UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
Washington, D.C. 20549
FORM 10-KSB
[X] ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(D) OF THE SECURITIES EXCHANGE
ACT OF 1934
FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998
OR
[] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934 FOR THE TRANSITION PERIOD FROM TO
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COMMISSION FILE NUMBER: 0-24849
FIRST NILES FINANCIAL, INC.
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(Name of small business issuer in its charter)
Delaware 34-1870418
- ---------------------------------------------- -------------------
(State or other jurisdiction of incorporation (I.R.S. Employer
or organization) Identification No.)
55 North Main Street, Niles, Ohio 44446-5097
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(Address of principal executive offices) (Zip Code)
Registrant's telephone number, including area code: (330) 652-2539
--------------------------
Securities Registered Pursuant to Section 12(b) of the Act:
NONE
----
Securities Registered Pursuant to Section 12(g) of the Act:
COMMON STOCK, PAR VALUE $0.01 PER SHARE
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(Title of class)
Check whether the issuer (1) filed all reports required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 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 X. NO ___.
Check if there is no disclosure of delinquent filers in response to Item 405 of
Regulation S-B contained herein, and no disclosure will be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-KSB or any amendment to
this Form 10-KSB. [X]
State the issuer's revenues for its most recent fiscal year: $5.7 million.
The aggregate market value of the voting stock held by non-affiliates of the
registrant, computed by reference to the average of the closing bid and asked
price of such stock on the Nasdaq System as of March 25, 1999, was $17.8
million. (The exclusion from such amount of the market value of the shares owned
by any person shall not be deemed an admission by the registrant that such
person is an affiliate of the registrant.)
As of March 25, 1999, there were issued and outstanding 1,754,411 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-KSB -- Portions of the Annual Report to Shareholders for the
fiscal year ended September 30, 1998.
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting
of Shareholders to be held during April 1999.
Transitional Small Business Disclosure Format: Yes ____; No X
<PAGE>
FORWARD-LOOKING STATEMENTS
First Niles Financial, Inc., and its wholly-owned subsidiary, Home
Federal Savings and Loan Association of Niles, may from time to time make
written or oral "forward-looking statements", including statements contained in
its filings with the Securities and Exchange Commission. These forward-looking
statements may be included in this Annual Report on Form 10-KSB and the exhibits
attached to it, in First Niles' reports to stockholders and in other
communications by the company, which are made in good faith by us pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements about our beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions,
that are subject to significant risks and uncertainties, and are subject to
change based on various factors, some of which are beyond our control. The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause
First Niles' and Home Federal's financial performance to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in the
forward-looking statements:
o the strength of the United States economy in general and the
strength of the local economies in which we conduct operations;
o the effects of, and changes in, trade, monetary and fiscal policies
and laws, including interest rate policies of the Federal Reserve
Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of our new products and
services and the perceived overall value of these products and
services by users, including the features, pricing and quality
compared to competitors' products and services;
o the willingness of users to substitute competitors' products and
services for our products and services;
o our success in gaining regulatory approval of our products and
services, when required;
o the impact of changes in financial services' laws and regulations,
including laws concerning taxes, banking, securities and insurance;
o technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We
incorporate by reference those factors included in First Niles' Registration
Statement on Form SB-2 (Reg. No. 333-58883). We do not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of First Niles or Home Federal.
2
<PAGE>
PART I
ITEM 1. DESCRIPTION OF BUSINESS
GENERAL
First Niles Financial, Inc., a Delaware corporation, was formed in July
1998 to act as the holding company for Home Federal Savings and Loan Association
of Niles upon the completion of Home Federal's conversion from mutual to stock
form. First Niles received approval from the Office of Thrift Supervision to
acquire all of the common stock of Home Federal to be outstanding upon
completion of the conversion from mutual to stock form. The conversion was
completed on October 26, 1998. All references to First Niles or Home Federal,
unless otherwise indicated, on or before October 26, 1998, refer to Home Federal
before its conversion from mutual to stock form. References in this Form 10-KSB
to "we", "us", and "our" refer to First Niles and/or Home Federal as the context
requires.
The business and management of First Niles consists of the business and
management of Home Federal. At December 31, 1998, we had $86.7 million of assets
and stockholders' equity of $29.9 million (or 34.50% of total assets). Our
common stock is traded on The Nasdaq SmallCap Market under the symbol "FNFI".
Home Federal is a federally chartered stock savings association
headquartered in Niles, Ohio. Its deposits are insured up to applicable limits
by the Federal Deposit Insurance Corporation (the "FDIC") and are backed by the
full faith and credit of the United States.
