10-Q 1 form10q-81532_wayn.htm FORM 10-Q
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q
(Mark One)

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

For the quarterly period ended                              December 31, 2006                                   

OR

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

For the transition period from ____________ to _______________

Commission File No. 0-23433

WAYNE SAVINGS BANCSHARES, INC.
(Exact name of registrant as specified in its charter)

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

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

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

Yes   ý No o

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

Large accelerated filer o
Accelerated filer o
Non-accelerated filer  ý

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

As of February 8, 2007, the latest practicable date, 3,194,109 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.


1


Wayne Savings Bancshares, Inc.


   
Page
     
 
     
 
 
 
 
     
     
 
    
     
     
 
     
     
     
     
     
     
     
     
 




2



(In thousands, except share data)

 
  
December 31,
  
March 31,
  
ASSETS
 
2006
  
2006
  
 
  
(Unaudited)
      
           
Cash and due from banks  
  
$
2,389
  
$
2,952
  
Federal funds sold  
    
10,000
    
-
  
Interest-bearing deposits in other financial institutions
   
8,501
    
11,171
  
Cash and cash equivalents 
    
20,890
    
14,123
  
               
Investment securities available for sale - at market
    
58,127
    
67,505
  
Investment securities held to maturity - at amortized cost, approximate market value
              
of $622 and $5,796 as of December 31, 2006 and March 31, 2006, respectively
   
602
    
5,802
  
Mortgage-backed securities available for sale - at market
   
62,483
    
53,932
  
Mortgage-backed securities held to maturity - at cost, approximate market value of
             
$1,302 and $1,805 as of December 31, 2006 and March 31, 2006, respectively
    
1,293
    
1,799
  
Loans receivable - net
    
240,751
    
235,312
  
Office premises and equipment - net
    
8,263
    
8,557
  
Real estate acquired through foreclosure
   
-
    
156
  
Federal Home Loan Bank stock - at cost
   
4,829
    
4,623
  
Cash surrender value of life insurance
   
5,978
    
5,811
  
Accrued interest receivable on loans
   
1,184
    
1,075
  
Accrued interest receivable on mortgage-backed securities
   
288
    
250
  
Accrued interest receivable on investments and interest-bearing deposits
   
464
    
700
  
Prepaid expenses and other assets
   
1,152
    
1,526
  
Goodwill and other intangible assets
   
2,428
    
2,508
  
Prepaid federal income taxes
   
228
    
-
  
               
Total assets
  
$
408,960
  
$
403,679
  
               
 LIABILITIES AND STOCKHOLDERS’ EQUITY
              
               
Deposits
  
$
335,425
  
$
332,570
  
Advances from the Federal Home Loan Bank
   
34,500
    
32,750
  
Advances by borrowers for taxes and insurance 
    
1,000
    
521
  
Accrued interest payable
   
354
    
263
  
Accounts payable on mortgage loans serviced for others
   
291
    
225
  
Other liabilities
   
1,082
    
1,118
  
Accrued federal income taxes
   
-
    
51
  
Deferred federal income taxes
    
1,026
    
665
  
Total liabilities
   
373,678
    
368,163
  
               
Commitments
   
-
    
-
  
               
Stockholders’ equity
              
Preferred stock (500,000 shares of $.10 par value authorized; none issued)
   
-
    
-
  
Common stock (9,000,000 shares of $.10 par value authorized; 3,978,731 and 3,934,874
              
shares issued at December 31, 2006 and March 31, 2006, respectively) 
    
398
    
393
  
Additional paid-in capital
   
36,249
    
35,604
  
Retained earnings - substantially restricted
   
11,844
    
11,394
  
Less required contributions for shares acquired by Employee Stock Ownership Plan
   
(1,178
)
  
(1,239
)
Less 729,622 and 595,322 shares of treasury stock at December 31, 2006 and
             
March 31, 2006, respectively - at cost
    
(11,618
)
  
(9,625
)
Accumulated other comprehensive loss - unrealized losses on securities designated
              
as available for sale, net of tax effects 
    
(413
)
  
(1,011
)
Total stockholders’ equity
   
35,282
    
35,516
  
               
Total liabilities and stockholders’ equity
 
$
408,960
  
$
403,679
  

See accompanying notes to consolidated financial statements.
3


Wayne Savings Bancshares, Inc.


(In thousands, except share data)

 
  
Nine months
  
Three months
  
 
  
ended
  
ended
  
 
  
December 31,
  
December 31,
  
 
  
2006
  
2005
  
2006
  
2005
  
 
  
(Unaudited)
  
Interest income
                          
Loans
  
$
11,924
  
$
10,351
  
$
4,048
  
$
3,626
  
Mortgage-backed securities
    
2,327
    
1,462
    
846
    
483
  
Investment securities
   
2,082
    
2,296
    
627
    
763
  
Interest-bearing deposits and other
   
360
    
351
    
158
    
109
  
Total interest income 
    
16,693
    
14,460
    
5,679
    
4,981
  
                           
Interest expense
                          
Deposits
   
7,194
    
5,201
    
2,545
    
1,855
  
Borrowings
   
1,038
    
764
    
410
    
262
  
Total interest expense
   
8,232
    
5,965
    
2,955
    
2,117
  
                           
Net interest income
   
8,461
    
8,495
    
2,724
    
2,864
  
Provision for losses on loans
    
70
    
-
    
10
    
-
  
Net interest income after provision for losses on loans 
    
8,391
    
8,495
    
2,714
    
2,864
  
                           
Other income
                          
Gain (loss) on sale of loans
   
-
    
68
    
-
    
(1
)
Proceeds due from bank-owned life insurance policy
   
-
    
63
    
-
    
63
  
Increase in cash surrender value of life insurance
   
167
    
184
    
57
    
59
  
Service fees, charges and other operating 
    
1,123
    
1,006
    
376
    
346
  
Total other income
   
1,290
    
1,321
    
433
    
467
  
                           
General, administrative and other expense
                          
Employee compensation and benefits
   
4,179
    
5,070
    
1,332
    
1,957
  
Occupancy and equipment 
    
1,438
    
1,410
    
503
    
509
  
Federal deposit insurance premiums
    
31
    
33
    
11
    
11
  
Franchise taxes
   
177
    
394
    
(21
)
  
