form10q-118713_wayne.htm

See accompanying notes to condensed consolidated financial statements.

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 1:

Basis of Presentation

The accompanying unaudited condensed consolidated financial statements as of September 30, 2011 and for the three and six months ended September 30, 2011 and 2010, 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, 2011. Reference is made to the accounting policies of the Company described in the Notes to the Consolidated Financial Statements contained in its Annual Report on Form 10-K.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included. The results of operations for the three and six months ended September 30, 2011, 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, 2011, has been derived from the consolidated balance sheet of the Company as of that date.

Critical Accounting Policies – The Company’s critical accounting policies relate to the allowance for loan losses and goodwill. The Company has established a systematic method of periodically reviewing the credit quality of the loan portfolio in order to establish a sufficient allowance for loan losses. The allowance for loan losses is based on management’s current judgments about the credit quality of individual loans and segments of the loan portfolio. The allowance for loan losses is established through a provision, and considers all known internal and external factors that affect loan collectibility as of the reporting date. Such evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers among other matters, the estimated net realizable value or the fair value of the underlying collateral, economic conditions, historical loan loss experience, management’s knowledge of inherent risks in the portfolio that are probable and reasonably estimable and other factors that warrant recognition in providing an appropriate loan loss allowance. Management has discussed the development and selection of this critical accounting policy with the audit committee of the Board of Directors. The Company recorded all assets and liabilities acquired in prior purchase acquisitions, including goodwill and other intangibles, at fair value as required. Goodwill is subject, at a minimum, to annual tests for impairment. Other intangible assets are amortized over their estimated useful lives using the straight-line method, and are subject to impairment if events or circumstances indicate a possible inability to realize the carrying amount. The initial goodwill and other intangibles recorded and subsequent impairment analysis requires management to make subjective judgments concerning estimates of how the acquired asset will perform in the future. Events and factors that may significantly affect the estimates include, among others, customer attrition, changes in revenue growth trends, specific industry conditions and changes in competition.

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 2:

Principles of Consolidation

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

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

Note 3:

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 six months ended September 30,				For the three months ended September 30,
	2011		2010		2011		2010
Weighted-average common shares outstanding (basic)		2,930,075		2,921,174		2,930,075		2,921,174
Dilutive effect of assumed exercise of stock options		––		––		––		––
Weighted-average common shares outstanding (diluted)		2,930,075		2,921,174		2,930,075		2,921,174

None of the outstanding options were included in the diluted earnings per share calculation for the three and six months ended September 30, 2011 and 2010, 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 September 30, 2011, 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.

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The Company accounts for the stock option plan in accordance with the provisions of FASB ASC 718-10. FASB ASC 718-10 requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date. Compensation cost is then recognized over the vesting period. There were no options granted during the six months ended September 30, 2011 and 2010. There was no compensation expense recognized for the stock option plan during the six months ended September 30, 2011 and 2010, as all options were fully vested prior to these periods.

A summary of the status of the Company’s stock option plan as of and for the six months ended September 30, 2011, and for the years ended March 31, 2011 and 2010, is presented below:

	Six months ended September 30,					Year ended March 31,
	2011					2011					2010
	Shares			Weighted Average exercise price		Shares			Weighted Average exercise price		Shares		Weighted Average exercise price
Outstanding at beginning of period		83,816		$	13.95		94,020		$	13.95		94,020	$	13.95
Granted		––			––		––			––		––		––
Exercised		––			––		––			––		––		––
Forfeited		(20,408	)		13,.95		(10,204	)		13.95		—		—

Outstanding at end of period		63,408		$	13.95		83,816		$	13.95		94,020	$	13.95

Options exercisable at period-end		63,408		$	13.95		83,816		$	13.95		94,020	$	13.95

The following information applies to options outstanding at September 30, 2011:

Number outstanding		63,408
Exercise price on all remaining options outstanding	$	13.95
Weighted-average remaining contractual life	2.50 years

Note 5:

Regulatory Matters

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Following the dissolution of the OTS on July 21, 2011, the Bank must give notice to the Federal Reserve Bank of Cleveland prior to declaring a dividend to the Company and is subject to existing regulatory guidance where, in general, a dividend is permissible without regulatory approval if the institution is considered to be “well capitalized” and the dividend does not exceed current year to date net income plus the change in retained earnings for the previous two calendar years.

Quantitative measures established by regulation to ensure capital adequacy require the Bank to maintain minimum amounts and ratios (set forth in the table below) of risk-based capital (as defined in the regulations) to risk-weighted assets (as defined), and of tangible and core capital (as defined) to adjusted total assets (as defined). As of September 30, 2011, the Bank met all capital adequacy requirements to which it was subject.

As of September 30, 2011, based on the computations for the Thrift Financial Report (TFR) the Bank is classified as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well-capitalized, the Bank must maintain capital ratios as set forth in the table below. There are no conditions or events since September 30, 2011 that management believes have changed the Bank’s capital classification.

The Bank’s actual capital amounts and ratios as of September 30, 2011 and March 31, 2011 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 September 30, 2011
Tangible capital	$	34,700		8.7	%	$	6,006		1.5	%	$	20,021		5.0	%
Core capital		34,700		8.7			16,016		4.0			24,025		6.0
Risk-based capital		37,613		16.1			18,645		8.0			23,307		10.0

As of March 31, 2011
Tangible capital	$	34,051		8.4	%	$	6,053		1.5	%	$	20,176		5.0	%
Core capital		34,051		8.4			16,141		4.0			24,212		6.0
Risk-based capital		35,888		15.1			19,023		8.0			23,779		10.0

Note 6:

Recent Accounting Developments

FASB Accounting Standards Update (ASU) 2010-28 “Intangibles – Goodwill and Other” (Topic 350), issued in December 2010, concerns when to perform step 2 of the goodwill impairment test for reporting units with zero or negative carrying amounts. The guidance clarifies the circumstances under which step 2 of the goodwill impairment test must be performed. The guidance is effective for fiscal years beginning after December 15, 2010 (April 1, 2011 for the Company), and for interim periods within those fiscal years. The adoption of FASB ASC 2010-28 did not have a material effect on the Company’s financial condition or results of operations.

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

FASB Accounting Standards Update (ASU) 2011-02 “Receivables: A Creditor’s Determination of Whether a Restructuring is a Troubled Debt Restructuring” (Topic 310), issued on April 5, 2011, concerns the clarification of the accounting principles applied to loan modification and addresses the recording of an impairment loss. The guidance is effective for fiscal quarters and years beginning after June 15, 2011 (July 1, 2011 for the Company). The adoption of FASB ASU 2011-02 did not have a material effect on the Company’s financial condition or results of operations.

