form10q-85828_wayn.htm
UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D. C. 20549

FORM 10-Q
(Mark One)

x
QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
 
For the quarterly period ended
June 30, 2007
  

OR

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

For the transition period from ____________ to _______________

Commission File No. 0-23433

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

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

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

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

Yes    ý  
No o

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

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

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

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

 
1

Wayne Savings Bancshares, Inc.

INDEX

   
Page
     
 
     
3
 
4
 
5
 
6
 
8
     
12
     
19
     
19
     
     
 
     
20
     
20
     
20
     
20
     
20
     
21
     
21
     
 
22


 
2

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

(In thousands, except share data)

   
June 30,
    
March 31,
  
ASSETS
  
2007
    
2007
  
   
(Unaudited)
        
             
Cash and due from banks
   $
2,365
     $
2,194
  
Federal funds sold
    
-
      
9,000
  
Interest-earning deposits in other financial institutions
    
7,176
      
6,021
  
Cash and cash equivalents
    
9,541
      
17,215
  
                 
Investment securities available for sale - at fair value
    
44,434
      
54,128
  
Investment securities held to maturity - at amortized cost, approximate
                
fair value of $524 and $573 at June 30, 2007 and March 31, 2007, respectively
    
519
      
565
  
Mortgage-backed securities available for sale - at fair value
    
73,538
      
67,856
  
Mortgage-backed securities held to maturity - at amortized cost, approximate
                
fair value of $1,097 and $1,219 at June 30, 2007 and March 31, 2007, respectively
    
1,089
      
1,209
  
Loans receivable - net of allowance for loan losses of $1,571 and $1,523
                
at June 30, 2007 and March 31, 2007, respectively
    
244,402
      
240,049
  
Office premises and equipment – net
    
8,052
      
8,179
  
Real estate acquired through foreclosure
    
113
      
-
  
Federal Home Loan Bank stock - at cost
    
4,829
      
4,829
  
Cash surrender value of life insurance
    
6,091
      
6,034
  
Accrued interest receivable on loans
    
1,133
      
1,100
  
Accrued interest receivable on mortgage-backed securities
    
339
      
314
  
Accrued interest receivable on investments and interest-bearing deposits
    
386
      
667
  
Prepaid expenses and other assets
    
1,118
      
1,065
  
Goodwill and other intangible assets
    
2,375
      
2,402
  
Prepaid federal income taxes
    
-
      
125
  
                 
Total assets
   $
397,959
     $
405,737
  
                 
LIABILITIES AND STOCKHOLDERS’ EQUITY
                
                 
Deposits
   $
326,377
     $
333,540
  
Advances from the Federal Home Loan Bank
    
35,450
      
34,500
  
Advances by borrowers for taxes and insurance
    
205
      
616
  
Accrued interest payable
    
435
      
383
  
Accounts payable on mortgage loans serviced for others
    
95
      
197
  
Other liabilities
    
1,125
      
1,071
  
Accrued federal income taxes
    
20
      
-
  
Deferred federal income taxes
    
518
      
997
  
Total liabilities
    
364,225
      
371,304
  
                 
Commitments
    
-
      
-
  
                 
Stockholders’ equity
                
Preferred stock (500,000 shares of $.10 par value authorized; no
                
 shares issued)
    
-
      
-
  
Common stock (9,000,000 shares of $.10 par value authorized; 3,978,731
                
 shares issued)
    
398
      
398
  
Additional paid-in capital
    
36,106
      
36,106
  
Retained earnings - substantially restricted
    
12,122
      
11,982
  
Less required contributions for shares acquired by Employee Stock
                
 Ownership Plan
     (1,158 )     (1,158 )
Less 784,622 shares of treasury stock-at cost
     (12,419 )     (12,419 )
Accumulated comprehensive loss, net of tax benefits
     (1,315 )     (476 )
Total stockholders’ equity
    
33,734
      
34,433
  
                 
Total liabilities and stockholders’ equity
   $
397,959
     $
405,737
  
 
 
See accompanying notes to consolidated financial statements.    

