UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D. C. 20549

FORM 10-Q

(Mark One)

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

For the quarterly period ended                               June 30, 2009                           

OR

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

For the transition period from ____________ to _______________

Commission File No. 0-23433

WAYNE SAVINGS BANCSHARES, INC.

(Exact name of registrant as specified in its charter)

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

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

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

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

Large accelerated filer ¨    Accelerated filer ¨    Non-accelerated filer  ¨  Smaller Reporting Company  ý  

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

Yes ¨               No  ý  

As of August 7, 2009, the latest practicable date, 3,004,113 shares of the registrant’s common stock, $.10 par value, were issued and outstanding.

Wayne Savings Bancshares, Inc.

Index

		Page
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income (Loss)	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	24
Item 3	Quantitative and Qualitative Disclosures About Market Risk	33
Item 4T	Controls and Procedures	33
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	34
Item 1A	Risk Factors	34
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	34
Item 3	Defaults Upon Senior Securities	34
Item 4	Submission of Matters to a Vote of Security Holders	34
Item 5	Other Information	34
Item 6	Exhibits	35
SIGNATURES		36

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	June 30, 2009			March 31, 2009
	(Unaudited)
ASSETS
Cash and due from banks	$	7,885		$	2,935
Interest-bearing demand deposits		3,640			3,855
Cash and cash equivalents		11,525			6,790
Available-for-sale securities		114,201			117,733
Held-to-maturity securities		836			952
Loans receivable – net of allowance for loan losses of $2,437 and $2,484 at June 30, 2009 and March 31, 2009, respectively		251,562			254,326
Premises and equipment		7,649			7,553
Federal Home Loan Bank stock		5,025			5,025
Foreclosed assets held for sale  -  net		926			594
Accrued interest receivable		1,422			1,675
Bank-owned life insurance		6,570			6,508
Goodwill		1,719			1,719
Other intangible assets		445			471
Other assets		2,199			1,048
Prepaid federal income taxes		–			27
Total assets	$	404,079		$	404,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand	$	56,957		$	53,085
Savings and money market		85,237			83,759
Time		165,819			172,690
Total deposits		308,013			309,534
Other short term borrowings		10,229			10,154
Federal Home Loan Bank advances		47,000			46,000
Accrued interest payable and other liabilities		2,593			3,237
Accrued federal income taxes		58			–
Deferred federal income taxes		1,223			1,083
Total liabilities		369,116			370,008
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		36,023			36,028
Retained earnings		13,107			12,726
Shares acquired by ESOP		(875	)		(899	)
Accumulated other comprehensive income, net of tax effects		840			690
Treasury stock, at cost - 974,618 common shares		(14,530	)		(14,530	)
Total stockholders’ equity		34,963			34,413
Total liabilities and stockholders’ equity	$	404,079		$	404,421

See accompanying notes to condensed consolidated financial statements. 

2

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income

For the three months ended June 30, 2009 and 2008

(In thousands)

(Unaudited)

	2009		2008
Interest and Dividend Income
Loans	$	3,682	$	3,814
Securities		1,403		1,519
Dividends on Federal Home Loan Bank stock and other		57		99
Total interest and dividend income		5,142		5,432
Interest Expense
Deposits		1,382		2,096
Other short term borrowings		10		21
Federal Home Loan Bank advances		502		470
Total interest expense		1,894		2,587
Net Interest Income		3,248		2,845
Provision for Loan Losses		165		61
Net Interest Income After Provision for Loan Losses		3,083		2,784
Noninterest Income
Net gains on loan sales		63		-
Trust income		37		46
Earnings on bank-owned life insurance		57		55
Service fees, charges and other operating		344		328
Total noninterest income		501		429
Noninterest Expense
Salaries and employee benefits		1,429		1,382
Occupancy and equipment		465		501
Federal deposit insurance premiums		339		9
Franchise taxes		88		102
Loss on disposal and impairment provision of  real estate acquired through foreclosure		11		-
Amortization of intangible assets		25		27
Other		548		494
Total noninterest expense		2,905		2,515
Income Before Income Taxes		679		698
Provision for Federal Income Taxes		147		167
Net Income	$	532	$	531
Basic Earnings Per Share	$	.18	$	.18
Diluted Earnings Per Share	$	.18	$	.18
Dividends Per Share	$	.05	$	.12

See accompanying notes to condensed consolidated financial statements. 

3

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income (Loss)

For the three months ended June 30, 2009 and 2008

(In thousands)

(Unaudited)

	2009		2008
Net income	$	532	$	531
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities, net of related
taxes (benefits) of $77 and $(667) during the respective periods		150		(1,294	)
Comprehensive income (loss)	$	682	$	(763	)
Accumulated other comprehensive income (loss)	$	840	$	(587	)

See accompanying notes to condensed consolidated financial statements. 

