10-Q 1 form10q-18442_wayne.htm 10-Q

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended June 30, 2017

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

For the transition period from ___________ to ___________

Commission file number 0-23433

WAYNE SAVINGS BANCSHARES, INC.

(Exact Name of Registrant as Specified in its Charter)

Delaware		31-1557791
State or Other Jurisdiction of Incorporation or Organization		I.R.S. Employer Identification No.

151 North Market Street Wooster, Ohio 44691		44691
Address of Principal Executive Offices		Zip Code

330-264-5767

Registrant’s Telephone Number, Including Area Code

Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes þ No ¨

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). Yes þ No ¨

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, smaller reporting company, or an emerging growth company. See the definitions of “large accelerated filer,” “accelerated filer,” “smaller reporting company,” and “emerging growth company” in Rule 12b-2 of the Exchange Act.

Large accelerated filer ¨	Accelerated filer ¨
Non-accelerated filer ¨ (Do not check if a smaller reporting company)	Smaller reporting company þ
Emerging growth company ¨

If an emerging growth company, indicate by check mark if the registrant has elected not to use the extended transition period for complying with any new or revised financial accounting standards provided pursuant to Section 13(a) of the Exchange Act. ¨

Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Act). Yes ¨ No þ

As of July 31, 2017, the latest practicable date, 2,781,839 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	34


Item 3	Quantitative and Qualitative Disclosures About Market Risk	48

Item 4	Controls and Procedures	48


PART II - OTHER INFORMATION

Item 1	Legal Proceedings	49

Item 1A	Risk Factors	49

Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	49

Item 3	Defaults Upon Senior Securities	49

Item 4	Mine Safety Disclosures	49

Item 5	Other Information	50

Item 6	Exhibits	50

SIGNATURES		51

Index

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

	June 30, 2017			December 31, 2016
		(Unaudited)
Assets
Cash and due from banks	$	3,410		$	10,138
Interest-bearing deposits		4,682			6,618
Cash and cash equivalents		8,092			16,756

Available-for-sale securities		62,176			70,709
Held-to-maturity securities		11,777			9,559
Loans, net of allowance for loan losses of $3,157 and $3,040 at June 30, 2017 and December 31, 2016, respectively		337,820			332,283
Premises and equipment		6,270			6,420
Federal Home Loan Bank stock		4,226			4,226
Foreclosed assets held for sale, net		230			2
Accrued interest receivable		1,150			1,146
Bank-owned life insurance		9,960			9,827
Goodwill		1,719			1,719
Prepaid federal income taxes		—			264
Other assets		1,782			1,880
Total assets	$	445,202		$	454,791

Liabilities and Stockholders’ Equity
Liabilities
Deposits
Demand	$	111,522		$	111,213
Savings and money market		147,970			141,029
Time		118,015			131,491
Total deposits		377,507			383,733
Other short-term borrowings		6,599			7,246
Federal Home Loan Bank advances		15,000			18,000
Accrued federal income taxes		34			—
Deferred federal income taxes		157			184
Interest payable and other liabilities		3,858			4,600
Total liabilities		403,155			413,763
Commitments and Contingencies		—			—
Stockholders’ Equity
Preferred stock, 500,000 shares of $.10 par value authorized; no shares issued		—			—
Common stock, $.10 par value; authorized 9,000,000 shares; 3,978,731 shares issued		398			398
Additional paid-in capital		36,067			36,041
Retained earnings		23,153			22,317
Shares acquired by ESOP		(239	)		(273	)
Accumulated other comprehensive loss		(396	)		(519	)
Treasury stock, at cost: Common: 1,196,892 shares at June 30, 2017 and December 31, 2016		(16,936	)		(16,936	)
Total stockholders’ equity		42,047			41,028
Total liabilities and stockholders’ equity	$	445,202		$	454,791

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 six months ended June 30, 2017 and 2016
(In thousands, except per share data)
(Unaudited)

	Three Months Ended June 30,						Six Months Ended June 30,
	2017			2016			2017			2016
Interest and Dividend Income
Loans	$	3,566		$	3,209		$	7,005		$	6,378
Securities		472			568			954			1,196
Dividends on Federal Home Loan Bank stock and other		57			49			113			93
Total interest and dividend income		4,095			3,826			8,072			7,667

Interest Expense
Deposits		437			447			882			868
Other short-term borrowings		2			2			5			4
Federal Home Loan Bank advances		60			69			120			139
Total interest expense		499			518			1,007			1,011

Net Interest Income		3,596			3,308			7,065			6,656
Provision (Credit) for Loan Losses		83			11			110			(56	)
Net Interest Income After Provision (Credit) for Loan Losses		3,513			3,297			6,955			6,712
Noninterest Income
Deposit service charges		151			145			303			282
Gain on loan sales		138			73			171			121
Earnings on bank-owned life insurance		76			75			149			148
Interchange fees		115			103			218			199
Other operating		160			159			286			257
Total noninterest income		640			555			1,127			1,007
Noninterest Expense
Salaries and employee benefits		1,526			1,762			3,250			3,448
Net occupancy and equipment expense		527			509			1,053			1,036
Federal deposit insurance premiums		42			69			88			140
Franchise taxes		94			89			185			177
Advertising and marketing		62			73			132			142
Legal		156			30			347			90
Audit and accounting		106			85			216			164
Stockholder expense		186			28			262			58
Other		402			305			727			603
Total noninterest expense		3,101			2,950			6,260			5,858
Income Before Federal Income Taxes		1,052			902			1,822			1,861
Provision for Federal Income Taxes		291			228			490			480
Net Income	$	761		$	674		$	1,332		$	1,381
Other comprehensive income:
Unrealized gains on available-for-sale securities		159			159			230			640
Unrecognized loss on split-dollar life insurance policy		—			—			(29	)		—
Tax expense		(54	)		(53	)		(78	)		(218	)
Other comprehensive income		105			106			123			422
Total comprehensive income	$	866		$	780		$	1,455		$	1,803
Basic and Diluted Earnings Per Share	$	0.27		$	0.24		$	0.48		$	0.50
Dividends Per Share	$	0.09		$	0.09		$	0.18		$	0.18

See accompanying notes to condensed consolidated financial statements.

Index

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows
For the six months ended June 30, 2017 and 2016
(In thousands)
(Unaudited)

	Six Months Ended June 30,
	2017			2016
Operating Activities
Net income	$	1,332		$	1,381
Items not requiring (providing) cash
Depreciation and amortization		342			322
Provision (credit) for loan losses		110			(56	)
Amortization of premiums and discounts on securities		441			590
Amortization of mortgage servicing rights		23			17
Accretion of net deferred loan origination fees		(42	)		(56	)
Increase in value of bank-owned life insurance		(133	)		(135	)
Amortization expense of stock benefit plan		60			45
Provision for impairment on foreclosed assets held for sale		2			16
Loss on sale of foreclosed assets held for sale		—			5
Net gain on sale of loans		(171	)		(121	)
Proceeds from sale of loans in the secondary market		5,904			3,091
Origination of loans for sale in the secondary market		(5,733	)		(2,970	)
Deferred income taxes		(105	)		(60	)
Changes in
Accrued interest receivable		(4	)		(17	)
Other assets		338			(393	)
Interest payable and other liabilities		(122	)		(162	)
Net cash provided by operating activities		2,242			1,497
Investing Activities
Purchase of available-for-sale securities		—			(3,475	)
Purchase of held-to-maturity securities		(2,273	)		(895	)
Proceeds from maturities and paydowns of available-for-sale securities		8,351			12,281
Proceeds from maturities and paydowns of held-to-maturity securities		27			27
Net change in loans		(5,835	)		(22,017	)
Purchase of premises and equipment		(193	)		(318	)
Proceeds from the sale of foreclosed assets		1			80
Net cash provided by (used in) investing activities	$	78		$	(14,317	)

See accompanying notes to condensed consolidated financial statements.

Index

Wayne Savings Bancshares, Inc.
Condensed Consolidated Statements of Cash Flows (continued)
For the six months ended June 30, 2017 and 2016
(In thousands)
(Unaudited)

	Six Months Ended June 30,
	2017			2016
Financing Activities
Net change in deposits	$	(6,226	)	$	14,508
Net change in other short-term borrowings		(647	)		551
Proceeds from Federal Home Loan Bank advances		26,100			13,375
Repayments of Federal Home Loan Bank advances		(29,100	)		(13,375	)
Advances by borrowers for taxes and insurance		(615	)		(834	)
Dividends on common stock		(496	)		(494	)
Net cash provided by (used in) financing activities		(10,984	)		13,731
Change in Cash and Cash Equivalents		(8,664	)		911
Cash and Cash Equivalents, Beginning of period		16,756			11,156

Cash and Cash Equivalents, End of period	$	8,092		$	12,067
Supplemental Cash Flows Information
Interest paid on deposits and borrowings	$	1,007		$	1,005
Federal income taxes paid	$	250		$	150

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale	$	230		$	106
Recognition of mortgage servicing rights	$	86		$	45
Dividends payable	$	250		$	250

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 June 30, 2017 and for the three and six months ended June 30, 2017 and 2016, 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 consolidated financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the year ended December 31, 2016. Reference is made to the accounting policies of the Company described in the Notes to the Consolidated Financial Statements contained in the Company’s Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring adjustments) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three and six months ended June 30, 2017, are not necessarily indicative of the results which may be expected for the full year. The condensed consolidated balance sheet of the Company as of December 31, 2016 has been derived from the consolidated balance sheet of the Company as of that date.