        
 
3

WAYNE SAVINGS BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF INCOME

For the three months ended June 30, 2007 and 2006
 (Dollars in thousands, except share data)
(Unaudited)

   
2007
    
2006
  
Interest income
            
Loans
   $
4,090
     $
3,891
  
Mortgage-backed securities
    
922
      
699
  
Investment securities
    
532
      
743
  
Interest-bearing deposits and other
    
155
      
103
  
Total interest income
    
5,699
      
5,436
  
                 
Interest expense
                
Deposits
    
2,531
      
2,232
  
Borrowings
    
386
      
283
  
Total interest expense
    
2,917
      
2,515
  
                 
Net interest income
    
2,782
      
2,921
  
Provision for losses on loans
    
30
      
30
  
Net interest income after provision for losses on loans
    
2,752
      
2,891
  
                 
Other income
                
Increase in cash surrender value of life insurance
    
58
      
55
  
Trust income
    
56
      
26
  
Service fees, charges and other operating
    
334
      
345
  
Total other income
    
448
      
426
  
                 
General, administrative and other expense
                
Employee compensation and benefits
    
1,383
      
1,398
  
Occupancy and equipment
    
486
      
458
  
Franchise taxes
    
96
      
118
  
Amortization of intangible assets
    
27
      
27
  
Other operating
    
502
      
486
  
Total general, administrative and other expense
    
2,494
      
2,487
  
                 
Income before income taxes
    
706
      
830
  
                 
Federal incomes taxes
                
Current
    
230
      
208
  
Deferred
     (47 )    
29
  
Total federal income taxes
    
183
      
237
  
                 
NET INCOME
   $
523
     $
593
  
                 
EARNINGS PER SHARE
                
Basic
   $
0.17
     $
0.18
  
Diluted
   $
0.17
     $
0.18
  
                 
DIVIDENDS PER SHARE
   $
0.12
     $
0.12
  

      
See accompanying notes to consolidated financial statements.      
      
 
4

WAYNE SAVINGS BANCSHARES, INC.

CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

For the three months ended June 30,
(In thousands)
(Unaudited)


   
2007
    
2006
  
             
Net income
   $
523
     $
593
  
                 
Other comprehensive loss, net of tax:
                
  Unrealized holding losses on securities, net of tax benefits
                
    of $432 and $260, during the respective periods
     (839 )     (505 )
                 
Comprehensive income (loss)
   $ (316 )   $
88
  
                 
Accumulated comprehensive loss
   $ (1,315 )   $ (1,516 )
 
 
See accompanying notes to consolidated financial statements.

 
5

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS

For the three months ended June 30,
(In thousands)
   
2007
    
2006
  
   
(Unaudited)
        
             
Cash flows from operating activities:
            
Net income for the period
   $
523
     $
593
  
Adjustments to reconcile net income to net cash provided by
                
operating activities:
                
Amortization of discounts and premiums on loans,
                
investments and mortgage-backed securities – net
     (2 )     (8 )
Amortization of deferred loan origination fees
     (13 )     (10 )
Depreciation and amortization
    
159
      
173
  
Amortization of expense related to ESOP
    
-
      
20
  
Provision for losses on loans
    
30
      
30
  
Federal Home Loan Bank stock dividends
    
-
       (66 )
Increase in cash surrender value of life insurance
     (57 )     (55 )
Increase (decrease) in cash due to changes in:
                
Accrued interest receivable on loans
    
51
       (29 )
Accrued interest receivable on mortgage-backed securities
     (25 )     (13 )
Accrued interest receivable on investments and interest-bearing deposits
    
197
      
129
  
Prepaid expenses and other assets
     (53 )     (341 )
Amortization of expense related to intangibles
    
27
      
27
  
Accrued interest payable
    
52
      
27
  
Accounts payable on mortgage loans serviced for others
     (102 )     (104 )
Other liabilities
    
54
      
68
  
Federal income taxes
                
Current
    
145
      
73
  
Deferred
     (47 )    
29
  
Net cash provided by operating activities
    
939
      
543
  
                 
Cash flows provided by (used in) investing activities:
                
Purchase of investment securities designated as available for sale
     (1,652 )     (1,101 )
Proceeds from maturity of investment securities designated as held to maturity
    
46
      
165
  
Proceeds from maturity of investment securities designated as available for sale
    
10,990
      
5,465
  
Purchase of mortgage-backed securities designated as available for sale
     (12,445 )     (8,478 )
Principal repayments on mortgage-backed securities designated as held to maturity
    
119
      
103
  
Principal repayments and sales of mortgage-backed securities designated as available for sale
    
5,851
      
4,677
  
Loan principal repayments
    
12,677
      
21,477
  
Loan disbursements
     (17,160 )     (23,188 )
Purchase of office premises and equipment - net
     (32 )     (32 )
Proceeds from sale of real estate acquired through foreclosure
    
-
      
59
  
Net cash used in investing activities
     (1,606 )     (853 )
                 
Net cash used in operating and investing activities
                
(balance carried forward)
     (667 )     (310 )
 
 
See accompanying notes to consolidated financial statements.

 
6

Wayne Savings Bancshares, Inc.