4

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the three months ended June 30, 2009 and 2008

(In thousands)

(Unaudited)

	2009			2008
Operating Activities
Net income	$	532		$	531
Items not requiring (providing) cash
Depreciation and amortization		145			167
Provision for loan losses		165			61
Amortization of premiums and discounts on securities		(17	)		(28	)
Amortization of mortgage servicing rights		11			9
Amortization of deferred loan origination fees		(37	)		(14	)
Amortization of  intangible assets		25			27
Deferred income taxes		63			(35	)
Net gains on sales of loans		(63	)		––
Proceeds from sale of loans in the secondary market		2,484			––
Origination of loans for sale in the secondary market		(2,468	)		––
Amortization expense of stock benefit plan		13			32
Loss on disposal and impairment provision of real estate acquired through foreclosure		11			––
Federal Home Loan Bank stock dividends		––			(66	)
Increase in value of bank owned life insurance		(62	)		(59	)
Changes in
Accrued interest receivable		253			105
Other assets		(1,135	)		472
Interest payable and other liabilities		(168	)		(9	)
Net cash provided by (used in) operating activities		(248	)		1,129
Investing Activities
Purchase of  available-for-sale securities		(9,122	)		(10,235	)
Proceeds from maturities of available-for-sale securities		12,900			5,186
Proceeds from maturities of held-to-maturity securities		115			56
Net change in loans		1,812			(2,520	)
Purchase of premises and equipment		(241	)		(97	)
Proceeds from the sale of foreclosed assets		528			41
Net cash provided by (used in) investing activities		5,992			(7,569	)

See accompanying notes to condensed consolidated financial statements. 

5

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the three months ended June 30, 2009 and 2008

(In thousands)

(Unaudited)

	2009			2008
Financing Activities
Net change in deposits	$	(1,521	)	$	(2,280	)
Net change in other short-term borrowings		75			1,106
Proceeds from Federal Home Loan Bank advances		9,200			9,500
Repayments of Federal Home Loan Bank advances		(8,200	)		(7,850	)
Advances by borrowers for taxes and insurance		(418	)		(488	)
Cash dividends paid		(145	)		(352	)
Treasury stock purchases		–			(48	)
Net cash used in financing activities		(1,009	)		(412	)
Increase (decrease) in Cash and Cash Equivalents		4,735			(6,852	)
Cash and Cash equivalents, Beginning of period		6,790			13,063
Cash and Cash equivalents, End of period	$	11,525		$	6,211
Supplemental Cash Flows Information       Cash Paid For:
Interest on deposits and borrowings	$	1,988		$	2,582
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale	$	871		$	69
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects	$	150		$	(1,294	)
Dividends payable	$	150		$	360

See accompanying notes to condensed consolidated financial statements. 

6

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1: Basis of Presentation

The accompanying unaudited consolidated financial statements as of June 30, 2009 and for the three months ended June 30, 2009 and 2008 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, 2009.  Reference is made to the accounting policies of the Company described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included.  The results of operations for the three month period ended June 30, 2009 are not necessarily indicative of the results which may be expected for the entire fiscal year.  The condensed consolidated balance sheet of the Company as of March 31, 2009 has been derived from the consolidated balance sheet of the Company as of that date.

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

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

Note 2: Principles of Consolidation

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

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

7

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 3: Earnings Per Share

Basic earnings per common share is computed based upon the weighted-average number of common shares outstanding during the period, less shares in the Company’s Employee Stock Ownership Plan (“ESOP”) that are unallocated and not committed to be released.  Diluted earnings per common share include the dilutive effect of all additional potential common shares issuable under the Company’s stock option plan.  The computations are as follows:

	For the three months ended
	June 30,
	2009		2008
Weighted-average common shares
outstanding (basic)		2,911,956		2,905,931
Dilutive effect of assumed exercise
of stock options		–		–
Weighted-average common shares
outstanding (diluted)		2,911,956		2,905,931

None of the outstanding options were included in the diluted earnings per share calculation for the three month periods ended June 30, 2009 and 2008, as the average fair value of the shares was less than the option exercise prices.

Note 4: Stock Option Plan

In fiscal 2004, the Company adopted a Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to authorized common stock.  As of June 30, 2009, all options under the 2004 Plan have been granted and (excluding forfeited options), are subject to exercise at the discretion of the grantees, and will expire in fiscal 2014 unless otherwise exercised or forfeited.

The Company accounts for the stock plan in accordance with the provisions of SFAS No. 123(R), “Share Based Payment.”  SFAS No. 123(R) requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date.  Compensation cost is then recognized over the vesting period.  There were no options granted during the three months ended June 30, 2009 and 2008.  There was no compensation expense recognized for the stock option plan during the three  month periods ended June 30, 2009 and 2008, as all options were fully vested prior to these periods.

8

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

A summary of the status of the Company’s stock option plan as of and for the three months ended June 30, 2009 and for the years ended March 31, 2009 and 2008, is presented below:

	Three months ended June 30,				Year ended March 31,
	2009				2009					2008
	Shares		Weighted Average exercise price		Shares			Weighted Average exercise price		Shares			Weighted Average exercise price
Outstanding at beginning of period		94,020	$	13.95		104,224		$	13.95		114,224		$	13.95
Granted		–		–		–			–		–			–
Exercised		–		–		–			–		–			–
Forfeited		–		–		(10,204	)		13.95		(10,000	)		13.95
Outstanding at end of period		94,020	$	13.95		94,020		$	13.95		104,224		$	13.95
Options exercisable at period-end		94,020	$	13.95		94,020		$	13.95		104,224		$	13.95

The following information applies to options outstanding at June 30, 2009:

Number outstanding	94,020
Exercise price on all remaining options outstanding	$13.95
Weighted-average remaining contractual life	4.75 years

Note 5: Regulatory Matters

The Bank is subject to certain restrictions on the amount of dividends that it may declare without prior regulatory approval.  At June 30, 2009, the Bank had regulatory approval for $1.1 million of retained earnings for dividend declaration.

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

9

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of tangible and core capital (as defined) to adjusted total assets (as defined).  Management believes, as of June 30, 2009, that the Bank met all capital adequacy requirements to which it is subject.

