10-Q

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             & #160;     December 31, 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 o

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

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

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

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

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

Wayne Savings Bancshares, Inc.

Index

		Page
PART I - FINANCIAL INFORMATION
Item 1	Condensed Consolidated Balance Sheets	2
	Condensed Consolidated Statements of Income	3
	Condensed Consolidated Statements of Comprehensive Income	4
	Condensed Consolidated Statements of Cash Flows	5
	Notes to Condensed Consolidated Financial Statements	7
Item 2	Management’s Discussion and Analysis of Financial Condition and Results of Operations	25
Item 3	Quantitative and Qualitative Disclosures About Market Risk	39
Item 4T	Controls and Procedures	39
PART II - OTHER INFORMATION
Item 1	Legal Proceedings	40
Item 1A	Risk Factors	40
Item 2	Unregistered Sales of Equity Securities and Use of Proceeds	40
Item 3	Defaults Upon Senior Securities	40
Item 4	Submission of Matters to a Vote of Security Holders	40
Item 5	Other Information	40
Item 6	Exhibits	41
SIGNATURES		42

Wayne Savings Bancshares, Inc.

Condensed Consolidated Balance Sheets

(In thousands, except share data)

	December 31, 2009			March 31, 2009
	(Unaudited)
ASSETS
Cash and due from banks	$	9,132		$	2,935
Interest-bearing demand deposits		4,487			3,855
Cash and cash equivalents		13,619			6,790
Available-for-sale securities		112,144			117,733
Held-to-maturity securities		755			952
Loans receivable – net of allowance for loan losses of $3,028 and $2,484 at     December 31, 2009 and March 31, 2009, respectively		250,574			254,326
Premises and equipment		7,413			7,553
Federal Home Loan Bank stock		5,025			5,025
Foreclosed assets held for sale  -  net		786			594
Accrued interest receivable		1,426			1,675
Bank-owned life insurance		6,693			6,508
Goodwill		1,719			1,719
Other intangible assets		400			471
Other assets		2,705			1,048
Prepaid federal income taxes		4			27
Total assets	$	403,263		$	404,421
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand	$	58,870		$	53,085
Savings and money market		92,416			83,759
Time		157,748			172,690
Total deposits		309,034			309,534
Other short term borrowings		7,776			10,154
Federal Home Loan Bank advances		45,500			46,000
Accrued interest payable and other liabilities		3,071			3,237
Deferred federal income taxes		1,261			1,083
Total liabilities		366,642			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		36,013			36,028
Retained earnings		14,094			12,726
Shares acquired by ESOP		(828	)		(899	)
Accumulated other comprehensive income, net of tax effects		1,474			690
Treasury stock, at cost - 974,618 common shares		(14,530	)		(14,530	)
Total stockholders’ equity		36,621			34,413
Total liabilities and stockholders’ equity	$	403,263		$	404,421

See accompanying notes to condensed consolidated financial statements. 

2

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Income

For the nine and three months ended December 31, 2009 and 2008

(In thousands, except per share amounts)

(Unaudited)

	Nine months				Three months
	ended				ended
	December 31,				December 31,
	2009		2008		2009		2008
Interest and Dividend Income
Loans	$	10,895	$	11,608	$	3,581	$	3,927
Securities		4,132		4,428		1,351		1,416
Dividends on Federal Home Loan Bank stock and other		179		236		57		65
Total interest and dividend income		15,206		16,272		4,989		5,408
Interest Expense
Deposits		3,720		5,788		1,099		1,798
Other short term borrowings		26		57		7		13
Federal Home Loan Bank advances		1,438		1,414		443		479
Total interest expense		5,184		7,259		1,549		2,290
Net Interest Income		10,022		9,013		3,440		3,118
Provision for Loan Losses		1,115		346		570		185
Net Interest Income After Provision for Loan Losses		8,907		8,667		2,870		2,933
Noninterest Income
Gain on disposal of real estate acquired through foreclosure		-		10		-		-
Gain on sale of available-for-sale securities		91		-		91		-
Gain on sale of loans		161		-		48		-
Trust income		142		137		53		46
Earnings on bank-owned life insurance		173		167		58		55
Service fees, charges and other operating		1,030		996		334		320
Total noninterest income		1,597		1,310		584		421
Noninterest Expense
Salary and employee benefits		4,352		4,208		1,480		1,430
Net occupancy and equipment expense		1,378		1,528		440		505
Federal deposit insurance premiums		579		35		122		13
Franchise taxes		263		349		87		128
Losses on real estate acquired through foreclosure		91		-		30		-
Loss on disposal of premises and equipment		4		-		-		-
Amortization of intangible assets		71		80		23		27
Other		1,425		1,468		472		465
Total noninterest expense		8,163		7,668		2,654		2,568
Income Before Federal Income Taxes		2,341		2,309		800		786
Provision for Federal Income Taxes		522		593		165		202
Net Income	$	1,819	$	1,716	$	635	$	584
Basic Earnings Per Share	$	.62	$	.59	$	.21	$	.20
Diluted Earnings Per Share	$	.62	$	.59	$	.21	$	.20
Dividends Per Share	$	.15	$	.36	$	.05	$	.12

See accompanying notes to condensed consolidated financial statements. 

3

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Comprehensive Income

For the nine and three months ended December 31, 2009 and 2008

(In thousands)

(Unaudited)

	Nine months						Three months
	ended						ended
	December 31,						December 31,
	2009			2008			2009			2008
Net income	$	1,819		$	1,716		$	635		$	584
Other comprehensive income (loss):
Unrealized holding gains (losses) on securities, net of related
taxes (benefits) of $435, $(142), $(180) and $585 during the
respective periods		844			(276	)		(349	)		1,135
Reclassification adjustment for realized gains included in
income, net of related taxes of $31, $0, $31 and $0 during
the respective periods		(60	)		–			(60	)		–
Comprehensive income	$	2,603		$	1,440		$	226		$	1,719
Accumulated other comprehensive income	$	1,474		$	431		$	1,474		$	431

See accompanying notes to condensed consolidated financial statements. 