133
  
Other operating
   
1,555
    
1,550
    
530
    
576
  
Total general, administrative and other expense 
    
7,380
    
8,457
    
2,355
    
3,186
  
                           
Earnings before income taxes (credits) 
    
2,301
    
1,359
    
792
    
145
  
                           
Federal incomes taxes (credits)
                          
Current
   
608
    
82
    
310
    
(147
)
Deferred 
    
53
    
199
    
(81
)
  
121
  
Total federal income taxes (credits)
   
661
    
281
    
229
    
(26
)
                           
NET EARNINGS
 
$
1,640
  
$
1,078
  
$
563
  
$
171
  
EARNINGS PER SHARE
                          
Basic
 
$
0.51
  
$
0.32
  
$
0.18
  
$
0.05
  
Diluted 
  
$
0.51
  
$
0.32
  
$
0.18
  
$
0.05
  
                           
DIVIDENDS PER SHARE
 
$
0.36
  
$
0.36
  
$
0.12
  
$
0.12
  

See accompanying notes to consolidated financial statements.

4


Wayne Savings Bancshares, Inc.


(In thousands)


   
Nine months
  
Three months
  
   
ended
  
ended
  
   
December 31,
  
December 31,
  
   
2006
  
2005
  
2006
  
2005
  
   
(Unaudited)
  
                   
Net earnings
  
$
1,640
  
$
1,078
  
$
563
  
$
171
  
                           
Other comprehensive income (loss):
                          
Unrealized holding gains (losses) on securities, net of related
                          
taxes (benefits) of $308, $(22), $83 and $(233) during the
                          
respective periods
    
598
    
(42
)
  
162
    
(452
)
                           
Comprehensive income (loss)
  
$
2,238
  
$
1,036
  
$
725
  
$
(281
)
                           
Accumulated comprehensive loss
  
$
(413
)
$
(834
)
$
(413
)
$
(834
)

 

5


Wayne Savings Bancshares, Inc.


For the nine months ended December 31,
(In thousands)

 
  
2006
  
2005
  
 
  
(Unaudited)
  
           
Cash flows from operating activities:
              
Net earnings for the period
 
$
1,640
  
$
1,078
  
Adjustments to reconcile net earnings to net cash provided by
              
operating activities:
              
Amortization of discounts and premiums on loans,
             
investments and mortgage-backed securities - net
   
(66
)
  
384
  
Amortization of deferred loan origination fees
   
(39
)
  
(110
)
Depreciation and amortization
   
528
    
504
  
Amortization of expense related to ESOP
    
109
    
153
  
Gain on sale of loans
    
-
    
(17
)
Proceeds due from bank-owned life insurance policy 
    
-
    
(63
)
Proceeds from sale of loans in the secondary market
   
-
    
5,763
  
Loans originated for sale in the secondary market 
    
-
    
(5,749
)
Provision for losses on loans 
    
70
    
-
  
Federal Home Loan Bank stock dividends 
    
(206
)
  
(173
)
Increase (decrease) in cash due to changes in:
              
Accrued interest receivable on loans
   
(109
)
  
(420
)
Accrued interest receivable on mortgage-backed securities
   
(38
)
  
152
  
Accrued interest receivable on investments and interest-bearing deposits 
    
236
    
199
  
Prepaid expenses and other assets
   
374
    
274
  
Amortization of expense related to intangibles
   
80
    
80
  
Accrued interest payable
    
91
    
(38
)
Accounts payable on mortgage loans serviced for others
   
66
    
136
  
Other liabilities
    
(36
)
  
(21
)
Federal income taxes
              
Current 
    
(279
)
  
170
  
Deferred
   
53
    
199
  
Net cash provided by operating activities
   
2,474
    
2,501
  
               
Cash flows provided by (used in) investing activities:
              
Purchase of investment securities designated as available for sale
   
(1,101
)
  
(7,344
)
Purchase of investment securities designated as held to maturity
   
-
    
(50
)
Proceeds from maturity of investment securities designated as held to maturity 
    
2,708
    
1,168
  
Proceeds from sale of investment securities designated as held to maturity
   
2,512
    
-
  
Proceeds from maturity of investment securities designated as available for sale
   
11,091
    
4,135
  
Purchase of mortgage-backed securities designated as available for sale
   
(15,584
)
  
(16,215
)
Principal repayments on mortgage-backed securities designated as held to maturity
    
500
    
698
  
Principal repayments and sales of mortgage-backed securities designated as available for sale
   
7,380
    
21,900
  
Loan principal repayments
   
38,643
    
24,082
  
Loan disbursements
    
(44,114
)
  
(40,228
)
Purchase of office premises and equipment - net 
    
(234
)
  
(246
)
Proceeds from sale of real estate acquired through foreclosure
    
156
    
163
  
Increase in cash surrender value of life insurance
   
(167
)
  
(184
)
Net cash provided by (used in) investing activities
    
1,790
    
(12,121
)
               
Net cash provided by (used in) operating and investing activities
              
(balance carried forward)
   
4,264
    
(9,620
)

 

6


Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the nine months ended December 31,
(In thousands)


   
2006
  
2005
  
   
(Unaudited)
  
           
Net cash provided by (used in) operating and investing activities
              
(balance brought forward)
 
$
4,264
  
$
(9,620
)
               
Cash flows provided by (used in) financing activities:
              
Net increase in deposit accounts
   
2,855
    
8,282
  
Proceeds from Federal Home Loan Bank advances
   
78,400
    
37,150
  
Repayments of Federal Home Loan Bank advances
   
(76,650
)
  