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

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

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

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 7:

Securities

The amortized cost and approximate fair values, together with gross unrealized gains and losses, of securities are as follows:

	Amortized Cost		Gross Unrealized Gains		Gross Unrealized Losses		Approximate Fair Value
	(In thousands)
Available-for-sale Securities:
September 30, 2011:
U.S. government agencies	$	1,687	$	48	$	1	$	1,734
Mortgage-backed securities of government sponsored entities		104,905		3,238		88		108,055
Private-label collateralized mortgage obligations		1,950		56		—		2,006
State and political subdivisions		24,449		1,257		27		25,679

Totals	$	132,991	$	4,599	$	116	$	137,474

March 31, 2011:
U.S. government agencies	$	1,938	$	71	$	1	$	2,008
Mortgage-backed securities of government sponsored entities		99,779		2,597		118		102,258
Private-label collateralized mortgage obligations		2,282		56		—		2,338
State and political subdivisions		25,330		350		328		25,352

Totals	$	129,329	$	3,074	$	447	$	131,956

Index

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:
September 30, 2011:
U.S. government agencies	$	148	$	––	$	1	$	147
Mortgage-backed securities of government sponsored entities		402		14		––		416
State and political subdivisions		14		1		––		15

	$	564	$	15	$	1	$	578

March 31, 2011:
U.S. government agencies	$	153	$	––	$	1	$	152
Mortgage-backed securities of government sponsored entities		417		12		––		429
State and political subdivisions		21		1		––		22

	$	591	$	13	$	1	$	603

Index

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 September 30, 2011 by contractual maturity, are shown below. Expected maturities will differ from contractual maturities because issuers may have the right to call or prepay obligations with or without call or prepayment penalties.

	Available-for-sale				Held-to-maturity
	Amortized Cost		Fair Value		Amortized Cost		Fair Value
	(In thousands)

Within one year	$	1,516	$	1,563	$	14	$	15
One to five years		1,258		1,291		—		—
Five to ten years		7,475		7,932		––		––
After ten years		15,887		16,627		148		147

		26,136		27,413		162		162

Mortgage-backed securities of government sponsored entities		104,905		108,055		402		416
Private-label collateralized mortgage obligations		1,950		2,006		—		—

Totals	$	132,991	$	137,474	$	564	$	578

The carrying value of securities pledged as collateral to secure public deposits and for other purposes was $52.1 million and $55.7 million at September 30, 2011 and March 31, 2011, respectively.

Certain investments in debt securities are reported in the financial statements at an amount less than their historical cost. The total fair value of these investments at September 30, 2011 and March 31, 2011, was $13.4 million and $28.6 million, which represented approximately 10% and 22%, respectively, of the Company’s aggregate available-for-sale and held-to-maturity investment portfolio. These declines resulted primarily from changes in market interest rates.

Based on evaluation of available evidence, including recent changes in market interest rates, credit rating information and information obtained from regulatory filings, management believes the declines in fair value for these government agency, mortgage-backed and state and political subdivision securities are temporary at September 30, 2011.

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.

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

	September 30, 2011
	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. government agencies	$	—	$	—	$	318	$	2	$	318	$	2
Mortgage-backed securities of government sponsored entities		11,713		88		—		—		11,713		88
State and political subdivisions		—		—		1,323		27		1,323		27
Total temporarily impaired securities	$	11,713	$	88	$	1,641	$	29	$	13,354	$	117

	March 31, 2011
	Less than 12 Months				12 Months or More				Total
Description of Securities	Fair Value		Unrealized Losses		Fair Value		Unrealized Losses		Fair Value		Unrealized Losses
	(In thousands)
U.S. government agencies	$	—	$	—	$	329	$	2	$	329	$	2
Mortgage-backed securities of government sponsored entities		17,150		118		—		—		17,150		118
State and political subdivisions		10,403		304		761		24		11,164		328
Total temporarily impaired securities	$	27,553	$	422	$	1,090	$	26	$	28,643	$	448

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

Note 8:

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 assets measured at fair value on a recurring basis and recognized in the Company’s balance sheets, as well as the general classification of such instruments pursuant to the valuation hierarchy.

Available-for-sale Securities

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

The following table presents the fair value measurements of assets measured at fair value on a recurring basis and the level within the FASB ASC 820-10 fair value hierarchy in which the fair value measurements fall at September 30, 2011 and March 31, 2011:

			Fair Value Measurements Using
	Fair Value		Quoted Prices in Active Markets for Identical Assets (Level 1)		Significant Other Observable Inputs (Level 2)		Significant Unobservable Inputs (Level 3)
	(In thousands)
September 30, 2011
U.S. government agencies	$	1,734	$	––	$	1,734	$	––
Mortgage-backed securities of government sponsored entities		108,055		––		108,055		––
Private-label collateralized mortgage obligations		2,006		—		2,006		—
State and political subdivisions		25,679		––		25,679		––


March 31, 2011
U.S. government agencies	$	2,008	$	––	$	2,008	$	––
Mortgage-backed securities of government sponsored entities		102,258		––		102,258		––
Private-label collateralized mortgage obligations		2,338		—		2,338		—
State and political subdivisions		25,352		––		25,352		––

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

Impaired Loans (Collateral Dependent)

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 September 30, 2011 and March 31, 2011.

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

September 30, 2011
Impaired loans	$	1,810	$	––	$	––	$	1,810
Foreclosed assets		1,389		––		––		1,389

March 31, 2011
Impaired loans	$	4,766	$	––	$	––	$	4,766
Foreclosed assets		1,710		––		––		1,710

Index

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.

	September 30, 2011				March 31, 2011
	Carrying Amount		Fair Value		Carrying Amount		Fair Value
	(In thousands)
Financial assets
Cash and cash equivalents	$	12,222	$	12,222	$	8,271	$	8,271
Available-for-sale securities		137,474		137,474		131,956		131,956
Held-to-maturity securities		564		578		591		603
Loans, net of allowance for loan losses		229,660		237,172		239,993		244,500
Federal Home Loan Bank stock		5,025		5,025		5,025		5,025
Interest receivable		1,598		1,598		1,647		1,647

Financial liabilities
Deposits		327,932		327,201		320,072		313,888
Other short-term borrowings		5,339		5,339		6,373		6,373
Federal Home Loan Bank advances		29,067		30,228		39,507		40,215
Advances from borrowers for taxes and insurance		516		516		559		559
Interest payable		98		98		123		123

The following methods and assumptions were used to estimate the fair value of each class of financial instruments.

Cash and Cash Equivalents, Interest Receivable and Federal Home Loan Bank Stock

The carrying amount approximates fair value.

Loans

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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 September 30, 2011 and March 31, 2011.