4

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows

For the nine months ended December 31, 2009 and 2008

(In thousands)

(Unaudited)

	2009			2008
Operating Activities
Net income	$	1,819		$	1,716
Items not requiring (providing) cash
Depreciation and amortization		438			500
Provision for loan losses		1,115			346
Amortization of premiums and discounts on securities		(120	)		(76	)
Amortization of mortgage servicing rights		29			19
Amortization of deferred loan origination fees		(71	)		(29	)
Amortization of intangible assets		71			80
Federal Home Loan Bank stock dividends		–			(133	)
Increase in value of bank owned life insurance		(185	)		(181	)
Amortization expense of stock benefit plan		40			86
Loss on real estate acquired through foreclosure		91			–
Net gain on sale of loans		(161	)		–
Net gain on sale of available-for-sale securities		(91	)		–
Proceeds from sale of loans in secondary market		5,406			–
Origination of loans for sale in the secondary market		(5,323	)		–
Deferred income taxes		(225	)		(75	)
Changes in
Accrued interest receivable		249			158
Other assets		(1,663	)		797
Interest payable and other liabilities		(519	)		(73	)
Net cash provided by operating activities		900			3,135
Investing Activities
Purchase of  available-for-sale securities		(24,819	)		(18,466	)
Proceeds from maturities of available-for-sale securities		27,230			24,161
Proceeds from maturities of held-to-maturity securities		195			247
Proceeds from sale of investment securities designated as available-for-sale		4,579			–
Net change in loans		1,986			(13,980	)
Purchase of premises and equipment		(298	)		(168	)
Proceeds from the sale of foreclosed assets		517			154
Net cash provided by (used in) investing activities		9,390			(8,052	)

See accompanying notes to condensed consolidated financial statements. 

5

Wayne Savings Bancshares, Inc.

Condensed Consolidated Statements of Cash Flows (continued)

For the nine months ended December 31, 2009 and 2008

(In thousands)

(Unaudited)

	2009			2008
Financing Activities
Net change in deposits	$	(500	)	$	(6,920	)
Net change in other short-term borrowings		(2,378	)		4,305
Proceeds from Federal Home Loan Bank advances		20,300			59,310
Repayments of Federal Home Loan Bank advances		(20,800	)		(53,310	)
Advances by borrowers for taxes and insurance		353			261
Cash dividends paid		(436	)		(1,046	)
Treasury stock purchases		–			(49	)
Net cash provided by (used in) financing activities		(3,461	)		2,551
Increase (Decrease) in Cash and Cash Equivalents		6,829			(2,366	)
Cash and Cash equivalents, Beginning of period		6,790			13,063
Cash and Cash equivalents, End of period	$	13,619		$	10,697
Supplemental Cash Flows Information       Cash Paid For:
Interest on deposits and borrowings	$	5,333		$	7,374
Federal income taxes	$	725		$	525
Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale	$	800		$	797
Unrealized gains (losses) on securities designated as available for sale,
net of related tax effects	$	844		$	(276	)
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 condensed consolidated financial statements as of and for the nine and three months ended December 31, 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 condensed financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the year ended March 31, 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 nine and three month periods ended December 31, 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 includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance.  Management has discussed the development and selection of this critical accounting policy with the audit committee of the Board of Directors.

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 nine months ended				For the three months ended
	December 31,				December 31,
	2009		2008		2009		2008
Weighted-average common shares
outstanding (basic)		2,911,990		2,903,599		2,912,056		2,902,525
Dilutive effect of assumed exercise
of stock options		-		-		-		-
Weighted-average common shares
outstanding (diluted)		2,911,990		2,903,599		2,912,056		2,902,525

None of the outstanding options were included in the diluted earnings per share calculation for the nine and three month periods ended December 31, 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 December 31, 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 FASB ASC 718-10.  FASB ASC 718-10 requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date.  Compensation cost is then recognized over the vesting period.  There were no options granted during the nine months ended December 31, 2009 and 2008.  There was no compensation expense recognized for the stock option plan during the nine month periods ended December 31, 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 nine months ended December 31, 2009, and for the years ended March 31, 2009, and 2008, is presented below:

	Nine months ended December 31,				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 December 31, 2009:

Number outstanding	94,020
Exercise price on all remaining options outstanding	$13.95
Weighted-average remaining contractual life	4.25 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 December 31, 2009, the Bank had regulatory approval for $813,000 of retained earnings for dividend declaration.

The Bank is subject to various regulatory capital requirements administered by the federal banking agencies.  Failure to meet minimum capital requirements can initiate certain mandatory–and possibly additional discretionary–actions by regulators that, if undertaken, could have a direct material effect on the Company’s and the Bank’s financial statements.  Under capital adequacy guidelines and the regulatory framework for prompt corrective action, the Bank must meet specific capital guidelines that involve quantitative measures of assets, liabilities and certain off-balance-sheet items as calculated under regulatory accounting practices.  The capital amounts and classification are also subject to qualitative judgments by the regulators about components, risk weightings and other 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 December 31, 2009, that the Bank met all capital adequacy requirements to which it is subject.

As of December 31, 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 December 31, 2009, March 31, 2009, and December 31, 2008, 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 December 31, 2009
Tangible capital	$	32,060		8.0	%	$	5,980		1.5	%	$	19,933		5.0	%
Core capital		32,060		8.0			15,946		4.0			23,919		6.0
Risk-based capital		34,164		13.9			19,669		8.0			24,586		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
As of December 31, 2008
Tangible capital	$	30,629		7.6	%	$	6,037		1.5	%	$	20,123		5.0	%
Core capital		30,629		7.6			16,098		4.0			24,148		6.0
Risk-based capital		32,279		12.9			19,976		8.0			24,970		10.0

10

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 6: Recent Accounting Developments

FASB ASC 805-10 concerning business combinations seeks 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 guidance 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.

FASB ASC 805-10 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 FASB ASC 805-10 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

FASB ASC 810-10 concerning noncontrolling interests in consolidated financial statements establishes 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 guidance improves comparability by eliminating that diversity.  The FASB ASC 810-10 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008.  The Company adopted FASB ASC 810-10 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

FASB ASC 815-10 concerning disclosures about derivative instruments and hedging activities was issued in March 2008 and amends and expands the disclosure requirements of previous guidance to provide greater transparency about (i) how and why an entity uses derivative

11

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

instruments, (ii) how derivative instruments and related hedge items are accounted for under FASB ASC 815-10 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, FASB ASC 815-10 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.  FASB ASC 815-10 is effective for financial statements issued for fiscal years and interim periods beginning after November 15, 2008, with early application encouraged.  The Company adopted FASB ASC 815-10 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

FASB ASC 805-20 concerns accounting for assets acquired and liabilities assumed in a business combination that arise from contingencies and clarifies previous guidance regarding the initial recognition and measurement, subsequent measurement and accounting and disclosure of assets and liabilities arising from contingencies in a business combination. FASB ASC 805-20 eliminates the distinction between contractual and noncontractual contingencies discussed in FASB ASC 805-10, specifies whether contingencies should be measured at fair value or in accordance with FASB ASC 450-10, 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.  FASB ASC 805-20 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 adopted FASB ASC 805-20 effective April 1, 2009, as required, without material effect on the Company’s financial position or results of operations.

FASB ASC 820-10 concerns 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.  The guidance was issued on April 9, 2009 and provides additional guidance for estimating fair value when the volume and level of activity for the asset or liability have significantly decreased.  FASB ASC 820-10 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.  FASB ASC 820-10 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, only if FASB ASC 320-10 and FASB ASC 825-10 are adopted concurrently.  FASB ASC 820-10 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The Company adopted FASB ASC 820-10 effective June 30, 2009, as required, without material effect on the Company’s financial position or results of operations.

