General

The consolidated financial statements include Wayne Savings Bancshares, Inc. and its wholly-owned subsidiary, Wayne Savings Community Bank. Intercompany transactions and balances are eliminated in the consolidated financial statements.

The Company's net income is primarily dependent on its net interest income, which is the difference between interest income earned on its loan, mortgage-backed securities and investment portfolios, and its cost of funds consisting of interest paid on deposits and borrowings. The Company's net income also is affected by its provision for losses on loans, as well as the amount of noninterest income, including trust fees and service charges, and noninterest expense, such as salaries and employee benefits, deposit insurance premiums, occupancy and equipment costs, and income taxes. Earnings of the Company also are affected significantly by general economic and competitive conditions, particularly changes in market interest rates, government policies and actions of regulatory authorities.

Business Strategy

The Company's current business strategy is to operate a well-capitalized, profitable and community-oriented bank dedicated to providing quality service and products to its customers. The Company has sought to implement this strategy in recent years by: (1) closely monitoring the needs of customers and providing personal, quality customer service; (2) continuing the origination of a wide array of loan products in the Company's market area; (3) managing interest rate risk exposure by better matching asset and liability maturities and rates; (4) increasing fee income, including the continuing growth of the trust department;
(5) managing asset quality; (6) maintaining a strong retail deposit base; (7) maintaining capital in excess of regulatory requirements; and (8) emphasizing the commercial loan program to add high quality, higher yielding assets to the Company's loan portfolio.

Discussion of Financial Condition Changes from March 31, 2008 to March 31, 2009

In addition to the historical information contained herein, the following discussion contains forward-looking statements that involve risks and uncertainties. Economic circumstances, the Company's operations, and actual results could differ significantly from those discussed in forward-looking statements. Some of the factors that could cause or contribute to such differences are discussed herein but also include changes in the economy and interest rates in the nation and the Company's general market area. The forward-looking statements contained herein include, but are not limited to, those with respect to the following matters: (1) management's determination of the amount and adequacy of the allowance for loan losses; (2) the effect of changes in interest rates; (3) management's opinion as to the effects of recent accounting pronouncements on the Company's consolidated financial statements; and (4) management's opinion as to the Bank's ability to maintain regulatory capital at current levels. The Company considers the allowance for loan losses and related loss provision to be a critical accounting policy. A detailed discussion as to the application of such policy is set forth on the following pages.

At March 31, 2009, total assets increased incrementally to $404.4 million from the $401.6 million total at March 31, 2008 mainly due to an increase in loans of $12.1 million offset by a decrease of $6.0 million in federal funds sold. Liquid assets, consisting of cash, federal funds sold and interest-bearing deposits, decreased by $6.3 million, or 48.0%, to $6.8 million at March 31, 2009, mainly due to a reduction in federal funds sold. During the fiscal year ended March 31, 2009, loans receivable increased $12.1 million, or 5.0%, as the Bank originated and retained $67.5 million of loans and received payments of $55.4 million. Rather than reinvest funds from repayments on loans in long-term, fixed rate and lower yielding residential loans, the lending division has been able to originate non-residential real estate loans. The Company believes that investing in shorter-term adjustable-rate commercial loans positions the Company favorably in the current interest rate environment. The loan portfolio continued to increase during the fiscal year ending March 31, 2009, as exemplified by an increase in nonresidential real estate loans of $9.3 million and an increase in commercial loans of $5.7 million, slightly reduced by a consumer loan decrease of $1.3 million and a decrease in one-to four-family residential loans of $725,000.