CONSOLIDATED STATEMENTS OF CASH FLOWS (CONTINUED)

For the three months ended June 30,
(In thousands)


   
2007
    
2006
  
   
(Unaudited)
  
             
Net cash used in operating and investing activities
            
(balance brought forward)
   $ (667 )   $ (310 )
                 
Cash flows provided by (used in) financing activities:
                
Net increase (decrease)  in deposit accounts
     (7,163 )    
5,148
  
Proceeds from Federal Home Loan Bank advances
    
4,050
      
25,250
  
Repayments of Federal Home Loan Bank advances
     (3,100 )     (33,000 )
Advances by borrowers for taxes and insurance
     (411 )     (427 )
Dividends paid on common stock
     (383 )     (401 )
Proceeds from exercise of stock options
    
-
      
279
  
Tax benefits from exercise of stock options
    
-
      
5
  
Net cash used in financing activities
     (7,007 )     (3,146 )
                 
Net decrease in cash and cash equivalents
     (7,674 )     (3,456 )
                 
Cash and cash equivalents at beginning of period
    
17,215
      
14,123
  
                 
Cash and cash equivalents at end of period
   $
9,541
     $
10,667
  
                 
                 
Supplemental disclosure of cash flow information:
                
Cash paid during the period for:
                
Federal income taxes
   $
85
     $
130
  
                 
Interest on deposits and borrowings
   $
2,865
     $
2,488
  
                 
                 
Supplemental disclosure of noncash investing activities:
                
Transfers from loans to real estate acquired through foreclosure
   $
113
     $
-
  
                 
Unrealized losses on securities designated as available for sale,
                
net of related tax effects
   $ (839 )   $ (505 )
                 
Dividends payable
   $
383
     $
403
  

See accompanying notes to consolidated financial statements.

 
7

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three month periods ended June 30, 2007 and 2006


1.
Basis of Presentation

The accompanying unaudited consolidated financial statements for the three months ended June 30, 2007 and 2006 were prepared in accordance with instructions for Form 10-Q and Article 10 of Regulation S-X and, therefore, do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America.  Accordingly, these financial statements should be read in conjunction with the consolidated financial statements and notes thereto of Wayne Savings Bancshares, Inc. (the “Company”) included in the Annual Report on Form 10-K for the year ended March 31, 2007.

In the opinion of management, all adjustments (consisting only of normal recurring accruals) which are necessary for a fair presentation of the unaudited financial statements have been included.  The results of operations for the three month period ended June 30, 2007 are not necessarily indicative of the results which may be expected for the entire fiscal year.

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

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

2.
Principles of Consolidation

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

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

 
8

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three month periods ended June 30, 2007 and 2006


3.
Earnings Per Share

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

   
For the three months ended
  
   
June 30,
  
   
2007
    
2006
  
             
Weighted-average common shares
            
  outstanding (basic)
    
3,085,641
      
3,234,972
  
Dilutive effect of assumed exercise
                
  of stock options
    
-
      
13,024
  
Weighted-average common shares
                
  outstanding (diluted)
    
3,085,641
      
3,247,996
  
                 


None of the outstanding options were included in the diluted earnings per share calculation for the three month period ended June 30, 2007 as the average share price was less than the option exercise prices.  All of  the outstanding options were included in the diluted earnings per share calculation for the three month period ended June 30, 2006.

4.
Stock Option Plan

The Company maintains a 1993 incentive Stock Option Plan that provided for the issuance of 196,390 shares of authorized common stock, as adjusted, with no options outstanding at June 30, 2007.  In fiscal 2004, the Company adopted a new Stock Option Plan that provided for the issuance of 142,857 incentive options and 61,224 non-incentive options with respect to authorized common stock.  As of June 30, 2007, all options under the 2004 Plan have been granted and (excluding forfeited options), are subject to exercise at the discretion of the grantees, and will expire in fiscal 2014 unless otherwise exercised or forfeited.

The Company accounts for the stock plan in accordance with the provisions of SFAS No. 123(R), “Share Based Payment.”  SFAS No. 123(R) requires the recognition of compensation expense related to stock option awards based on the fair value of the option award at the grant date.  Compensation cost is then recognized over the vesting period.  There were no options granted during each of the three months ended June 30, 2007 and 2006.  There was no compensation expense recognized for the stock option plan during the three month periods ended June 30, 2007 and 2006, as all options were fully vested prior to these periods.