Note 9:

Credit Quality of Loans and the Allowance for Loan Losses

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

September 30, 2011	One-to-four family residential			All other mortgage loans		Commercial business loans		Consumer loans		Unallocated		Total
Quarterly	(In thousands)
Allowance for loan losses: Balance, June 30,2011	$	1,076		$	1,840	$	295	$	10	$	—	$	3,221
Provision charged to expense		(53	)		487		8		—		—		442
Losses charged off		(34	)		—		—		—		—		(34	)
Recoveries		—			—		—		—		—		—
Balance, September 30, 2011	$	989		$	2,327	$	303	$	10	$		$	3,629
Six months year to date
Balance, March 31, 2011	$	1,073		$	1,967	$	158	$	5	$	—	$	3,203
Provision charged to expense		2			360		145		5		—		512
Losses charged off		(87	)		—		—		—		—		(87	)
Recoveries		1			—		—		—		—		1
Balance, September 30, 2011	$	989		$	2,327	$	303	$	10	$		$	3,629
Ending balance: individually evaluated for impairment	$	186		$	1,703	$	196	$	—	$	—	$	2,085
Ending balance: collectively evaluated for impairment	$	803		$	624	$	107	$	10	$	—	$	1,544

Loans:
Ending balance	$	154,979		$	68,540	$	8,954	$	2,288			$	234,761
Ending balance: individually evaluated for impairment	$	3,498		$	6,858	$	238	$	—			$	10,594
Ending balance: collectively evaluated for impairment	$	153,061		$	61,682	$	8,716	$	2,288			$	225,747

March 31, 2011	One-to-four family residential			All other mortgage loans			Commercial business loans			Consumer loans			Unallocated		Total
	(In thousands)
Allowance for loan losses:
Balance, beginning of year	$	1,140		$	1,469		$	209		$	8		$	—	$	2,826
Provision charged to expense		37			488			30			(3	)		—		552
Losses charged off		(112	)		(5	)		(81	)		(1	)				(199	)
Recoveries		8			15			—			1			—		24
Balance, end of year	$	1,073		$	1,967		$	158		$	5		$	—	$	3,203
Ending balance: individually evaluated for impairment	$	149		$	1,158		$	59		$	—		$	—	$	1,366
Ending balance: collectively evaluated for impairment	$	924		$	809		$	99		$	5		$	—	$	1,837
Loans:
Ending balance	$	162,435		$	70,976		$	8,204		$	2,414				$	244,029
Ending balance: individually evaluated for impairment	$	3,183		$	6,017		$	123		$	—				$	9,323
Ending balance: collectively evaluated for impairment	$	159,252		$	64,959		$	8,081		$	2,414				$	234,706

Total loans in the above tables do not include deferred loan origination fees of $395,000 and $420,000 or loans in process of $1.1 million and $402,000 for September 30, 2011 and March 31, 2011, respectively.

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

September 30, 2011	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	149,363	$	58,192	$	8,590	$	2,285
Special Mention (Risk 5)		431		3,490		126		—
Substandard (Risk 6)		5,185		6,858		238		3

Total	$	154,979	$	68,540	$	8,954	$	2,288

March 31, 2011	One-to-four family residential		All other mortgage loans		Commercial business loans		Consumer loans
	(In thousands)
Rating *
Pass (Risk 1-4)	$	156,866	$	58,341	$	7,917	$	2,391
Special Mention (Risk 5)		834		6,601		164		—
Substandard (Risk 6)		4,735		6,034		123		23

Total	$	162,435	$	70,976	$	8,204	$	2,414

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

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

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

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

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

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

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

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

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

One-to-four family residential loans	$	193	$	411	$	972	$	1,576	$	153,403	$	154,979	$	—
All other mortgage loans		45		511		1,899		2,455		66,085		68,540		—
Commercial business loans		23		38		35		96		8,858		8,954		—
Consumer loans		10		10		16		36		2,252		2,288		—

Total	$	271	$	970	$	2,922	$	4,163	$	230,598	$	234,761	$	—

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

One-to-four family residential loans	$	1,306	$	113	$	1,782	$	3,201	$	159,234	$	162,435	$	—
All other mortgage loans		888		—		1,386		2,274		68,702		70,976		—
Commercial business loans		—		90		—		90		8,114		8,204		—
Consumer loans		—		—		20		20		2,394		2,414		—

Total	$	2,194	$	203	$	3,188	$	5,585	$	238,444	$	244,029	$	—

Non-accrual loans were comprised of the following at:

	September 30, 2011		March 31, 2011
	Nonaccrual
	(In thousands)

One-to-four family residential loans	$	2,770	$	2,739
All other mortgage loans		3,158		2,362
Commercial business loans		237		33
Consumer loans		3		23

Total	$	6,168	$	5,157

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

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

September 30, 2011	Recorded Balance		Unpaid Principal Balance		Specific Allowance		QTD Average Investment in Impaired Loans		YTD Average Investment in Impaired Loans		QTD Interest Income Recognized		YTD Interest Income Recognized
	(in thousands)
Loans without a specific valuation allowance
One-to-four family residential loans	$	3,003	$	3,003	$	—	$	2,945	$	3,280	$	22	$	50
All other mortgage loans		1,777		1,777		—		1,922		2,191		29		34

Loans with a specific valuation allowance
One-to-four family residential loans		494		494		186		382		573		13		18
All other mortgage loans		5,082		5,082		1,703		5,047		5,265		5		54
Commercial business loans		238		238		196		221		583		—		—

Total:
One-to-four family residential loans	$	3,497	$	3,497	$	186	$	3,327	$	3,853	$	35	$	68
All other mortgage loans		6,859		6,859		1,703		6,969		7,456		34		88
Commercial business loans		238		238		196		221		583		—		—
	$	10,594	$	10,594	$	2,085	$	10,517	$	11,892	$	69	$	156

Index

Wayne Savings Bancshares, Inc.

Notes to Condensed Consolidated Financial Statements

March 31, 2011	Recorded Balance		Unpaid Principal Balance		Specific Allowance		Average Investment in Impaired Loans		Interest Income Recognized
	(in thousands)
Loans without a specific valuation allowance
One-to-four family residential loans	$	2,319	$	2,319	$	—	$	1,781	$	91
All other mortgage loans		919		919		—		839		38

Loans with a specific valuation allowance
One-to-four family residential loans		863		863		149		505		7
All other mortgage loans		5,099		5,099		1,158		3,503		128
Commercial business loans		123		123		59		131		6

Total:
One-to-four family residential loans	$	3,182	$	3,182	$	149	$	2,286	$	98
All other mortgage loans		6,018		6,018		1,158		4,342		166
Commercial business loans		123		123		59		131		6
	$	9,323	$	9,323	$	1,366	$	6,759	$	270

	Quarter-to-Date						Year-to-Date
September 30, 2011	Number of loans		Pre- modification Unpaid Principal Balance		Post- modification Unpaid Principal Balance		Number of loans		Pre- modification Unpaid Principal Balance		Post- modification Unpaid Principal Balance
Troubled Debt Restructurings	(dollars in thousands)

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

All the above TDR classifications occurred due to an effective interest rate below the market interest rate of similar debt. Each TDR has been individually evaluated for impairment with the appropriate specific valuation allowance included in the allowance for loan losses calculation.