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 Condensed 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 fair values, together with gross unrealized gains and losses, of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Available-for-sale securities
June 30, 2017:
U.S. government agencies	$	8	$	—	$	—	$	8
Mortgage-backed securities of government sponsored entities		50,675		396		335		50,736
State and political subdivisions		11,101		375		44		11,432
Totals	$	61,784	$	771	$	379	$	62,176

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Available-for-sale securities	(In thousands)
December 31, 2016:
U.S. government agencies	$	11	$	—	$	—	$	11
Mortgage-backed securities of government sponsored entities		58,797		399		582		58,614
Private-label collateralized mortgage obligations		41		—		1		40
State and political subdivisions		11,698		402		56		12,044
Totals	$	70,547	$	801	$	639	$	70,709

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
	(In thousands)
Held-to-maturity Securities:
June 30, 2017:
U.S. government agencies	$	15	$	—	$	—	$	15
Mortgage-backed securities of government sponsored entities		682		3		1		684
State and political subdivisions		11,080		99		46		11,133
Totals	$	11,777	$	102	$	47	$	11,832

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Fair Value
Held-to-maturity Securities:	(In thousands)
December 31, 2016:
U.S. government agencies	$	21	$	—	$	—	$	21
Mortgage-backed securities of government sponsored entities		704		7		—		711
State and political subdivisions		8,834		12		239		8,607
Totals	$	9,559	$	19	$	239	$	9,339

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2017 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	$	5,215	$	5,406	$	2,058	$	2,065
Five to ten years		4,550		4,658		2,886		2,893
After ten years		1,344		1,376		6,151		6,190
		11,109		11,440		11,095		11,148

Mortgage-backed securities of government sponsored entities		50,675		50,736		682		684
Totals	$	61,784	$	62,176	$	11,777	$	11,832

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $39.3 million at June 30, 2017, compared to $43.7 million at December 31, 2016.

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 June 30, 2017 and December 31, 2016 was $37.9 million and $49.8 million, which represented approximately 51% and 62%, respectively, of the Company’s total aggregate fair value of the available-for-sale and held-to-maturity investment portfolios. These decreases 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 decreases in fair value for these securities are temporary at June 30, 2017.

Should the impairment of any of these 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 temporarily impaired 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 Condensed Consolidated Financial Statements

	June 30, 2017
	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Mortgage-backed securities of government sponsored entities	$	20,208	$	154	$	12,264	$	182	$	32,472	$	336
State and political subdivisions		4,406		48		974		42		5,380		90
Total temporarily impaired securities	$	24,614	$	202	$	13,238	$	224	$	37,852	$	426

	December 31, 2016
	Less than 12 Months				More than 12 Months				Total
	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
Mortgage-backed securities of government sponsored entities	$	32,810	$	409	$	7,978	$	173	$	40,788	$	582
Private-label collateralized mortgage obligations		—		—		40		1		40		1
State and political subdivisions		8,087		204		929		91		9,016		295
Total temporarily impaired securities	$	40,897	$	613	$	8,947	$	265	$	49,844	$	878

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 term of the loan.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed 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 collectibility of a loan balance is in question. 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 collectibility 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. While management uses the best information available to make such evaluations, future adjustments to the allowance may be necessary if economic conditions differ substantially from the assumptions used in making the evaluations.

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

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

The risk characteristics of each portfolio segment are as follows:

One-to-four Family 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, nonresidential 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.

Nonresidential real estate loans are negotiated on a case-by-case basis. Loans secured by nonresidential 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 nonresidential 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 originates 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 Condensed 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 six months ended June 30, 2017 and 2016:

Three months ended June 30, 2017	One-to-four family residential			All other mortgage loans			Commercial business loans		Consumer loans			Total
	(In thousands)
Beginning balance	$	1,444		$	1,129		$	465	$	6		$	3,044
Provision charged (credited) to expense		(111	)		(34	)		229		(1	)		83
Losses charged off		—			—			—		—			—
Recoveries		29			—			1		—			30
Ending balance	$	1,362		$	1,095		$	695	$	5		$	3,157

Three months ended June 30, 2016	One-to-four family residential		All other mortgage loans			Commercial business loans			Consumer loans			Total
	(In thousands)
Beginning balance	$	1,279	$	1,207		$	281		$	4		$	2,771
Provision charged (credited) to expense		303		(245	)		(47	)		—			11
Losses charged off		—		(5	)		—			(1	)		(6	)
Recoveries		—		—			—			—			—
Ending balance	$	1,582	$	957		$	234		$	3		$	2,776

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

Six months ended June 30, 2017	One-to-four family residential			All other mortgage loans			Commercial business loans		Consumer loans			Total
	(In thousands)
Beginning balance	$	1,479		$	1,108		$	447	$	6		$	3,040
Provision charged (credited) to expense		(123	)		(13	)		247		(1	)		110
Losses charged off		(23	)		—			—		—			(23	)
Recoveries		29			—			1		—			30
Ending balance	$	1,362		$	1,095		$	695	$	5		$	3,157

Six months ended June 30, 2016	One-to-four family residential		All other mortgage loans			Commercial business loans			Consumer loans			Total
	(In thousands)
Beginning balance	$	1,346	$	1,210		$	279		$	2		$	2,837
Provision charged (credited) to expense		235		(248	)		(45	)		2			(56	)
Losses charged off		—		(5	)		—			(1	)		(6	)
Recoveries		1		—			—			—			1
Ending balance	$	1,582	$	957		$	234		$	3		$	2,776

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 June 30, 2017 and December 31, 2016:

June 30, 2017	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans		Total
Allowance Balances:	(In thousands)
Ending balance:
Individually evaluated for impairment	$	254	$	148	$	437	$	1	$	840
Collectively evaluated for impairment		1,108		947		258		4		2,317
Total allowance for loan losses	$	1,362	$	1,095	$	695	$	5	$	3,157

Loan Balances:
Ending balance:
Individually evaluated for impairment	$	1,475	$	1,057	$	558	$	1	$	3,091
Collectively evaluated for impairment		190,839		126,828		26,079		1,933		345,679
Total balance	$	192,314	$	127,885	$	26,637	$	1,934	$	348,770

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

December 31, 2016	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans		Total
Allowance Balances:	(In thousands)
Ending balance:
Individually evaluated for impairment	$	323	$	151	$	184	$	—	$	658
Collectively evaluated for impairment		1,156		957		263		6		2,382
Total allowance for loan losses	$	1,479	$	1,108	$	447	$	6	$	3,040

Loan Balances:
Ending balance:
Individually evaluated for impairment	$	1,527	$	1,067	$	547	$	—	$	3,141
Collectively evaluated for impairment		191,897		120,890		22,668		2,193		337,648
Total balance	$	193,424	$	121,957	$	23,215	$	2,193	$	340,789

Total loans in the above tables do not include deferred loan origination fees of $745,000 and $747,000 or loans in process of $7.0 million and $4.7 million, respectively, for June 30, 2017 and December 31, 2016.

The following tables present the credit risk profile of the Bank’s loan portfolio based on rating category and payment activity as of June 30, 2017 and December 31, 2016:

June 30, 2017	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	188,982	$	123,352	$	25,909	$	1,933
Special Mention (Risk 5)		—		1,927		35		—
Substandard (Risk 6)		3,332		2,606		693		1
Total	$	192,314	$	127,885	$	26,637	$	1,934

December 31, 2016	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	189,975	$	119,503	$	22,427	$	2,193
Special Mention (Risk 5)		—		—		—		—
Substandard (Risk 6)		3,449		2,454		788		—
Total	$	193,424	$	121,957	$	23,215	$	2,193

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

There were no loans classified as Doubtful (Risk 7) at either June 30, 2017 or at December 31, 2016.

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.