 
9

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three month periods ended June 30, 2007 and 2006


4.             Stock Option Plan (continued)

A summary of the status of the Company’s stock option plans as of and the three months ended June 30, 2007 and for the years ended March 31, 2007 and 2006, is presented below:
                                     
   
Three months ended
    
Year ended
  
   
June 30,
    
March 31,
  
   
2007
    
2007
    
2006
  
         
Weighted-
          
Weighted-
          
Weighted-
  
         
average
          
average
          
average
  
         
exercise
          
exercise
          
exercise
  
   
Shares
    
price
    
Shares
    
price
    
Shares
    
price
  
                                     
Outstanding at beginning of period
    
114,224
     $
13.95
      
179,148
     $
13.92
      
214,204
     $
13.84
  
Granted
    
-
      
-
      
-
      
-
      
-
      
-
  
Exercised
    
-
      
-
       (60,924 )    
13.86
       (27,556 )    
13.32
  
Forfeited
    
-
      
-
       (4,000 )    
13.95
       (7,500 )    
13.95
  
                                                 
Outstanding at end of period
    
114,224
     $
13.95
      
114,224
     $
13.95
      
179,148
     $
13.92
  
                                                 
Options exercisable at period-end
    
114,224
     $
13.95
      
114,224
     $
13.95
      
179,148
     $
13.92
  
                                                 
The following information applies to options outstanding at June 30, 2007:

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

5.
Recent Accounting Developments

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

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

 
10

Wayne Savings Bancshares, Inc.

NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

For the three month periods ended June 30, 2007 and 2006


5.
Recent Accounting Developments (continued)

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

SFAS No. 156 applies to all separately recognized servicing assets and liabilities acquired or issued after the beginning of an entity’s fiscal year that begins after September 15, 2006, or April 1, 2007 as to the Company.  Management adopted SFAS No. 156 effective April 1, 2007, as required, without material effect on the Company’s consolidated statements of financial condition or results of operations.

In July 2006, the FASB issued FASB Interpretation No. 48 (“FIN 48”), “Accounting for Uncertainty in Income Taxes.”  The interpretation clarifies the accounting for uncertainty in income taxes recognized in a company’s financial statements in accordance with SFAS No. 109, “Accounting for Income Taxes.”  Specifically, FIN 48 prescribes a recognition threshold and a measurement attribute for the financial statement recognition and measurement of a tax provision taken or expected to be taken on a tax return.  FIN 48 also provides guidance on the related derecognition, classification, interest and penalties, accounting for interim periods, disclosure, and transition of uncertain tax positions.  FIN 48 is effective for fiscal years beginning after December 15, 2006, or April 1, 2007 as to the Company.  Management adopted FIN 48 effective April 1, 2007, as required, without material effect on the Company’s consolidated statements of financial position or results of operations.

In September 2006, the FASB issued SFAS No. 157, “Fair Value Measurements.”  This Statement defines fair value, establishes a framework for measuring fair value and expands disclosures about fair value measurements.  This Statement emphasizes that fair value is a market-based measurement and should be determined based on assumptions that a market participant would use when pricing an asset or liability.  This Statement clarifies that market participant assumptions should include assumptions about risk as well as the effect of a restriction on the sale or use of an asset.  Additionally, this Statement establishes a fair value hierarchy that provides the highest priority to quoted prices in active markets and the lowest priority to unobservable data.  This Statement is effective for fiscal years beginning after November 15, 2007, or April 1, 2008 as to the Company, and interim periods within that fiscal year.  The adoption of this Statement is not expected to have a material adverse effect on the Company’s financial position or results of operations.

In February 2007, the FASB issued SFAS No. 159, “The Fair Value Option for Financial Assets and Financial Liabilities – Including an Amendment of FASB Statement No. 115.”  This Statement allows companies the choice to measure many financial instruments and certain other items at fair value.  The objective is to improve financial reporting by providing entities with the opportunity to mitigate volatility in reported earnings caused by measuring related assets and liabilities differently without having to apply complex hedge accounting provisions.  This Statement is expected to expand the use of fair value measurement, which is consistent with the Board’s long-term measurement objectives for accounting for financial instruments.  This Statement is effective as of the beginning of an entity’s first fiscal year that begins after November 15, 2007, or April 1, 2008 as to the Company, and interim periods within that fiscal year.  Early adoption is permitted as of the beginning of a fiscal year that begins on or before November 15, 2007, provided the entity also elects to apply the provisions of SFAS No. 157, “Fair Value Measurements.”  The Company is currently evaluating the impact the adoption of SFAS No. 159 will have on the financial statements.

 
11

Wayne Savings Bancshares, Inc.