As of June 30, 2009, the most recent notification from the Office of Thrift Supervision categorized the Bank as well capitalized under the regulatory framework for prompt corrective action.  To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table below.  There are no conditions or events since that notification that management believes have changed the Bank’s category.

The Bank’s actual capital amounts and ratios as of June 30, 2009 and March 31, 2009 are presented in the following table.

	Actual					For Capital Adequacy Purposes					To Be Well Capitalized Under Prompt Corrective Action Provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
	(Dollars in thousands)
As of June 30, 2009
Tangible capital	$	30,973		7.7	%	$	6,006		1.5	%	$	20,021		5.0	%
Core capital		30,973		7.7			16,017		4.0			24,026		6.0
Risk-based capital		32,686		12.4			20,060		8.0			25,075		10.0
As of March 31, 2009
Tangible capital	$	30,525		7.6	%	$	6,018		1.5	%	$	20,060		5.0	%
Core capital		30,525		7.6			16,048		4.0			24,072		6.0
Risk-based capital		32,341		12.8			20,212		8.0			25,265		10.0

10

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 6: Recent Accounting Developments

SFAS No. 141 (revised 2007), “Business Combinations” objective  is to improve the relevance, representational faithfulness and comparability of the information that a reporting entity provides in its financial reports about a business combination and its effects.  This Statement introduces new accounting concepts, and several of these changes have the potential to generate greater earnings volatility, in connection with and after an acquisition.  Some of the more significant changes include:

· Transaction costs and restructuring charges will now be expensed.

· The accounting for certain assets acquired and liabilities assumed will change significantly.  The most significant to the Company being that allowance for loan losses at acquisition date will be eliminated.

· Contingent consideration will be measured at fair value until settled.

· Equity issued in an acquisition will be valued at the closing date, as opposed to the announcement date.

· Material adjustments made to the initial acquisition will be recorded back to the acquisition date.

SFAS No. 141 (R) applies prospectively to business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008 and may not be applied before that date.  The Company adopted SFAS No. 141 (R) effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—An Amendment of ARB No. 51,” amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary.  It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements.  Before this statement was issued, limited guidance existed for reporting noncontrolling interests.  As a result, considerable diversity in practice existed.  So called minority interests were reported in the consolidated statement of financial position as liabilities or in the mezzanine section between liabilities and equity.  This Statement improves comparability by eliminating that diversity.  SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company adopted SFAS No. 160 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

SFAS No. 161, “Disclosures About Derivative Instruments and Hedging Activities—An Amendment of SFAS Statement No. 133”  was issued in March 2008 and amends and expands the disclosure requirements of SFAS No. 133 to provide greater transparency about (i) how and why an entity uses derivative instruments, (ii) how derivative instruments and related hedge items are

11

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

accounted for under SFAS No. 133 and its related interpretations and (iii) how derivative instruments and related hedged items affect an entity’s financial position, results of operations and cash flows.  To meet those objectives, SFAS No. 161 requires qualitative disclosures about objectives and strategies for usingderivatives, quantitative disclosures about fair value amounts of gains and losses on derivative instruments and disclosures about credit-risk-related contingent features in derivative agreements.  SFAS No. 161 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company adopted SFAS No. 161 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

The FASB Staff Position (FSP) FAS 141(R)-1,” Accounting for Assets Acquired and Liabilities Assumed in a Business Combination That Arise from Contingencies amends and clarifies FAS 141(R), Business Combinations,” regarding the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. This FSP eliminates the distinction between contractual and noncontractual contingencies discussed in FAS 141(R), specifies whether contingencies should be measured at fair value or in accordance with FAS 5, provides application guidance on subsequent accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies and establishes new disclosure requirements.  This FSP is effective for assets or liabilities arising from contingencies in business combinations for which the acquisition date is on or after the beginning of the first annual reporting period beginning on or after December 15, 2008.  The Company has adopted the applicable standard effective April 1, 2009 without material effect on the Company’s financial position or results of operations.

The FSP FAS 157-4 —“Determining Fair Value When the Volume and Level of Activity for The Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly,” issued on April 9, 2009, provides additional guidance for estimating fair value in accordance with FASB Statement No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased.  This FSP also includes guidance on identifying circumstances that indicate a transaction is not orderly.   Even if there has been a significant decrease in the volume and level of activity regardless of valuation technique, the objective of a fair value measurement remains the same.  Fair value is the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction (that is, not a forced liquidation or distressed sale) between market participants at the measurement date under current market conditions.  This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 115-2 and FAS 124-2 and FSP FAS 107-1 and APG 28-1 are adopted concurrently.  This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The Company adopted SFAS No. 157-4 effective April 1, 2009 without material effect on the Company’s financial position or results of operations.

The FSP FAS 115-2 and FAS 124-2 — “Recognition and Presentation of Other-Than-Temporary Impairments” issued on April 9, 2009, this FSP amends FASB Statement No. 107, “Disclosures about Fair Value of Financial Instruments” and APB Opinion No. 28, “Interim Financial

12

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Reporting,” to require disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  This FSP is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 107-1 and APG 28-1 are adopted concurrently.  This FSP does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The Company adopted SFAS 115-2 and FAS 124-2 effective April 1,2009, as required, without material effect on the Company’s financial position or results of operations.