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 the borrower is resolving the financial uncertainties. 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 nonperforming 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.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

The following tables present the Bank’s loan portfolio aging analysis for June 30, 2017 and December 31, 2016:

June 30, 2017	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 and Accruing
	(In thousands)
One-to-four family residential loans	$	126	$	119	$	399	$	644	$	191,670	$	192,314	$	17
All other mortgage loans		—		—		63		63		127,822		127,885		—
Commercial business loans		525		—		23		548		26,089		26,637		—
Consumer loans		7		—		—		7		1,927		1,934		—
Total	$	658	$	119	$	485	$	1,262	$	347,508	$	348,770	$	17

December 31, 2016	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 and Accruing
	(In thousands)
One-to-four family residential loans	$	442	$	419	$	959	$	1,820	$	191,604	$	193,424	$	—
All other mortgage loans		—		—		63		63		121,894		121,957		—
Commercial business loans		16		—		22		38		23,177		23,215		—
Consumer loans		8		—		—		8		2,185		2,193		—
Total	$	466	$	419	$	1,044	$	1,929	$	338,860	$	340,789	$	—

Nonaccrual loans were comprised of the following at:

Nonaccrual loans	June 30, 2017		December 31, 2016
	(In thousands)
One-to-four family residential loans	$	1,407	$	1,473
All other mortgage loans		63		63
Commercial business loans		548		22
Consumer loans		—		—
Total	$	2,018	$	1,558

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

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 June 30, 2017 and December 31, 2016 in combination with activity for the three and six months ended June 30, 2017 and 2016 is presented below:

	As of June 30, 2017						Three months ended June 30, 2017				Six months ended June 30, 2017
	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	$	1,137	$	1,151	$	—	$	1,170	$	9	$	1,153	$	18
All other mortgage loans		218		218		—		221		5		222		9
Commercial business loans		—		—		—		—		—		—		—
Consumer loans		—		—		—		—		—		—		—

Loans with a specific valuation allowance
One-to-four family residential loans		338		338		254		360		—		375		—
All other mortgage loans		839		839		148		838		13		839		26
Commercial business loans		558		558		437		566		7		559		15
Consumer loans		1		1		1		1		—		—		—

Total:
One-to-four family residential loans	$	1,475	$	1,489	$	254	$	1,530	$	9		1,528	$	18
All other mortgage loans		1,057		1,057		148		1,059		18		1,061		35
Commercial business loans		558		558		437		566		7		559		15
Consumer loans		1		1		1		1		—		—		—
	$	3,091	$	3,105	$	840	$	3,156	$	34	$	3,148	$	68

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

	As of December 31, 2016						Three months ended June 30, 2016				Six months ended June 30, 2016
	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	$	1,121	$	1,189	$	—	$	900	$	10	$	1,008	$	20
All other mortgage loans		226		226		—		1,034		17		689		35
Commercial business loans		—		—		—		—		—		—		—

Loans with a specific valuation allowance
One-to-four family residential loans		406		406		323		772		—		1,036		—
All other mortgage loans		841		841		151		213		—		496		—
Commercial business loans		547		547		184		41		1		38		1

Total:
One-to-four family residential loans	$	1,527	$	1,595	$	323	$	1,672	$	10	$	2,044	$	20
All other mortgage loans		1,067		1,067		151		1,247		17		1,185		35
Commercial business loans		547		547		184		41		1		38		1
	$	3,141	$	3,209	$	658	$	2,960	$	28	$	3,267	$	56

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

All TDR classifications are due to concessions being granted to borrowers experiencing financial difficulties. Concessions to borrowers can include exceptions to loan policy including high loan-to-value ratios, no private mortgage insurance (“PMI”) and high debt-to-income ratios, as well as term and rate exceptions. There were two TDR classifications of $134,000 that occurred in the 2017 year-to-date period. One of these borrowers received a rate concession, while the second borrower was advanced additional funds. There were $412,000 of TDR classifications that occurred in the 2016 year-to-date period and included the renewal of an interest-only loan as the customer repayments had not been in accordance with the original loan terms. The remaining loans that were classified as TDR’s during the 2016 year-to-date period were to the same borrower and were on a nonaccrual status. 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 three and six months ended June 30, 2017 and 2016. 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 Condensed Consolidated Financial Statements

	Quarter-to-Date						Year-to-Date
Troubled Debt Restructurings	Number of loans		Pre- modification Recorded Principal Balance		Post- modification Recorded Principal Balance		Number of loans		Pre- modification Recorded Principal Balance		Post- modification Recorded Principal Balance
			(dollars in thousands)						(dollars in thousands)
June 30, 2017
One-to-four family residential loans		—	$	—	$	—		2	$	134	$	134

June 30, 2016
One-to-four family residential loans		—	$	—	$	—		8	$	412	$	412

Foreclosed assets held for sale include those properties that the Bank has obtained legal title to through a formal foreclosure process or the borrower conveying all interest in the property to the Bank through the completion of a deed in lieu of foreclosure or similar legal agreement. The following table presents the balance of mortgage loans collateralized by residential real estate properties held as foreclosed assets at June 30, 2017 and December 31, 2016.

	June 30, 2017		December 31, 2016
	Recorded Investment
	(In thousands)
One-to-four family residential loans	$	230	$	2

Banks foreclose on certain properties in the normal course of business when it is more probable than not that the loan balance will not be recovered through scheduled payments. Foreclosure is usually a last resort and begins after all other collection efforts have been exhausted. The following table presents the balance of those mortgage loans collateralized by residential real estate properties that are in the formal process of foreclosure at June 30, 2017 and December 31, 2016.

	June 30, 2017		December 31, 2016
	Recorded Investment
	(In thousands)
One-to-four family residential loans	$	199	$	97

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

Note 5:

Goodwill

The following table presents the balance of goodwill at June 30, 2017 and December 31, 2016:

	June 30, 2017		December 31, 2016
	(In thousands)
Goodwill	$	1,719	$	1,719

The Company is required to annually test goodwill for impairment or more frequently if impairment indicators exist. The Company’s testing of goodwill at November 30, 2016 indicated there was no impairment in the carrying value of the related asset. There have been no indicators of impairment during 2017.

Note 6:

Repurchase Agreements

Repurchase agreements are offered by the Bank to commercial business customers to provide them with an opportunity to earn a return on their excess cash balances. These repurchase agreements are considered secured borrowings and are reported in other short-term borrowings. On a daily basis the Bank transfers securities to these customers in exchange for their cash and subsequently agrees to repurchase those same securities the next business day. In the event the Bank is unable to repurchase the securities from the customer, the customer will then have a claim against those securities.

The following table presents the fair value and type of securities pledged as collateral in exchange for these short-term borrowings at June 30, 2017 and December 31, 2016.

	June 30, 2017		December 31, 2016
	(In thousands)
Repurchase Agreements
Mortgage-backed securities of government sponsored entities	$	6,599	$	7,246
Gross amount of recognized liabilities for repurchase agreements in other short-term borrowings	$	6,599	$	7,246

The contractual maturities of the repurchase agreements is overnight and continuous for both June 30, 2017 and December 31, 2016.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

Note 7:

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. There were no dilutive shares at June 30, 2017 or June 30, 2016.

The computations are as follows:

	Three months ended June 30,				Six months ended June 30,
	2017		2016		2017		2016
Net income (in thousands)	$	761	$	674	$	1,332	$	1,381
Weighted-average common shares outstanding		2,754,573		2,747,567		2,754,573		2,747,567
Net income per share	$	0.27	$	0.24	$	0.48	$	0.50

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 the Bank’s capital classification are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. Furthermore the Bank’s regulators could require adjustments to regulatory capital not reflected in these financial statements.

The Bank must give notice to, or under certain conditions specified by regulation, apply to, the Federal Reserve Bank of Cleveland prior to declaring a dividend to the Company. Under existing regulatory guidance, a dividend is generally 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. An Ohio-chartered savings association must seek advance approval of the Superintendent of the Ohio Division of Financial Institutions before declaring a dividend that would exceed the total of the savings association’s net profits for that year combined with its retained net profits of the preceding two years, less any required transfers to surplus.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the following table) of Tier 1 capital to average assets, of Tier 1 common equity capital to risk-weighted assets, of Tier 1 capital to risk-weighted assets, and of total risk-based capital to risk-weighted assets, all as defined in the regulations. Management believes, as of June 30, 2017, that the Bank met all capital adequacy requirements to which it is subject.

As of June 30, 2017, based on the computations for the call report the Bank is 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 June 30, 2017, that management believes have changed the Bank’s capital classification. The Bank’s actual capital amounts and ratios as of June 30, 2017 and December 31, 2016 are presented in the following table.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

	Actual				For Capital Adequacy Purposes				To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio		Amount		Ratio		Amount		Ratio
As of June 30, 2017
Tier 1 capital to average assets	$	39,836		9.0%	$	17,766		4.0%	$	22,207		5.0%
Tier 1 common equity capital to risk- weighted assets		39,836		13.3%		13,494		4.5%		19,492		6.5%
Tier 1 capital to risk-weighted assets		39,836		13.3%		17,992		6.0%		23,990		8.0%
Total risk-based capital to risk- weighted assets		42,997		14.3%		23,990		8.0%		29,987		10.0%
As of December 31, 2016
Tier 1 capital to average assets	$	38,133		8.5%	$	17,850		4.0%	$	22,313		5.0%
Tier 1 common equity capital to risk- weighted assets		38,133		13.0%		13,159		4.5%		19,007		6.5%
Tier 1 capital to risk-weighted assets		38,133		13.0%		17,545		6.0%		23,393		8.0%
Total risk-based capital to risk- weighted assets		41,176		14.1%		23,393		8.0%		29,241		10.0%

Effective January 1, 2015, new regulatory capital requirements commonly referred to as “Basel III” were implemented and are reflected in the capital table above. Management opted out of the accumulated other comprehensive income treatment under the new requirements, and as such unrealized gains and losses from available-for-sale securities will continue to be excluded from Bank regulatory capital.