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

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

   
For the three months ended June 30,
  
   
2007
    
2006
  
   
Average
          
Average
    
Average
          
Average
  
   
Balance
    
Interest
    
Rate
    
Balance
    
Interest
    
Rate
  
   
(Dollars in thousands)
  
Interest-earning assets:
                                    
Loans receivable, net1
   $
240,058
     $
4,090
       6.82 %   $
235,419
     $
3,891
       6.61 %
Mortgage-backed
                                                
securities2
    
71,544
      
922
      
5.15
      
58,521
      
699
      
4.78
  
Investment securities
    
50,016
      
532
      
4.25
      
71,001
      
743
      
4.19
  
Interest-bearing deposits3
    
13,448
      
155
      
4.61
      
10,667
      
103
      
3.86
  
Total interest-
                                                
earning assets
    
375,066
      
5,699
      
6.08
      
375,608
      
5,436
      
5.79
  
Non-interest-earning assets
    
21,926
                      
22,857
                  
                                                 
Total assets
   $
396,992
                     $
398,465
                  
                                                 
Interest-bearing liabilities:
                                                
Deposits
   $
326,468
      
2,531
      
3.10
     $
333,773
      
2,232
      
2.67
  
Borrowings
    
32,214
      
386
      
4.79
      
25,998
      
283
      
4.35
  
Total interest-
                                                
bearing liabilities
    
358,682
      
2,917
      
3.25
      
359,771
      
2,515
      
2.80
  
Non-interest bearing
                                                
Liabilities
    
4,030
                      
3,056
                  
Total liabilities
    
362,712
                      
362,827
                  
Stockholders’ equity
    
34,280
                      
35,638
                  
Total liabilities and
                                                
stockholders’ equity
   $
396,992
                     $
398,465
                  
Net interest income
           $
2,782
                     $
2,921
          
Interest rate spread4
                     2.83 %                     2.99 %
Net yield on interest-
                                                
earning assets5
                     2.97 %                     3.11 %
Ratio of average interest-
                                                
earning assets to average
                                                
interest-bearing liabilities
                     104.57 %                     104.40 %
                                                 
_______________________________________________________

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

 
12

Wayne Savings Bancshares, Inc.

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


Discussion of Financial Condition Changes from March 31, 2007 to June 30, 2007

At June 30, 2007, the Company had total assets of $398.0 million, a decrease  of $7.8 million, or 1.9%, from March 31, 2007 levels.

Liquid assets, consisting of cash, federal funds sold, interest-bearing deposits and investment securities, decreased by $17.4 million, or 24.2%, to $54.5 million at June 30, 2007, due primarily to maturities of investment securities totaling $11.0 million and a reduction of federal funds sold by $9.0 million.  The decrease in federal funds sold is directly related to the reduction in deposit balances, as management chose to not compete with retail certificate of deposit offerings above the federal fund rate.  These decreases were offset by a $1.2 million increase in interest-bearing deposits in other financial institutions.

Mortgage-backed securities increased by $5.6 million, or 8.1%, during the three months ended June 30, 2007.  Management utilized funds from principal repayments and proceeds from maturities of investment securities to purchase mortgage-backed securities of $12.4 million during the period.    The purchases were partially offset by $6.0 million in principal repayments coupled with a decrease in market value of $901,000.

At June 30, 2007, loans receivable increased by $4.4 million, or 1.8%, compared to March 31, 2007, as the Bank originated and retained $17.2 million of loans and received payments of $12.7 million.  The lending division has focused on the origination of shorter-term and adjustable-rate commercial and commercial real estate loans.  The Company believes that investing in shorter-term and adjustable-rate commercial loans positions the Company more favorably from an interest rate risk management perspective.  The composition of the loan portfolio has changed during the three months ended June 30, 2007, due to a net increase of $2.8 million in non-residential real estate loans, and an increase of $637,000 in consumer loans, which were offset by a decrease in commercial loans of $2.4 million and a decrease of $3.2 million in the loans in process, as the commercial lending department was able to disburse payments to previously committed loans.

   
June 30, 2007
    
March 31, 2007
  
   
(Dollars in thousands)   
  
Mortgage loans:
                        
One- to four-family residential(1)
   $
143,245
       57.18 %   $
144,311
       57.87 %
Residential construction loans
    
2,985
      
1.19
      
2,019
      
.81
  
Multi-family residential
    
9,122
      
3.65
      
8,938
      
3.59
  
Non-residential real estate/land(2)
    
64,722
      
25.84
      
61,873
      
24.82
  
Total mortgage loans
    
220,074
      
87.86
      
217,141
      
87.09
  
Other loans:
                                
Consumer loans(3)
    
6,097
      
2.43
      
5,460
      
2.19
  
Commercial business loans
    
24,332
      
9.71
      
26,730
      
10.72
  
Total other loans
    
30,429
      
12.14
      
32,190
      
12.91
  
Total loans before net items
    
250,503
       100.00 %    
249,331
       100.00 %
Less:
                                
Loans in process
    
4,101
              
7,334
          
Deferred loan origination fees
    
429
              
425
          
Allowance for loan losses
    
1,571
              
1,523
          
Total loans receivable, net
   $
244,402
             $
240,049
          
Mortgage-backed securities, net(4)
   $
74,627
             $
69,065
          
______________________________________________
(1)
Includes equity loans collateralized by second mortgages in the aggregate amount of $18.4 million and $19.2 million as of June 30, 2007 and March 31, 2007, respectively.  Such loans have been underwritten on substantially the same basis as the Company’s first mortgage loans.
(2)
Includes land loans of $211,000 and $204,000 as of June 30, 2007 and March 31, 2007, respectively.
(3)
Includes second mortgage loans of $333,000 and $425,000 as of June 30, 2007 and March 31, 2007, respectively.
(4)
Includes mortgage-backed securities designated as available for sale.