There were no TDR classifications which defaulted during the three and six month period ended September 30, 2011.

As a result of adopting the amendments in Accounting Standards Update No. 2011-02 (the ASU), the Company reassessed all restructurings occurring on or after the beginning of its current fiscal year (April 1, 2011) for identification of TDRs. The Company identified no additional TDRs for which an allowance for credit losses had previously been measured under a general allowance for credit losses methodology.

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Strategic Initiatives

As part of an ongoing strategic planning process, which includes annual plan updates and regular progress reviews by the Board of Directors, the Company is engaged in several initiatives to improve the returns to shareholders over a foreseeable time horizon.

These initiatives include the development of a comprehensive marketing and sales program to increase top line revenue of the company through loans and fee income generating activities, a comprehensive review of the branch facilities and staff to identify opportunities for cost effective reductions to improve operational efficiency, evaluation of alternative approaches for the delivery of trust services to ensure profitable operation of the department and evaluation of information technology solutions to improve internal efficiency and customer service.

In addition, the Board of Directors has established the position of Chief Risk Officer, with responsibility for the development of a comprehensive Enterprise Risk Management (ERM) program to ensure that the earnings generated through existing and contemplated activities are commensurate with the risks assumed in those activities and consistent with legal requirements, regulatory requirements and general economic conditions.

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

At September 30, 2011, the Company had total assets of $406.3 million, a decrease of $1.4 million, or 0.4%, from total assets at March 31, 2011.

Liquid assets, consisting of cash, interest-bearing demand deposits and available-for-sale securities, increased by $9.5 million, or 6.8%, to $149.7 million at September 30, 2011 compared to $140.2 million at March 31, 2011. The increase was primarily due to an increase of $4.0 million in cash and cash equivalents and an increase in available-for-sale securities of $5.5 million, or 4.2%. These increases were in turn due to regular payments and “prepayments” on loans that reduced the loan portfolio and an increase in deposit balances due to customer preferences for insured deposit accounts over other investment alternatives. Increased payments on loans, also known as “prepayments,” occur in low interest rate environments where borrowers can exercise an option to refinance existing loans either with or without a prepayment penalty. Similarly, low interest rates induce depositors to select liquid types of accounts over time deposits and other investment alternatives.

Total securities increased by $5.5 million, or 4.1%, during the six month period ended September 30, 2011. The increase was primarily due to purchases of $22.6 million and an increase in the fair value of available-for-sale investment securities of $1.9 million, partially offset by maturities and principal repayments of $18.2 million and amortization of premiums of $684,000 for the year. Purchases were mainly funded by proceeds from principal payments received from the loan and securities portfolios and an increase in deposit balances as more fully described above.

Net loans receivable decreased by $10.3 million, or 4.3% at September 30, 2011 compared to March 31, 2011. The Bank originated $18.7 million of loans, received payments of $29.1 million and originated and sold $1.1 million of 30-year fixed-rate mortgage loans into the secondary market. The low interest rate environment has induced a number of residential and commercial borrowers to refinance existing loans, which increases loan repayment activity, while the continuing difficult economic environment continues to limit the demand for new loans by credit worthy borrowers.

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

As part of an overall strategy to manage liquidity and interest rate risk, management has executed a strategy of immediately selling certain newly originated 30-year fixed-rate mortgage loans into the secondary market to limit the accumulation of interest rate risk on the balance sheet and to keep the secondary market channel open as a backup source of liquidity. Similarly, in order to further limit the accumulation of interest rate risk on the balance sheet, the Company focuses on the origination of shorter-term and adjustable-rate secured commercial loans and limits the origination and retention of long term fixed-rate residential mortgages. To the extent that loan demand is insufficient in the current period, investments in the securities portfolio are made to provide future cash flows to fund loan demand in future periods while also limiting the interest rate risk exposure of the Company. Investments generally contribute to higher risk based capital ratios, compared to loans, as the investments the Company purchases are risk weighted less than the loan originations. When loan volume accelerates, risk based capital will decline.

	September 30, 2011				March 31, 2011
	(Dollars in thousands)
Mortgage loans:
One-to-four family residential(1)	$	154,979	66.02	%	$	162,435	66.57	%
Residential construction loans		537	0.23			160	0.07
Multi-family residential		8,682	3.70			8,308	3.40
Non-residential real estate/land(2)		59,321	25.27			62,508	25.61
Total mortgage loans		223,579	95.22			233,411	95.65
Other loans:
Consumer loans(3)		2,288	0.97			2,414	0.99
Commercial business loans		8,954	3.81			8,204	3.36
Total other loans		11,242	4.78			10,618	4.35
Total loans before net items		234,761	100.00	%		244,029	100.00	%
Less:
Loans in process		1,077				413
Deferred loan origination fees		395				420
Allowance for loan losses		3,629				3,203
Total loans receivable, net	$	229,660			$	239,993

_____________________________

(1)	Includes loans collateralized by second mortgages in the aggregate amount of $15.8 million at both September 30, 2011 and March 31, 2011. Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.

(2)	Includes land loans of $2.8 million for both September 30, 2011 and March 31, 2011.

(3)	Includes second mortgage loans of $1.2 million and $988,000 for September 30, 2011 and March 31, 2011, respectively.

Foreclosed assets held for sale amounted to $1.5 million at September 30, 2011 and $2.2 million at March 31, 2011. Activity during the year consisted of eight acquisitions totaling $455,000 and the capitalization of improvements totaling $64,000, offset by write downs (provisions for impairment on foreclosed assets held for sale) totaling $510,000 and sales of $620,000. These write downs are reflected in the carrying values of foreclosed assets at the end of each period. Despite the difficult real property markets in the Company’s market area, transactions continue to be executed. 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 and impaired assets amounted to $13.8 million at September 30, 2011, compared to $13.2 million at March 31, 2011.

Deposits totaled $327.9 million at September 30, 2011, an increase of $7.9 million, or 2.5%, over $320.1 million at March 31, 2011. Demand accounts increased by $7.7 million and time deposits increased by $441,000, partially offset by a $300,000 decrease in savings and money market accounts. Management continued to exercise discipline during the period with regard to the pricing of retail certificates, keeping

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

rates close to market benchmarks. Given the uncertain status of the economy in general, customers are choosing to increase their liquidity and keep their funds in secure products offered by the Bank.

Other short-term borrowings, in the form of recurring repurchase agreements with commercial customers of the Bank, declined $1.0 million over the six months to a balance of $5.3 million. These customer repurchase agreements are offered by the Bank in order to retain customer funds and to afford commercial customers the opportunity to earn a return on a short term secured transaction. Average balances are shown in the tables below and reflect no significant variation during the periods. The interest rate paid on these borrowings was 0.15% for September 30, 2011 and 0.30% for March 31, 2011.