(46,650
)
Advances by borrowers for taxes and insurance
   
479
    
292
  
Dividends paid on common stock
    
(1,190
)
  
(1,216
)
Proceeds from exercise of stock options
    
602
    
367
  
Tax benefits from exercise of stock options 
    
-
    
27
  
Purchase of treasury shares
    
(1,993
)
  
(5,025
)
Net cash provided by (used in) financing activities
    
2,503
    
(6,773
)
               
Net increase (decrease) in cash and cash equivalents
   
6,767
    
(16,393
)
               
Cash and cash equivalents at beginning of period
    
14,123
    
29,942
  
               
Cash and cash equivalents at end of period
  
$
20,890
  
$
13,549
  
               
               
Supplemental disclosure of cash flow information:
              
Cash paid during the period for:
              
Federal income taxes
 
$
830
  
$
325
  
               
Interest on deposits and borrowings
  
$
8,141
  
$
6,003
  
               
               
Supplemental disclosure of noncash investing activities:
              
Transfers from loans to real estate acquired through foreclosure
 
$
-
  
$
184
  
               
Unrealized gains (losses) on securities designated as available for sale,
              
net of related tax effects
 
$
598
  
$
(42
)
               
Recognition of mortgage servicing rights in accordance
              
with SFAS No. 140 
  
$
-
  
$
51
  
               
Dividends payable
 
$
390
  
$
401
  
 
 

7


Wayne Savings Bancshares, Inc.


For the nine and three month periods ended December 31, 2006 and 2005

 
1.
Basis of Presentation
 
The accompanying unaudited consolidated financial statements for the nine and three months ended December 31, 2006 and 2005 were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the year ended March 31, 2006.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the nine and three month periods ended December 31, 2006 are not necessarily indicative of the results which may be expected for the entire fiscal year.

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

Use of Estimates - The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results could differ from those estimates.

2.
Principles of Consolidation

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

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


8


Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended December 31, 2006 and 2005


3.
Earnings Per Share

Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s Employee Stock Ownership Plan (“ESOP”) that are unallocated and not committed to be released. Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company’s stock option plan. The computations are as follows:
 
     
For the nine months ended
  
For the three months ended
  
     
December 31,
  
December 31,
  
     
2006
  
2005
  
2006
  
2005
  
                     
 
Weighted-average common shares
                          
 
outstanding (basic)
    
3,209,885
    
3,320,492
    
3,239,078
    
3,231,757
  
 
Dilutive effect of assumed exercise
                          
 
of stock options
    
7,315
    
17,747
    
5,010
    
9,778
  
 
Weighted-average common shares
                          
 
outstanding (diluted)
    
3,217,200
    
3,338,239
    
3,244,088
    
3,241,535
  

All outstanding options were included in the diluted earnings per share calculation for the three and nine month periods ended December 31, 2006 and 2005.

4.
Stock Option Plan

The Company maintains a 1993 incentive Stock Option Plan that provided for the issuance of 196,390 shares of authorized common stock, as adjusted, with no options outstanding at December 31, 2006. In fiscal 2004, the Company adopted a new Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to authorized common stock. As of December 31, 2006, all options under the 2004 Plan have been granted and (excluding forfeited options), are subject to exercise at the discretion of the grantees, and will expire in fiscal 2014 unless otherwise exercised or forfeited.

In the fourth quarter of fiscal 2005, the Company adopted the provisions of SFAS No. 123(R), “Share Based Payment.” SFAS No. 123(R) requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost is then recognized over the vesting period. There were no options granted during each of the nine months ended December 31, 2006 and 2005.



9


Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended December 31, 2006 and 2005


4.
Stock Option Plan (continued)

A summary of the status of the Company’s stock option plans as of and for the years ended March 31, 2006 and 2005, and the nine months ended December 31, 2006 is presented below:
                             
     
Nine months ended
  
Year ended
  
     
December 31,
  
March 31,
  
     
2006
  
2006
  
2005
  
         
Weighted-
      
Weighted-
      
Weighted-
  
         
average
      
average
      
average
  
         
exercise
      
exercise
      
exercise
  
     
Shares
  
price
  
Shares
  
price
  
Shares
  
price
  
                             
 
Outstanding at beginning of period
    
179,148
  
$
13.92
    
214,204
  
$
13.84
    
214,204
  
$
13.84
  
 
Granted
    
-
    
-
    
-
    
-
    
163,265
    
13.95
  
 
Exercised
    
(60,924
)
  
13.85
    
(27,556
)
  
13.32
    
-
    
-
  
 
Forfeited
    
(4,000
)
  
13.95
    
(7,500
)
  
13.95
    
(163,265
)
  
13.95
  
                                         
 
Outstanding at end of period
    
114,224
  
$
13.95
    
179,148
  
$
13.92
    
214,204
  
$
13.84
  
                                         
 
Options exercisable at period-end
    
114,224
  
$
13.95
    
179,148
  
$
13.92
    
214,204
  
$
13.84
  
                                         
 
Fair value of options granted
        
$
-
        
$
-
        
$
4.07
  

The following information applies to options outstanding at December 31, 2006:

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

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

5.
Recent Accounting Developments

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

 
·
Separately recognize financial assets as servicing assets or servicing liabilities, each time it undertakes an obligation to service a financial asset by entering into certain kinds of servicing contracts;
 
·
Initially measure all separately recognized servicing assets and liabilities at fair value, if practicable; and
 
·
Separately present servicing assets and liabilities subsequently measured at fair value in the statement of financial condition and additional disclosures for all separately recognized servicing assets and servicing liabilities.


10


Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended December 31, 2006 and 2005


5.
Recent Accounting Developments (continued)

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

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

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

Additionally, SFAS No. 158 will require entities to measure the funded status of the plan as of the date of the year-end statement of financial condition, with a few exceptions.