Our principal business is attracting retail deposits from the general
public and investing those funds primarily in permanent and construction loans
secured by first mortgages on owner-occupied, one- to four-family residences. We
also originate, to a lesser extent, loans secured by first mortgages on
non-owner-occupied one- to four-family residences, permanent and construction
commercial and multi-family real estate loans, and consumer loans. Excess funds
are generally invested in investment securities and mortgage-backed and related
securities.
Our profitability depends primarily on net interest income, which is
the difference between interest and dividend income on interest-earning assets,
and interest expense on interest-bearing liabilities. Interest-earning assets
include principally loans, investment securities, mortgage-backed and related
securities and interest-earning deposits in other institutions. Net interest
income is dependent upon the level of interest rates and the extent to which
such rates are changing. Our profitability is also dependent, to a lesser
extent, on the level of noninterest income, provision for loan losses,
noninterest expense and income taxes. Our operations and profitability are
subject to changes in interest rates, applicable statutes and regulations, and
general economic conditions, as well as other factors beyond our control.
Our offices are located at 55 North Main Street, Niles, Ohio 44446-5097
and our telephone number is (330) 652-2539.
3
<PAGE>
For information relating to our year 2000 preparedness, costs, risks
and contingency plans, see the discussion contained under "Management's
Discussion and Analysis of Financial Condition and Results of Operations -- Year
2000 Issue" in the Annual Report attached as Exhibit 13 to this Annual Report on
Form 10-KSB.
MARKET AREA
Our primary market area is Niles, Ohio. Our primary lending area
consists generally of the area within a 30 mile radius of the City of Niles.
Although we may grant loans outside of this 30 mile radius upon the approval of
our Board of Directors, we do not grant loans outside the State of Ohio.
Trumbull County, where Home Federal is located, consists primarily of
suburban and rural communities with manufacturing and wholesale distribution
activities serving as the basis of the local economy. Major employers in the
area include General Motors Corp. and WCI Steel, Inc.
Our market area has experienced a higher current unemployment rate than
Ohio and the United States. In December 1998, Trumbull County had an
unemployment rate of 5.4%, compared to an unemployment rate of 3.9% in Ohio, and
4.3 % in the United States. Furthermore, the population of Niles has remained
relatively stagnant from 1990 to 1998, and is expected to remain relatively
constant for the foreseeable future.
Our market area comprises a broad range of income and educational
levels and employment sectors. In both Niles and Trumbull County, the services
and manufacturing sectors represent approximately equal shares of the business
and employment base, followed by the wholesale/retail sector. The level of
financial competition in both Niles and Trumbull County is strong and dominated
by commercial banks, with financial institutions of varying sizes and
characteristics operating in and around our market area. These economic
conditions and strong competition have also resulted in reduced loan demand
which, in turn, has resulted in a high concentration of investment securities
and mortgage-backed and related securities in our portfolio compared to typical
savings institutions. In the event current economic and market conditions
persist or worsen, and loan demand remains weak, no assurances can be given that
we will be able to maintain or increase our mortgage loan portfolio, which could
adversely affect our operations and financial results.
LENDING ACTIVITIES
GENERAL. Our primary lending activity is the origination of loans
secured by first mortgages on one- to four-family residential properties. We
also make permanent and construction loans on multi-family and commercial
properties, and a limited number of consumer and commercial business loans. Our
mortgage loans carry either a fixed or an adjustable interest rate. Mortgage
loans are generally long-term and amortize on a monthly basis with principal and
interest due each month. At December 31, 1998, our net loan portfolio totaled
$36.1 million, which constituted 41.7% of our total assets.
4
<PAGE>
Management originates all loans, which are subject to ratification by
the Board of Directors. Commercial real estate loans and multi-family loans are
generally reviewed by the Board before we extend a lending commitment. Unless we
are aware of factors that may lead to an environmental concern, we generally do
not require any environmental study at the time a loan is made. If an
environmental problem were discovered to exist after a loan has been originated
and the loan has become delinquent, we may choose not to foreclose on the
property if the potential environmental liability would render foreclosure
imprudent.
Management is responsible for presenting to the Board information about
the credit-worthiness of a borrower and the estimated value of the subject
property. Information relating to credit-worthiness of a borrower generally
consists of a summary of the borrower's credit history, employment, employment
stability, net worth and income. The estimated value of the property must be
supported by an appraisal report prepared in accordance with our appraisal
policy.