12

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

FASB ASC 320-10 concerns recognition and presentation of other-than-temporary impairments and was issued on April 9, 2009.  The guidance requires disclosures about fair value of financial instruments for interim reporting periods of publicly traded companies as well as in annual financial statements.  FASB ASC 320-10 is effective for interim reporting periods ending after June 15, 2009, with early adoption permitted for periods ending after March 15, 2009, only if FASB ASC 820-10 and FASB ASC 825-10 are adopted concurrently.  FASB ASC 320-10 does not require disclosures for earlier periods presented for comparative purposes at initial adoption. The Company adopted FASB ASC 320-10 effective June 30, 2009, as required, without material effect on the Company’s financial position or results of operations.

FASB ASC 825-10 concerning interim disclosures about fair value of financial instruments was issued on April 9, 2009 and 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.  FASB ASC 825-10 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 FASB ASC 820-10 and FASB ASC 320-10 are adopted concurrently.  The Company adopted FASB ASC 825-10 effective June 30, 2009, as required, without material effect on the Company’s financial position or results of operations.

FASB ASC 855-10 concerning subsequent events was issued in May 2009 and 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.  FASB ASC 855-10 is effective for periods ending after June 15, 2009.  The Company adopted FASB ASC 855-10 effective June 30, 2009, as required, without material effect on the Company’s financial position or results of operations.

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

13

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

FASB ASC 860-10 is effective as of the beginning of a reporting entity’s first annual reporting period beginning after November 15, 2009 (April 1, 2010, as to the Company), for interim periods within that first annual reporting period, and for interim and annual reporting periods thereafter. The recognition and measurement provisions of FASB ASC 860-10 must be applied to transfers that occur on or after the effective date.  Early application is prohibited.  FASB ASC 860-10 also requires additional disclosures about transfers of financial assets that occur both before and after the effective date.  The Company does not believe that the adoption of FASB ASC 860-10 will have a significant effect on its consolidated financial statements.

FASB ASC 860-10 also improves how enterprises account for and disclose their involvement with variable interest entities (VIE’s), which are special-purpose entities, and other entities whose equity at risk is insufficient or lacks certain characteristics.  Among other things, FASB ASC 860-10 changes how an entity determines whether it is the primary beneficiary of a variable interest entity (VIE) and whether that VIE should be consolidated.  FASB ASC 860-10 requires an entity to provide significantly more disclosures about its involvement with VIEs.  As a result, the Company must comprehensively review its involvements with VIEs and potential VIEs, including entities previously considered to be qualifying special purpose entities, to determine the effect on its consolidated financial statements and related disclosures.  FASB ASC 860-10 is effective as of the beginning of a reporting entity’s first annual reporting period that begins after November 15, 2009 (April 1, 2010, as to the Company), and for interim periods within the first annual reporting period.  Earlier application is prohibited.  The Company does not believe that the adoption of FASB ASC 860-10 will have a significant effect on its consolidated financial statements.

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

Note 7: Subsequent Events

Subsequent events have been evaluated through February 5, 2010, which is the date the financial statements were issued.

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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:
December 31, 2009:
U.S. government agencies	$	2,645	$	122	$	2	$	2,765
Mortgage-backed securities		86,078		2,690		195		88,573
State and political subdivisions		20,494		448		136		20,806
	$	109,217	$	3,260	$	333	$	112,144
March 31, 2009:
U.S. government agencies	$	9,057	$	250	$	3	$	9,304
Mortgage-backed securities		86,557		2,208		651		88,114
State and political subdivisions		20,380		442		507		20,315
	$	115,994	$	2,900	$	1,161	$	117,733
December 31, 2008:
U.S. government agencies	$	7,170	$	111	$	3	$	7,278
Mortgage-backed securities		85,932		1,621		482		87,071
State and political subdivisions		19,883		398		495		19,786
	$	112,985	$	2,130	$	980	$	114,135

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Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Held-to-maturity Securities:
December 31, 2009:
U.S. government agencies	$	175	$	–	$	2	$	173
Mortgage-backed securities		518		8		–		526
State and political subdivisions		62		5		–		67
	$	755	$	13	$	2	$	766
March 31, 2009:
U.S. government agencies	$	189	$	–	$	3	$	186
Mortgage-backed securities		674		4		5		673
State and political subdivisions		89		5		–		94
	$	952	$	9	$	8	$	953
December 31, 2008:
U.S. government agencies	$	191	$	–	$	3	$	188
Mortgage-backed securities		710		2		11		701
State and political subdivisions		90		6		–		96
	$	991	$	8	$	14	$	985

16

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Amortized cost and fair value of available-for-sale securities and held-to-maturity securities at December 31, 2009, March 31, 2009, and December 31, 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.

December 31, 2009	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
One to five years	$	3,275	$	3,405	$	62	$	67
Five to ten years		4,354		4,502		–		–
After ten years		15,510		15,664		175		173
		23,139		23,571		237		240
Mortgage-backed securities		86,078		88,573		518		526
Totals	$	109,217	$	112,144	$	755	$	766

March 31, 2009	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Within one year	$	2,000	$	2,004	$	–	$	–
One to five years		3,669		3,777		89		95
Five to ten years		4,270		4,327		–		–
After ten years		19,498		19,511		189		185
		29,437		29,619		278		280
Mortgage-backed securities		86,557		88,114		674		673
Totals	$	115,994	$	117,733	$	952	$	953

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Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

December 31, 2008	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)
Within one year	$	1,999	$	2,018	$	–	$	–
One to five years		3,779		3,867		90		96
Five to ten years		4,260		4,284		–		–
After ten years		17,015		16,895		191		188
		27,053		27,064		281		284
Mortgage-backed securities		85,932		87,071		710		701
Totals	$	112,985	$	114,135	$	991	$	985

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $53.4 million, $50.6 million and $46.4 million at December 31, 2009, March 31, 2009, and December 31, 2008, respectively.

Gross gains of $104,000 and gross losses of $13,000 resulting from sales of available-for-sale securities were recognized for the three and nine months ended December 31, 2009.  Gains and losses on the sale of securities are recorded on the trade date and are determined using the specific identification method.

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 December 31, 2009, March 31, 2009, and December 31, 2008, was $19.4 million, $21.4 million and $28.0 million, which represented approximately 17%, 18% and 24%, 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.

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Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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 December 31, 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.  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.