The recognition provisions of SFAS No. 158 are effective for fiscal years ending after December 31, 2006, or March 31, 2007, as to the Company. SFAS No. 158 is to be applied as of the end of the year adopted. Retrospective application is prohibited.

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

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

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

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


11


Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the nine and three month periods ended December 31, 2006 and 2005


5.
Recent Accounting Developments (continued)

SAB No. 108 established an approach that requires quantification of financial statement misstatements based on the effects of the misstatement on each of the Company’s financial statements and the related financial statement disclosures.  This approach is commonly referred to as the “dual approach” because it requires quantification of errors under both the roll-over and iron curtain methods. 

SAB No. 108 allows a registrant to initially apply the dual approach either by (1) retroactively adjusting prior financial statements as if the dual approach had always been used, or by (2) recording the cumulative effect of initially applying the dual approach as adjustments to the carrying values of assets and liabilities as of the beginning of its fiscal year (April 1, 2006, as to the Company) with an offsetting adjustment recorded to the opening balance of retained earnings. Use of this “cumulative effect” transition method requires detailed disclosure of the nature and amount of each individual error being corrected through the cumulative adjustment and how and when it arose.

Management is currently evaluating the requirements of SAB No. 108 but does not expect it to have a material adverse effect on the Company’s consolidated statements of financial position or results of operations.

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



12


Wayne Savings Bancshares, Inc.

ITEM 2
  
 
CONDITION AND RESULTS OF OPERATIONS
  


Average Balance Sheet

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

   
For the nine months ended December 31,
  
   
2006
  
2005
  
   
Average
      
Average
  
Average
      
Average
  
   
Balance
  
Interest
  
Rate
  
Balance
  
Interest
  
Rate
  
   
(Dollars in thousands)
  
Interest-earning assets:
                                      
Loans receivable, net1 
  
$
236,917
  
$
11,924
    
6.71
%
$
219,668
  
$
10,351
    
6.28
%
Mortgage-backed
                                     
securities2 
    
62,637
    
2,327
    
4.95
    
54,229
    
1,462
    
3.59
  
Investment securities
    
66,724
    
2,082
    
4.16
    
76,906
    
2,296
    
3.98
  
Interest-bearing deposits3 
    
11,705
    
360
    
4.10
    
15,001
    
351
    
3.12
  
Total interest-
                                      
earning assets   
    
377,983
    
16,693
    
5.89
    
365,804
    
14,460
    
5.27
  
Non-interest-earning assets 
    
22,781
                
25,103
              
                                       
Total assets 
  
$
400,764
              
$
390,907
              
                                       
Interest-bearing liabilities:
                                      
Deposits 
  
$
331,637
    
7,194
    
2.89
  
$
324,300
    
5,201
    
2.14
  
Borrowings 
    
30,247
    
1,038
    
4.58
    
27,340
    
764
    
3.73
  
Total interest-
                                      
bearing liabilities
   
361,884
    
8,232
    
3.03
    
351,640
    
5,965
    
2.26
  
Non-interest bearing
                                      
liabilities
   
3,221
                
1,662
              
Total liabilities
   
365,105
                
353,302
              
Stockholders’ equity 
    
35,659
                
37,605
              
Total liabilities and
                                      
stockholders’ equity 
  
$
400,764
              
$
390,907
              
Net interest income   
        
$
8,461
              
$
8,495
        
Interest rate spread4      
                
2.86
%
              
3.01
%
Net yield on interest-
                                      
earning assets5      
                
2.98
%
              
3.10
%
Ratio of average interest-
                                      
earning assets to average
                                      
interest-bearing liabilities    
                
104.45
%
              
104.03
%
_______________________________________________________
1
Includes non-accrual loan balances.
2 
Includes mortgage-backed securities designated as available for sale.
3
Includes federal funds sold and interest-bearing deposits in other financial institutions.
4
Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
5
Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.


13


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

Average Balance Sheet - (continued)



   
For the three months ended December 31,
  
   
2006
  
2005
  
   
Average
      
Average
  
Average
      
Average
  
   
Balance
  
Interest
  
Rate
  
Balance
  
Interest
  
Rate
  
   
(Dollars in thousands)
  
Interest-earning assets:
                                      
Loans receivable, net1
  
$
238,683
  
$
4,048
    
6.78
%
$
227,198
  
$
3,626
    
6.38
%
Mortgage-backed
                                     
securities2 
    
66,485
    
846
    
5.09
    
50,747
    
483
    
3.81
  
Investment securities
   
61,419
    
627
    
4.08
    
75,893
    
763
    
4.02
  
Interest-bearing deposits3 
    
14,261
    
158
    
4.43
    
12,333
    
109
    
3.54
  
Total interest-
                                      
earning assets
   
380,848
    
5,679
    
5.96
    
366,171
    
4,981
    
5.44
  
Non-interest-earning assets
    
22,782
                
24,973
              
                                       
Total assets
 
$
403,630
              
$
391,144
              
                                       
Interest-bearing liabilities:
                                      
Deposits
 
$
329,691
    
2,545
    
3.09
  
$
326,088
    
1,855
    
2.28
  
Borrowings 
    
34,586
    
410
    
4.74
    
27,551
    
262
    
3.80
  
Total interest-
                                      
bearing liabilities
   
364,277
    
2,955
    
3.24
    
353,639
    
2,117
    
2.39
  
Non-interest bearing
                                      
Liabilities
    
3,838
                
1,603
              
Total liabilities
   
368,115
                
355,242
              
Stockholders’ equity 
    
35,515
                
35,902
              
Total liabilities and
                                      
stockholders’ equity 
  
$
403,630
              
$
391,144
              
Net interest income 
        
$
2,724
              
$
2,864
        
Interest rate spread4   
                
2.72
%
              
3.05
%
Net yield on interest-
                                      
earning assets5  
                
2.86
%
              
3.13
%
Ratio of average interest-
                                      
earning assets to average
                                      
interest-bearing liabilities   
                
104.55
%
              
103.54
%

____________________________________________________

 
1
Includes non-accrual loan balances.
2
Includes mortgage-backed securities designated as available for sale.
3
Includes federal funds sold and interest-bearing deposits in other financial institutions.
4
Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.
5
Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.


