				1,691
Deferred loan origination fees		508				409
Allowance for loan losses		3,812				3,854
Total loans receivable, net	$	239,789			$	232,099

⁽¹⁾

Includes loans collateralized by second mortgages in the aggregate amount of $15.3 million at September 30, 2012 and $15.9 million at December 31, 2011. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

⁽²⁾

Includes land loans of $2.1 million for September 30, 2012 and $2.7 million for December 31, 2011.

⁽³⁾

Includes second mortgage loans of $735,000 for September 30, 2012 and $1.2 million December 31, 2011.

Foreclosed assets held for sale totaled $59,000 at September 30, 2012 compared to $1.3 million at December 31, 2011. Activity during the nine months consisted of the sale of a nonresidential property for $1.2 million with an associated writedown of $46,000 to reflect market values. Total non-performing and impaired assets totaled $13.2 million, or 3.3% of total assets, and $12.2 million, or 2.98% of total assets, at September 30, 2012 and December 31, 2011, respectively.

Bank Owned Life Insurance (BOLI) increased by $1.5 million during the nine month period ended September 30, 2012. Management executed a strategy to improve the credit quality of the existing portfolio by exchanging insurance policies. As part of this process, management invested additional funds to generate increased earnings in order to offset compensation and benefits costs while meeting minimum policy issuance requirements.

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Goodwill of $1.7 million is carried on the Company’s balance sheet as a result of the acquisition of Stebbins Bancshares in June 2004. In accordance with FASB ASC 350, this goodwill is tested for impairment on at least an annual basis. Management evaluated the goodwill using an analysis of required measures of value, including the current stock price as an indicator of minority interest value, change of control multiples as a measure of controlling interest value and discounted cash flow analysis as a measure of going concern value and applied a weighting based on appraisal standards to arrive at a valuation conclusion that indicated no impairment at March 31, 2012, and there were no interim impairment indicators that would require another evaluation at September 30, 2012.

Deposits totaled $327.4 million at September 30, 2012, a decrease of $6.5 million, or 1.9%, compared to $333.8 million at December 31, 2011. Time deposits decreased by $11.6 million, or 7.8%, partially offset by a $2.8 million increase in savings and money market accounts and an increase of $2.3 million in demand accounts. Management continued to exercise discipline during the period with regard to the pricing of retail certificates, keeping rates close to market benchmarks and not competing for certificates where a profitable customer relationship was not involved. Given the uncertain status of the economy in general, customers are choosing to increase their liquidity and keep their funds in insured checking, savings and money market products offered by the Bank.

Other short-term borrowings, which consists solely of repurchase agreements with commercial customers of the Bank, increased by $1.9 million and totaled $7.2 million at September 30, 2012. These customer repurchase agreements are offered by the Bank in order to retain commercial customer funds and to afford those commercial customers the opportunity to earn a return on a short-term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% at both September 30, 2012 and December 31, 2011.

Advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) totaled $21.2 million at September 30, 2012, compared to $26.6 million at December 31, 2011. The Company uses advances from the FHLB for both short-term cash management purposes and to extend liability duration for interest rate risk management purposes, as the cost of duration purchased from the FHLB is less expensive than obtaining a similar duration through retail certificates of deposit. Repricing risk associated with advances is mitigated through the laddering of advance maturities over time. The weighted average cost of FHLB advances was 2.72% at September 30, 2012 compared to 2.67% at December 31, 2011.

Stockholders’ equity increased by $724,000, or 1.8%, during the nine months ended September 30, 2012, primarily due to net income of $1.2 million, partially offset by dividends declared of $599,000.

Comparison of Operating Results for the Three Month Periods Ended September 30, 2012 and 2011

General

Net income for the three months ended September 30, 2012 totaled $465,000, reflecting an increase of $156,000, or 50.5%, compared to $309,000 for the three month period ended September 30, 2011. The increase in net income was primarily due to a decrease of $217,000 in provision for loan losses, and a $212,000 decrease in provision for impairment on foreclosed assets held for sale. These decreases were partially offset with an increase in other noninterest expense of $128,000, an increase in federal income taxes of $109,000 and a decrease of $46,000 in net interest income.