The FSP FAS 107-1 and APG 28-1 —“Interim Disclosures about Fair Value of Financial Instruments” issued on April 9, 2009 amends the other-than-temporary guidance in United States generally accepted accounting principles for debt securities to make the guidance more operational and to improve the presentation and disclosure of other-than-temporary impairments on debt and equity securities in the financial statements.  This FSP does not amend existing recognition and measurement guidance related to other-than-temporary impairments of equity securities and does not require disclosures for earlier periods presented for comparative purposes at initial adoption.  Effective for interim reporting periods ending after June 15, 2009, early adoption is permitted for periods ending after March 15, 2009 only if FSP FAS 157-4 and FSP FAS 115-2 and FAS 124-2 are adopted concurrently.  The Company adopted SFAS 107-1 and APG 28-1 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

In May 2009, the FASB issued SFAS No. 165, “Subsequent Events.”  SFAS No. 165 established standards for accounting for and disclosure of events that occur after the balance sheet date but before financial statements are issued or are available to be issued.  SFAS No. 165 is effective for periods ending after June 15, 2009.  The company adopted SFAS No. 165 effective June 30, 2009, as required, without material effect on the Company’s financial position or results of operations.

In June 2009, the FASB issued SFAS No. 166, “Accounting for Transfers of Financial Assets: an Amendment of FASB Statement No. 140.”SFAS No. 166 changes the derecognition guidance for transferors of financial assets, including entities that sponsor securitizations, to align that guidance with the original intent of SFAS No. 140, “Accounting for the Transfers and Servicing of Financial Assets and Extinguishments of Liabilities.”  SFAS No. 166 also eliminates the exemption from consolidation for qualifying special-purpose entities (QSPEs).  As a result, all existing QSPEs need to be evaluated to determine whether the QSPE should be consolidated in accordance with SFAS No. 166.

SFAS No. 166 is effective as of the beginning of a reporting entity’s first annual reporting period beginning after November 15, 2009 (April 1, 2010 as to the Company), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The recognition and measurement provisions of SFAS No. 166 must be applied to transfers that occur on or after the effective date.  Early application is prohibited.  SFAS No. 166 also requires additional disclosures about transfers of financial assets that occur both before and after the effective date.  The Company does not believe that the adoption of SFAS No. 166 will have a significant effect on its consolidated financial statements.

13

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

In June 2009, the FASB issued SFAS No.167, “Amendments to FASB Interpretation No. 46(R),” to improve how enterprises account for and disclose their involvement with variable interest entities (VIE’s), which are special-purpose entities, and other entities whose equity at risk is insufficient or lack certain characteristics.  Among other things, SFAS No. 167 changes how an entity determines whether it is the primary beneficiary of a variable interest entity (VIE) and whether that VIE should be consolidated.  SFAS No. 167 requires an entity to provide significantly more disclosures about its involvement with VIEs.  As a result, the Company must comprehensively review its involvements with VIEs and potential VIEs, including entities previously considered to be qualifying special purpose entities, to determine the effect on its consolidated financial statements and related disclosures.

SFAS No. 167 is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009 (April 1, 2010 as to the Company) and for interim periods within the first annual reporting period.  Earlier application is prohibited.  The Company does not believe that the adoption of SFAS No. 167 will have a significant effect on its consolidated financial statements.

Note 7: Subsequent Events

Subsequent events have been evaluated through August 10, 2009, which is the date the financial statements were issued.

14

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 8:                  Securities

The amortized cost and approximate fair values of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Available-for-sale Securities:
June 30, 2009:
U.S. government agencies	$	4,902	$	126	$	4	$	5,024
Mortgage-backed securities		86,715		2,239		393		88,561
State and political subdivisions		20,618		377		379		20,616
	$	112,235	$	2,742	$	776	$	114,201
June 30, 2008:
U.S. government agencies	$	17,101	$	42	$	7	$	17,136
Mortgage-backed securities		88,666		380		760		88,286
State and political subdivisions		17,913		199		248		17,864
	$	123,680	$	621	$	1,015	$	123,286

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Held-to-maturity Securities:
June 30, 2009:
U.S. government agencies	$	186	$	–	$	4	$	182
State and political subdivisions		82		7		–		89
Mortgage-backed securities		568		6		1		573
	$	836	$	13	$	5	$	844
June 30, 2008:
U.S. government agencies	$	297	$	–	$	1	$	296
State and political subdivisions		110		6		–		116
Mortgage-backed securities		777		2		3		776
	$	1,184	$	8	$	4	$	1,188

15

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The amortized cost and fair value of available-for-sale securities and held-to-maturity securities at June 30, 2009 and 2008, 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.

June 30, 2009	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One to five years	$	3,514	$	3,628	$	82	$	89
Five to ten years		2,521		2,538		–		–
After ten years		19,485		19,474		186		182
		25,520		25,640		268		271
Mortgage-backed securities		86,715		88,561		568		573
Totals	$	112,235	$	114,201	$	836	$	844

June 30, 2008	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Within one year	$	11,847	$	11,876	$	–	$	–
One to five years		3,906		3,897		110		116
Five to ten years		3,741		3,720		–		–
After ten years		15,520		15,507		297		296
		35,014		35,000		407		412
Mortgage-backed securities		88,666		88,286		777		776
Totals	$	123,680	$	123,286	$	1,184	$	1,188

16

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 $50.6 million at both June 30, 2009 and March 31, 2009.

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, 2009 and June 30, 2008 was $28.5 million and $56.9 million, which represented approximately 25% and 46%, respectively, of the Company’s aggregate available-for-sale and held-to-maturity investment portfolio.  These declines resulted primarily from changes in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these government agency, mortgage-backed and state and political subdivision securities are temporary at June 30, 2009.