14


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Discussion of Financial Condition Changes from March 31, 2006 to December 31, 2006

At December 31, 2006, the Company had total assets of $409.0 million, an increase of $5.3 million, or 1.3%, from March 31, 2006 levels.

Liquid assets, consisting of cash, federal funds sold, interest-bearing deposits and investment securities, decreased by $7.8 million, or 8.9%, to $79.6 million at December 31, 2006, due primarily to sales and maturities of investment securities totaling $16.3 million. In addition to maturities of available for sale investment securities totaling $11.1 million, investment securities held to maturity decreased $5.2 million due to the maturity of a $2.5 million corporate bond, coupled with management’s decision to sell another $2.5 million corporate bond due to deterioration of the credit rating to sub-investment level. Additionally, the interest-bearing deposits in other financial institutions decreased $2.7 million.

Mortgage-backed securities increased by $8.0 million, or 14.4%, during the nine months ended December 31, 2006. Due to a decline in loan demand, management elected to use proceeds from sales and maturities of investment securities to fund purchases of mortgage-backed securities, totaling $15.6 million during the period. In addition, the market value of the mortgage-backed securities portfolio increased by $0.3 million. Such purchases and the market value increase were partially offset by principal repayments totaling $7.9 million.

At December 31, 2006 loans receivable increased by $5.4 million, or 2.3%, compared to March 31, 2006, as the Bank originated and retained $44.1 million of loans and received payments of $38.6 million. Rather than reinvest funds from repayments on loans in long-term, fixed-rate residential loans, the lending division has focused on the origination of shorter-term and adjustable-rate commercial and commercial real estate loans. The Company believes that investing in shorter-term and adjustable-rate commercial loans positions the Company more favorably from an interest rate risk management perspective. The composition of the loan portfolio has changed during the nine months ended December 31, 2006, due to a net decrease of $5.4 million in residential and construction mortgage loans, offset by increases in nonresidential real estate loans of $8.1 million and a net increase in commercial loans of $2.6 million in connection with the Bank’s increased emphasis on commercial lending.

 
  
December 31, 2006
  
March 31, 2006
  
 
  
(Dollars in thousands)
  
Mortgage loans:
                          
One- to four-family residential(1)
  
$
145,107
    
59.33
%
$
149,134
    
62.40
%
Residential construction loans
   
3,306
    
1.35
    
4,675
    
1.96
  
Multi-family residential
   
7,652
    
3.13
    
7,930
    
3.32
  
Non-residential real estate/land(2)
    
58,911
    
24.09
    
50,778
    
21.25
  
Total mortgage loans
   
214,976
    
87.90
    
212,517
    
88.93
  
Other loans:
                          
Consumer loans(3) 
    
5,435
    
2.22
    
4,901
    
2.05
  
 Commercial business loans 
    
24,153
    
9.88
    
21,550
    
9.02
  
Total other loans 
    
29,588
    
12.10
    
26,451
    
11.07
  
Total loans before net items
   
244,564
    
100.00
%
  
238,968
    
100.00
%
Less:
                          
Loans in process
   
1,892
          
1,729
        
Deferred loan origination fees
    
431
          
443
        
Allowance for loan losses 
    
1,490
          
1,484
        
Total loans receivable, net
  
$
240,751
        
$
235,312
        
Mortgage-backed securities, net(4) 
  
$
63,776
        
$
55,731
        
____________________________________
(1)
Includes equity loans collateralized by second mortgages in the aggregate amount of $19.9 million and $20.9 million as of December 31, 2006 and March 31, 2006, respectively. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.
(2)
Includes land loans of $197,000 and $674,000 as of December 31, 2006 and March 31, 2006, respectively.
(3)
Includes second mortgage loans of $449,000 and $783,000 as of December 31, 2006 and March 31, 2006, respectively.
(4)  Includes mortgage-backed securities designated as available for sale. 
 

15


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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

Non-performing loans amounted to $815,000 at December 31, 2006, compared with $772,000 in non-performing loans at March 31, 2006. Such loans consisted, on both dates, of primarily residential mortgage loans. Historically, the Company generally has not recognized significant losses on non-performing loans secured by residential mortgages. The following table sets forth information regarding our past due, nonaccrual and impaired loans and real estate acquired through foreclosure as of December 31, 2006 and March 31, 2006.

   
December 31,
  
March 31,
  
   
2006
  
2006
  
   
(Dollars in thousands)
  
Past due loans 30-89 days:
              
Mortgage loans:
              
One- to four-family residential
  
$
374
  
$
553
  
Nonresidential
    
-
    
-
 
Land
    
-
    
-
 
Non-mortgage loans:
              
Commercial business loans
    
59
    
72
  
Consumer loans
    
8
    
1
  
   
$
441
  
$
626
 
               
Non-performing loans:
              
Mortgage loans:
              
One- to four-family residential
    
815
    
725
  
All other mortgage loans
    
-
    
-
 
Non-mortgage loans:
              
Commercial business loans
    
-
    
47
  
Consumer
    
-
    
-
 
Total non-performing loans
    
815
    
772
  
Total real estate acquired through foreclosure
    
-
    
156
  
Total non-performing assets
  
$
815
  
$
928
 
               
Total non-performing loans to net
              
loans receivable
    
0.34
%
  
0.33
%
Total non-performing loans to total assets
    
0.20
%
  
0.19
%
Total non-performing assets to total assets
    
0.20
%
  
0.23
%

 


16


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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

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

 
 For the nine months ended
For the year ended
  
 
  
December 31, 2006
  
March 31, 2006
  
 
  