Index

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. 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,
	2012							2011
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net⁽¹⁾	$	237,377	$	2,964		4.99	%	$	232,467	$	3,067		5.28	%
Investment securities⁽²⁾		130,419		788		2.42			139,498		1,091		3.13
Interest-earning deposits⁽³⁾		11,534		55		1.91			16,616		54		1.30
Total interest-earning assets		379,330		3,807		4.01			388,581		4,212		4.34
Noninterest-earning assets		23,990							23,818

Total assets	$	403,320						$	412,399

Interest-bearing liabilities:
Deposits	$	326,828	$	500		0.61	%	$	328,638	$	752		0.92	%
Other short-term borrowings		7,035		3		0.17			5,904		3		0.20
Borrowings		24,066		165		2.74			34,298		272		3.17
Total interest-bearing liabilities		357,929		668		0.75			368,840		1,027		1.11

Noninterest bearing liabilities		4,531							3,653
Total liabilities		362,460							372,493
Stockholders’ equity		40,860							39,906
Total liabilities and stockholders’ equity	$	403,320						$	412,399
Net interest income			$	3,139						$	3,185
Interest rate spread⁽⁴⁾						3.26	%						3.23	%
Net yield on interest-earning assets⁽⁵⁾						3.31	%						3.28	%
Ratio of average interest-earning assets to average interest-bearing liabilities						105.98	%						105.35	%

⁽¹⁾	Includes non-accrual loan balances.

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

⁽³⁾	Includes interest-earning 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.

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Interest Income

Interest income decreased by $405,000 or 9.6%, to $3.8 million for the three months ended September 30, 2012, compared to the same period in 2011. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.01% in the 2012 period from 4.34% for the 2011 period, as well as a decrease of $9.3 million in the average balance of interest-earning assets to $379.3 million for the 2012 period compared to an average balance of $388.6 million for the 2011 period.The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates compared to the 2011 period as a result of interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $103,000, or 3.4%, for the three month period ended September 30, 2012, compared to the same period in 2011. The loan portfolio yield decreased from 5.28% for the three months ended September 30, 2011 to 4.99% for the three months ended September 30, 2012, as a result of reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding increased $4.9 million, or 2.1%, to $237.4 million for the 2012 period compared to $232.5 million for the 2011 period. Interest income on securities decreased by $303,000 during the three months ended September 30, 2012, compared to the same period in 2011. This decrease was primarily due to a decrease of 71 basis points in the weighted-average rate to 2.42% for the 2012 period, compared to 3.13% for the 2011 period, and a decline in the average balance of $9.1 million, or 6.5%. 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 flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income increased $1,000 for three month periods ended September 30, 2012 from September 30, 2011. The increase was due to a 61 basis point increase in the weighted average rate from 1.30% at September 30, 2011, to 1.91% at September 30, 2012 and was substantially offset by the decrease in the average balance of $5.1 million, or 30.6%.

Interest Expense

Interest expense totaled $668,000 for the three month period ended September 30, 2012, a decrease of $359,000, or 35.0%, compared to $1.0 million for the three month period ended September 30, 2011. The decrease was primarily due to a 36 basis point decrease in the weighted-average cost of funds to 0.75% for the 2012 period compared to 1.11% for the prior year period and to a lesser extent, due to a decrease in the average balance of total interest-bearing liabilities of $10.9 million, or 3.0%, for the 2012 period compared to the 2011 period.

Interest expense on deposits for the three month period ended September 30, 2012 totaled $500,000, a decrease of $252,000, or 33.5%, compared to $752,000 for the same period in the previous year. The decrease was mainly due to a 31 basis point decrease in the weighted-average cost of deposits, to 0.61% for the 2012 period compared to 0.92% for the 2011 period, as well as a decrease in the average balance of $1.8 million to $326.8 million for the period ended September 30, 2012. The decrease in interest expense

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $3,000 for both three month periods ended September 30, 2012, and 2011. The weighted-average cost decreased 3 basis points to 0.17% which was fully offset by an increase in the average balance of $1.1 million, or 19.1%.