December 31, 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	$	–	$	–	$	367	$	4	$	367	$	4
Mortgage-backed securities		12,022		195		–		–		12,022		195
State and political subdivisions		6,605		120		430		16		7,035		136
Total temporarily impaired securities	$	18,627	$	315	$	797	$	20	$	19,424	$	335

March 31, 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	$	38	$	1	$	359	$	5	$	397	$	6
Mortgage-backed securities		5,025		302		6,171		354		11,196		656
State and political subdivisions		9,404		491		406		16		9,810		507
Total temporarily impaired securities	$	14,467	$	794	$	6,936	$	375	$	21,403	$	1,169

19

Wayne Savings Bancshares, Inc

Notes to Condensed Consolidated Financial Statements

	December 31, 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	$	332	$	5	$	71	$	1	$	403	$	6
Mortgage-backed securities		15,688		449		2,089		44		17,777		493
State and political subdivisions		9,817		495		–		–		9,817		495
Total temporarily impaired securities	$	25,837	$	949	$	2,160	$	45	$	27,997	$	994

Note 9: Fair Value Measurements

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

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

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

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

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

Following is a description of the valuation methodologies used for 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.

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

20

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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 FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at December 31, 2009, March 31, 2009, and December 31, 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)
December 31, 2009
U.S. government agencies	$	2,765	$	–	$	2,765	$	–
Mortgage-backed securities	$	88,573	$	–	$	88,573	$	–
State and political subdivisions	$	20,806	$	–	$	20,806	$	–
	$	112,144	$	–	$	112,144	$	–
March 31, 2009
U.S. government agencies	$	9,304	$	–	$	9,304	$	–
Mortgage-backed securities	$	88,114	$	–	$	88,114	$	–
State and political subdivisions	$	20,315	$	–	$	20,315	$	–
	$	117,733	$	–	$	117,733	$	–
December 31, 2008
U.S. government agencies	$	7,278	$	–	$	7,278	$	–
Mortgage-backed securities	$	87,071	$	–	$	87,071	$	–
State and political subdivisions	$	19,786	$	–	$	19,786	$	–
	$	114,135	$	–	$	114,135	$	–

21

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 December 31, 2009, impaired loans consisted primarily of loans secured by nonresidential real estate and secured commercial loans.  Management has determined fair value measurements on impaired loans primarily through evaluation of appraisals performed.

Foreclosed Assets Held for Sale

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

The following table presents the fair value measurements of assets measured at fair value on a nonrecurring basis and the level within the FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at December 31, 2009, March 31, 2009, and December 31, 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)
December 31, 2009
Impaired loans	$	3,402	$	–	$	–	$	3,402
Foreclosed assets		786		–		–		786
March 31, 2009
Impaired loans	$	3,264	$	–	$	–	$	3,264
Foreclosed assets		594		–		–		594
December 31, 2008
Impaired loans	$	427	$	–	$	–	$	427
Foreclosed assets		735		–		–		735

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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.

	December 31, 2009				March 31, 2009				December 31, 2008
	Carrying Amount		Fair Value		Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets
Cash and cash equivalents	$	13,619	$	13,619	$	6,790	$	6,790	$	10,697	$	10,697
Available-for-sale securities		112,144		112,144		117,733		117,733		114,135		114,135
Held-to-maturity securities		755		766		952		953		991		985
Loans, net of allowance for loan losses		250,574		255,911		254,326		263,450		255,121		269,091
Federal Home Loan Bank stock		5,025		5,025		5,025		5,025		5,025		5,025
Interest receivable		1,426		1,426		1,675		1,675		1,595		1,595
Financial liabilities
Deposits		309,034		303,397		309,534		305,937		310,811		309,220
Other short-term borrowings		7,776		7,776		10,154		10,154		11,592		11,592
Federal Home Loan Bank advances		45,500		46,607		46,000		47,411		44,500		46,206
Advances from borrowers for taxes and insurance		904		904		551		551		936		936
Interest payable		202		202		351		351		305		305

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.

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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.

Held-to-maturity securities

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

Deposits

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

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

The carrying amount approximates fair value.

Federal Home Loan Bank Advances

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

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

The fair value of commitments to originate loans is estimated using the fees currently charged to enter into similar agreements, taking into account the remaining terms of the agreements and the present creditworthiness of the counterparties.  For fixed-rate loan commitments, fair value also considers the difference between current levels of interest rates and the committed rates.  The fair values of letters of credit and lines of credit are based on fees currently charged for similar agreements or on the estimated cost to terminate or otherwise settle the obligations with the counterparties at the reporting date.  Fair values of commitments were not material at December 31, 2009, March 31, 2009, and December 31, 2008.

24

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Discussion of Financial Condition Changes from March 31, 2009, to December 31, 2009

At December 31, 2009, the Company had total assets of $403.3 million, a decrease of $1.2 million, or 0.3%, 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 0.1%, to $125.8 million at December 31, 2009.  This was primarily due to an increase of $6.8 million in cash and cash equivalents which was offset by a decrease in available-for-sale securities of $5.6 million, or 4.8%.

Total securities decreased by $5.8 million, or 4.9%, during the nine months ended December 31, 2009.  This decrease was primarily due to principal repayments of $27.4 million and sales of $4.5 million, partially offset by purchases of $24.8 million and an increase in the market value of available for sale investment securities of $1.2 million.  Purchases were mainly funded by proceeds from principal payments received from the securities portfolio.  The securities sold from the available-for-sale portfolio were sold to improve both the interest rate risk and credit risk profile of the securities portfolio.

Prepaid assets increased by $1.7 million as a result of the federal deposit insurance assessment imposed on all insured institutions during December 2009.  The assessment required the payment in advance of deposit insurance premiums for calendar years 2010, 2011 and 2012.  This prepaid asset will be amortized into expense over the next three calendar years based on actual deposit balances subject to assessment as reported through the quarterly regulatory reporting process.  Any balance remaining in the prepaid asset account after the payment due on June 30, 2013 will be refunded by the FDIC.

Net loans receivable decreased by $3.8 million, or 1.5% at December 31, 2009 compared to March 31, 2009.  The Bank originated $48.1 million of loans, received payments of $50.6 million, originated and sold $5.3 million of 30-year fixed-rate mortgage loans into the secondary market and increased the allowance for loan losses, net of charge-offs, by $544,000.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.

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Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

	December 31, 2009				March 31, 2009				December 31, 2008
	(Dollars in thousands)
Mortgage loans:
One- to four-family residential(1)	$	139,169	54.16	%	$	141,285	54.40	%	$	141,038	54.17	%
Residential construction loans		2,431	0.95			1,587	0.61			1,801	0.69
Multi-family residential		8,707	3.39			8,604	3.31			8,664	3.33
Non-residential real estate/land(2)		68,612	26.70			70,725	27.23			70,992	27.26
Total mortgage loans		218,919	85.20			222,201	85.55			222,495	85.45
Other loans:
Consumer loans(3)		3,562	1.39			4,923	1.90			5,210	2.00
Commercial business loans		34,462	13.41			32,592	12.55			32,679	12.55
Total other loans		38,024	14.80			37,515	14.45			37,889	14.55
Total loans before net items		256,944	100.00	%		259,716	100.00	%		260,384	100.00	%
Less:
Loans in process		2,921				2,506				3,065
Deferred loan origination fees		421				400				397
Allowance for loan losses		3,028				2,484				1,801
Total loans receivable, net	$	250,574			$	254,326			$	255,121
Mortgage-backed securities, net(4)	$	89,091			$	88,788			$	87,781

__________________________________

(1) Includes equity loans collateralized by second mortgages in the aggregate amount of $16.6 million, $16.9 million and $16.8 million as of December 31, 2009, March 31, 2009, and December 31, 2008, respectively.  Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

(2) Includes land loans of $122,000, $202,000 and $215,000 at December 31, 2009, March 31, 2009, and December 31, 2008.