 
13

Wayne Savings Bancshares, Inc.

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


Discussion of Financial Condition Changes from March 31, 2007 to June 30, 2007 (continued)

Non-performing loans amounted to $539,000 at June 30, 2007, compared with $950,000 in non-performing loans at March 31, 2007.  Such loans as of June 30, 2007 consisted of residential mortgage loans compared to March 31, 2007, when non-performing loans were comprised of $683,000 in residential loans and a $267,000 commercial business loan, which is sixty days past due as of June 30, 2007 .  Historically, the Company generally has not recognized significant losses on non-performing loans secured by residential mortgages.  The following table sets forth information regarding our past due, nonaccrual and impaired loans and real estate acquired through foreclosure as of June 30, 2007 and March 31, 2007.

   
June 30,
    
March 31,
  
   
2007
    
2007
  
   
(Dollars in thousands)
  
Past due loans 30-89 days:
            
Mortgage loans:
            
One- to four-family residential
   $
915
     $
270
  
Nonresidential
    
-
      
-
  
Land
    
-
      
-
  
Non-mortgage loans:
                
Commercial business loans
    
264
      
-
  
Consumer loans
    
3
      
11
  
    $
1,182
     $
281
  
                 
Non-performing loans:
                
Mortgage loans:
                
One- to four-family residential
   $
539
     $
683
  
All other mortgage loans
    
-
      
-
  
Non-mortgage loans:
                
Commercial business loans
    
-
      
267
  
Consumer
    
-
      
-
  
Total non-performing loans
    
539
      
950
  
Total real estate acquired through foreclosure
    
113
      
-
  
Total non-performing assets
   $
652
     $
950
  
                 
Total non-performing loans to net
                
loans receivable
     0.22 %     0.40 %
Total non-performing loans to total assets
     0.14 %     0.23 %
Total non-performing assets to total assets
     0.16 %     0.23 %



 
14

Wayne Savings Bancshares, Inc.

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


Discussion of Financial Condition Changes from March 31, 2007 to June 30, 2007 (continued)

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

   
For the three
months ended
    
For the year
ended
  
   
June 30, 2007
    
March 31, 2007
  
   
(Dollars in thousands)
  
             
Loans receivable, net
   $
244,402
     $
240,049
  
Average loans receivable, net
   $
240,058
     $
237,429
  
Allowance balance (at beginning of period)
   $
1,523
     $
1,484
  
Charge-offs:
                
Mortgage loans:
                
One- to four-family
    
-
       (31 )
Residential construction
    
-
      
-
  
Multi-family residential
    
-
      
-
  
Non-residential real estate and land
    
-
       (31 )
Other loans:
                
Consumer
    
-
       (21 )
Commercial
    
-
      
-
  
Gross charge-offs
    
-
       (83 )
Recoveries:
                
Mortgage loans:
                
One- to four-family
    
13
      
1
  
Residential construction
    
-
      
-
  
Multi-family residential
    
-
      
-
  
Non-residential real estate and land
    
-
      
-
  
Other loans:
                
Consumer
    
5
      
21
  
Commercial
    
-
      
-
  
Gross recoveries
    
18
      
22
  
Net (charge-offs) recoveries
    
18
       (61 )
Provision charged to operations
    
30
      
100
  
Allowance for loans losses balance (at end
                
of period)
   $
1,571
     $
1,523
  
Allowance for loan losses as a percent of loans
                
receivable, net at end of period
     0.64 %     0.63 %
Net loans charged off as a percent of average
                
loans receivable, net
     0.00 %     0.03 %
Ratio of allowance for loan losses to non-
                
performing loans at end of period
     291.47 %     160.32 %


Deposits totaled $326.4 million at June 30, 2007, a decrease of $7.2 million, or 2.1%, from $333.5 million at March 31, 2007.  Certificates of deposits decreased by $8.2 million coupled with a decrease in NOW accounts of $1.6 million.  These decreases were partially offset by an increase in money market deposits of $1.4 million and an increase in savings accounts of $1.1 million.

Borrowings totaled $35.5 million at June 30, 2007 as compared with $34.5 million at March 31, 2007.  The Company increased its borrowings due to deposit run off during the three month period.