Interest expense on Federal Home Loan Bank advances totaled $165,000 for the three month period ended September 30, 2012, a decrease of $107,000 compared to expense of $272,000 for the 2011 period. The decrease was primarily due to a decline of $10.2 million, or 29.8%, in the average balance outstanding, and a decrease in the weighted-average cost of 43 basis points to 2.74%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates.

Net Interest Income

Net interest income totaled $3.1 million for the three month period ended September 30, 2012, a decrease of $46,000, or 1.4%, from the three month period ended September 30, 2011. The decline in net interest income was mainly due to a $9.3 million decrease in the average balance of interest-earning assets, partially offset by a $10.9 million decline in the average balances of interest earning liabilities. Despite the decline in net interest income, the interest rate spread increased 3 basis points to 3.26% for the 2012 period compared to 3.23% for the 2011 period. The increase in the above interest rate spread can be attributed to the the higher average balances in higher yielding loans which was more than offset with declines in both the average balances of the lower yielding investment securities and interest earning cash balances. Similarly, the net interest margin increased 3 basis points to 3.31% for the three month period ended September 30, 2012 compared to 3.28% for the 2011 period. This results in increased loan repayment activity, and accelerated the prepayments on the real estate based securities portfolio which creates excess amortization of premiums and reduced earnings. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded $225,000 in the provision for loan losses for the three month period ended September 30, 2012, resulting in a decrease of $217,000 compared to the $442,000 provision for the three month period ended September 30, 2011. During the 2011 period, the Bank recorded a large provision based on an updated appraisal on a single commercial real estate property. The current provision for loan losses was mainly due to both the increased number of foreclosures within the Bank’s market and increased delinquencies during the quarter.

Index

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 decreased $77,000 mainly due to a reduction in customer service charges and investment income from non-depository products, partially offset by an increased gain on the sale of loans of $73,000, for the three month period ended September 30, 2012, compared to the three month period ended September 30, 2011.

Noninterest Expense

Noninterest expense decreased by $104,000, or 3.5%, to $2.8 million for the three months ended September 30, 2012, compared to $2.9 million for the three months ended September 30, 2011. The decrease was primarily due to a decrease of $212,000 in provision for impairment on foreclosed assets held for sale, as the prior year required provision of $150,000 for a single commercial real estate property, and a decrease of $38,000 in salaries and employee benefits, partially offset by an increase in other operating expense of $128,000, or 25.3%. The decrease in salaries and employee benefits was primarily due to the decline in participants in the employee healthcare plan in the 2012 quarter compared to the 2011 quarter and the attrition of corporate staff positions. The increase in other operating expense was primarily due to increased marketing expenses incurred as part of the Company’s strategic initiative to increase top line revenues as well as with additional special services required to assist the Bank in contract negotiations with vendors and legal services.

Federal Income Taxes

A federal income tax expense of $125,000 was recognized for the three month period ended September 30, 2012, an increase of $109,000 compared to the three month period ended September 30, 2011. The increase was primarily due to a $265,000 increase in pretax income resulting from the factors discussed above.

Comparison of Operating Results for the Nine Month Periods Ended September 30, 2012 and 2011

General

Net income for the nine months ended September 30, 2012 totaled $1.2 million, an increase of $12,000, or 1.0%, compared to the nine month period ended September 30, 2011. The increase in net income was primarily due to an increase of $146,000 in noninterest income, primarily due to gain on sale of loans, partially offset by a $118,000 decrease in net interest income as the interest earning asset balances declined.

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Average Balance Sheet

	For the nine months ended September 30,
	2012							2011
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net⁽¹⁾	$	234,195	$	8,895		5.06	%	$	236,921	$	9,379		5.28	%
Investment securities⁽²⁾		133,246		2,592		2.59			134,893		3,330		3.29
Interest-earning deposits⁽³⁾		13,804		171		1.65			14,560		171		1.57
Total interest-earning assets		381,245		11,658		4.08			386,374		12,880		4.44
Noninterest-earning assets		23,818							24,186