(Dollars in thousands)
  
           
Loans receivable, net
 
$
240,751
  
$
235,312
  
Average loans receivable, net  
  
$
236,917
  
$
222,944
  
Allowance balance (at beginning of period)
 
$
1,484
  
$
1,374
  
Charge-offs:
              
Mortgage loans:
              
One- to four-family
    
(46
)
  
(73
)
Residential construction
   
-
    
-
  
Multi-family residential 
    
-
    
-
  
Non-residential real estate and land  
    
(15
)
  
-
  
Other loans:
              
Consumer 
    
(21
)
  
(75
)
Commercial 
    
-
    
(10
)
Gross charge-offs
   
(82
)
  
(158
)
Recoveries:
              
Mortgage loans:
              
One- to four-family
    
1
    
14
  
Residential construction
    
-
    
-
  
Multi-family residential 
    
-
    
-
  
Non-residential real estate and land
    
-
    
-
  
Other loans:
              
Consumer  
    
17
    
35
  
Commercial 
    
-
    
8
  
Gross recoveries  
    
18
    
57
  
Net charge-offs 
    
(64
)
  
(101
)
Provision charged to operations
    
70
    
211
  
Allowance for loans losses balance (at end
              
of period) 
  
$
1,490
  
$
1,484
  
Allowance for loan losses as a percent of loans
              
receivable, net at end of period  
    
0.62
%
  
0.63
%
Net loans charged off as a percent of average
             
loans receivable, net 
    
0.03
%
  
0.05
%
Ratio of allowance for loan losses to non-
              
performing loans at end of period 
    
182.82
%
  
192.23
%


Deposits totaled $335.4 million at December 31, 2006, an increase of $2.9 million, or 0.9%, from $332.6 million at March 31, 2006. Savings deposits decreased by $9.1 million offset by an increase in money market deposits of $3.5 million and an increase in certificates of deposit of $9.5 million.

Borrowings totaled $34.5 million at December 31, 2006 as compared with $32.8 million at March 31, 2006. The Company increased its borrowings and restructured short-term variable-rate borrowings into lower cost fixed-rate borrowings during the December 31, 2006 nine month period.


17


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


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

Stockholders’ equity decreased by $234,000, or 0.7%, during the nine months ended December 31, 2006, due primarily to the purchase of treasury stock of $2.0 million and dividends paid of $1.2 million, which were partially offset by net earnings of $1.6 million, a decrease in unrealized losses on available for sale securities of $598,000 and proceeds from stock options exercised of $602,000.

Comparison of Operating Results for the Nine Month Periods Ended December 31, 2006 and 2005

General

Net earnings totaled $1.6 million for the nine months ended December 31, 2006, an increase of $562,000, or 52.1%, compared to net earnings of $1.1 million for the nine months ended December 31, 2005. The increase in net earnings was primarily attributable to a decrease in general, administrative and other expense of $1.1 million, or 12.7%, partially offset by an increase in federal income taxes of $380,000, or 135.2% and an increase in provision for loan losses of $70,000.

Interest Income

Interest income increased by $2.2 million, or 15.4%, to $16.7 million for the nine months ended December 31, 2006, compared to the same period in 2005. This increase was due primarily to an increase in the weighted-average yield on interest-earning assets to 5.89% from 5.27% for the nine-month period ended December 31, 2005. Additionally, the average balance of interest-earning assets outstanding increased by $12.2 million to $378.0 million for the nine months ended December 31, 2006, from $365.8 million for the comparable period ended December 31, 2005. The yield increase was primarily due to an increase in the prime rate over the past year and the corresponding impact on the Company’s interest-earning assets, particularly investment securities and interest-bearing deposits.

Interest income on loans increased by $1.6 million, or 15.2%, for the nine months ended December 31, 2006, compared to the same period in 2005, due primarily an increase in the average balance of loans outstanding period to period of $17.2 million, or 7.9%, to $236.9 million for the 2006 period, coupled with an increase in the weighted-average yield of 43 basis points to 6.71% for the nine months ended December 31, 2006.

Interest income on mortgage-backed securities increased by $865,000, or 59.2%, during the nine months ended December 31, 2006, compared to the same period in 2005, due primarily to an increase of 136 basis points in the weighted-average yield, to 4.95% in the 2006 period as compared to 3.59% for the comparable 2005 period. The slowdown of prepayments caused premium amortization to decrease, resulting in an increase in interest income on mortgage-backed securities. In addition to the increased weighted-average rate, the average balance increased by $8.4 million, or 15.5% over the nine months ended December 31, 2006 compared to the same period in 2005.

Interest income on investment securities decreased by $214,000, or 9.3%, during the nine-months ended December 31, 2006, compared to the same period in 2005, reflecting a decrease in the average balance of $10.2 million, or 13.2%, to $66.7 million from $76.9 million during the comparable 2005 period, offset by an increase in the weighted-average yield to 4.16% from 3.98% for the nine month period in 2005.

Interest income on interest-bearing deposits increased by $9,000, or 2.6%, for the nine months ended December 31, 2006, compared to the same period in 2005, due primarily to an increase in the weighted-average yield of 98 basis points, to 4.10% for the 2006 period from 3.12% for the nine months ended December 31, 2005, offset by a decrease in the average balance outstanding of $3.3 million, or 22.0%.


18


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison of Operating Results for the Nine Month Periods Ended December 31, 2006 and 2005 (continued)

Interest Expense

Interest expense totaled $8.2 million for the nine months ended December 31, 2006, an increase of $2.3 million, or 38.0%, over the nine months ended December 31, 2005. The increase resulted from a 77 basis point increase in the weighted-average cost of funds to 3.03% for the 2006 period, coupled with an increase in the average balance of deposits and borrowings outstanding of $10.2 million, or 2.9%, to $361.9 million for the nine-month period ended December 31, 2006.