Implementation of the deductions and other adjustments to Common Equity Tier 1 (CET1) began on January 1, 2015, and will phase in over a four-year period (beginning at 40% on January 1, 2015, with an additional 20% per year thereafter). Under the new rule, in order to avoid limitations on capital distributions, including dividend payments and certain discretionary bonus payments to executive officers, a banking organization must hold a capital conservation buffer composed of CET1 capital above its minimum risk-based capital requirements. The implementation of the capital conservation buffer began on January 1, 2016, at the 0.625% level and will phase in over a four-year period (increasing by that amount on each subsequent January 1 until it reaches 2.5% on January 1, 2019).

Note 9:

Accumulated Other Comprehensive Income (Loss)

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

	Gross Unrealized Gains on Available-for- Sale Securities		Net Unrealized Loss for Unfunded Status of Split-Dollar Life Insurance Plan Liability (tax-free)			Gross Unrealized Loss for Unfunded Status of Defined Benefit Plan			Tax Effect		Total Accumulated Other Comprehensive Income (Loss)
	(In thousands)
June 30, 2017	$	392	$	(160	)	$	(750	)	$	122	$	(396	)

December 31, 2016	$	162	$	(131	)	$	(750	)	$	200	$	(519	)

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

There were no amounts reclassified out of accumulated other comprehensive income (loss) during the

three and six months ended June 30, 2017 or 2016.

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 consolidated 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 quoted prices of securities with similar characteristics or independent asset pricing services and pricing models, the inputs of which are market-based or independently sourced market parameters, including, but not limited to, yield curves, interest rates, volatilities, prepayments, defaults, cumulative loss projections and cash flows. Such securities are classified in Level 2 of the valuation hierarchy.

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2017 and December 31, 2016:

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

			Fair Value Measurement 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)
June 30, 2017
U.S. government agencies	$	8	$	—	$	8	$	—
Mortgage-backed securities of government sponsored entities		50,736		—		50,736		—
State and political subdivisions		11,432		—		11,432		—

			Fair Value Measurement 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)
December 31, 2016
U.S. government agencies	$	11	$	—	$	11	$	—
Mortgage-backed securities of government sponsored entities		58,614		—		58,614		—
Private-label collateralized mortgage obligations		40		—		40		—
State and political subdivisions		12,044		—		12,044		—

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

Nonrecurring Measurements

Certain assets may be required to be measured at fair value on a nonrecurring basis in periods subsequent to their initial recognition. These assets 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 collateral underlying collateral-dependent loans are obtained when the loan is determined to be collateral-dependent and subsequently as deemed necessary by the office of the Chief Financial Officer. Appraisals are reviewed for accuracy and consistency by the Credit Analyst. Appraisers are selected from the list of approved appraisers maintained by management. The appraised values are reduced by discounts to consider lack of marketability and estimated cost to sell if repayment or satisfaction of the loan is dependent on the sale of the collateral. These discounts and estimates are developed by the office of the Chief Financial Officer by comparison to historical results.

Foreclosed Assets Held for Sale

Foreclosed assets held for sale are carried at the lower of fair value at acquisition date or current estimated fair value, less estimated cost to sell when the real estate is acquired. Estimated fair value of real estate is based on appraisals or evaluations. Foreclosed assets held for sale are classified within Level 3 of the fair value hierarchy.

Appraisals of real estate are obtained when the real estate is acquired and subsequently as deemed necessary by the Chief Financial Officer. Appraisals are reviewed internally for accuracy and consistency in accordance with regulatory requirements. Appraisers are selected from the list of approved appraisers maintained by management.

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the fair value hierarchy in which the fair value measurements fall at June 30, 2017 and December 31, 2016.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

			Fair Value Measurement 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)
June 30, 2017
Collateral-dependent impaired loans	$	121	$	—	$	—	$	121

December 31, 2016
Collateral-dependent impaired loans	$	1,053	$	—	$	—	$	1,053
Foreclosed assets		2		—		—		2

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

Valuation Technique

Unobservable Inputs

Weighted Average

June 30, 2017

Collateral-dependent impaired loans

121

Estimated proceeds
from liquidation of
collateral

Selling Costs

77%

December 31, 2016

Collateral-dependent impaired loans

1,053

Market comparable
properties and
specialized equipment
discounts

Discounts

25%

Foreclosed assets

Expected selling price

Selling Costs

10%

There were changes in the inputs or methodologies used to determine fair value at June 30, 2017 as compared to December 31, 2016 as the commercial customer is in the process of liquidating its collateral.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

The following table presents estimated fair values of the Company’s financial instruments not carried at fair value. 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)
	(In thousands)
June 30, 2017
Financial assets
Cash and cash equivalents	$	8,092	$	8,092	$	—	$	—
Held-to-maturity securities		11,777		—		11,832		—
Loans, net of allowance for loan losses		337,820		—		—		350,549
Federal Home Loan Bank stock		4,226		—		4,226		—
Interest receivable		1,150		—		1,150		—

Financial liabilities
Deposits		377,507		259,492		117,694		—
Other short-term borrowings		6,599		—		6,599		—
Federal Home Loan Bank advances		15,000		—		14,960		—
Advances from borrowers for taxes and insurance		691		—		691		—
Interest payable		29		—		29		—

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed 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)
	(In thousands)
December 31, 2016
Financial assets
Cash and cash equivalents	$	16,756	$	16,756	$	—	$	—
Held-to-maturity securities		9,559		—		9,339
Loans, net of allowance for loan losses		332,283		—		—		341,999
Federal Home Loan Bank stock		4,226		—		4,226		—
Interest receivable		1,146		—		1,146		—

Financial liabilities
Deposits		383,733		252,242		130,770		—
Other short-term borrowings		7,246		—		7,246		—
Federal Home Loan Bank advances		18,000		—		17,938		—
Advances from borrowers for taxes and insurance		1,306		—		1,306		—
Interest payable		29		—		29		—

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.

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 Condensed Consolidated Financial Statements

Loans, net of allowance for loan losses

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.

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 June 30, 2017 and December 31, 2016.

Note 11:

Recent Accounting Developments

FASB ASU 2014-15, Presentation of Financial Statements-Going Concern (Subtopic 205-40), Disclosure of Uncertainties about an Entity’s Ability to Continue as a Going Concern, was issued in August 2014. The amendments in this update provide guidance in Generally Accepted Accounting Principles (GAAP) about management’s responsibility to evaluate whether there is substantial doubt about an entity’s ability to continue as a going concern and to provide related footnote disclosures. The amendments in this update are effective for the annual period ending after December 15, 2016, and for annual periods and interim periods thereafter. Early application is permitted. The adoption of this standard did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2015-10, Technical Corrections and Improvements was issued in June, 2015. The amendments in this Update represent changes to clarify the Codification, correct unintended application of guidance, or make minor improvements to the Codification that are not expected to have a significant effect on current accounting practice or create a significant administrative cost to entities. The amendments in this Update that

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

require transition guidance are effective for all entities for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2015. Early adoption is permitted, including adoption in an interim period. All other amendments will be effective upon the issuance of this update. The adoption of the amendments that required transition guidance did not have a material impact on the Company’s consolidated financial statements. The adoption of the other amendments in this update did not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2016-01, Financial Instruments–Overall (Subtopic 825-10), Recognition and Measurement of Financial Assets and Financial Liabilities was issued in January 2016. The amendments in this Update make targeted improvements to generally accepted accounting principles, and address certain aspects of recognition, measurement, presentation, and disclosure of financial statements. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, including interim periods within those fiscal years. Except as specifically stated, early adoption of the amendments in this Update is not permitted. This standard is not expected to have a material impact on the Company’s consolidated financial statements. The Company is no longer required to disclose the method and assumptions used to estimate the fair value of financial instruments measured at amortized cost.

FASB ASU 2016-04, Liabilities-Extinguishments of Liabilities (Subtopic 405-20), was issued in March 2016. The amendments in this Update apply to entities that offer certain prepaid stored-value products, including prepaid gift cards, prepaid telecommunication cards, and travelers checks. The amendments in this Update contain specific guidance for the derecognition of pre-paid stored value product liabilities and are an improvement to GAAP because they specify how pre-paid stored-value product liabilities within the Update’s scope should be derecognized. The amendments in this Update are effective for financial statements issued for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Earlier application is permitted, including adoption in an interim period. This standard is not expected to have a material impact on the Company’s consolidated financial statements, because the Company does not currently have any liabilities related to stored value cards.

FASB ASU 2016-13, Financial Instruments – Credit Losses (Topic 326), Measurement of Credit Losses on Financial Instruments, was issued in June 2016. The main objective of this Update is to provide financial statement users with more decision-useful information about the expected credit losses on financial instruments and other commitments to extend credit held by a reporting entity at each reporting date. To achieve this objective, the amendments in this Update replace the incurred loss impairment methodology in current GAAP with a methodology that reflects expected credit losses and requires consideration of a broader range of reasonable and supportable information to inform credit loss estimates. The amendments in this Update are effective for fiscal years beginning after December 15, 2019, including interim periods within those fiscal year. Early adoption of the amendments in this Update are allowed for fiscal years beginning after December 15, 2018, including interim periods within those fiscal years. An entity will apply the amendments in this Update through a cumulative-effect adjustment to retained earnings as of the beginning of the first reporting period in which the guidance is effective (that is, a modified-retrospective approach). A prospective transition approach is required for debt securities for which an other-than-temporary impairment had been recognized before the effective date. The effect of a prospective transition approach is to maintain the same amortized cost basis before and after the effective date of this Update. The Company is studying the implications of this update, including following evolving regulatory and industry guidance, and gathering additional detailed historical data. The effect of this Update on the Company’s financial statements is not known at this time.