(3) Includes second mortgage loans of $1.1 million, $1.3 million and $1.4 million as of December 31, 2009, March 31, 2009, and December 31, 2008, respectively.

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

Non-performing loans amounted to $4.9 million and $5.0 million at December 31, 2009 and March 31, 2009, respectively.  At December 31, 2009, non-performing loans consisted primarily of residential mortgage loans of approximately $1.8 million, commercial real estate loans with a combined balance of $2.7 million, commercial business loans totaling $367,000 and consumer loans totaling $16,000.  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 business loans totaling $558,000 and $4,000 in consumer loans.   Foreclosed assets held for sale amounted to $786,000 in five properties at December 31, 2009, compared to $594,000 in two properties at March 31, 2009, an increase of 32.3%.  The growth in the balance of foreclosed assets is due to the pace of acquisitions being faster than the pace of dispositions.  However, despite the difficult real property markets in the Company’s market area, transactions are being executed.  Since March 31, 2009, eight properties, seven of which are residential and one non-residential, have been acquired and five residential properties have been sold.  Management has been actively working to maximize current net proceeds compared to estimates of expected future carrying costs and potential future values.   Total non-performing assets amounted to $5.7 million at December 31, 2009, compared to $5.6 million at March 31, 2009.

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Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The following table sets forth information regarding our past due, nonaccrual and impaired loans and foreclosed assets held for sale as of December 31, 2009, March 31, 2009, and December 31, 2008.

	December 31,  2009			March 31, 2009			December 31, 2008
	(Dollars in thousands)
Past due loans 30-89 days:
Mortgage loans:
One- to four-family residential	$	677		$	491		$	996
Multifamily and nonresidential		966			77			3,697
Non-mortgage loans:
Commercial business loans		134			–			160
Consumer loans		4			18			12
	$	1,781		$	586		$	4,865
Non-performing loans:
Mortgage loans:
One- to four-family residential	$	1,790		$	1,409		$	1,517
All other mortgage loans		2,735			3,027			327
Non-mortgage loans:
Commercial business loans		366			558			189
Consumer		16			4			–
Total non-performing loans		4,908			4,998			2,033
Total foreclosed assets held for sale		786			594			735
Total non-performing assets	$	5,694		$	5,592		$	2,768
Total non-performing loans to net loans receivable		1.96	%		1.97	%		0.80	%
Total non-performing loans to total assets		1.22	%		1.24	%		0.50	%
Total non-performing assets to total assets		1.41	%		1.38	%		0.68	%

27

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

	For the nine months ended December 31, 2009			For the year ended March 31, 2009			For the nine months ended December 31, 2008
				(Dollars in thousands)
Loans receivable, net	$	250,574		$	254,326		$	255,121
Average loans receivable, net	$	252,698		$	250,220		$	248,842
Allowance balance (at beginning of period)	$	2,484		$	1,777		$	1,777
Provision for losses		1,115			1,068			346
Charge-offs:
Mortgage loans:
One- to four-family		(230	)		(49	)		(24	)
Non-residential real estate and land		(104	)		(245	)		(229	)
Other loans:
Consumer		–			(3	)		(4	)
Commercial		(266	)		(74	)		(74	)
Gross charge-offs		(600	)		(371	)		(331	)
Recoveries:
Mortgage		28			–			–
Consumer		1			10			9
Gross recoveries		29			10			9
Net charge-offs		(571	)		(361	)		(322	)
Allowance for loan losses balance     (at end of period)	$	3,028		$	2,484		$	1,801
Allowance for loan losses as a percent of loans receivable, net at end of period		1.21	%		0.97	%		0.71	%
Net loans charged off as a percent of average loans receivable, net		0.23	%		0.14	%		0.13	%
Ratio of allowance for loan losses to non-performing loans at end of period		61.70	%		49.70	%		88.59	%

28

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Deposits totaled $309.0 million at December 31, 2009, a decrease of $500,000, or 0.2%, from $309.5 million at March 31, 2009.  Certificates of deposit decreased by $14.9 million, partially offset by an increase in savings and money market accounts of $8.7 million and an increase in demand accounts of $5.8 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.  Management believes that the changing composition of deposits is temporary due to the low interest rate environment and difficult economic environment that is inducing customers to deposit funds in more liquid types of deposit accounts.  Management further believes that if interest rates begin to rise, customers will shift funds to take advantage of higher yielding, less liquid certificate of deposit accounts.

Other short-term borrowings, in the form of repurchase agreements with customers, totaled $7.8 million at December 31, 2009, and $10.2 million at March 31, 2009.  The interest rate paid on these borrowings is 0.40% at December 31, 2009 compared to 0.66% at March 31, 2009.  The decrease in the rate paid was due to decreases in short term market interest rates associated with Federal Reserve rate reductions during the period.

Advances from the Federal Home Loan Bank of Cincinnati totaled $45.5 million at December 31, 2009, a decrease of $500,000 from $46.0 million at March 31, 2009.  The Company primarily uses advances from the FHLB for short term cash management purposes and to extend liability duration for interest rate risk management purposes.  Repricing risk associated with advances is mitigated through the scheduling of staggered advance maturities over time.  The weighted average cost of FHLB advances was 3.82% at December 31, 2009 compared to 4.13% at March 31, 2009.  The decrease in the rate paid is due to decreases in market interest rates.

Stockholders’ equity increased by $2.2 million, or 6.4%, during the nine months ended December 31, 2009, due primarily to net income of $1.8 million and an increase in accumulated other comprehensive income of $784,000,  partially offset by declared dividends of $436,000.

Comparison of Operating Results for the Nine Month Periods Ended December 31, 2009 and 2008

General

Net income for the nine months ended December 31, 2009, totaled $1.8 million, an increase of $103,000, or 6.0%, compared to net income for the nine months ended December 31, 2008.  The increase in net income was primarily attributable to an increase in net interest income of $1.0 million, an increase in noninterest income of $297,000 and a decrease in the provision for federal income taxes of $71,000. These items were partially offset by an increase in the provision for loan losses of $769,000 and an increase in total noninterest expenses of $505,000.