Should the impairment of any of these government agency, mortgage-backed and state and political subdivision securities become other than temporary, the cost basis of the investment will be reduced and the resulting loss recognized in net income in the period the other-than-temporary impairment is identified.

17

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The following table shows the Company’s investments’ gross unrealized losses and fair value, aggregated by investment category and length of time that individual securities have been in a continuous unrealized loss position at June 30, 2009:

June 30, 2009
	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(In thousands)
U.S. government agencies	$	–	$	–	$	390	$	8	$	390	$	8
Mortgage-backed securities		10,956		172		6,464		222		17,420		394
State and political subdivisions		7,230		154		3,455		225		10,685		379
Total temporarily impaired securities	$	18,186	$	326	$	10,309	$	455	$	28,495	$	781

June 30, 2008
	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
(In thousands)
U.S. government agencies	$	1,940	$	8	$	–	$	–	$	1,940	$	8
Mortgage-backed securities		43,405		710		1,946		54		45,351		763
State and political subdivisions		9,599		248		–		–		9,599		248
Total temporarily impaired securities	$	54,944	$	966	$	1,946	$	54	$	56,890	$	1,019

18

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 9: Fair Value Measurements

The Company accounts for fair value measurements in accordance with SFAS No. 157, “Fair Value Measurements.”  SFAS No. 157 defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.

SFAS No. 157 defines fair value as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.  SFAS No. 157 also establishes a fair value hierarchy which requires an entity to maximize the use of observable inputs and minimize the use of unobservable inputs when measuring fair value.  The standard describes three levels of inputs that may be used to measure fair value:

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

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

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

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

19

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Available-for-sale Securities

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

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the SFAS No. 157 fair value hierarchy in which the fair value measurements fall at June 30, 2009 and 2008:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
					(in thousands)
June 30, 2009
U.S. government agencies	$	5,024	$	–	$	5,024	$	–
State and political subdivisions	$	88,561	$	–	$	88,561	$	–
Mortgage-backed securities	$	20,616	$	–	$	20,616	$	–
	$	114,201	$	–	$	114,201	$	–

June 30, 2008
U.S. government agencies	$	17,136	$	–	$	17,136	$	–
State and political subdivisions	$	88,286	$	–	$	88,286	$	–
Mortgage-backed securities	$	17,864	$	–	$	17,864	$	–
	$	123,286	$	–	$	123,286	$	–

20

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

Impaired Loans

At June 30, 2009, impaired loans consisted primarily of loans secured by multi-family residential real estate, nonresidential and commercial real estate.  Management has determined fair value measurements on impaired loans and foreclosed assets primarily through evaluation of appraisals performed.

Foreclosed Assets Held for Sale

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

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the SFAS No. 157 fair value hierarchy in which the fair value measurements fall at June 30, 2009 and 2008.

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
					(in thousands)
June 30, 2009 Impaired loans	$	3,085	$	–	$	–	$	3,085
Foreclosed assets		926		–		–		926
June 30, 2008 Impaired loans	$	795	$	–	$	–	$	795
Foreclosed assets		121		–		–		121

21

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

	June 30, 2009				June 30, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets
Cash and cash equivalents	$	11,525	$	11,525	$	6,211	$	6,211
Available-for-sale securities		114,201		114,201		123,286		123,286
Held-to-maturity securities		836		844		1,184		1,188
Loans, net of allowance for loan losses		251,562		257,650		244,651		249,189
Federal Home Loan Bank stock		5,025		5,025		4,958		4,958
Interest receivable		1,422		1,422		1,648		1,648
Financial liabilities
Deposits		308,013		301,945		315,451		308,776
Other short-term borrowings		10,229		10,229		8,393		8,393
Federal Home Loan Bank advances		47,000		48,119		40,150		40,668
Advances from borrowers for taxes and insurance		133		133		188		188
Interest payable		257		257		425		425

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.

22

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Loans

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

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, 2009 and 2008.

23

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Discussion of Financial Condition Changes from March 31, 2009 to June 30, 2009

At June 30, 2009, the Company had total assets of $404.1 million, a decrease of $342,000, or 0.1%, from total assets at March 31, 2009.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, increased by $1.2 million, or 1.0%, to $125.7 million at June 30, 2009.  This was primarily due to an increase of $4.8 million in cash and cash equivalents, partially offset by a decrease in available-for-sale securities of $3.5 million, or 3.0%.

Total securities decreased by $3.6 million, or 3.1%, during the three months ended June 30, 2009.  This decrease was primarily due to principal repayments of $13.0 million, partially offset by purchases of $9.1 million and an increase in the market value of available for sale investment securities of $228,000.  Purchases were mainly funded by proceeds from principal payments received from the securities portfolio.

Net loans receivable decreased by $2.8 million, or 1.1%  at June 30, 2009 compared to March 31, 2009.  The Bank originated $21.1 million of loans and received payments of $23.9 million.  Included in this loan activity are originations and sales into the secondary market of $2.5 million of 30-year fixed-rate mortgage loans.The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity.  Due to the interest rate risk associated with 30-year fixed-rate mortgage loans, management has adopted a strategy of immediately selling certain newly originated loans of this type into the secondary market to limit the accumulation of interest rate risk on the balance sheet.  In addition, management believes it appropriate to keep the secondary market channel open as a backup source of liquidity.  As part of an overall interest rate risk management strategy, based on the Company’s belief that investing in shorter-term and adjustable-rate commercial loans positions the Company more favorably from an interest rate risk management perspective, compared to the origination and retention of long term fixed-rate residential mortgages, the lending division continues to focus on the origination of shorter-term and adjustable-rate commercial and commercial real estate loans.  Consistent with this strategy, the composition of the loan portfolio has changed during the three months ended June 30, 2009, mainly due to a decrease of $1.8 million in one- to four-family loans and decrease in non-residential real estate loans of $3.4 million, offset by an increase of $3.8 million in commercial business loans.