Advances from the Federal Home Loan Bank of Cincinnati (“FHLB”) totaled $29.1 million at September 30, 2011, and $39.5 million at March 31, 2011. The Company 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 laddering of advance maturities over time. The weighted average cost of FHLB advances was 2.85% at September 30, 2011, compared to 3.15% at March 31, 2011.

Stockholders’ equity increased by $1.7 million, or 4.5%, during the six months ended September 30, 2011, mainly due to the addition of accumulated other comprehensive income of $1.2 million and net income of $824,000, partially offset by declared dividends of $351,000.

Comparison of Operating Results for the Three Month Periods Ended September 30, 2011 and 2010

General

Net income for the three months ended September 30, 2011 totaled $309,000, a decrease of $365,000, or 54.2%, compared to $674,000 for the three month period ended September 30, 2010. The decrease in net income was primarily due to an increase of $322,000 in provision for loan losses, an increase of $193,000 in provision for impairment on foreclosed assets held for sale and a $49,000 decrease in net interest income partially offset by a $197,000 decrease in tax expense.

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Average Balance Sheet

The following table sets forth certain information relating to the Company’s average balance sheet and reflects the average yield on assets and average cost of liabilities for the periods indicated 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 September 30,
	2011							2010
	Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)	$	232,467	$	3,067		5.28	%	$	241,765		$	3,329		5.51	%
Investment securities(2)		139,498		1,091		3.13			129,805			1,214		3.74
Interest-earning deposits(3)		16,616		54		1.30			13,543			58		1.71
Total interest-earning assets		388,581		4,212		4.34			385,113			4,601		4.78
Noninterest-earning assets		23,818							25,208

Total assets	$	412,399						$	410,321

Interest-bearing liabilities:
Deposits	$	328,638	$	752		0.92	%	$	315,966		$	958		1.21	%
Other short-term borrowings		5,904		3		0.20			7,485			8		0.43
Borrowings		34,298		272		3.17			44,075			401		3.64
Total interest-bearing liabilities		368,840		1,027		1.11			367,526			1,367		1.49

Noninterest bearing liabilities		3,653							4,145
Total liabilities		372,493							371,671
Stockholders’ equity		39,906							38,650
Total liabilities and stockholders’ equity	$	412,399						$	410,321
Net interest income			$	3,185							$	3,234
Interest rate spread(4)						3.23	%							3.29	%
Net yield on interest-earning assets(5)						3.28	%							3.36	%
Ratio of average interest-earning assets to average interest-bearing liabilities						105.35	%							104.79	%

(1) Includes non-accrual loan balances.

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

(3) Includes interest-bearing deposits in other financial institutions.

(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest Income

Interest income decreased by $389,000 or 8.5%, to $4.2 million for the three months ended September 30, 2011, compared to the same period in 2010. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.34% in the 2011 period from 4.78% for the 2010 period, partially offset by an increase of $3.5 million in the average balance of interest-earning assets outstanding to $388.6 million for the 2011 period compared to an average balance of $385.1 million for the 2010 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2010 period to the 2011 period through interest rate resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $262,000, or 7.9%, for the three month period ended September 30, 2011, compared to the same period in 2010, due to a decrease in the average balance of loans outstanding of $9.3 million and a reduction of 23bps in the portfolio yield. The yield on the loan portfolio decreased from 5.51% for the three months ended September 30, 2010 to 5.28% for the three months ended September 30, 2011, again due to reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding decreased $9.3 million, or 3.8%, to $232.5 million for the 2011 period compared to $241.8 million for the 2010 period. Loan prepayments have increased due to the low interest rate environment and loan originations have decreased due to lack of demand from qualified borrowers resulting from the continued difficult economic conditions in 2011.

Interest income on securities decreased by $123,000, or 10.1%, during the three months ended September 30, 2011, compared to the same period in 2010. This decrease was due primarily to a decrease of 61 basis points in the weighted-average rate to 3.13% for the 2011 period, compared to 3.74% for the 2010 period, partially offset by an increase in the average balance of $9.7 million, or 7.5%. As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide portfolio cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income decreased by $4,000 to $54,000 for the three month period ended September 30, 2011 compared to the 2010 period. The decrease can be attributed to the decrease in the weighted-average yield of 41 basis points to 1.30% as a result of reductions in short term market interest rates. The decrease in the weighted average yield was offset by an increase in weighted average balances of $3.1 million.

Interest Expense

Interest expense totaled $1.0 million for the three month period ended September 30, 2011, a decrease of $340,000, or 24.9%, compared to $1.4 million for the three month period ended September 30, 2010. The decrease was mainly due to a 38 basis point decrease in the weighted-average cost of funds to 1.11% for the 2011 period compared to 1.49% the previous year, partially offset by an increase in the average balance of total interest-bearing liabilities of $1.3 million for the 2011 period compared to the 2010 period.

Interest expense on deposits totaled $752,000, a decrease of $206,000, or 21.5%, compared to $958,000 for the same period in the previous year. The decrease was mainly due to a 29 basis point decrease in the

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

weighted-average cost of deposits, to 0.92% for the 2011 period compared to 1.21% for the 2010 period, partially offset by an increase in the average balance of $12.7 million, or 4.0%, to $328.6 million for the period ending September 30, 2011. The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $3,000 for the three month period ended September 30, 2011, a $5,000 decrease over the same period in the previous year. The weighted-average cost decreased 23 basis points to 0.20% and the average balance decreased $1.6 million, or 21.1%

Interest expense on Federal Home Loan Bank advances totaled $272,000 for the three month period ended September 30, 2011, a decrease of $129,000 compared to the expense of $401,000 for the 2010 period. The decrease was mainly due to a decline of $9.8 million, or 22.2%, in the average balance outstanding along with a decrease in the weighted-average cost of 47 basis points to 3.17%. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates. During December 2010, the Bank modified $8.5 million of FHLB advances to reduce the carrying cost and extend the maturity dates of those advances to take advantage of the interest rate environment at that time. Management will continue to reserve FHLB borrowing capacity as a possible substitute for higher cost retail deposits and as a means of extending liability duration to manage interest rate risk on the balance sheet.

Net Interest Income

Net interest income totaled $3.2 million for the three month period ended September 30, 2011, a decrease of $49,000, or 1.5%, from the three month period ended September 30, 2010. The interest rate spread decreased 7 basis point to 3.22% for the 2011 period compared to the 2010 period. Similarly, the net interest margin decreased 8 basis points to 3.28% for the three month period ended September 30, 2011. The relatively equivalent rates can be attributed to management’s close monitoring of borrowed funds balances and pricing of existing loan and deposit products. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded a $442,000 provision for loan losses for the three month period ended September 30, 2011, an increase of $322,000 compared to the $120,000 provision for the three month period ended September 30, 2010. The increase was mainly due to an additional allocated allowance required for an updated appraisal on a single commercial real estate property . The provision for loan losses is based on management’s assessment of portfolio performance indicators, including the levels and trends in delinquent loans, non-performing loans and charge-offs, and economic conditions in the Company’s market area, characterized by continuing high levels of unemployment and foreclosure activity, although these ratios trended lower in 2011 compared to 2010, partially offset by a decrease in the size of the loan portfolio. 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 September 30, 2011.