Total assets	$	405,063						$	410,560

Interest-bearing liabilities:
Deposits	$	328,516	$	1,654		0.67	%	$	324,697	$	2,392		0.98	%
Other short-term borrowings		6,738		8		0.16			6,199		13		0.28
Borrowings		25,194		515		2.73			36,865		876		3.17
Total interest-bearing liabilities		360,448		2,177		0.81			367,761		3,281		1.19

Noninterest bearing liabilities		4,322							3,834
Total liabilities		364,770							371,595
Stockholders’ equity		40,293							38,965
Total liabilities and stockholders’ equity	$	405,063						$	410,560
Net interest income			$	9,481						$	9,599
Interest rate spread⁽⁴⁾						3.27	%						3.25	%
Net yield on interest-earning assets⁽⁵⁾						3.32	%						3.31	%
Ratio of average interest-earning assets to average interest-bearing liabilities						105.77	%						105.06	%

⁽¹⁾	Includes non-accrual loan balances.

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

⁽³⁾	Includes interest-earning 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.

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

Interest Income

Interest income decreased by $1.2 million, or 9.5%, to $11.7 million for the nine months ended September 30, 2012, compared to the same period in 2011. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.08% in the 2012 period from 4.44% for the 2011 period, and a decrease of $5.1 million in the average balance of interest-earning assets outstanding to $381.2 million for the 2012 period compared to an average balance of $386.4 million for the 2011 period.The decrease in yield was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2011 period to the 2012 period as a result of interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $484,000, or 5.2%, for the nine month period ended September 30, 2012, compared to the same period in 2011. The loan portfolio yield decreased from 5.28% for the nine months ended September 30, 2011 to 5.06% for the nine months ended September 30, 2012, due to reduced origination yields and the amortization, prepayment and downward repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding decreased $2.7 million, or 1.2%, to $234.2 million for the 2012 period compared to $236.9 million for the 2011 period

Interest income on securities decreased by $738,000, or 22.2%, during the nine months ended September 30, 2012, compared to the same period in 2011. This decrease was primarily due to a decrease of 70 basis points in the weighted-average rate to 2.59% for the 2012 period, compared to 3.29% for the 2011 period, combined with a decrease in the average balance of $1.6 million, or 1.2%. 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 flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income remained constant at $171,000 for both nine month periods ended September 30, 2012 and September 30, 2011. The increase from a weighted average rate of 1.57% in September 30, 2011 to 1.65% at September 30, 2012 was fully offset by a decrease in the weighted average balance of $756,000, or 5.2%.

Interest Expense

Interest expense totaled $2.2 million for the nine month period ended September 30, 2012, a decrease of $1.1 million, or 33.7%, compared to $3.3 million for the nine month period ended September 30, 2011. The decrease was mainly due to a 38 basis point decrease in the weighted-average cost of funds to 0.81% for the 2012 period compared to 1.19% the previous year and, to a lesser extent, by a decrease in the average balance of total interest-bearing liabilities of $7.3 million, or 2.0%, for the 2012 period compared to the 2011 period.

Interest expense on deposits totaled $1.7 million, a decrease of $738,000, or 30.9%, compared to $2.4 million for the same period in the previous year. The decrease was mainly due to a 31 basis point decrease

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

in the weighted-average cost of deposits, to 0.67% for the 2012 period compared to 0.98% for the 2011 period, partially offset by an increase in the average balance of $3.8 million, or 1.2%, to $328.5 million for the period ended September 30, 2012. The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $8,000 for the nine month period ended September 30, 2012, a $5,000 decrease over the same period in the previous year. The weighted-average cost decreased 12 basis points to 0.16% and was partially offset with an increase in the average balance of $539,000, or 8.7%.

Interest expense on Federal Home Loan Bank advances totaled $515,000 for the nine month period ended September 30, 2012, a decrease of $361,000 compared to expense of $876,000 for the 2011 period. The decrease was mainly due to a decline of $11.7 million, or 31.7%, in the average balance outstanding, and a decrease in the weighted-average cost of 44 basis points to 2.73%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates.