 
15

Wayne Savings Bancshares, Inc.

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


Discussion of Financial Condition Changes from March 31, 2007 to June 30, 2007 (continued)

Stockholders’ equity decreased by $699,000, or 2.0%, during the three months ended June 30, 2007, due primarily to an increase in unrealized losses on available for sale securities of $839,000 and dividends of $383,000, which were partially offset by net earnings of $523,000.

Comparison of Operating Results for the Three Month Periods Ended June 30, 2007 and 2006

General

Net earnings totaled $523,000 for the three months ended June 30, 2007, a decrease of $70,000, or 11.8%, compared to net earnings of $593,000 for the three months ended June 30, 2006.  The decrease in net earnings was primarily attributable to a decrease in net interest income of $139,000 or 4.8%, partially offset by an increase in other income of $22,000, or 5.2% and a decrease in federal income taxes of $54,000, or 22.8%.

Interest Income

Interest income increased by $263,000, or 4.8%, to $5.7 million for the three months ended June 30, 2007, compared to the same period in 2006.  This increase was due to an increase in the weighted-average yield on interest-earning assets to 6.08% in the 2007 period from 5.79% for the three month period ended June 30, 2006.  This increase was offset by a $542,000 decrease in the average balance of interest-earning assets outstanding to $375.1 million for the three months ended June 30, 2007, from $375.6 million for the comparable period ended June 30, 2006. The yield increase was primarily due to a change in the composition of loans, mainly due to the increase in higher rate nonresidential real estate and land loans, coupled with the prime rate increases during the June 30, 2006 quarter.

Interest income on loans increased by $199,000, or 5.1%, for the three months ended June 30, 2007, compared to the same period in 2006, due primarily an increase in the average balance of loans outstanding period to period of $4.6 million, or 2.0%, to $240.1 million for the 2007 period, coupled with an increase in the weighted-average yield of 21 basis points to 6.82% for the three months ended June 30, 2007.

Interest income on mortgage-backed securities increased by $223,000, or 31.9%, during the three months ended June 30, 2007, compared to the same period in 2006.  This was primarily due to an increase of $13.0 million, or 22.3%, in the average balance outstanding and a 37 basis point increase in the weighted-average yield to 5.15%.

Interest income on investment securities decreased by $211,000, or 28.4%, during the three-months ended June 30, 2007, compared to the same period in 2006, reflecting a decrease in the average balance outstanding of $21.0 million, or 29.6%, to $50.0 million for the 2007 period from $71.0 million during the comparable 2006 period, partially offset by an increase in the weighted-average yield to 4.25% from 4.19% for the three month period in 2006.

Interest income on interest-bearing deposits increased by $52,000, or 50.5%, for the three months ended June 30, 2007, compared to the same period in 2006, due primarily to an increase in the average balance outstanding of $2.8 million, or 26.1%, coupled with an increase in the weighted-average yield of 75 basis points, to 4.61% for the 2007 period from 3.86% for the three months ended June 30, 2006.

 
16

Wayne Savings Bancshares, Inc.

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


Comparison of Operating Results for the Three Month Periods Ended June 30, 2007 and 2006 (continued)

Interest Expense

Interest expense totaled $2.9 million for the three months ended June 30, 2007, an increase of $402,000, or 16.0%, over the three months ended June 30, 2006.  The increase resulted from a 45 basis point increase in the weighted-average cost of funds to 3.25% for the 2007 period, partially offset by a decrease in the average balance of deposits and borrowings outstanding of $1.1 million to $358.7 million for the three month period ended June 30, 2007.

Interest expense on deposits totaled $2.5 million for the three months ended June 30, 2007, an increase of $299,000, or 13.4%, compared to the three months ended June 30, 2006, as a result of a 43 basis point increase in the weighted-average cost of deposits to 3.10% for the 2007 period, which was partially offset by a decrease in the average balance outstanding of $7.3 million, or 2.2%, to $326.5 million for the 2007 period.

Interest expense on borrowings totaled $386,000 for the three months ended June 30, 2007, an increase of $103,000, or 36.4%, over the 2006 period, primarily due to an increase in the average balance outstanding of $6.2 million, or 23.9%, coupled with an increase in the weighted-average yield of 44 basis points, to 4.79% for the three months ended June 30, 2007.

Net Interest Income

Net interest income totaled $2.8 million for the three months ended June 30, 2007, a decrease of $139,000, or 4.8%, compared to the three month period ended June 30, 2006.  The average interest rate spread decreased to 2.83% for the three months ended June 30, 2007 from 2.99% for the three months ended June 30, 2006.  The net interest margin decreased to 2.97% for the three months ended June 30, 2007 from 3.11% for the three months ended June 30, 2006.  The average interest rate spread decreased mainly due to the cost of deposits increasing at a higher rate than the yield on loans, as maturing certificates of deposit renewed from older, lower rates into higher current rates.  Management has allowed runoff in the retail certificate of deposit portfolio, through a limited response to competitive pricing pressure to limit the increase in the cost of deposits.