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Noninterest Income

Noninterest income, consisting of service fees and charges on deposit accounts, earnings on bank-owned life insurance, trust income, gain on sale of foreclosed assets and gain on the sale of loans increased by $47,000, or 9.7%, for the three month period ended September 30, 2011, compared to the three month period ended September 30, 2010. The increase was due primarily to increased trust income of $33,000 and a $23,000 increase in other service fees, charges and other operating income from increased fee income related to sales of non-deposit investment products. These increased income levels were mainly due to non-recurring fee items. These increases were partially offset by a decrease in the gain on sale of loans of $21,000.

The increase in service fees on deposit accounts was due to a non-recurring increase in annuity fee sales offset by reduced overdraft and monthly statement fees as customers managed their deposit accounts to avoid such fees and the effect of an overall reduction in the level of economic activity in the Company’s market area.

Noninterest Expense

Noninterest expense increased by $238,000, or 8.8%, to $3.0 million for the three months ended September 30, 2011, compared to $2.7 million for the three months ended September 30, 2010. The increase was primarily due to a $193,000 increase in provision for impairment on foreclosed assets held for sale, of which $150,000 was related to a single commercial real estate property, and an increase of $82,000 in salaries and employee benefits. The large increase in the provision for impairment on foreclosed assets is related to the continued evaluation and appraisal of foreclosed property held by the Bank. Salaries and employee benefits increased mainly due to merit increases and increased commission based compensation year over year. Federal deposit insurance premiums decreased by $46,000 due to lower assessment rates for the 2011 period compared to the 2010 period.

Federal Income Taxes

Federal income tax expense was $16,000 for the three month period ended September 30, 2011, a decrease of $197,000 compared to the three month period ended September 30, 2010. The decrease was primarily due to a $562,000 decrease in pretax income resulting from the factors discussed above. The effective tax rate was 4.9% for the 2011 period compared to 24.0% for the 2010 period. The decrease in the effective tax rate was mainly due to an increase in the proportion of tax exempt income generated by municipal securities and bank owned life insurance to total income.

Comparison of Operating Results for the Six Month Periods Ended September 30, 2011 and 2010

General

Net income for the six months ended September 30, 2011 totaled $824,000, a decrease of $493,000, or 37.4%, compared to $1.3 million for the six month period ended September 30, 2010. The decrease in net income was primarily due to an increase of $434,000 in provision for impairment on foreclosed assets held

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

for sale, a $202,000 increase in provision for loan losses and a $127,000 increase in salaries and employee benefits offset by a $251,000 decrease in tax expense.

Average Balance Sheet

	For the six months ended September 30,
	2011							2010
	Average Balance		Interest		Average Rate			Average Balance		Interest			Average Rate
	(Dollars in thousands)
Interest-earning assets:
Loans receivable, net(1)	$	235,294	$	6,204		5.27	%	$	246,620		$	6,763		5.48	%
Investment securities(2)		136,435		2,268		3.32			126,915			2,430		3.83
Interest-earning deposits(3)		15,390		112		1.46			13,447			115		1.71
Total interest-earning assets		387,119		8,584		4.43			386,982			9,308		4.81
Noninterest-earning assets		24,025							22,275

Total assets	$	411,144						$	409,257

Interest-bearing liabilities:
Deposits	$	326,426	$	1,544		0.95	%	$	315,272		$	1,970		1.25	%
Other short-term borrowings		5,949		8		0.27			7,377			15		0.41
Borrowings		35,572		565		3.18			44,330			817		3.69
Total interest-bearing liabilities		367,947		2,117		1.15			366,979			2,802		1.53

Noninterest bearing liabilities		3,624							4,153
Total liabilities		371,571							371,132
Stockholders’ equity		39,573							38,125
Total liabilities and stockholders’ equity	$	411,144						$	409,257
Net interest income			$	6,467							$	6,506
Interest rate spread(4)						3.28	%							3.28	%
Net yield on interest-earning assets(5)						3.34	%							3.36	%
Ratio of average interest-earning assets to average interest-bearing liabilities						105.21	%							105.45	%

__________________________________

(1) Includes non-accrual loan balances.

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

(3) Includes interest-bearing deposits in other financial institutions.

(4) Interest rate spread represents the difference between the average yield on interest-earning assets and the average cost of interest-bearing liabilities.

(5) Net yield on interest-earning assets represents net interest income as a percentage of average interest-earning assets.

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

Interest Income

Interest income decreased by $724,000 or 7.8%, to $8.6 million for the six months ended September 30, 2011, compared to the same period in 2010. The decrease was due to a decline in the weighted-average yield on interest-earning assets to 4.43% in the 2011 period from 4.81% for the 2010 period, partially offset by an increase of $137,000 in the average balance of interest-earning assets outstanding to $387.1 million for the 2011 period compared to an average balance of $387.0 million for the 2010 period. The yield decrease was primarily due to the cumulative effect of interest-earning assets repricing to lower current market rates from the 2010 period to the 2011 period through resets on adjustable rate loans and securities, prepayments, lower rates on new loan originations and reinvestment of securities cashflows at lower market yields.

Interest income on loans decreased by $559,000, or 8.3%, for the six month period ended September 30, 2011, compared to the same period in 2010, due to a decrease in the average balance of loans outstanding of $11.3 million coupled with a reduction of 21bps in the portfolio yield. The yield on the loan portfolio decreased from 5.48% for the six months ended September 30, 2010 to 5.27% for the six months ended September 30, 2011, again due to reduced origination yields and the amortization, prepayment and repricing of higher yielding assets due to the low level of market interest rates. The average balance of loans outstanding decreased $11.3 million, or 4.6%, to $235.3 million for the 2011 period compared to $246.6 million for the 2010 period. Loan prepayments have increased due to the low interest rate environment and loan originations have decreased due to lack of demand from qualified borrowers resulting from the continued difficult economic conditions in 2011.

Interest income on securities decreased by $162,000, or 6.7%, during the six months ended September 30, 2011, compared to the same period in 2010. This decrease was due primarily to a decrease of 51 basis points in the weighted-average rate to 3.32% for the 2011 period, compared to 3.83% for the 2010 period, partially offset by an increase in the average balance of $9.5 million, or 7.5%. As discussed earlier, maturing securities cash flows are being reinvested at significantly lower market rates, and the duration of purchased securities is being shortened to mitigate the interest rate risk associated with a possible future increase in the level of market interest rates and to provide portfolio cash flows to fund future loan demand.