29

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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 nine months ended December 31,
	2009							2008
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net1	$	252,698	$	10,895		5.75	%	$	248,842	$	11,608		6.22	%
Investment securities2		114,161		4,132		4.83			118,256		4,428		4.99
Interest-earning deposits3		13,075		179		1.83			11,343		236		2.77
Total interest-earning assets		379,934		15,206		5.34			378,441		16,272		5.73
Noninterest-earning assets		23,059							21,570
Total assets	$	402,993						$	400,011
Interest-bearing liabilities:
Deposits	$	306,807		3,720		1.62		$	313,050		5,788		2.47
Other short-term borrowings		8,573		26		0.40			8,895		57		0.85
Borrowings		47,044		1,438		4.08			41,115		1,414		4.59
Total interest-bearing liabilities		362,424		5,184		1.91			363,060		7,259		2.67
Noninterest bearing  liabilities		4,537							3,909
Total liabilities		366,961							366,969
Stockholders’ equity		36,032							33,042
Total liabilities and stockholders’ equity	$	402,993						$	400,011
Net interest income			$	10,022						$	9,013
Interest rate spread4						3.43	%						3.06	%
Net yield on interest-earning assets5						3.52	%						3.18	%
Ratio of average interest- earning assets to average  interest-bearing liabilities						104.83	%						104.24	%

___________________________________________

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.

30

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Interest Income

Interest income decreased by $1.1 million, or 6.6%, to $15.2 million for the nine months ended December 31, 2009, compared to the same period in 2008.  This decrease was mainly due to a decrease in the weighted-average yield on interest-earning assets to 5.34% in the 2009 period from 5.73% for the nine month period ended December 31, 2008. The yield decrease was primarily due to a decrease in overall market rates from December 31, 2008, to December 31, 2009.

Interest income on loans decreased by $713,000, or 6.1%, for the nine months ended December 31, 2009, compared to the same period in 2008, due primarily to a reduction in the weighted-average rate on loans of 47 basis points from 6.22% for the period ended December 31, 2008, to 5.75% for the period ended December 31, 2009. As discussed earlier, this was mainly due to the decrease in market rates 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 $3.9 million, or 1.5%, to $252.7 million for the 2009 period.

Interest income on securities decreased by $296,000, or 6.7%, during the nine months ended December 31, 2009, compared to the same period in 2008.  This decrease was primarily due to a decrease in the average balance of securities of $4.1 million, or 3.5%, combined with a decrease in the weighted-average yield to 4.83%  for the period ended December 31, 2009, from 4.99% for the period ended December 31, 2008.

Dividendson Federal Home Loan Bank stock and other income decreased by $57,000, or 24.2%, for the nine months ended December 31, 2009, compared to the same period in 2008, due primarily to a decrease in the weighted-average yield to 1.83% for the nine months ended December 31, 2009, compared to 2.77% for the 2008 period, a decrease of 94 basis points resulting from reductions in short term market interest rates.  The decrease in yield was offset by an increase of $1.7 million in the average balance.

Interest Expense

Interest expense totaled $5.2 million for the nine months ended December 31, 2009, a decrease of $2.1 million, or 28.6%, compared to the nine month period ended December 31, 2008.  The decrease resulted from a 76 basis point decrease in the weighted-average cost of funds to 1.91% for the nine month period ended December 31, 2009, along with a decrease of $636,000 in the average balance of deposits and borrowings outstanding, from $363.0 million for the nine month period ended December 31, 2008 to $362.4 million for the nine month period ended December 31, 2009.

Interest expense on deposits totaled $3.7 million for the nine month period ended December 31, 2009, a decrease of $2.1 million, or 35.7%, compared to the nine month period ended December 31, 2008.  The decrease resulted from an 85 basis point decrease in the weighted-average cost of deposits to 1.62% for the nine month period ended December 31, 2009 combined with a decrease in the average balance outstanding of $6.2 million, or 2.0%, to $306.8 million for the 2009 period.  The decrease in the rate was due to the market rate decreases discussed above, combined with management’s pricing strategy also discussed above.

Interest expense on other short-term borrowings totaled $26,000 for the nine month period ended December 31, 2009, a decrease of $31,000, from the $57,000 expense for the nine month period ended December 31, 2008.  The decrease was primarily due to a decrease in the weighted-average cost of 45 basis points, to 0.40% for the nine months ended December 31, 2009 and a decrease in the average balance of $322,000.  The decrease in rate was due to the market rate decreases discussed above.

31

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Interest expense on Federal Home Loan Bank advances totaled $1.4 million for the nine months ended December 31, 2009, an increase of $24,000 over the 2008 nine month period.  The increase was due to an increase in the average balance of $5.9 million, or 14.4%, as the Company replaced the loss of higher cost retail certificates of deposit with lower cost Federal Home Loan Bank advances as part of management’s deposit pricing strategy discussed above, combined with a decrease in the average rate of 51 basis points from 4.59% for the nine month period ended December 31, 2008, to 4.08% for the nine month period ended December 31, 2009.

Net Interest Income

Net interest income totaled $10.0 million for the nine month period ended December 31, 2009, an increase of $1.0 million, or 11.2%, compared to the nine month period ended December 31, 2008.  The average interest rate spread increased to 3.43% for the nine month period ended December 31, 2009, from 3.06% for the nine month period ended December 31, 2008.  The increase was primarily due to the effect of overall market rate decreases and management’s strategy not to compete with national and online competitors offering higher rates on retail deposits, combined with 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 and money market and demand deposit accounts.  The net interest margin increased to 3.52% for the nine month period ended December 31, 2009 from 3.18% for the nine month period ended December 31, 2008.

Provision for Loan Losses

Management recorded a $1.1 million provision for loan losses for the nine month period ended December 31, 2009, an increase of $769,000 compared to the $346,000 provision made during the comparable period in 2008.  The amount of the provision for loan losses is based on management’s assessment of portfolio performance indicators, primarily the increase in delinquent loans, non-performing loans and charge-offs, and economic conditions in the Company’s market area.  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, 2009.

Noninterest Income

Noninterest income of $1.6 million, consisting primarily of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income, gains on the sale of securities and gains from the sale of loans, increased by $287,000, or 21.9%, for the nine month period ended December 31, 2009, compared to $1.3 million for the nine month period ended December 31, 2008.  The increase was primarily due to a gain on sale of loans of $161,000 in the nine months ended December 31, 2009, compared to no gain in the nine month period ended December 31, 2008, a gain from the sale of available for sale securities of $91,000, compared to no gain in the nine month period ended December 31, 2008, and an increase in service fees, charges and other operating income of $34,000, or 3.4%.  As discussed above, management is executing a strategy of selectively selling 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.