Provision for Losses on Loans

Management recorded a $30,000 provision for losses on loans for the three month period ended June 30, 2007 and June 30, 2006.  To the best of management’s knowledge, all known and inherent losses that are probable and which can be reasonably estimated have been recorded as of June 30, 2007.

Other Income

Other income, consisting primarily of the cash surrender value of life insurance, trust income, service fees and charges on deposit accounts, increased by $22,000, or 5.2%, for the three months ended June 30, 2007,  compared to the three months ending June 30, 2006.  The increase was primarily due to an increase in trust income of $30,000, including a $14,000 one-time estate administration fee, for the three months ended June 30, 2007,  coupled with a $21,000 increase in check card processing fees.  These increases were partially offset by a decrease in deposit-related service fees of $19,000, mainly due to decreased volume,  and  an increase in the mortgage servicing asset amortization of $9,000.

 
17

Wayne Savings Bancshares, Inc.

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


Comparison of Operating Results for the Three Month Periods Ended June 30, 2007 and 2006 (continued)

General, Administrative and Other Expense

General, administrative and other expense increased by $7,000,  or 0.3%, to $2.5 million for the three months ended June 30, 2007, compared to the three months ended June 30, 2006.  The two areas of increase were occupancy and equipment expense of $28,000 and other operating expense of $16,000 for the three months ended June 30, 2007.  These increases were offset by decreases of $22,000 in franchise taxes and $15,000 in employee compensation and benefits.

The occupancy and equipment expense increase was due primarily  to a $10,000 increase in repair costs, a $9,000 increase in both maintenance and lease expenses, an increase of $7,000 in ATM expenses and $6,000 of increased travel expense.  These increases were offset by a $14,000 decrease in depreciation expense.

The increase in other operating expense was mainly due to an increase of $23,000 in internet banking as the usage increased and $18,000 in office supplies, offset by decreases of $12,000 in legal expense,  $7,000 in supervisory exam expense and $5,000 in organizational dues expense.

The franchise tax expense reduction was mainly due to the effects of the treasury stock repurchase programs implemented during fiscal 2007.

The decrease in compensation and benefits was due to an average reduction of two full-time equivalent employees from June 30, 2006 to June 30, 2007 resulting in a $22,000 decrease in salaries, coupled with a $7,000 decrease in stock compensation due to a decline in the fair value of the Company’s shares.  These decreases in compensation and benefits expense were offset by a $12,000 increase in retirement plan contributions expense.

Federal Income Taxes

Federal income tax expense was $183,000 for the three months ended June 30, 2007, a decrease of $54,000, or 22.8%, compared to the same period in 2006, primarily due to the $124,000, or 14.9%, decrease in earnings before taxes.  The difference in the effective tax rate from the 34% statutory rate was mainly due to the  beneficial effects of income from the cash surrender value on life insurance and other tax-exempt obligations.



 
18

Wayne Savings Bancshares, Inc.

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


Forward-Looking Statements

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

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

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


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, 2007.


ITEM 4
CONTROLS AND PROCEDURES

 
(a)
Evaluation of disclosure controls and procedures.

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

 
(b)
Changes in internal controls.

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

 
19

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, 2007.

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

 
(a)
Not applicable
 
(b)
Not applicable
 
(c)
The following table sets forth certain information regarding repurchases by the Company for the quarter ended June 30, 2007.

     
Total # of
Maximum # of shares
 
Total
Average
shares purchased
which may still be
 
# of shares
price paid
as part of the
purchased as part
Period
purchased
per share
announced plan
of the announced plan
         
April 1-30, 2007
-
$   -
-
112,967
May  1-31, 2007
-
$   -
-
112,967
June 1-30, 2007
-
$   -
-
112,967

Notes to the Table:

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



ITEM 3.
Defaults Upon Senior Securities

Not applicable

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

None


 
20

Wayne Savings Bancshares, Inc.

PART II (CONTINUED)


ITEM 5.
Other Information
Not applicable

ITEM 6.
Exhibits



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


 
21

SIGNATURES

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





Date: 
August 13, 2007
 By:  
/s/ Phillip E. Becker
     
Phillip E. Becker
     
President and Chief  Executive Officer
       
       
       
Date:  
August 13, 2007
 By:  
/s/ H. Stewart Fitz Gibbon III
 
 
  
H. Stewart Fitz Gibbon III
     
Executive Vice President and
     
Chief Financial Officer


22