Dividends on Federal Home Loan Bank stock and other income decreased by $3,000 to $112,000 for the six month period ended September 30, 2011 compared to the 2010 period. The decrease can be attributed to the decrease in the weighted-average yield of 25 basis points to 1.46% as a result of reductions in short term market interest rates. The decrease in the weighted average yield was offset by an increase in weighted average balances of $1.9 million.

Interest Expense

Interest expense totaled $2.1 million for the six month period ended September 30, 2011, a decrease of $685,000, or 24.4%, compared to $2.8 million for the six month period ended September 30, 2010. The decrease was mainly due to a 38 basis point decrease in the weighted-average cost of funds to 1.15% for the 2011 period compared to 1.53% the previous year, partially offset by an increase in the average balance of total interest-bearing liabilities of $968,000 for the 2011 period compared to the 2010 period.

Interest expense on deposits totaled $1.5 million a decrease of $426,000, or 21.6%, compared to $2.0 million for the same period in the previous year. The decrease was mainly due to a 30 basis point decrease in the weighted-average cost of deposits, to 0.95% for the 2011 period compared to 1.25% for the 2010

Index

Wayne Savings Bancshares, Inc.

Management’s Discussion and Analysis of Financial

Condition and Results of Operations

period, partially offset by an increase in the average balance of $11.2 million, or 3.5%, to $326.4 million for the period ending September 30, 2011. The decrease in interest expense is slowing as rates paid on deposit products reach floors established by local market competitors and overall market conditions.

Interest expense on other short-term borrowings totaled $8,000 for the six month period ended September 30, 2011, a $7,000 decrease over the same period in the previous year. The weighted-average cost decreased 14 basis points to 0.27% and the average balance decreased $1.4 million, or 19.4%

Interest expense on Federal Home Loan Bank advances totaled $565,000 for the six month period ended September 30, 2011, a decrease of $252,000 compared to the expense of $817,000 for the 2010 period. The decrease was mainly due to a decline in the weighted-average cost of 51 basis points to 3.18%, and a decrease of $8.8 million, or 19.8%, in the average balance of advances outstanding. The decrease in the rate paid is mainly due to decreases in market interest rates as maturing advances have either been paid off or refinanced at lower rates. During December 2010, the Bank modified $8.5 million of FHLB advances to reduce the carrying cost and extend the maturity dates of those advances to take advantage of the current low interest rate environment. Management will continue to reserve FHLB borrowing capacity as a possible substitute for higher cost retail deposits and as a means of extending liability duration to manage interest rate risk on the balance sheet.

Net Interest Income

Net interest income totaled $6.5 million for the six month period ended September 30, 2011, which decreased $39,000, or 0.6%, from the previous year’s six month period ended September 30, 2010. The interest rate spread remained at 3.28% for both periods. The net interest margin decreased 2 basis points to 3.34% for the six month period ended September 30, 2011. The relatively equivalent rates can be attributed to management’s close monitoring of borrowings and pricing of existing products. The cost of funds was managed in a manner that would allow the Bank to compete with existing market interest rates on interest earning assets.

Provision for Loan Losses

Management recorded a $512,000 provision for loan losses for the six month period ended September 30, 2011, an increase of $202,000 compared to the $310,000 provision for the six month period ended September 30, 2010. The increase was mainly due to an additional allocated allowance required for an updated appraisal on a single commercial real estate property . The provision for loan losses is based on management’s assessment of portfolio performance indicators, including the levels and trends in delinquent loans, non-performing loans and charge-offs, and economic conditions in the Company’s market area, characterized by continuing high levels of unemployment and foreclosure activity, although these ratios trended lower in 2011 compared to 2010, partially offset by a decrease in the size of the loan portfolio. 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 September 30, 2011.

Noninterest Income

Index

Wayne Savings Bancshares, Inc.

Part I

$4,000 for the six month period ended September 30, 2011, compared to the six month period ended September 30, 2010. The decrease was due primarily to a decrease in the gain on sale of loans of $70,000, partially offset by increased trust income of $57,000 coupled with a $12,000 increase in other service fees, charges and other operating income related to sales of non-deposit investment products. The trust income increased levels was mainly due to non-recurring fee items.

The increase in service fees on deposit accounts was due to a non-recurring increase in the volume of fee income related to sales of non-deposit investment products offset by reduced overdraft and monthly statement fees as customers managed their deposit accounts to avoid such fees and the effect of an overall reduction in the level of economic activity in the Company’s market area.

Noninterest Expense

Noninterest expense increased by $499,000, or 9.2%, to $6.0 million for the six months ended September 30, 2011, compared to $5.5 million for the six months ended September 30, 2010. The increase was primarily due to a $434,000 increase in provision for impairment on foreclosed assets held for sale, of which $337,000 was related to a single commercial real estate property, and an increase of $127,000 in salaries and employee benefits mainly due to merit increases year to year. The large increase in the provision for impairment on foreclosed assets is related to the continued evaluation and appraisal of foreclosed property held by the Bank. Federal deposit insurance premiums decreased by $83,000 due to lower assessment rates for the 2011 period compared to the 2010 period.

Federal Income Taxes

Federal income tax expense was $152,000 for the six month period ended September 30, 2011, a decrease of $251,000 compared to the six month period ended September 30, 2010. The decrease was primarily due to a $744,000 decrease in pretax income resulting from the factors discussed above. The effective tax rate was 15.6% for the 2011 period compared to 23.4% for the 2010 period. The decrease in the effective tax rate was mainly due to an increase in the proportion of tax exempt income generated by municipal securities and bank owned life insurance to total income.

Forward-Looking Statements

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

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

Index

Wayne Savings Bancshares, Inc.

Part I

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

ITEM 3 Quantitative and Qualitative Disclosures About Market Risk

Management believes there has been no material change in the Company’s market risk since the Company’s Form 10-K filed with the Securities and Exchange Commission for the year ended March 31, 2011.

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.

Index

Wayne Savings Bancshares, Inc.

PART II

ITEM 1.	Legal Proceedings
	Not applicable.

ITEM 1A.	Risk Factors
	There have been no material changes in the risk factors set forth in Part I, Item 1A of the Company’s Annual Report on Form 10-K for the year ended March 31, 2011.

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.	Reserved

	Not applicable.

ITEM 5.	Other Information
	Not applicable.

Index

Wayne Savings Bancshares, Inc.