At March 31, 2009 and 2008, the allowance for loan losses totaled $2.4 million, or 0.97% of loans and $1.8 million or 0.73% of loans, respectively. In determining the amount of the loan loss allowance at any point of time, management and the board systematically determine the risk of loss in the portfolio. First, delinquent nonresidential, multi-family and commercial loans are evaluated for potential impairment in carrying value. At March 31, 2009, all delinquent nonresidential, multi-family and commercial loans were analyzed, with $668,000 of the reserve being allocated to these categories of loans. The largest commercial real estate loan totaled $2.8 million, located in Wadsworth, Ohio, for which the Company obtained an appraisal of $3.8 million during the quarter ended March 31, 2009. The second commercial real estate loan was transferred into foreclosed assets held for sale in the quarter ended June 30, 2009. The Company had four commercial loans totaling $558,000 that were identified as impaired. In addition, the Company had two non-residential real estate loans totaling $347,000, of which one loan was restructured for interest only payments and the second loan was 30 days past due. The second step in determining the allowance for loan losses entails the application of historic loss experience to individual loan types in the portfolio. In addition to the historic loss percentage, management employs an additional risk percentage tailored to the Board's and management's perception of the overall risk in the economy. Finally, to provide additional assurance regarding the validity of the commercial loan risk rating system, management engages a third party loan reviewer who provides independent validation of the Bank's loan grading process. Management recorded a $1.1 million provision for losses on loans for fiscal 2009, an increase of $834,000 over the $234,000 recorded for the fiscal year ended March 31, 2008, primarily due to the increase in non-performing loans, increased charge-offs and growth in the portfolio. In addition, the FAS 114 analysis for potential impairment indicated the need for allocations within the reserve as discussed above.

In addition to the FAS 114 analysis performed on loans as discussed above, management evaluated the Company's holding of stock in the Federal Home Loan Bank of Cincinnati and the Company's goodwill. Media reports during January 2009 suggested a risk of impairment in Federal Home Loan Bank stock. The Company's subsidiary, Wayne Savings Community Bank, holds $5.0 million of stock in the Federal Home Loan Bank of Cincinnati ("FHLB") as part of its membership and to support advance activity as required by the FHLB. Management has reviewed the rating agency report underlying the media reports, and along with regular review of the FHLB of Cincinnati's filings with the SEC, has concluded that the investment is not impaired at this time.

Goodwill of $1.7 million is carried on the Company's balance sheet as a result of the acquisition of Stebbins Bancshares in June 2004. In accordance with FAS 142, this goodwill is tested for impairment on at least an annual basis. The date used by management up to and including the current fiscal year was December
31. Given the significant discount in the Company's stock price compared to book and tangible book values, an evaluation was done as of March 31, 2009. Management evaluated the goodwill using an analysis of required measures of value, including the current stock price as an indicator of minority interest value, change of control multiples as a measure of controlling interest value and discounted cash flow analysis as a measure of

going concern value and applied a weighting based on appraisal standards to arrive at a valuation conclusion that indicated no impairment at this time. Management elected to change the evaluation date to the annual financial statement date of March 31 to produce a more accurate assessment as of the financial statement date.

Deposits totaled $309.5 million at March 31, 2009, a decrease of $8.2 million, or 2.6%, from $317.7 million at March 31, 2008. Certificates of deposit decreased by $10.3 million, or 5.7%, and money market deposits decreased $1.8 million, or 4.5%. These decreases were offset by an increase in savings accounts of $1.8 million, or 4.0%, and an increase in checking accounts of $2.2 million, or 4.3%. The Company experienced an increase in low cost liquid deposit accounts as management exercised discipline during the period with regard to the pricing of retail certificates. In general, management attempts to benchmark retail certificate of deposit pricing to the cost of alternate sources of funds, including Federal Home Loan Bank advances and brokered deposits. Exceptions are made to defend customer relationships with significant value to the Bank while allowing rate sensitive certificate of deposit shoppers to move to other alternatives. The local deposit market has been negatively affected by national and online competitors offering higher rates to address liquidity concerns in national markets.

Other short term borrowings increased by $2.8 million as a result of the increase in commercial repurchase agreements growth.

Additional Federal Home Loan advances of $7.5 million maturing in fiscal 2012, 2013 and 2014 were borrowed to offset the runoff in deposits due to management's strategic pricing strategy.

Stockholders' equity totaled $34.4 million, an increase of $309,000, or 0.9%, during the year ending March 31, 2009, due primarily to $1.9 million in net income for the fiscal year ended March 31, 2009 and an increase of $114,000 in accumulated other comprehensive income resulting from the unrealized gains on available for sale securities during fiscal 2009 and amortization of the ESOP shares of $99,000. These increases were offset by dividends totaling $1.2 million, a $404,000 reduction due to the adoption of the EITF Issue 06-4, which required the Company to record a liability for postretirement cost of split dollar life insurance agreements related to the bank owned life insurance program, a decrease in the accumulated other comprehensive income arising from the FAS 158 pension adjustment of $131,000 and purchases of treasury stock totaling $49,000 for the fiscal year ended March 31, 2009.