Interest expense on deposits totaled $7.2 million for the nine months ended December 31, 2006, an increase of $2.0 million, or 38.3%, compared to the nine months ended December 31, 2005, as a result of a 75 basis point increase in the weighted-average cost of deposits to 2.89% for the 2006 period, coupled with an increase in the average balance outstanding of $7.3 million, or 2.3%, to $331.6 million for the 2006 period.
 
Interest expense on borrowings totaled $1.0 for the nine months ended December 31, 2006, an increase of $274,000, or 35.9%, over the 2005 period, primarily due to an increase in the weighted-average yield of 85 basis points, to 4.58% for the nine months ended December 31, 2006, coupled with an increase in the average balance outstanding of $2.9 million, or 10.6%.

Net Interest Income

Net interest income totaled $8.5 million for the nine months ended December 31, 2006, a decrease of $34,000, or 0.4%, compared to the nine month period ended December 31, 2005. The average interest rate spread decreased to 2.86% for the nine months ended December 31, 2006 from 3.01% for the nine months ended December 31, 2005. The net interest margin decreased to 2.98% for the nine months ended December 31, 2006 from 3.10% for the nine months ended December 31, 2005.

Provision for Losses on Loans

Management recorded a $70,000 provision for losses on loans for the nine-month period ended December 31, 2006. The Company did not record a provision for losses on loans for the nine month period ended December 31, 2005. This increase was primarily due to the shift in the composition of the loan portfolio discussed above. To the best of management’s knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of December 31, 2006.

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, gain on sale of loans, service fees and charges on deposit accounts decreased by $31,000, or 2.3%, for the nine months ended December 31, 2006, as compared with the nine months ending December 31, 2005. Gain on sale of loans decreased by $68,000 due to management’s decision to retain mortgage loans originated in the portfolio instead of selling them into the secondary market. The decrease in income on the cash surrender value of life insurance of $80,000, or 32.4%, was due primarily to the $63,000 benefit received from the bank owned life insurance policy received in fiscal 2006 and a decrease in the average balance on these policies. These decreases were partially offset by an increase of $117,000, or 11.6%, in service fees, charges and other operating income, which was mainly comprised of an increase in trust income.


19


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison of Operating Results for the Nine Month Periods Ended December 31, 2006 and 2005 (continued)

General, Administrative and Other Expense

General, administrative and other expense decreased by $1.1 million, or 12.7%, to $7.4 million for the nine months ended December 31, 2006 compared to the nine months ended December 31, 2005. Employee compensation and benefits expense decreased by $891,000, or 17.6%, due primarily to an unanticipated pension expense of $438,000 recognized during the nine months ended December 31, 2005, as a result of the death of Company’s former chairman and Chief Executive Officer and management’s successful efforts to reduce the number of full time equivalent employees from 126 at December 31, 2005 to 112 at December 31, 2006. The majority of this reduction occurred through attrition. Additionally, during the nine-month period ended December 31, 2006, management undertook an initiative to enhance the Bank’s sales culture at the branch manager level. In connection with this initiative several employees left the Bank. Franchise taxes were reduced by $217,000, or 55.1%, due primarily to a receivable from an amendment of a prior year return of $97,000 coupled with the effects of the treasury stock repurchase programs from prior years. These decreases were offset by an increase of $28,000, or 2.0%, in occupancy and equipment expense, which was due primarily to data processing expenses needed to facilitate growth in internet banking, the implementation of check imaging technology and increased building maintenance, insurance and taxes at the Company’s branches.

Federal Income Taxes

Federal income tax expense was $661,000 for the nine months ended December 31, 2006, an increase of $380,000, or 135.2%, compared to the same period in 2005, primarily due to the $942,000, or 69.3%, increase in earnings before taxes. The difference in the effective tax rate from the 34% statutory rate was mainly due to the beneficial effects of income from the cash surrender value on life insurance and other tax-exempt obligations.


Comparison of Operating Results for the Three Month Periods Ended December 31, 2006 and 2005

General

Net earnings totaled $563,000 for the quarter ended December 31, 2006, an increase of $392,000, or 229.2%, compared to net earnings of $171,000 for the quarter ended December 31, 2005. The increase in net earnings was primarily attributable to a decrease in general, administrative and other expense of $831,000, or 26.1%, offset by an increase in federal income taxes of $255,000 and a decrease of $140,000, or 4.9%, in net interest income.

Interest Income

Interest income increased by $698,000, or 14.0%, to $5.7 million for the three months ended December 31, 2006, compared to the same period in 2005. This increase was primarily due to an increase in the weighted-average yield on interest-earning assets to 5.96% for the 2006 period from 5.44% for the three-month period ended December 31, 2005. The increase in yield was primarily due to an increase in the prime rate over the past year and the corresponding impact on the Company’s interest-earning assets, particularly short-term investment securities and interest-bearing deposits.

Interest income on loans increased by $422,000, or 11.6%, for the three months ended December 31, 2006, compared to the same period in 2005, due primarily to an increase an increase in the weighted-average yield of 40 basis points to 6.78% coupled with an increase in the average balance of loans outstanding period to period of $11.5 million, or 5.1%, to $238.7 million for the 2006 period.


20


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison of Operating Results for the Three Month Periods Ended December 31, 2006 and 2005 (continued)

Interest Income (continued)

Interest income on mortgage-backed securities increased by $363,000, or 75.2%, during the three months ended December 31, 2006, compared to the same period in 2005, due primarily to an increase of 128 basis points in the weighted-average yield, to 5.09% for the 2006 period as compared to 3.81% for the comparable 2005 period. The slowdown of prepayments caused premium amortization to decrease, resulting in an increase in interest income on mortgage-backed securities. In addition to the increased weighted-average rate, the average balance outstanding increased by $15.7 million, or 31.0%.
 