32

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Noninterest Expense

Noninterest expense of $8.2 million for the nine month period ended December 31, 2009 was up by $495,000, or 6.5%, compared to the $7.7 million for the nine months ended December 31, 2008.  The increase was mainly due to a $544,000 increase in federal deposit insurance premiums resulting from an increase in the FDIC assessment rate schedule, the imposition of a special assessment by the FDIC on all insured institutions during the period and the absence of assessment credits in the 2009 period that were realized in the 2008 period.  Loss on disposal of real estate acquired through foreclosure increased by $91,000 for the nine month period ended December 31, 2009, compared to the nine month period in 2008.  Compensation expense increased by $144,000, or 3.4%, during the 2009 period due primarily to merit compensation increases and increased employee healthcare costs from period to period.  These increased expenses were partially offset by a decrease in net occupancy and equipment expenses of $150,000, or 9.8%, mainly due to decreased depreciation expense as management has carefully controlled the purchase of capital items coupled with a decrease in leasehold expenditures.  Other noninterest expense items decreased by $43,000 mainly due to a decline in accounting and professional service costs.  Franchise tax expense decreased by $86,000, or 24.6%, to $263,000 for the nine month period ended December 31, 2009, compared to the nine months ended December 31, 2008, mainly due to adjustments in 2008 of a refund claim relating to a prior year’s amended return.

Federal Income Taxes

Federal income tax expense was $522,000 for the nine months ended December 31, 2009, a decrease of $71,000, or 12.0%, compared to the same period in 2008. The decrease was primarily due to an increase in interest income on non-taxable municipal securities during the 2009 period compared to the same period in 2008.  The effective tax rates were 22.3% and 25.7% for the nine month periods ended December 31, 2009 and 2008, respectively.

Comparison of Operating Results for the Three Month Periods Ended December 31, 2009 and 2008

General

Net income for the three months ended December 31, 2009 totaled $635,000, an increase of $51,000, or 8.7%, compared to $584,000 for the three month period ended December 31, 2008.  The increase in net income was primarily attributable to an increase in net interest income of $322,000, an increase in noninterest income of $163,000 and a decrease in the provision for federal income taxes of $37,000.  These items were partially offset by an increase in the provision for loan losses of $385,000 and an increase in noninterest expenses of $86,000.

33

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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 December 31,
	2009							2008
	Average Balance		Interest		Average Rate			Average Balance		Interest		Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)	$	252,656	$	3,581		5.67	%	$	256,409	$	3,927		6.13	%
Investment securities(2)		112,270		1,351		4.81			111,905		1,416		5.06
Interest-earning deposits(3)		13,119		57		1.74			10,130		65		2.57
Total interest-earning assets		378,045		4,989		5.28			378,444		5,408		5.72
Noninterest-earning assets		22,772							21,619
Total assets	$	400,817						$	400,063
Interest-bearing liabilities:
Deposits	$	306,125		1,099		1.44		$	311,315		1,798		2.31
Other short-term borrowings		7,008		7		0.40			9,531		13		0.55
Borrowings		45,938		443		3.86			42,609		479		4.50
Total interest-bearing liabilities		359,071		1,549		1.73			363,455		2,290		2.52
Noninterest bearing  liabilities		5,010							3,382
Total liabilities		364,081							366,837
Stockholders’ equity		36,736							33,226
Total liabilities and stockholders’ equity	$	400,817						$	400,063
Net interest income			$	3,440						$	3,118
Interest rate spread(4)						3.55	%						3.20	%
Net yield on interest- earning assets(5)						3.64	%						3.30	%
Ratio of average interest- earning assets to average  interest-bearing liabilities						105.28	%						104.12	%

___________________________________________________

(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.

34

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Interest Income

Interest income decreased by $419,000 or 7.8%, to $5.0 million for the three months ended December 31, 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 5.28% in the 2009 period from 5.72% for the three month period ended December 31, 2008, combined with a decrease of $399,000 in the average balance of interest-earning assets outstanding to $378.0 million for the three month period ended December 31, 2009, from $378.4 million for the comparable period ended December 31, 2008.The yield decrease was primarily due to the effect of Federal Reserve rate decreases that culminated in December 2008, leading to lower short term interest rates through much of 2009 as compared to 2008.

Interest income on loans decreased by $346,000, or 8.8%, for the three month period ended December 31, 2009, compared to the same period in 2008, primarily due to a reduction in the weighted-average rate on loans from 6.13% for the three months ended December 31, 2008 to 5.67% for the three months ended December 31, 2009.  As discussed earlier, this was mainly due to a decrease in rates of 175 basis points implemented by the Federal Reserve during the quarter ended December 31, 2008, and the corresponding effect on adjustable rate loans and new originations.   The decrease in interest income was further impacted by a decrease in the average balance of loans outstanding of $3.8 million, or 1.5%, to $252.7 million for the 2009 period.  Loan demand from qualified borrowers has been significantly reduced by the deterioration in economic conditions through 2009 as compared to 2008.

Interest income on securities decreased by $65,000, or 4.6%, during the three months ended December 31, 2009, compared to the same period in 2008.  This decrease was due primarily to a decrease of 25 basis points in the weighted-average rate to 4.81% for the three months ended December 31, 2009, compared to 5.06% for the same period ended December 31, 2008, partially offset by an increase in the average balance of $365,000, or 0.3%.

Dividends on Federal Home Loan Bank stock and other income decreased by $8,000, or 12.3%, for the three months ended December 31, 2009, compared to the same period in 2008, due primarily to a decrease in the weighted-average yield of 83 basis points resulting from reductions in short term market interest rates, to 1.74% for the 2009 quarter from 2.57% for the period ended December 31, 2008.  This decrease was partially offset by an increase in the average balance of $3.0 million.

Interest Expense

Interest expense totaled $1.5 million for the three months ended December 31, 2009, a decrease of $741,000, or 32.4%, compared to $2.3 million for the three months ended December 31, 2008.  The decrease resulted from a 79 basis point decrease in the weighted-average cost of funds to 1.73% for the 2009 period coupled with a decrease of $4.4 million in the average balance of deposits and borrowings outstanding to $359.1 million for the three month period ended December 31, 2009.

Interest expense on deposits totaled $1.1 million for the three months ended December 31, 2009, a decrease of $699,000, or 38.9%, compared to $1.8 million for the three months ended December 31, 2008.  The decrease resulted from an 87 basis point decrease in the weighted-average cost of deposits, to 1.44% for the 2009 period, combined with a decrease in the average balance outstanding of $5.2 million, or 1.7%, to $306.1 million for the 2009 period.  The decrease in the rate was due to market interest rate decreases and management’s retail deposit pricing strategy as discussed above.

35

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Interest expense on other short-term borrowings totaled $7,000 for the three month period ended December 31, 2009, a decrease of $6,000, from the 2008 period.  The decrease was primarily due to a decrease in the weighted-average cost of 15 basis points, to 0.40% for the three month period ended December 31, 2009, as the Federal Reserve decreased rates from period to period, combined with a decrease in the average balance of short-term borrowings of $2.5 million.

Interest expense on Federal Home Loan Bank advances totaled $443,000 for the three month period ended December 31, 2009, a decrease of $36,000 compared to the 2008 period.  The decrease was primarily due to a decrease in the weighted-average cost of 64 basis points to 3.86%.  This was partially offset by an increase of $3.3 million, or 7.8%, in the average balance of advances outstanding, as the Company replaced the loss of higher cost retail certificates of deposit with lower cost Federal Home Loan Bank advances.  The substitution of borrowings in place of deposits was consistent with management’s retail deposit pricing strategy as discussed above.