Comparison of Operating Results for the Years Ended March 31, 2009 and 2008

General

Net income totaled $1.9 million for the fiscal year ended March 31, 2009, a decrease of $101,000 when compared to net income for the fiscal year ended March 31, 2008. The decrease in net income was primarily attributable to an increase in the provision for loan losses of $834,000 coupled with an increase in total noninterest expense of $160,000, or 1.6% and a decrease in total noninterest income of $157,000, or 8.3%. These decreases in net income were partially offset by an increase in net interest income of $986,000, or 8.8%, and reduced income tax expense of $64,000, or 10.5%.

Interest Income

Interest income decreased $1.5 million or 6.5%, to $21.5 million for the fiscal year ended March 31, 2009, compared to fiscal 2008. This decrease was mainly due to a decrease in the weighted-average yield on interest-earning assets to 5.67% from 6.09% for the fiscal year ended March 31, 2009, offset by an increase in the average balance of $2.3 million, or 0.6%. The yield decrease is primarily due to the Federal Reserve lowering the federal funds rate 200 basis points over the past year. These rate decreases have negatively

affected the yields earned on the Company's interest earning assets and the most immediate decrease is reflected in the yield on interest-bearing deposits.

Interest income on loans decreased $1.2 million, or 7.5%, for the year ended March 31, 2009, compared to fiscal 2008, due primarily to a 65 basis point decrease in the weighted-average yield on loans outstanding, offset by a $5.4 million, or 2.2%, increase in the average balance of loans year over year. The decrease in the yield was due to the decrease in market interest rates and the corresponding downward impact on new originations. The increase in the average balance of loans was primarily due to the emphasis on the origination of nonresidential and commercial loans.

Interest income on securities decreased $51,000, or 0.9%, during fiscal 2009, compared to fiscal 2008, due primarily to a decrease of $2.3 million, or 1.9%, in the average balance, caused mainly by continued principal prepayments and maturities of $30.0 million, which exceeded purchases of $27.0 million, offset by an increase of five basis points in the weighted-average yield to 4.99% as compared to 4.94%, from the comparable 2008 period, generally reflecting reinvestment in higher yielding mortgage backed securities as the lower yielding agency bonds matured. Despite the Federal Reserve's action of lowering the federal funds rate by 200 basis points over the fiscal year, management was able to increase the average interest yield on investment securities.

Interest income on interest-earning deposits decreased by $188,000, or 39.2%, for the fiscal year ended March 31, 2009, due primarily to a decrease in the weighted-average yield of 141 basis points to 2.70%, coupled with a decrease in the average balance during fiscal 2009 of $873,000, or 7.5%. As discussed above, the decrease in the yield was primarily due to the actions of the Federal Reserve in lowering the federal funds rate 200 basis points over the past year.

Interest Expense

Interest expense for the fiscal year ended March 31, 2009 totaled $9.3 million, a decrease of $2.5 million, or 21.0%, from interest expense for fiscal year ended March 31, 2008. The decrease in interest expense resulted from a decrease in the weighted-average cost of funds of 72 basis points to 2.55% for fiscal 2009, offset by an increase of $4.6 million, or 1.3%, in the average balance of deposits and borrowings outstanding in fiscal 2009.

Interest expense on deposits totaled $7.4 million for fiscal 2009, a decrease of $2.5 million, or 25.0%, compared to fiscal 2008. The decrease in deposit costs resulted from a decrease of 74 basis points in the weighted-average cost of deposits to 2.35% for fiscal 2009, coupled with a decrease in the average balance outstanding of $4.8 million, or 1.5%. In addition, as noted earlier, a shift in the composition of deposits from higher cost certificates of deposit to lower cost checking and savings accounts contributed to the decrease in the cost of deposits, along with the actions of the Federal Reserve in lowering the federal funds rate during the year.

Interest expense on other short term borrowings totaled $67,000 for the year ended March 31, 2009, a decrease of $158,000, or 70.2%, from the 2008 period, due primarily to a decrease in the weighted-average rate of 267 basis points to 0.72% for the fiscal year ended March 2009. The rate decrease was the result of the Federal Reserve lowering the federal funds rate 200 basis points over the past year as this product is linked to this rate.