Interest income on investment securities decreased by $136,000, or 17.8%, during the three months ended December 31, 2006, compared to the same period in 2005, reflecting a decrease in the average balance outstanding of $14.5 million, or 19.1%, to $61.4 million in the 2006 period from $75.9 million during the comparable 2005 period, partially offset by an increase in the weighted-average yield of 6 basis points to 4.08%.

Interest income on interest-bearing deposits increased by $49,000, or 45.0%, for the three months ended December 31, 2006, due primarily to an increase in the weighted-average yield of 89 basis points to 4.43% from 3.54% for the quarter ended December 31, 2005, coupled with an increase in the average balance outstanding of $1.9 million, or 15.6%.

Interest Expense

Interest expense totaled $3.0 million for the three months ended December 31, 2006, an increase of $838,000, or 39.6%, compared to the three months ended December 31, 2005. The increase resulted from an 85 basis point increase in the average cost of funds to 3.24% for the 2006 period, coupled with an increase in the average balance of deposits and borrowings outstanding of $10.6 million, or 3.0%, to $364.3 million for the three-month period ended December 31, 2006.

Interest expense on deposits totaled $2.5 million for the three months ended December 31, 2006, an increase of $690,000, or 37.2%, compared to the three months ended December 31, 2005, as a result of an increase in the weighted-average cost of deposits of 81 basis points to 3.09% for the 2006 period, coupled with an increase in the average balance outstanding of $3.6 million, or 1.1%, to $329.7 million for the 2006 period.
 
Interest expense on borrowings totaled $410,000 for the three months ended December 31, 2006, an increase of $148,000, or 56.5%, over the 2005 period, primarily due to an increase in the average balance outstanding of $7.0 million, or 25.5%, coupled with an increase in the weighted-average cost of 94 basis points to 4.74% for the three months ended December 31, 2006.

Net Interest Income

Net interest income totaled $2.7 million for the three months ended December 31, 2006, a decrease of $140,000, or 4.9%, from the three month period ended December 31, 2005. The average interest rate spread decreased to 2.72% for the three months ended December 31, 2006 from 3.05% for the three months ended December 31, 2005. The net interest margin decreased to 2.86% for the three months ended December 31, 2006 from 3.13% for the three months ended December 31, 2005. The interest rate spread decrease was primarily a result of the Bank’s cost of funds increasing more rapidly than the yield on the Bank’s interest-earning assets, due primarily to the shorter-term nature of the Bank’s deposits, competition for deposits in the Bank’s local market area and consumer preference for higher yielding certificates of deposit.


21


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Comparison of Operating Results for the Three Month Periods Ended December 31, 2006 and 2005 (continued)

Provision for Losses on Loans 

Management recorded a $10,000 provision for losses on loans for the three-month period ended December 31, 2006. The Company did not record a provision for losses on loans for the three month period ending December 31, 2005. This increase was primarily due to the shift in the composition of the loan portfolio discussed above. To the best of management’s knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of December 31, 2006.

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, gain on sale of loans, service fees, and charges on deposit accounts decreased by $34,000, or 7.3%, for the three months ended December 31, 2006 as compared with the quarter ended December 31, 2005. The cash surrender value of life insurance decreased by $65,000, or 53.3%, mainly due to the benefit received from the bank owned life insurance policy in fiscal 2006. These decreases were offset by an increase of $30,000, or 8.7%, in service fees, charges and other operating income, which was mainly comprised of general depositor service charges coupled with an increase in trust income.

General, Administrative and Other Expense

General, administrative and other expense decreased by $831,000, or 26.1%, to $2.4 million for the three months ended December 31, 2006 compared to the three months ended December 31, 2005. Employee compensation and benefits expense decreased by $625,000, or 31.9%, due primarily to an unanticipated pension expense of $420,000 as a result of the death of Company’s former chairman and Chief Executive Officer in fiscal 2006, coupled with management’s successful efforts to reduce the number of full time equivalent employees from 126 at December 31, 2005 to 112 at December 31, 2006. The majority of this reduction occurred through attrition. Franchise taxes were reduced by $154,000, or 115.8%, as a result of a receivable created by an amendment of a prior year return of $97,000 in addition to the treasury stock repurchase programs from prior years. A decrease of $46,000, or 8.0%, in other operating expense was due primarily to a decrease in marketing and charitable contribution expenditures.

Federal Income Taxes

Federal income tax expense was $229,000 for the three months ended December 31, 2006, an increase of $255,000 compared to the same period in 2005, primarily due to the $647,000 increase in earnings before taxes. The difference in the effective tax rate from the 34% statutory rate is mainly due to the beneficial effects of income from the cash surrender value on life insurance and other tax-exempt obligations.



22


Wayne Savings Bancshares, Inc.

MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS (CONTINUED)


Forward-Looking Statements

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

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

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

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


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.


23


Wayne Savings Bancshares, Inc. 


Legal Proceedings

Not applicable

Risk Factors

Not applicable

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 December 31, 2006.
 
       
Total # of
Maximum # of shares
   
Total
Average
shares purchased
which may still be
   
# of shares
price paid
as part of the
purchased as part
 
Period
purchased
per share
announced plan
of the announced plan
           
 
October 1-31, 2006
-    
$  -     
-    
84,602
 
November 1-30, 2006
40,000
$14.76
40,000
44,602
 
December 1-31, 2006
38,800
$14.61
38,800
5,802

Notes to the Table:

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

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



Defaults Upon Senior Securities

Not applicable

Submission of Matters to a Vote of Security Holders

None



24


Wayne Savings Bancshares, Inc. 

PART II (CONTINUED)


Other Information
Not applicable

Exhibits


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

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

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


25



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:
     February 8, 2007
  
By:
/s/ Phillip E. Becker
       
Phillip E. Becker
       
President and Chief Executive Officer
         
         
         
Date:
    February 8, 2007
  
By:
/s/ H. Stewart Fitz Gibbon III
       
H. Stewart Fitz Gibbon III
       
Executive Vice President and
       
Chief Financial Officer



26