24

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

	June 30, 2009				March 31, 2009
	(Dollars in thousands)
Mortgage loans:
One- to four-family residential(1)	$	138,980	53.94	%	$	141,285	54.40	%
Residential construction loans		2,082	0.81			1,587	0.61
Multi-family residential		8,541	3.31			8,604	3.31
Non-residential real estate/land(2)		67,296	26.12			70,725	27.23
Total mortgage loans		216,899	84.18			222,201	85.55
Other loans:
Consumer loans(3)		4,366	1.69			4,923	1.90
Commercial business loans		36,386	14.13			32,592	12.55
Total other loans		40,752	15.82			37,515	14.45
Total loans before net items		257,651	100.00	%		259,716	100.00	%
Less:
Loans in process		3,266				2,506
Deferred loan origination fees		386				400
Allowance for loan losses		2,437				2,484
Total loans receivable, net	$	251,562			$	254,326
Mortgage-backed securities, net(4)	$	89,129			$	88,788

_____________________________

(1) Includes equity loans collateralized by second mortgages in the aggregate amount of $16.5 million and $16.9 million as of  June 30, 2009 and March 31, 2009, respectively.  Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

(2) Includes land loans of $215,000 for both June 30, 2009 and March 31, 2009.

(3) Includes second mortgage loans of $1.2 million and $1.3 million as of June 30, 2009 and March 31, 2009, respectively.

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

Non-performing loans amounted to $4.4 million and $5.0 million at June 30, 2009 and March 31, 2009, respectively.  At June 30, 2009, non-performing loans consisted primarily of residential mortgage loans of approximately $1.0 million, commercial real estate loans with a combined balance of $2.8 million, $577,000 in commercial business loans and consumer loans  totaling $12,000.  At March 31, 2009, non-performing loans were comprised of $1.4 million in residential loans, $3.0 million in commercial real estate loans, commercial loans totaling $558,000 and $4,000 in consumer loans.   Foreclosed assets held for sale amounted to $926,000 at June 30, 2009 compared to $594,000 at March 31, 2009, an increase of 55.9%.   Total non-performing assets amounted to $5.3 million at June 30, 2009 compared to $5.6 million at March 31, 2009.  The decrease was mainly due to a decrease in non-performing residentialmortgage loans of $392,000 and a decrease in non-performing commercial real estate loans of $268,000.The following table sets forth information regarding our past due, nonaccrual and impaired loans and foreclosed assets held for sale as of June 30, 2009 and March 31, 2009.

25

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

	June 30, 2009			March 31, 2009
	(Dollars in thousands)
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential	$	609		$	491
Nonresidential		510			77
Non-mortgage loans:
Commercial business loans		90			–
Consumer loans		12			18
	$	1,221		$	586
Non-performing loans:
Mortgage loans:
One- to four-family residential	$	1,017		$	1,409
All other mortgage loans		2,759			3,027
Non-mortgage loans:
Commercial business loans		577			558
Consumer		12			4
Total non-performing loans		4,365			4,998
Total foreclosed assets held for sale		926			594
Total non-performing assets	$	5,291		$	5,592
Total non-performing loans to net loans receivable		1.74	%		1.97	%
Total non-performing loans to total assets		1.08	%		1.24	%
Total non-performing assets to total assets		1.31	%		1.38	%

26

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

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

	For the three months ended June 30, 2009			For the year ended March 31, 2009
	(Dollars in thousands)
Loans receivable, net	$	251,562		$	254,326
Average loans receivable, net	$	252,138		$	250,220
Allowance balance (at beginning of period)	$	2,484		$	1,777
Provision for losses		165			1,068
Charge-offs:
Mortgage loans:
One- to four-family		(63	)		(49	)
Non-residential real estate and land		(104	)		(245	)
Other loans:
Consumer		–			(3	)
Commercial		(46	)		(74	)
Gross charge-offs		(213	)		(371	)
Recoveries:
Other loans:
Consumer		1			10
Gross recoveries		1			10
Net charge-offs		(212	)		(361	)
Allowance for loan losses balance (at end of period)	$	2,437		$	2,484
Allowance for loan losses as a percent of loans receivable, net at end of period		0.97	%		0.97	%
Net loans charged off as a percent of average loans receivable, net		0.08	%		0.14	%
Ratio of allowance for loan losses to non-
performing loans at end of period		55.83	%		49.70	%

27

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Deposits totaled $308.0 million at June 30, 2009, a decrease of $1.5 million, or 0.5%, from $309.5 million at March 31, 2009.  Certificates of deposit decreased by $6.9 million, partially offset by an increase in savings and money market accounts of $1.5 million and NOW accounts of $3.9 million.  Management continued to exercise discipline during the period with regard to the pricing of retail certificates.  In general, management attempts to benchmark retail certificate of deposit pricing to the cost of alternate sources of funds, including Federal Home Loan Bank advances and brokered deposits.  Exceptions are made to defend customer relationships with significant value to the Bank while allowing rate sensitive certificate of deposit accounts to move to other alternatives.  The local deposit market continues to be negatively affected by national and online competitors offering higher rates to address liquidity concerns in national markets.