FASB ASU 2016-15, Statement of Cash Flows (Topic 230), Classification of Certain Cash Receipts and Cash Payments, was issued in August 2016. The amendments in this Update provide guidance on how certain

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

cash receipts and cash payments are presented and classified in the statement of cash flows. This Update addresses eight specific cash flow issues with the objective of reducing the diversity in practice. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. An entity that elects early adoption must adopt all the amendments in the same period. The amendments in this Update should be applied using a retrospective transition method to each period presented. The amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements, because the Company has limited exposure to those cash flow items included in the Update.

FASB ASU 2016-18, Statement of Cash Flows (Topic 230), Restricted Cash, was issued in November 2016. The amendments in this Update require that a statement of cash flows explain the change during the period in the total of cash, cash equivalents, and amounts generally described as restricted cash or restricted cash equivalents. The amendments in this Update are effective for fiscal years beginning after December 15, 2017, and interim periods within those fiscal years. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes the interim period. The amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements. The cash flow presentation will be expanded to include the activity related to restricted cash, or required cash reserve balances upon adoption.

FASB ASU 2016-19, Technical Corrections and Improvements, was issued in December 2016. The amendments in this Update cover a wide range of topics in the Accounting Standards Codification. The amendments generally fall into one of several categories including, amendments related to differences between original guidance and the Accounting Standards Codification, guidance clarification and reference corrections, simplification, or minor improvements. Most of the amendments in this Update do not require transition guidance and are effective upon issuance of this Update. The amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements, because the Company has limited exposure and disclosures relating to those items included in this Update.

FASB ASU 2017-01, Business Combinations, (Topic 805), Clarifying the Definition of a Business, was issued in January 2017. The amendments in this Update clarify the definition of a business, with the objective of adding guidance to assist entities with evaluating whether transactions should be accounted for as acquisitions (or disposals) of assets or businesses. The amendments in this Update should be applied to annual periods beginning after December 15, 2017, including interim periods within those periods. The amendments in this Update should be applied prospectively on or after the effective date. The amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements, because the Company historically has experienced minimal acquisitions or disposals, if any.

FASB ASU 2017-03, Accounting Changes and Error Corrections (Topic 250) and Investments – Equity Method and Joint Ventures (Topic 323), Amendments to SEC paragraphs Pursuant to Staff Announcements at the September 22, 2016 and November 17, 2016 EITF Meetings, was issued in January 2017. The amendments in this Update provide guidance on the disclosures required regarding the reporting and financial statement impact of recently issued but not yet adopted standards. The Changes and Corrections in this Update are effective upon release. The amendments in this update will require the Company to provide increased disclosure with respect to adopting current and future accounting Updates.

Index

Wayne Savings Bancshares, Inc.
Notes to Condensed Consolidated Financial Statements

FASB ASU 2017-04, Intangibles-Goodwill and Other (Topic 350) Simplifying the Test for Goodwill Impairment, was issued in January 2017. The amendments in this Update modify the concept of impairment from the condition that exists when the carrying amount of goodwill exceeds its implied fair value to the condition that exists when the carrying amount of a reporting unit exceeds its fair value. The amendments in this Update should be adopted for the annual or any interim goodwill impairment tests in fiscal years beginning after December 15, 2019. Early adoption is permitted for interim or annual goodwill impairment performed on testing dates after January 1, 2017. The amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2017-07, Compensation – Retirement Benefits (Topic 715), Improving the Presentation of Net Periodic Pension Cost and Net Periodic Post-retirement Benefit Cost, was issued in March 2017. The amendments in this Update require that an employer report the service cost component in the same line item or items as other compensation costs arising from services rendered to the pertinent employees during the period. The other components of net benefit cost are required to be presented in the income statement separately from the service cost component and outside a subtotal of income from operations. The amendments in this Update also allow for the service cost component to be eligible for capitalization when applicable. The amendments in this Update are effective for annual periods after December 31, 2017, including interim periods within those annual periods. Early adoption is permitted and should be made within the first interim period that financial statements are issued. The amendments in this Update should be applied retrospectively for the presentation of the service cost component and the other components of net periodic pension cost and net periodic post-retirement benefit cost in the income statement and prospectively, on and after the effective date, for the capitalization of the service cost component of net periodic pension cost and net periodic post-retirement benefit in assets. The amendments in this Update are not expected to have a material impact on the Company’s consolidated financial statements.

FASB ASU 2017-08, Receivables-Nonrefundable Fees and Other Costs (Subtopic 310-20) Premium Amortization on Purchased Callable Debt Securities, was issued in March 2017. The amendments in this Update shorten the amortization period for certain callable debt securities held at a premium. The amendments require the premium to be amortized to the earliest call date. The amendments do not require an accounting change for securities held at a discount; the discount continues to be amortized to maturity. The amendments in this Update are effective for fiscal years, and interim periods within those fiscal years, beginning after December 15, 2018. Early adoption is permitted, including adoption in an interim period. If an entity early adopts the amendments in an interim period, any adjustments should be reflected as of the beginning of the fiscal year that includes that interim period. An entity should apply the amendments in this Update on a modified retrospective basis through a cumulative-effect adjustment directly to retained earnings as of the beginning of the period of adoption. Additionally, in the period of adoption, an entity should provide disclosures about a change in accounting principle. The amendments in this Update are expected to have a negative impact on earnings during the shortened amortization period if the bond is not called. However, if the bond is not called, earnings should improve past the call date. If the bond is called as scheduled, the Updates in this amendment will not have a material impact on the Company’s consolidated financial statements.

FASB ASU 2017-9 Compensation - Stock Compensation (Topic 718), Scope of Modification Accounting, was issued in May 2017. The amendments in this Update provide guidance about which changes to the terms or conditions of a share-based payment award require an entity to apply modification accounting. The amendments in this Update are effective for all entities for annual periods, and interim periods within those annual periods, beginning after December 15, 2017. Early adoption is permitted, including adoption in any interim period, for reporting periods for which financial statements have not yet been issued. The amendments in this Update should be applied prospectively to an award modified on or after the adoption date. The amendments in this Update are not expected to impact the Company’s consolidated financial statements, as the Company does not currently have any outstanding share-based payment awards.

Index

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

Strategic Initiatives

The Company’s ongoing strategic planning process includes several initiatives to improve the returns to shareholders over a foreseeable time horizon through the following activities:

A strategic focus on providing enhanced customer service coupled with community relationships. Continued staff behavior development training to result in more efficient workflows, efficiencies and providing a better customer experience.

Continued growth of commercial business relationships to increase higher yielding, shorter duration assets, while also acquiring commercial deposits to reduce the necessary funding costs to carry these assets.

Modifying the branch structure from a transaction-oriented thrift culture to a relationship-oriented commercial bank culture through appropriate staffing and training. Management also continues to evaluate unique activities and opportunities to continue the Banks growth of commercial business relationships.

Critical Accounting Policies

Critical Accounting Policies – The Company’s critical accounting policy relates to the allowance for loan losses. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for loan losses. The allowance for loan losses is based on management’s current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision and considers all known internal and external factors that affect loan repayment as of the reporting date. Such evaluation, which includes a review of all loans on which full repayment 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, including those required by regulation 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.

Discussion of Financial Condition Changes from December 31, 2016 to June 30, 2017

At June 30, 2017, the Company had total assets of $445.2 million, a decrease of $9.6 million, from total assets at December 31, 2016. The decrease in total assets includes an $8.7 million decrease in cash and cash equivalents, and a $6.3 million decrease in securities balances, partially offset by a $5.5 million increase in net loans compared to December 31, 2016.

Index

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

Total securities decreased $6.3 million to $74.0 million at June 30, 2017, compared to December 31, 2016. The decrease in securities is primarily due to investing the principal and interest cash flows received from securities into higher yielding loans. The decrease included principal repayments of $8.4 million, and amortization of premiums of $441,000, partially offset by purchases totaling $2.3 million and a $230,000 increase in unrealized gains on available-for-sale securities during the six months ended June 30, 2017.

Net loans receivable increased $5.5 million at June 30, 2017 compared to December 31, 2016. The Bank originated $45.4 million of loans, received payments of $33.9 million, and originated and sold $5.7 million of fixed-rate residential mortgage loans into the secondary market. The increase in net loan balances is mainly due to new origination in excess of principal reductions during the current year period.