PART II

ITEM 6. Exhibits

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

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

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

	EX-101	Interactive financial data (XBRL)

Index

SIGNATURES

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

Date:	November 9, 2011	By:	/s/Rod C. Steiger
			Rod C. Steiger
			President and Chief Executive Officer



Date:	November 9, 2011	By:	/s/Myron Swartzentruber
			Myron Swartzentruber
			Senior Vice President and
			Chief Financial Officer

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)

	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	26

Item 3 Quantitative and Qualitative Disclosures About Market Risk	37

Item 4T Controls and Procedures	37


PART II - OTHER INFORMATION

Item 1 Legal Proceedings	38

Item 1A Risk Factors	38

Item 2 Unregistered Sales of Equity Securities and Use of Proceeds	38

Item 3 Defaults Upon Senior Securities	38

Item 4 Reserved	38

Item 5 Other Information	38

Item 6 Exhibits	39

SIGNATURES	40

	September 30, 2011			March 31, 2011
	(Unaudited)
ASSETS
Cash and due from banks	$	7,122		$	4,833
Interest-bearing demand deposits		5,100			3,438
Cash and cash equivalents		12,222			8,271

Available-for-sale securities		137,474			131,956
Held-to-maturity securities		564			591
Loans receivable – net of allowance for loan losses of $3,629 and $3,203 at September 30, 2011 and March 31, 2011, respectively		229,660			239,993
Premises and equipment		7,276			6,892
Federal Home Loan Bank stock		5,025			5,025
Foreclosed assets held for sale - net		1,482			2,214
Accrued interest receivable		1,598			1,647
Bank-owned life insurance		7,129			7,003
Goodwill		1,719			1,719
Other intangible assets		242			287
Prepaid Federal Deposit Insurance Corporation premiums		940			1,087
Other assets		875			1,045
Prepaid federal income taxes		98			8
Total assets	$	406,304		$	407,738

LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities
Deposits
Demand	$	70,927		$	63,208
Savings and money market		104,786			105,086
Time		152,219			151,778
Total deposits		327,932			320,072

Other short-term borrowings		5,339			6,373
Federal Home Loan Bank advances		29,067			39,507
Accrued interest payable and other liabilities		2,575			2,646
Deferred federal income taxes		1,379			861
Total liabilities		366,292			369,459

Commitments and Contingencies		––			––

Stockholders’ Equity
Preferred stock, 500,000 shares of $.10 par value authorized; no shares issued		––			––
Common stock, $.10 par value; authorized 9,000,000 shares; 3,978,731 shares issued		398			398
Additional paid-in capital		35,990			35,997
Retained earnings		16,301			15,828
Shares acquired by ESOP		(676	)		(719	)
Accumulated other comprehensive income, net of tax effects		2,529			1,305
Treasury stock, at cost – 974,618 common shares		(14,530	)		(14,530	)
Total stockholders’ equity		40,012			38,279
Total liabilities and stockholders’ equity	$	406,304		$	407,738

	2011			2010

Operating Activities
Net income	$	824		$	1,317
Items not requiring (providing) cash
Depreciation and amortization		271			271
Provision for loan losses		512			310
Amortization of premiums and discounts on securities – net		684			399
Amortization of mortgage servicing rights		21			19
Amortization of deferred loan origination fees		(32	)		(36	)
Amortization of intangible assets		45			46
Increase in value of bank owned life insurance		(126	)		(124	)
Amortization expense of stock benefit plan		36			36
Provision for impairment on foreclosed assets held for sale		510			76
Gain on sale of foreclosed assets held for sale		(8	)		(14	)
Net gain on sale of loans		(53	)		(123	)
Proceeds from sale of loans in secondary market		1,163			2,972
Origination of loans for sale in the secondary market		(1,110	)		(2,849	)
Deferred income taxes		(112	)		(99	)
Changes in
Accrued interest receivable		49			75
Other assets		59			(291	)
Prepaid federal deposit insurance premiums		147			—
Interest payable and other liabilities		(28	)		20
Net cash provided by operating activities		2,852			2,005

Investing Activities
Purchase of available-for-sale securities		(22,564	)		(30,569	)
Proceeds from maturities of available-for-sale securities		18,217			19,859
Proceeds from maturities of held-to-maturity securities		26			76
Net change in loans		9,334			6,600
Purchase of premises and equipment		(655	)		(60	)
Proceeds from the sale of foreclosed assets		749			633
Net cash provided by (used in) investing activities		5,107			(3,461	)

	2011			2010


Financing Activities
Net change in deposits	$	7,860		$	3,039
Net change in other short-term borrowings		(1,034	)		(433	)
Proceeds from Federal Home Loan Bank advances		—			10,250
Repayments of Federal Home Loan Bank advances		(10,440	)		(10,250	)
Advances by borrowers for taxes and insurance		(43	)		(10	)
Cash dividends paid		(351	)		(351	)
Net cash provided by (used in) by financing activities		(4,008	)		2,245

Increase in Cash and Cash Equivalents		3,951			789

Cash and Cash equivalents, Beginning of period		8,271			9,875

Cash and Cash equivalents, End of period	$	12,222		$	10,664

Supplemental Cash Flows Information Cash Paid For:
Interest on deposits and borrowings	$	2,142		$	2,847

Federal Income Taxes	$	355		$	345

Supplemental Disclosure of Non-Cash Investing and Financing Activities
Transfers from loans to foreclosed assets held for sale	$	455		$	345

Unrealized gains on securities designated as available-for-sale,
net of related tax effects	$	1,224		$	711

Dividends payable	$	180		$	180

	Six months				Three months
	ended				ended
	September 30,				September 30,
	2011		2010		2011		2010
Interest and Dividend Income
Loans	$	6,204	$	6,763	$	3,067	$	3,329
Securities		2,268		2,430		1,091		1,214
Dividends on Federal Home Loan Bank stock and other		112		115		54		58
Total interest and dividend income		8,584		9,308		4,212		4,601

Interest Expense
Deposits		1,544		1,970		752		958
Other short-term borrowings		8		15		3		8
Federal Home Loan Bank advances		565		817		272		401
Total interest expense		2,117		2,802		1,027		1,367

Net Interest Income		6,467		6,506		3,185		3,234

Provision for Loan Losses		512		310		442		120

Net Interest Income After Provision for Loan Losses		5,955		6,196		2,743		3,114

Noninterest Income
Gain on loan sales		53		123		35		56
Gain on sale of foreclosed assets held for sale		8		14		8		14
Trust income		153		96		81		48
Earnings on bank-owned life insurance		119		116		62		58
Service fees, charges and other operating		642		630		348		325
Total noninterest income		975		979		534		487

Noninterest Expense
Salaries and employee benefits		3,139		3,012		1,570		1,488
Net occupancy and equipment expense		913		885		461		433
Federal deposit insurance premiums		162		245		77		123
Franchise taxes		187		173		93		86
Provision for impairment on foreclosed assets held for sale		510		76		223		30
Amortization of intangible assets		45		46		22		23
Other		998		1,018		506		531
Total noninterest expense		5,954		5,455		2,952		2,714

Income Before Federal Income Taxes		976		1,720		325		887

Provision for Federal Income Taxes		152		403		16		213

Net Income	$	824	$	1,317	$	309	$	674

Basic Earnings Per Share	$	0.28	$	0.45	$	0.10	$	0.23

Diluted Earnings Per Share	$	0.28	$	0.45	$	0.10	$	0.23

Dividends Per Share	$	0.12	$	0.12	$	0.06	$	0.06