Net Interest Income

Net interest income totaled $9.5 million for the nine month period ended September 30, 2012, a decrease of $118,000, or 1.2%, from the nine month period ended September 30, 2011. The interest rate spread increased 2 basis points to 3.27% for the 2012 period compared to 3.25% for the 2011 period. The net interest margin increased 1 basis point to 3.32% for the nine month period ended September 30, 2012 compared to 3.31% during the same period in 2011. The pace of the declining cost on interest bearing liabilities declined at a slightly greater rate than the declining yield on interest earning assets. The market rate environment continues to push down on the yield the Bank is earning on interest earning assets. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded a provision for loan losses of $618,000 for the nine month period ended September 30, 2012, a decrease of $16,000 compared to the $634,000 provision for the nine month period ended September 30, 2011. The provision is based on management’s assessment of probable incurred losses in the loan portfolio. The level of provision for loan loss in 2012 was mainly due to a charge-off of a commercial real estate loan where the Bank held a second mortgage position on the collateral and additionally, two other relationships were evaluated based on a change in circumstance that resulted in a recognized impairment. The level of provision for loan loss in 2011 was due primarily to an additional allocated allowance required for an updated appraisal on a single commercial real estate property.

Index

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 BOLI, trust income and gain on the sale of loans increased by $146,000, or 11.0%, for the nine month period ended September 30, 2012, compared to the nine month period ended September 30, 2011. The increase was due primarily to increased gain on sale of loans of $143,000, an increase in BOLI income of $47,000 mainly due to the additional purchase of $1.3 million of BOLI and an increase in non-recurring trust income of $9,000. These increases were partially offset with reduced service charges on deposit accounts of $53,000. The purchase of BOLI is used to generate income to offset the costs of employee benefits.

Noninterest Expense

Noninterest expense decreased by $6,000, to $8.8 million for the nine months ended September 30, 2012, from the nine months ended September 30, 2011. The decrease was primarily due to decline in provision for impairment on foreclosed assets held for sale of $885,000, as the prior year required a $737,000 charge due to a single commercial real estate property, partially offset by an increase of $481,000, or 10.5%, in salaries and employee benefits, and an increase of $376,000, or 28.3%, in other operating expense. The increase in salaries and employee benefits was primarily due to the trust transfer and assumption agreement expenses and the development of a comprehensive training program. Also in the first quarter there was a non-recurring health savings account contribution and increased post-retirement costs compared to the prior year. The increase in other operating expense was primarily due to increased marketing expenses, additional costs for the trust transfer and assumption agreement and additional consulting fees to negotiate vendor contracts.

Federal Income Taxes

A federal income tax expense of $259,000 was recognized for the nine month period ended September 30, 2012, an increase of $38,000 compared to the nine month period ended September 30, 2011. The increase was primarily due to a $50,000 increase in pretax income resulting from the factors discussed above.

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.

Index

Wayne Savings Bancshares, Inc.
Management’s Discussion and Analysis of Financial
Condition and Results of Operations

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 nine month fiscal period ended December 31, 2011.

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.

Index

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 nine month fiscal period ended December 31, 2011.

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, 2012.

Period	Total # of shares purchased	Average price paid per share	Total # of shares purchased as part of the announced plan	Maximum # of shares which may still be purchased as part of the announced plan
July 1-31, 2012	—	$ —	—	—
August 1-31, 2012	5,267	$ 8.90	5,267	144,939
September 1-30, 2012	5,000	$ 9.05	10,267	139,939

Notes to the Table:

On August 10, 2012, the Company announced the authorization by the Board of Directors of a new program for the repurchase of 150,206 shares, or five percent (5%) of the Company’s outstanding shares of common stock.

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

ITEM 4.

Mine Safety Disclosures

Not applicable.

ITEM 5.

Other Information

Not applicable.

Index

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

	EX-101	Interactive financial data (XBRL)

Index

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 9, 2012	By:	/s/Rod C. Steiger
			Rod C. Steiger
			President and Chief Executive Officer



Date:	November 9, 2012	By:	/s/Myron Swartzentruber
			Myron Swartzentruber
			Senior Vice President and
			Chief Financial Officer

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Wayne Savings Bancshares (WAYN) Inactive 10-Q2012 Q3 Quarterly report

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