The allowance for loan losses totaled $3.2 million at June 30, 2017, compared to $3.0 million at December 31, 2016. The increase was primarily due to a provision for loan losses expense of $110,000 and net loan recoveries of $7,000. Total impaired assets were $3.3 million, or 0.75% of total assets at June 30, 2017, compared to $3.1 million, or 0.69% of total assets at December 31, 2016.

Management continues to focus on risk selection and the returns generated in return for risks taken in making its lending and investment decisions. Key areas of risk reviewed for each potential loan origination and securities purchase include credit, interest rate and liquidity risk. Interest rate risk arises mainly from longer term fixed-rate loans. Credit risk arises mainly from loan structure and underwriting conditions. The effects of additional loan portfolio risks generated by competitive pressures in the Company’s market area are evaluated relative to the projected returns to ensure acceptable financial performance over a long-term horizon. As part of an overall strategy to manage liquidity and interest rate risk, management continues to execute a strategy of immediately selling certain newly originated fixed-rate residential mortgage loans into the secondary market to limit the interest rate risk exposure on the balance sheet and to utilize the secondary market as a backup source of liquidity. Loans sold into the secondary market are sold with representations and warranties. In the event that those representations and warranties are violated, repurchase of loans may be required. No repurchases have been required in recent periods and management believes that the bank is in full compliance with applicable selling and servicing guides. 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. These strategies have the effect of generating lower loan yields in the short term due to the loans being priced off the lower yield short end of the yield curve. The principal source of liquidity is the Bank’s investment securities portfolio. To the extent that loan demand is insufficient in any given period, investments in the securities portfolio are made to provide cash flows to fund loan demand in future periods (a source of liquidity), while also limiting the interest rate risk exposure of the Company. As loan volume increases relative to investment volume, risk-based capital ratios will likely decline, because loans generally require a higher allocation of risk-based capital compared to investments. As demonstrated by quarterly balance sheet presentations, and as a result of general economic and competitive conditions, loan demand and originations are volatile on a sequential quarter basis, which in turn results in volatility in quarterly investment securities balances. The longer term trend and strategic direction is for an increase in higher yielding loan balances relative to lower yielding investment securities balances.

Index

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

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

	June 30, 2017				December 31, 2016
	Balance		Percent of total loans		Balance		Percent of total loans
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential⁽¹⁾	$	192,314		55.14%	$	193,424		56.76%
Residential construction loans		5,658		1.62%		2,744		0.81%
Multi-family residential		12,651		3.63%		11,425		3.35%
Nonresidential real estate/land⁽²⁾		109,576		31.42%		107,788		31.63%
Total mortgage loans		320,199		91.81%		315,381		92.54%
Other loans:
Consumer loans⁽³⁾		1,934		0.55%		2,193		0.64%
Commercial business loans		26,637		7.64%		23,215		6.81%
Total other loans		28,571		8.19%		25,408		7.46%
Total loans before net items		348,770		100.00%		340,789		100.00%
Less:
Loans in process		7,048				4,719
Deferred loan origination fees		745				747
Allowance for loan losses		3,157				3,040
Total loans receivable, net	$	337,820			$	332,283

⁽¹⁾

Includes equity loans collateralized by second mortgages in the aggregate amount of $15.7 million at June 30, 2017 and $15.8 million at December 31, 2016. Such loans are secured by one-to-four family residential properties and are underwritten to conform with bank loan policies.

⁽²⁾

Includes commercial loans secured by residential real estate of $35.9 million at June 30, 2017 and $33.0 million at December 31, 2016, and land loans of $4.9 million at June 30, 2017 and $4.9 million at December 31, 2016.

⁽³⁾

Includes second mortgage loans of $184,000 at June 30, 2017 and $217,000 at December 31, 2016.

Index

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

Foreclosed assets held for sale totaled $230,000 at June 30, 2017, compared to $2,000 at December 31, 2016. The increase in foreclosed assets during the current year was due to additions of properties totaling $230,000, partially offset by a provision of $2,000. During the prior year period there were additions of properties totaling $106,000, partially offset by a provision of $16,000, and sales totaling $85,000 that resulted in a net loss of $5,000.

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 November 30, 2016. Management believes that there were no interim impairment indicators that would require another evaluation at June 30, 2017.

Deposits totaled $377.5 million at June 30, 2017, a decrease of $6.2 million from $383.7 million at December 31, 2016. This decrease includes a $13.5 million decrease in time deposits, partially offset by a $309,000 increase in demand deposits and a $6.9 million increase in savings and money market balances. The Company continues to monitor deposit activity closely to respond to changes in customer preference for types of deposits and competitive pressure.

Other short-term borrowings, which consist solely of repurchase agreements with commercial customers of the Bank, decreased to $6.6 million at June 30, 2017 from $7.2 million at December 31, 2016. The decrease was due to a decrease in excess funds held by those commercial customers holding repurchase agreements. 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 weighted-average interest rate paid on these borrowings was 0.14% at June 30, 2017 and 0.15% at December 31, 2016.

Advances from the Federal Home Loan Bank (FHLB) totaled $15.0 million at June 30, 2017, a decrease of $3.0 million from $18.0 million at December 31, 2016. The decrease was due to the scheduled maturity, and repayment, of a $3.0 million fixed-rate advance borrowing during the six months ended June 30, 2017. In addition to this the Company borrowed short-term advances totaling $26.1 million during the current year of which were also repaid during the same period. The Company uses advances from the FHLB for both short-term cash management purposes and to extend the term to maturity of liabilities for interest rate risk management purposes. The cost of longer term liabilities purchased from the FHLB is generally less expensive than obtaining a similar term to maturity 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 1.33% at June 30, 2017 compared to 1.32% at December 31, 2016.

Stockholders’ equity increased by $1.0 million during the period ended June 30, 2017. This increase was due to net income of $1.3 million, and a $152,000 increase in unrealized gains on available-for-sale securities, partially offset by $496,000 in shareholder dividends, and a $29,000 increase in the unrecognized net loss arising from the cost of post-retirement split dollar life insurance coverage as part of the Company’s bank-owned life insurance plan.

Index

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

On September 22, 2016, the Company announced that its Board of Directors adopted a new stock repurchase program. Under the new stock repurchase program, the Company is authorized to repurchase up to 69,546 shares, or 2.5%, of its issued and outstanding shares of common stock No shares were purchased during the period ended June 30, 2017.

Comparison of Operating Results for the Three Months Ended June 30, 2017 and 2016

General

Net income for the three months ended June 30, 2017, totaled $761,000, an increase of $87,000, compared to $674,000 for the three month period ended June 30, 2016. The increase in net income was primarily due to an increase in both net interest income and noninterest income, partially offset by increases in, the provision for loan losses, noninterest expense and the provision for federal income taxes.

Net income for the three months ended June 30, 2017 was negatively impacted by a proxy contest for the election of directors at the annual shareholders meeting held on May 25, 2017. The proxy contest resulted in increased legal and stockholder expense compared to the prior year quarter of $212,000. Without these additional proxy contest expenses, net income would have been $901,000 for the three months ended June 30, 2017.

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 June 30,
	2017						2016
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net⁽¹⁾	$	336,278	$	3,566		4.24%	$	309,263	$	3,209		4.15%
Investment securities⁽²⁾		76,172		472		2.48%		97,159		568		2.34%
Interest-earning deposits⁽³⁾		9,626		57		2.37%		15,526		49		1.26%
Total interest-earning assets		422,076		4,095		3.88%		421,948		3,826		3.63%
Noninterest-earning assets		23,830						24,169
Total assets	$	445,906					$	446,117
Interest-bearing liabilities:
Deposits	$	375,648	$	437		0.47%	$	374,061	$	447		0.48%
Other short-term borrowings		6,766		2		0.12%		5,627		2		0.14%
Borrowings		17,676		60		1.36%		21,000		69		1.31%
Total interest-bearing liabilities		400,090		499		0.50%		400,688		518		0.52%
Noninterest-bearing liabilities		3,904						4,417
Total liabilities		403,994						405,105
Stockholders’ equity		41,912						41,012
Total liabilities and stockholders’ equity	$	445,906					$	446,117
Net interest income			$	3,596					$	3,308
Interest rate spread⁽⁴⁾						3.38%						3.11%
Net yield on interest-earning assets⁽⁵⁾						3.41%						3.14%
Ratio of average interest-earning assets to average interest- bearing liabilities						105.50%						105.31%

⁽¹⁾	Includes nonaccrual loan balances.

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

⁽³⁾	Includes interest-bearing deposits in other financial institutions and Federal Home Loan Bank stock.

⁽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 increased $269,000, and totaled $4.1 million for the three month period ended June 30, 2017, compared to $3.8 million for the three month period ended June 30, 2016. The increase was primarily due to an increase in the weighted-average yield, and to a lesser extent an increase in the average balance of interest-earning assets. The weighted-average yield was 3.88% for the three months ended June 30, 2017, and increased by 25 basis points compared to 3.63% for the three months ended June 30, 2016. The average balance of interest-earning assets increased by $128,000 and totaled $422.1 million for the 2017 period from $422.0 million in the 2016 period.