Interest expense on borrowings totaled $1.9 million for the year ended March 31, 2009, an increase of $133,000, or 7.5%, from the 2008 period, due primarily to an increase in the average balance of $6.8 million, or 18.8%, offset with a decrease in the weighted-average rate of 46 basis points to 4.41% for the fiscal year ended March 31, 2009 as a result of lower rate advances. The increase in the average balance was due to

increased borrowings to offset the runoff in deposits due to management's strategic pricing strategy that focused on the maintenance of customer relationships while avoiding high cost retail deposits.

Net Interest Income

Net interest income totaled $12.2 million for the fiscal year ended March 31, 2009, an increase of $986,000, or 8.8%, from the amount for fiscal 2008. The average interest rate spread increased to 3.12% for fiscal 2009 from 2.82% for fiscal 2008. The net interest margin increased to 3.21% for fiscal 2009 from 2.96% for the fiscal year ended March 31, 2008. These ratios increased as the decrease in the yield on average interest earning assets of 42 basis points was more than offset by the decrease in the cost of funds of 72 basis points. As noted earlier, a shift in the composition of deposits from higher cost certificates of deposit and money market investor deposits to the lower cost checking and savings accounts contributed to the decrease in the cost of deposits.

Provision for Losses on Loans

The Company recorded a provision for losses on loans totaling $1.1 million and $234,000 for the fiscal years ended March 31, 2009 and 2008, respectively. At March 31, 2009, all delinquent nonresidential, multi-family and commercial loans were analyzed, resulting in a reserve allocation of $668,000. The increase in the provision expense also reflects an increase in the levels of delinquent loans and management's analysis of economic conditions in the Bank's market areas. In the opinion of management, as of March 31, 2009, the carrying value of all non-performing loans as of March 31, 2009 is expected to be realized.

Noninterest Income

Noninterest income, consisting primarily of earnings on bank-owned life insurance policies, gains on sale of loans, trust income and service fees, and charges on deposit accounts decreased by $157,000, or 8.3%, to $1.7 million for fiscal 2009, from $1.9 million for the year ended March 31, 2008. The decrease resulted primarily from a decrease in service fees and charges on deposit accounts of $189,000, or 12.9%, mainly due to a volume decrease in fiscal 2009, partially offset by an increase of $49,000 in gain on sale of loans. As described under Item 1 above, management engages in limited sales of newly originated loans to limit the buildup of interest rate risk on the balance sheet and to provide liquidity to accommodate additional refinancing activity. Trust income and earnings on bank-owned life insurance were down by $8,000 and $9,000, respectively, as the market yields were down year to year.

Noninterest Expense

Noninterest expense increased by $160,000, or 1.6%, to $10.4 million for the fiscal year ended March 31, 2009, compared to fiscal 2008. The increase in noninterest expense was primarily due to an increase of $157,000 in loss on disposal and impairment provision of real estate acquired through foreclosure. Management evaluated two foreclosed assets held for sale and charged a provision of $120,000. In fiscal 2008, the Bank recognized a $31,000 gain on disposal of real estate acquired through foreclosure. Federal deposit insurance increased $83,000 as the one time credit given to the Bank in fiscal 2007 has now been fully used along with an increase in deposit insurance premium rates. Franchise tax expense increased by $65,000, or 16.8%, mainly due to a reduction of a receivable from an amendment of prior returns. Occupancy and equipment expense increased $38,000, or 1.9%, as a result of increased leasehold expenditures. Salaries and employee benefits increased by $12,000 from fiscal 2009 to fiscal 2008 as the Bank reduced staff, eliminated emeritus director fees and nominally was able to reduce benefit costs. A decrease of $195,000, or 9.5%, in other operating expense was primarily attributable to decreased advertising and public relations costs of $46,000, with reduced internal audit expenses of $82,000 and decreased internet banking costs of $50,000 as the Bank renegotiated the online banking contract.

Federal Income Taxes

Federal income tax expense was $546,000 for the year ended March 31, 2009, reflecting a decrease of $64,000 from fiscal 2008. The decrease resulted primarily from a $165,000 decrease in pre-tax income. 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 of life insurance and other tax-exempt obligations.