Other short-term borrowings, in the form of repurchase agreements with customers, totaled $10.2 million at June 30, 2009 and March 31, 2009.  The interest rate paid on these borrowings is .40%, which over the past year has declined significantly as the Federal Reserve lowered rates.

Advances from the Federal Home Loan Bank of Cincinnati totaled $47.0 million at June 30, 2009, an increase of $1.0 million, compared with $46.0 million at March 31, 2009.  As discussed above, the Company continues to use borrowed funds to compensate for the loss of higher cost retail certificates of deposit and to extend liability duration for interest rate risk management purposes.

Stockholders’ equity increased by $550,000, or 1.6%, during the three months ended June 30, 2009, due primarily to net income of $532,000 and an increase in accumulated other comprehensive income of $150,000,  partially offset by dividends payable of $150,000.

Comparison of Operating Results for the Three Month Periods Ended June 30, 2009 and 2008

General

Net income totaled $532,000 for the three months ended March 31, 2009 compared to $531,000 for the three months ended June 30, 2008.  While net income was essentially unchanged, there were significant changes in the composition of net income between the current period and the year ago period, reflecting a much lower interest rate environment and a more difficult economic environment.

28

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Average Balance Sheet

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

	For the three months ended June 30,
	2009							2008
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)	$	252,138	$	3,682		5.84	%	$	242,870	$	3,814		6.28	%
Investment securities(2)		115,692		1,403		4.85			123,869		1,519		4.91
Interest-earning deposits(3)		8,608		57		2.65			11,851		99		3.34
Total interest-earning assets		376,438		5,142		5.46			378,590		5,432		5.74
Non-interest-earning assets		29,711							24,524
Total assets	$	406,149						$	403,114
Interest-bearing liabilities:
Deposits	$	309,036		1,382		1.79		$	316,777		2,096		2.65
Other short-term borrowings		9,843		10		0.41			8,049		21		1.04
Borrowings		48,421		502		4.15			40,002		470		4.70
Total interest-bearing liabilities		367,300		1,894		2.06			364,828		2,587		2.84
Non-interest bearing  liabilities		3,531							4,845
Total liabilities		370,831							369,673
Stockholders’ equity		35,318							33,441
Total liabilities and stockholders’ equity	$	406,149						$	403,114
Net interest income			$	3,248						$	2,845
Interest rate spread(4)						3.40	%						2.90	%
Net yield on interest- earning assets(5)						3.45	%						3.01	%
Ratio of average interest- earning assets to average  interest-bearing liabilities						102.49	%						103.77	%

________________________________

(1) Includes non-accrual loan balances.

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

(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.

29

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest Income

Interest income decreased by $290,000 or 5.3%, to $5.1 million for the three months ended June 30, 2009, compared to the same period in 2008.  This decrease was due to a decrease in the weighted-average yield on interest-earning assets to 5.46% in the 2009 period from 5.74% for the three month period ended June 30, 2008 and a decrease of $2.2 million in the average balance of interest-earning assets outstanding to $376.4 million for the three months ended June 30, 2009, from $378.6 million for the comparable period ended June 30, 2008.The yield decrease was primarily due to lower market rates in the 2009 period compared to the 2008 period that resulted from the Federal Reserve’s interest rate reductions during the year.  The decrease in the average balance of earning assets was due to repayments on both loans and securities exceeding loan origination and securities purchase volumes, as the low levels of interest rates prompted borrowers to refinance loans held directly in portfolio and loans underlying mortgage-backed securities.

Interest income on loans decreased by $132,000, or 3.5%, for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to a reduction in the weighted-average rate on loans from 6.28% for the quarter ending June 30, 2008 to 5.84% for the June 30, 2009 quarter.  As discussed earlier, this was mainly due to a decrease in rates of 200 basis points implemented by the Federal Reserve over the past year and the corresponding impact on adjustable rate loans and new originations.   This decrease was partially offset by an increase in the average balance of loans outstanding period to period of $9.3 million, or 3.8%, to $252.1 million for the 2009 period.

Interest income on securities decreased by $116,000, or 7.6%, during the three months ended June 30, 2009, compared to the same period in 2008.  This decrease was primarily due to an $8.2 million, or 6.6%, reduction in the average balance of securities along with a decrease in the weighted-average rate to 4.85% for the three months ended June 30, 2009 compared to 4.91% for the same period ended June 30, 2008.

Dividends on Federal Home Loan Bank stock and other income decreased by $42,000, or 42.4%, for the three months ended June 30, 2009, compared to the same period in 2008, due primarily to a decrease in the weighted-average yield of 69 basis points resulting from reductions in short term market interest rates, to 2.65% for the 2009 quarter from 3.34% for the period ended June 30, 2008.

Interest Expense

Interest expense totaled $1.9 million for the three months ended June 30, 2009, a decrease of $693,000, or 26.8%, compared to the three months ended June 30, 2008.  The decrease resulted from a 78 basis point decrease in the weighted-average cost of funds to 2.06% for the 2009 period, partially offset by an increase of $2.5 million in the average balance of deposits and borrowings outstanding from $364.8 million in the 2008 period to $367.3 million for the three month period ended June 30, 2009.