Interest income on loans was $3.6 million for the three month period ended June 30, 2017, and increased $357,000 compared to the three month period ended June 30, 2016. The increase was primarily due to an increase in both the average balance of loans and the weighted-average yield. The average balance of loans increased by $27.0 million from $309.3 million in the 2016 period to $336.3 million for the 2017 period. The weighted-average yield was 4.24% for the three months ended June 30, 2017, and increased by 9 basis points compared to 4.15% for the three months ended June 30, 2016.

Interest income on securities decreased $96,000 during the three months ended June 30, 2017, compared to the same period in 2016. This decrease was due to a decrease in the average balance of investment securities, partially offset by an increase in the weighted-average rate. The average balance of investment securities decreased $21.0 million from $97.2 million in the 2016 period to $76.2 million in the 2017 period due to investing excess cash into the loan portfolio. The weighted-average rate increased 14 basis points from 2.34% in the 2016 period to 2.48% for the 2017 period due to a decrease in premium amortization compared to the prior year period.

Dividends on Federal Home Loan Bank stock and other income totaled $57,000 for the three month period ended June 30, 2017, and increased $8,000 compared to the same period in 2016. The increase was due to a 1.11% increase in the weighted-average rate from 1.26% in the 2016 period to 2.37% in the 2017 period, partially offset by a $5.9 million decrease in the average balance outstanding.

Interest Expense

Interest expense totaled $499,000 for the three month period ended June 30, 2017, a decrease of $19,000 compared to the three month period ended June 30, 2016. This decrease was due to a decrease in both the average balance of total interest-bearing liabilities and the weighted-average cost of funds. The average balance of total interest-bearing liabilities decreased $598,000 and totaled $400.1 million at June 30, 2017, and the weighted-average cost of funds decreased 2 basis points, from 0.52% in the 2016 period to 0.50% in the 2017 period.

Index

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

Interest expense on deposits for the three month period ended June 30, 2017 totaled $437,000, a decrease of $10,000 compared to same period in the previous year. The decrease was primarily due to a decrease in the weighted-average cost, partially offset by an increase in the average balance of deposits. The weighted average cost of deposits decreased 1 basis point from 0.48% in the 2016 period to 0.47% in the 2017 period. The average balance of deposits increased $1.5 million from $374.1 million during the 2016 period to $375.6 million in the 2017 period. The increase in the average balance was due to a $6.1 million increase in demand deposits, and a $7.9 million increase in savings and money market balances, partially offset by a $12.4 million decrease in certificates of deposits. The increase in the demand and savings and money market balances is due to the Company’s focus on growing lower-cost deposits while allowing the higher-cost certificates to mature, which allowed deposits to grow and that resulted in a decrease in the related cost.

Interest expense on other short-term borrowings totaled $2,000 for both of the three month periods ended June 30, 2017 and 2016. The average balance of short-term borrowings increased $1.1 million compared to the prior year period. The weighted-average cost of short-term borrowings decreased 2 basis points from 0.14% in the 2016 period to 0.12% in the 2017 period.

Interest expense on Federal Home Loan Bank advances totaled $60,000 for the three month period ended June 30, 2017, a decrease of $9,000 from $69,000 in the 2016 period. The decrease was primarily due to a $3.3 million decrease in the average balance outstanding from $21.0 million in the 2016 period to $17.7 million in the 2017 period, partially offset by a 5 basis point increase in the weighted-average cost from 1.31% in the 2016 period to 1.36% in the 2017 period. The decrease in the average balance was due to the scheduled maturities of fixed-rate term advances, while the increase in the weighted-average cost was due to the scheduled maturity of lower rate advances.

Net Interest Income

Net interest income totaled $3.6 million for the three months ended June 30, 2017, and increased $288,000 compared to the three month period ended June 30, 2016. The increase in net interest income was primarily due to a favorable shift in the composition of earning assets compared to the prior year quarter, and an increase in the net interest spread. The change in the composition of earning assets included a $27.0 million increase in the average balance of higher yielding loans, substantially offset by a $26.9 million net decline in lower yielding investments and interest-bearing deposits compared to the prior year quarter, resulting in a 25 basis point increase in the yield on earning assets. This increase was also due to a 27 basis point increase in the net interest spread from 3.11% at June 30, 2016 to 3.38% at June 30, 2017. The increase in the net interest spread is a result of yields on interest-earning assets increasing more than the rate paid on interest-bearing liabilities.

Index

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

Provision for Loan Losses

Management recorded an $83,000 provision for loan losses for the three month period ended June 30, 2017, compared to an $11,000 provision for the three month period ended June 30, 2016. The increase is primarily due to an increase in loan balances from the prior year, and an increase in both specific reserves and non-accrual loans compared to the prior year period. The specific reserves totaled $840,000 at June 30, 2017, an increase of $283,000 compared to the prior year quarter due to an increase in reserves required on a commercial borrower, while nonaccrual loans totaled $2.0 million at June 30, 2017 compared to $1.9 million in the prior year period.

Noninterest Income

Noninterest income totaled $640,000 for the three month period ended June 30, 2017, and increased $85,000, from $555,000 for the same period in 2016. The increase was primarily due to a $65,000 increase in gain on sale of loans due an increase in total loans sold compared to the prior year quarter.

Noninterest Expense

Noninterest expense totaled $3.1 million for the three month period ended June 30, 2017, an increase of $151,000 compared to the three months ended June 30, 2016. Included in this increase were proxy contest costs of $212,000 including both increased legal and shareholder stock-related expense a $111,000 increase in other operating expenses and a $21,000 increase in audit and accounting expense. The increase in other operating expense was due to an increase in internet banking expense, professional services, several check losses, charitable contributions and increased loan origination expenses. The increase in audit and accounting expense is due to the timing of expenses and an increase in the expense related to internal audit. These increases were partially offset by a $236,000 decrease in salaries and employee benefits, and a $27,000 decrease in federal deposit insurance premiums compared to the prior year quarter. The decrease in salaries and employee benefits was due to decreased compensation attributable to staff reductions, a decline in healthcare costs due to a change in providers, a decrease in pension costs due to scheduled retirements in 2016, and an increase in deferred loan costs. These decreases in salaries and employee benefits were partially offset by an increase in other employee benefits and education and training costs to facilitate the strategic initiative of enhanced customer service compared to the prior year quarter. The decrease in the federal deposit insurance premiums is due to a lower assessment rate compared to the prior year quarter.

Federal Income Taxes

Federal income tax expense totaled $291,000 for the three month period ended June 30, 2017, an increase of $63,000 compared to $228,000 for the three month period ended June 30, 2016. The increase was primarily due to a $150,000 increase in pretax income compared to the prior year period, and an increase in the effective tax rate. The effective tax rate in the current year quarter was 27.7% compared to 25.3% for the prior year quarter. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

Index

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

Comparison of Operating Results for the Six Months Ended June 30, 2017 and 2016

General

Net income for the six months ended June 30, 2017, totaled $1.3 million, a decrease of $49,000, compared to $1.4 million for the six month period ended June 30, 2016. The decrease in net income was due to increases in the provision for loan losses, noninterest expenses, and the provision for federal income taxes. The decreases were offset by both an increase in net interest income and noninterest income compared to the prior year period.

Net income for the six months ended June 30, 2017 was negatively impacted by a proxy contest for the election of directors at the annual shareholders meeting held on May 25, 2017. The proxy contest resulted in increased legal and stockholder expense compared to the prior year period of $412,000. Excluding these incremental expenses, the Company’s net income would have been $1.6 million for the six months ended June 30, 2017. The adjusted return on average equity would have been 7.70% and return on assets would have been 0.72% for the six months ended June 30, 2017.

Index

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

Average Balance Sheet

	For the six months ended June 30,
	2017						2016
	Average Balance		Interest		Average Rate		Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net⁽¹⁾	$	334,726	$	7,005		4.19%	$	304,038	$	6,378		4.20%
Investment securities⁽²⁾		77,803		954		2.45%		99,116		1,196		2.41%
Interest-earning deposits⁽³⁾		10,231		113		2.21%		12,661		93		1.47%
Total interest-earning assets		422,760		8,072		3.82%		415,815		7,667		3.69%
Noninterest-earning assets		23,666						24,188
Total assets	$	446,426					$	440,003
Interest-bearing liabilities:
Deposits	$	375,618	$	882		0.47%	$	367,970	$	868		0.47%
Other short-term borrowings		7,070		5		0.14%		5,747		4		0.14%
Borrowings		18,092		120		1.33%		21,324		139		1.30%
Total interest-bearing liabilities		400,780		1,007		0.50%		395,041		1,011		0.51%
Noninterest-bearing liabilities		4,039						4,260
Total liabilities		404,819						399,301
Stockholders’ equity		41,607						40,702
Total liabilities and stockholders’ equity	$	446,426					$	440,003
Net interest income			$	7,065					$	6,656
Interest rate spread⁽⁴⁾						3.32%						3.18%
Net yield on interest-earning assets⁽⁵⁾						3.34%						3.20%
Ratio of average interest-earning assets to average interest-bearing liabilities						105.48%						105.26%

⁽¹⁾	Includes nonaccrual loan balances.