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. Such yields and costs are derived by dividing income or expense by the average balance of assets or liabilities, respectively, for the periods presented.

                                                          Year Ended March 31,
                                              2009                                     2008
                               Average                    Average       Average                    Average
                               Balance      Interest        Rate        Balance      Interest        Rate
                                                         (Dollars in thousands)
Interest-earning assets:
Loans receivable, net (1)     $ 250,220     $  15,299         6.11 %   $ 244,800     $  16,546         6.76 %
Investment securities (2)       117,892         5,881         4.99       120,181         5,932         4.94
Interest-earning deposits
(3)                              10,819           292         2.70        11,692           480         4.11
Total interest-earning
assets                          378,931        21,472         5.67       376,673        22,958         6.09

Non-interest-earning assets      22,455                                   21,972

Total assets                  $ 401,386                                $ 398,645

Interest-bearing
liabilities:
Deposits                      $ 312,570         7,354         2.35     $ 317,406         9,801         3.09
Other short term borrowings       9,263            67          .72         6,634           225         3.39
Borrowings                       43,064         1,900         4.41        36,262         1,767         4.87
Total interest-bearing
liabilities                     364,897         9,321         2.55       360,302        11,793         3.27

Non-interest-bearing
liabilities                       2,992                                    3,846

Total liabilities               367,889                                  364,148

Stockholders' equity             33,497                                   34,497

Total liabilities and
stockholders' equity          $ 401,386                                $ 398,645

Net interest income                         $  12,151                                $  11,165

Interest rate spread (4)                                      3.12 %                                   2.82 %

Net yield on
interest-earning assets (5)                                   3.21 %                                   2.96 %
Ratio of average
interest-earning assets to
average
interest-bearing
liabilities                                                 103.85 %                                 104.54 %


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(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.

Rate/Volume Analysis.

The table below sets forth certain information regarding changes in interest income and interest expense of the Company for the periods indicated. For each category of interest-earning assets and interest-bearing liabilities, information is provided on changes attributable to (i) changes in average volume (changes in average volume multiplied by old rate); and (ii) changes in rate (change in rate multiplied by old average volume). Changes in rate-volume (changes in rate multiplied by the change in average volume) have been allocated proportionately between changes in rate and changes in volume.

                                                           Year ended March 31,
                                          2009 vs. 2008                             2008 vs. 2007
                                    Increase                                   Increase
                                   (decrease)              Total              (decrease)             Total
                                     due to               increase              due to             increase
                               Volume        Rate        (decrease)       Volume       Rate       (decrease)
                                                              (In thousands)
Interest income
attributable to:
Loans receivable              $    359     $ (1,606 )   $     (1,247 )   $    519     $    84     $       603
Investment securities             (114 )         63              (51 )       (306 )       437             131
Interest-bearing deposits          (34 )       (154 )           (188 )       (144 )       (42 )          (186 )
Total interest-earning
assets                             211       (1,697 )         (1,486 )         69         479             548

Interest expense
attributable to:
Deposits                          (165 )     (2,282 )         (2,447 )       (256 )       527             271
Other short term borrowings         77         (235 )           (158 )         39         (43 )            (4 )
Federal Home Loan Bank
Borrowings                         317         (184 )            133          237          91             328
Total interest-bearing
liabilities                        229       (2,701 )         (2,472 )         20         575             595
Increase (decrease) in net
interest income               $    (18 )   $  1,004     $        986     $     49     $   (96 )   $       (47 )

Liquidity and Capital Resources

The Bank's primary sources of funds are deposits, principal repayments and prepayments on loans and mortgage-backed securities, maturities of investment securities and other short-term investments, and earnings and funds provided from operations. While scheduled principal repayments on loans and mortgage-backed securities are a relatively predictable source of funds, deposit flows and loan prepayments are greatly influenced by the general level of interest rates, economic conditions and competition. The Bank manages the pricing of deposits to maintain a desired level of deposits and cost of funds. In addition, the Bank invests excess funds in federal funds and other short-term interest-earning assets, which provide liquidity to meet lending requirements. Federal funds sold and other liquid assets outstanding at March 31, 2009 and 2008, amounted to $125.5 million and $134.5 million, respectively. For additional information about cash flows from the Company's . . .