Interest expense on deposits totaled $1.4 million for the three months ended June 30, 2009, a decrease of $714,000, or 34.1%, compared to the three months ended June 30, 2008, as a result of an 86 basis point decrease in the weighted-average cost of deposits, to 1.79% for the 2009 period, combined with a decrease in the average balance outstanding of $7.7 million, or 2.4%, to $309.0 million for the 2009 period.  The decrease in the rate was due to market interest rate decreases as discussed above.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest expense on other short-term borrowings totaled $10,000 for the three months ended June 30, 2009, a decrease of $11,000, from the 2008 period, primarily due to a decrease in the weighted-average cost of 63 basis points, to .41% for the three months ended June 30, 2009, due to the Federal Reserve rate decreases.  This was partially offset by an increase in the average balance of short-term borrowings of $1.8 million.  Interest expense on Federal Home Loan Bank advances totaled $502,000 for the three months ended June 30, 2009, an increase of $32,000, over the 2008 period, primarily due to an increase in the average balance of $8.4 million, or 21.0%, as the Company replaced the loss of higher cost retail certificates of deposit with lower cost Federal Home Loan Bank advances. This was offset by a decrease of 55 basis points in the weighted-average cost of Federal Home Loan Bank advances to 4.15% for the 2009 period.

Net Interest Income

Net interest income totaled $3.2 million for the three months ended June 30, 2009, an increase of $403,000, or 14.2%, compared to the three month period ended June 30, 2008.  The interest rate spread increased to 3.40% for the three months ended June 30, 2009, from 2.90% for the three months ended June 30, 2008.  The net interest margin increased to 3.45% for the three months ended June 30, 2009 from 3.01% for the three months ended June 30, 2008.  The increase in the interest rate spread was due to a shift in asset composition from  lower yielding investment securities and deposits to higher yielding loans and mortgage-backed securities and a shift in composition of liabilities from higher cost retail certificates of deposit to lower cost Federal Home Loan Bank advances.

Provision for Loan Losses

Management recorded a $165,000 provision for loan losses for the three month period ended June 30, 2009, an increase of $104,000 compared to the provision for the same period in 2008, primarily due to the increase in non-performing loans  and charge-offs during the period.  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 June 30, 2009.

Noninterest Income

Non-interest income, consisting primarily of the earnings on bank-owned life insurance, trust income, service fees and charges on deposit accounts and gain on the sale of loans increased by $72,000, or 16.8%, for the three months ended June 30, 2009, compared to the three months ended June 30, 2008.  The increase was primarily due to net gains on loan sales of $63,000 during the 2009 period, compared to no gains in the 2008 period.  As discussed above, management is executing a strategy of selective sale of newly originated 30 year fixed rate mortgage loans to limit the accumulation of interest rate risk on the balance sheet and to maintain the secondary market as a backup source of liquidity.  Service fees, charges and other operating income increased $16,000, or 4.9%, as management implemented a new fee schedule.  These increases were partially offset by a decrease in trust income of $9,000, or 19.6%, in the three months ended June 30, 2009 compared to the same period ended June 30, 2008, mainly due to a decrease in the market value of assets held in trust accounts.

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Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Non-interest Expense

Non-interest expense increased by $390,000, or 15.5%, to $2.9 million for the three months ended June 30, 2009, compared to the three months ended June 30, 2008.  The increase was mainly due to a $330,000 increase in federal deposit insurance expense that includes an increase in the deposit insurance premium rate schedule, the 5 basis point special assessment, which was assessed on all FDIC insured institutions, and will be collected on September 30, 2009, and the absence of deposit insurance credits in the 2009 quarter that reduced costs for the 2008 quarter.  Other noninterest expenses, excluding deposit insurance expense, increased $60,000 or 2.3% for the 2009 quarter compared to the 2008 quarter.

Federal Income Taxes

Federal income tax expense was $147,000 for the three months ended June 30, 2009, a decrease of $20,000, or 12.0%, compared to the same period in 2008.  The decrease was primarily due to a decrease in income before taxes of $19,000, or 2.7%, and an increase in non-taxable interest income compared to the same period in 2008.    The effective tax rates were 21.6% and 23.9% for the three month periods ended June 30, 2009 and 2008, respectively.

Forward-Looking Statements

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

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

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

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Wayne Savings Bancshares, Inc.

Part I

ITEM 3                  Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s market risk since the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2009.

ITEM 4T               Controls and Procedures

(a)           Evaluation of disclosure controls and procedures.

Under the supervision and with the participation of the Company’s management, including our Chief Executive Officer and Chief Financial Officer, the Company evaluated the effectiveness of the design and operation of its disclosure controls and procedures (as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act) as of the end of the period covered by this report.  Based upon that evaluation, the Chief Executive Officer and Chief Financial Officer concluded that, as of the end of the period covered by this report, the Company’s disclosure controls and procedures were effective in timely alerting them to the material information relating to the Company (or our consolidated subsidiaries) required to be included in the Company’s periodic SEC filings.

(b)           Changes in internal controls.

There has been no change made in the Company’s internal control over financial reporting during the period covered by this report that has materially affected, or is reasonably likely to materially affect, the Company’s internal control over financial reporting.

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Wayne Savings Bancshares, Inc.

PART II

ITEM 1. Legal Proceedings

Not applicable.

ITEM 1A. Risk Factors

There have been no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2009.

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

(a) Not applicable.

(b) Not applicable.

(c) Not applicable.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

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

Not applicable.

ITEM 5. Other Information

Not applicable.

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Wayne Savings Bancshares, Inc.

PART II

ITEM 6. Exhibits

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

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

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

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

Date:	August 10, 2009	By:	/s/Phillip E. Becker
			Phillip E. Becker
			President and Chief Executive Officer
Date:	August 10, 2009	By:	/s/H. Stewart Fitz Gibbon III
			H. Stewart Fitz Gibbon III
			Executive Vice President and
			Chief Financial Officer

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