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

⁽³⁾	Includes interest-bearing deposits in other financial institutions and Federal Home Loan Bank stock.

⁽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 increased $405,000, and totaled $8.1 million for the six month period ended June 30, 2017, compared to $7.7 million for the six month period ended June 30, 2016. The increase was due to both an increase in the average balance of interest-earning assets and the weighted-average yield. The average balance of interest-earning assets increased by $7.0 million and totaled $422.8 million for the 2017 period compared to $415.8 million in the 2016 period. The weighted-average yield was 3.82% for the six months ended June 30, 2017, and increased by 13 basis points compared to 3.69% for the six months ended June 30, 2016.

Interest income on loans was $7.0 million for the six month period ended June 30, 2017, and increased $627,000 compared to the six month period ended June 30, 2016. The increase was primarily due to an increase in the average balance of loans, partially offset by a decrease in the weighted-average yield. The average balance of loans increased by $30.7 million from $304.0 million in the 2016 period to $334.7 million for the 2017 period. The weighted-average yield was 4.19% for the six months ended June 30, 2017, and decreased by 1 basis point compared to 4.20% for the six months ended June 30, 2016.

Interest income on securities decreased $242,000 during the six months ended June 30, 2017, compared to the same period in 2016. This decrease was due to a decrease in the average balance of investment securities, partially offset by an increase in the weighted-average rate. The average balance of investment securities decreased $21.3 million from $99.1 million in the 2016 period to $77.8 million in the 2017 period, while the weighted-average rate increased 4 basis points from 2.41% in the 2016 period to 2.45% for the 2017 period. The decrease in the average balance was due to investing excess cash into the loan portfolio, while the increase in yield was primarily due to a decrease in premium amortization compared to the prior year period.

Dividends on Federal Home Loan Bank stock and other income totaled $113,000 for the six month period ended June 30, 2017, an increase of $20,000 compared to the same period in 2016. The increase was due to a 74 basis point increase in the weighted-average rate from 1.47% in the 2016 period to 2.21% in the 2017 period, partially offset by a $2.4 million decrease in the average balance outstanding.

Interest Expense

Interest expense totaled $1.0 million for both six month periods ended June 30, 2017 and June 30, 2016. The weighted-average cost of interest-bearing liabilities declined by one basis point, substantially offset by an increase, and change in the composition, of the average balance of total interest-bearing liabilities. The weighted-average cost of interest-bearing liabilities was 0.50% at June 30, 2017 compared to 0.51% at June 30, 2016. The average balance of total interest-bearing liabilities increased $5.8 million from $395.0 million in the 2016 period to $400.8 million in the 2017 period. The increase in the average balance of interest-bearing liabilities included a $15.0 million increase in lower-cost demand, and savings and money market balances, partially offset by a $7.4 million decreased in higher-cost certificate of deposit balances.

Index

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

Interest expense on deposits for the six month period ended June 30, 2017 totaled $882,000, an increase of $14,000 compared to $868,000 for the same period in the previous year. The increase was primarily due to a $7.6 million increase in the average balance, while the weighted-average cost was unchanged at 0.47% for both six month periods ended June 30, 2017 and 2016. The increase in the average balance was due to a $6.4 million increase in demand deposits, and an $8.6 million increase in savings and money market balances, partially offset by a $7.4 million decrease in certificates of deposits. The increase in the demand and savings and money market balances is due to the Company’s focus on growing lower-cost deposits while allowing the higher-cost certificates to mature, which allowed deposits to grow without a corresponding increase in the cost.

Interest expense on other short-term borrowings totaled $5,000 for the six month period ended June 30, 2017, and increased $1,000 from the same period in the previous year. The average balance of short-term borrowings increased $1.3 million compared to the prior year period, while the weighted-average cost of short-term borrowings was unchanged at 0.14% for both the six month periods ended June 30, 2017 and 2016.

Interest expense on Federal Home Loan Bank advances totaled $120,000 for the six month period ended June 30, 2017, a decrease of $19,000 from $139,000 in the 2016 period. The decrease was primarily due to a $3.2 million decrease in the average balance outstanding from $21.3 million in the 2016 period to $18.1 million in the 2017 period, partially offset by a 3 basis point increase in the weighted-average cost from 1.30% in the 2016 period to 1.33% in the 2017 period. The decrease in the average balance was due to the scheduled maturities of fixed-rate term advances, while the increase in the weighted-average cost was due to the scheduled maturity of lower rate advances.

Net Interest Income

Net interest income totaled $7.1 million for the six months ended June 30, 2017, and increased $409,000 compared to the six month period ended June 30, 2016. The increase in net interest income was primarily due to a $6.9 million increase in the average balance of interest-earning assets and a favorable shift in the composition of earning assets compared to the prior year period. The increase in the average balance of earning assets was substantially due to a $30.7 million increase in the average balance of higher yielding loans, partially offset by a $23.7 million decrease in lower yielding investments and interest-bearing deposits compared to the prior year period. This increase was also due to a 14 basis point increase in the net interest spread from 3.18% at June 30, 2016 to 3.32% at June 30, 2017. The increase in the net interest spread is a result of yields on interest-earning assets increasing, while the rate paid on interest-bearing liabilities decreased.

Index

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

Provision (Credit) for Loan Losses

Management recorded a $110,000 provision for loan losses for the six month period ended June 30, 2017, compared to a credit for loan losses of $56,000 for the six month period ended June 30, 2016. The increase is due to increases in loan balances, specific reserves and nonaccrual loans compared to the prior year period.

Noninterest Income

Noninterest income totaled $1.1 million for the six month period ended June 30, 2017, and increased $120,000 from $1.0 million for the same period in 2016. The increase was due to $21,000 increase in deposit service charges, a $50,000 increase in gain on sale of loans, and a $29,000 increase in other operating income. The increase in deposit service charges was due to increased transactions. The increase in gain on sale of loans sold was due to an increase in the loans sold compared to the same period last year. The increase in other operating income was due to an increase in income from non-deposit investment fees compared to the same period last year.

Noninterest Expense

Noninterest expense totaled $6.3 million for the six month period ended June 30, 2017, an increase of $402,000, compared to $5.9 million for the six months ended June 30, 2016. The majority of this additional expense is comprised of approximately $412,000 in increased legal and shareholder stock-related expenses incurred as a result of the proxy contest referenced above. The remainder of the increase includes a $52,000 increase in audit and accounting expense and a $124,000 increase in other operating expense, partially offset by a $198,000 decrease in salaries and employee benefits, and a $52,000 decrease in federal deposit insurance premiums compared to the prior year period. The increase in audit and accounting expense is due to both the timing of the expenses and an increase in the expense related to internal audit. The increase in other operating expense was due to an increase in internet banking expense, professional services, several check loss incidents, and increased loan origination expenses. The decrease in salaries and employee benefits was due to decreased compensation attributable to staff reductions, a decline in healthcare costs due to a change in providers, a decrease in pension costs due to scheduled retirements in 2016, and an increase in deferred loan costs. These decreases were partially offset by an increase in education and training costs to facilitate the strategic initiative of enhanced customer service and an increase in ESOP expense. The decrease in the federal deposit insurance premiums is due to a lower assessment rate compared to the prior year period.

Federal Income Taxes

Federal income tax expense totaled $490,000 for the six month period ended June 30, 2017, an increase of $10,000 compared to $480,000 for the six month period ended June 30, 2016. The increase was primarily due to an increase in the effective tax rate from 25.8% in the prior year period to 26.9% in the 2017 period as a result of the decrease in tax-exempt earnings, partially offset by a $39,000 decrease in pre-tax earnings. The effective rate is below the statutory rate of 34% due to certain income items that are not subject to tax.

Index

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

Forward-Looking Statements

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

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

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

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 was filed with the Securities and Exchange Commission for the year ended December 31, 2016.

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 year ended December 31, 2016.

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 June 30, 2017.

Months ended	Total number of shares purchased		Average price paid per share		Total number of shares purchased as part of the announced plan		Maximum number of shares which may still be purchased as part of the announced plan
April 30, 2017		—	$	—		—		69,546
May 31, 2017		—		—		—		69,546
June 30, 2017		—		—		—		69,546
Total		—	$	—		—		69,546

Notes to the Table:

On September 22, 2016, the Company announced the authorization by the Board of Directors of a new program for the repurchase of up to 69,546 shares, or 2.5%, of the Company’s outstanding shares of common stock.

ITEM 3.

Defaults Upon Senior Securities

Not applicable.

ITEM 4.

Mine Safety Disclosures

Not applicable.

Index

Wayne Savings Bancshares, Inc.
PART II

ITEM 5.

Other Information

Not applicable.

ITEM 6.

Exhibits

Exhibit
Number	Description

31.1	Certification of Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

31.2	Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. Section 1350

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

101	Interactive financial data (XBRL)

Index

Wayne Savings Bancshares, Inc.

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:	August 4, 2017	By:	/s/David L. Lehman
			David L. Lehman
			President and Chief Executive Officer



Date:	August 4, 2017	By:	/s/Myron Swartzentruber
			Myron Swartzentruber
			Senior Vice President and
			Chief Financial Officer