Net Interest Income

Net interest income totaled $3.4 million for the three month period ended December 31, 2009, an increase of $322,000, or 10.3%, compared to the three month period ended December 31, 2008.  The interest rate spread increased 35 basis points to 3.55% for the three month period ended December 31, 2009, compared to 3.20% for the three month period ended December 31, 2008.  The net interest margin increased 34 basis points to 3.64% for the three month period ended December 31, 2009, compared to 3.30% for the three month period ended December 31, 2008.  The increase in the interest rate spread was due to a shift in asset composition from lower yielding investment securities and deposits in other financial institutions 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 $570,000 provision for loan losses for the three month period ended December 31, 2009, an increase of $385,000 compared to the $185,000 provision for the comparable period in 2008.  The amount of the provision for loan losses is based on management’s assessment of portfolio performance indicators, primarily the increase in delinquent loans, non-performing loans and charge-offs, and economic conditions in the Company’s market area.  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, 2009.

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income, gain on sale of securities available for sale and gain on the sale of loans increased by $163,000, or 38.7%, for the three month period ended December 31, 2009, compared to the three month period ended December 31, 2008.  The increase was primarily due to gains on the sale of available for sale securities totaling $91,000 and gains on loan sales totaling $48,000 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.  As also discussed above, management sold certain available for sale securities to improve the interest rate risk and credit risk profile of the securities portfolio.  Service fees, charges and other operating income increased

36

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Noninterest Income (continued)

$14,000, or 4.4%, as management implemented a new fee schedule during the 2009 period.  These increases were also supplemented by an increase in trust income of $7,000, or 15.2%, in the three months ended December 31, 2009, compared to the same period ended December 31, 2008.

Noninterest Expense

Noninterest expense increased by $86,000, or 3.4%, to $2.7 million for the three months ended December 31, 2009, compared to the three months ended December 31, 2008.  The increase was primarily due to a $109,000 increase in federal deposit insurance expense, as a result of increased assessment rates imposed by the FDIC on all insured institutions and the absence of credits in the 2009 period that were realized in the 2008 period, and an increase in losses on disposal of real estate acquired through foreclosure of $30,000.  Compensation and employee benefits increased $50,000, or 3.5%, mainly due to merit compensation increases and increased healthcare costs for the period ended December 31, 2009 compared to the period ended December 31, 2008.  These increases were partially offset by a decrease in occupancy and equipment expense items of $65,000 due to decreased depreciation as management has exercised careful control over the purchase of capital items coupled with a decrease in leasehold and maintenance expenditures.   Finally, franchise tax expense decreased $41,000, or 32.0%, to $87,000 for the three months ended December 31, 2009, compared to the three months ended December 31, 2008, mainly due to adjustments in 2008 of a refund claim relating to a prior year’s amended returns.

Federal Income Taxes

Federal income tax expense was $165,000 for the three month period ended December 31, 2009, a decrease of $37,000, or 18.3%, compared to the same period in 2008.  The decrease was primarily due to an increase in the proportion of non-taxable income, mainly bank owned life insurance and municipal securities interest income, compared to the same period in 2008.    The effective tax rates were 20.6% and 25.7% for the three month periods ended December 31, 2009, and 2008, respectively.

37

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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.

Notes to Condensed Consolidated Financial Statements

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.

39

Wayne Savings Bancshares, Inc.

PART II

ITEM 1. Legal Proceedings

Notapplicable.

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.

40

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

41

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:	February 5, 2010	By:	/s/Phillip E. Becker
			Phillip E. Becker
			President and Chief Executive Officer
Date:	February 5, 2010	By:	/s/H. Stewart Fitz Gibbon III
			H. Stewart Fitz Gibbon III
			Executive Vice President and
			Chief Financial Officer

42

EX-31.1

Exhibit 31.1

PURSUANT TO RULE 13a-14(a) AND 15d-14(a)

OF THE SECURITIES AND EXCHANGE ACT OF 1934

CERTIFICATION OF THE CHIEF EXECUTIVE OFFICER

I, Phillip E. Becker, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Wayne Savings Bancshares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(c) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d) disclosed in this quarterly report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit  committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 5, 2010	/s/Phillip E. Becker
Date	Phillip E. Becker
	President and Chief Executive Officer

EX-31.2

Exhibit 31.2

PURSUANT TO RULE 13a-14(a) AND 15d-14(a)

OF THE SECURITIES AND EXCHANGE ACT OF 1934

CERTIFICATION OF THE CHIEF FINANCIAL OFFICER

I, H. Stewart Fitz Gibbon III, certify that:

1. I have reviewed this quarterly report on Form 10-Q of Wayne Savings Bancshares, Inc.;

2. Based on my knowledge, this quarterly report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this quarterly report;

3. Based on my knowledge, the financial statements and other financial information included in this quarterly report fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this quarterly report;

4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(c) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have:

a) designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this quarterly report is being prepared;

b) designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles;

c) evaluated the effectiveness of the registrant’s disclosure controls and procedures and presented in this quarterly report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this quarterly report based on such evaluation; and

d) disclosed in this quarterly report any changes in the registrant’s internal control over financial reporting that occurred during the registrant’s most recent fiscal quarter that has materially affected, or is likely to materially affect, the registrant’s internal control over financial reporting; and

5. The registrant’s other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant’s auditors and the audit  committee of the registrant’s board of directors (or persons performing the equivalent functions):

a) all significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant’s ability to record, process, summarize and report financial information; and

b) any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant’s internal control over financial reporting.

February 5, 2010	/s/H. Stewart Fitz Gibbon III
Date	H. Stewart Fitz Gibbon III
	Executive Vice President and
	Chief Financial Officer

EX-32

EXHIBIT 32

CERTIFICATION PURSUANT TO

18 U.S.C. SECTION 1350

I, Phillip E. Becker,  President and Chief Executive Officer and H. Stewart Fitz Gibbon III, Executive Vice President and Chief Financial Officer, of Wayne Savings Bancshares, Inc. (the “Company”), hereby certify, pursuant to Section 906 of the Sarbanes-Oxley Act of 2002, 18 U.S.C. section 1350, that:

(1) The Quarterly Report on Form 10-Q of the Company for the quarter ended December 31, 2009 (the “Report”) fully complies with the requirements of Sections 13(a) or 15(d) of the Securities Exchange Act of 1934 (15 U.S.C. 78m(a) or 78o(d)); and

(2) The information contained in the Report fairly presents, in all material respects, the financial condition and results of operations of the Company.

February 5, 2010	/s/Phillip E. Becker
Date	Phillip E. Becker
	President and Chief Executive Officer
February 5, 2010	/s/H. Stewart Fitz Gibbon III
Date	H. Stewart Fitz Gibbon III
	Executive Vice President and
	Chief Financial Officer