At December 31, 1998, the maximum amount which we could have loaned to
any one borrower and the borrower's related entities was approximately $3.3
million. At December 31, 1998, we had no loans or groups of loans to related
borrowers with outstanding balances in excess of this amount. At that date, our
largest lending relationship to a single borrower or a group of related
borrowers consisted of nine loans totaling $2.3 million of which approximately
$29,000 was unfunded at December 31, 1998. Of the nine loans, two loans were for
the construction of a residential housing development, four loans were for
individual home construction, and three loans were secured by apartment rental
units and commercial office space. The second largest lending relationship at
December 31, 1998, consisted of two purchased participation loans totaling $1.7
million for the construction of an apartment complex and a completed
warehouse/office complex in Columbus, Ohio. Approximately $191,000 of the
$756,000 apartment complex participation construction loan was unfunded at
December 31, 1998. The third largest lending relationship at December 31, 1998,
consisted of seven loans totaling $1.1 million. Five of the loans are secured by
one- to four-family residences and two loans are for the development of
residential real estate. Each of the foregoing loans was current and performing
in accordance with its terms at December 31, 1998.
Our next largest lending relationship at December 31, 1998, totaled
$1.1 million and consisted of four loans secured by commercial and residential
real estate. At December 31, 1998, the largest of the four loans, with a balance
of $648,000, was nonperforming. See "- Asset Quality Nonperforming Assets."
We had 13 other lending relationships which exceeded $400,000 at
December 31, 1998. As of that date, all of these lending relationships were
current and performing generally in accordance with their loan terms except for
one lending relationship that was approximately 80 days delinquent. This lending
relationship consisted of 18 loans secured primarily by single family rental
units totaling $557,000.
5
<PAGE>
LOAN PORTFOLIO COMPOSITION. The following table sets forth information
concerning the composition of our loan portfolio in dollar amounts and in
percentages as of the dates indicated. The dollar amounts and percentages were
calculated before deductions for loans in process, deferred fees and discounts
and allowances for losses.
December 31,
----------------------------------------
1998 1997
------------------ ------------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
REAL ESTATE LOANS:
- ------------------
One- to four-family ............... $25,474 66.81% $25,634 64.29%
Commercial ........................ 5,042 13.23 4,603 11.54
Multi-family ...................... 1,298 3.40 4,143 10.39
Construction or development ....... 5,104 13.39 4,231 10.61
------- ------ ------- ------
Total real estate loans ....... 36,918 96.83 38,611 96.83
------- ------ ------- ------
OTHER LOANS:
- ------------
Consumer Loans:
Home equity ...................... 915 2.40 926 2.32
Deposit account .................. 82 0.21 84 0.21
------- ------ ------- ------
Total consumer loans .......... 997 2.61 1,010 2.53
Commercial business loans ......... 213 0.56 255 0.64
------- ------ ------- ------
Total other loans ............. 1,210 3.17 1,265 3.17
------- ------ ------- ------
Total loans ................... 38,128 100.00% 39,876 100.00%
====== ======
LESS:
- -----
Loans in process................... 1,212 2,278
Allowance for losses............... 784 854
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1,996 3,132
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Total loans receivable, net........ $36,132 $36,744
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6
<PAGE>
The following table shows the composition of our loan portfolio by
fixed- and adjustable-rate at the dates indicated.
December 31,
-------------------------------------
1998 1997
----------------- -----------------
Amount Percent Amount Percent
------- ------- ------- -------
(Dollars in Thousands)
FIXED-RATE LOANS:
- -----------------
Real estate:
One- to four-family .................. $13,710 35.96% $11,997 30.09%
Commercial ........................... 318 0.83 1,430 3.59
Multi-family ......................... 188 0.49 289 0.72
Construction or development .......... 3,698 9.70 1,776 4.45
------- ------ ------- ------
Total real estate loans ........... 17,914 46.98 15,492 38.85
------- ------ ------- ------
Consumer .............................. 997 2.61 1,010 2.53
Commercial business ................... 213 0.56 255 0.64
------- ------ ------- ------
1,210 3.17 1,265 3.17
------- ------ ------- ------
Total fixed-rate loans ............ 19,124 50.16 16,757 42.02
ADJUSTABLE-RATE LOANS:
- ----------------------
Real estate:
One- to four-family .................. 11,764 30.85 13,637 34.20
Commercial ........................... 4,724 12.39 3,173 7.96
Multi-family ......................... 1,110 2.91 3,854 9.66
Construction or development .......... 1,406 3.69 2,455 6.16
------- ------ ------- ------
Total real estate loans ........... 19,004 49.84 23,119 57.98
Consumer .............................. -- -- -- --
------- ------ ------- ------
Total adjustable-rate loans ....... 19,004 49.84 23,119 57.98
------- ------ ------- ------
Total loans ....................... 38,128 100.00% 39,876 100.00%
====== ======
LESS:
- -----
Loans in process....................... 1,212 2,278
Deferred fees and discounts............ -- --
Allowance for loan losses.............. 784 854
------- -------
1,996 3,132
------- -------
Total loans receivable, net......... $36,132 $36,744
======= =======
7
<PAGE>
The following schedule illustrates the contractual maturity of our real
estate construction and commercial business loan portfolios at December 31, 1998
before net items. Mortgage loans that have adjustable or renegotiable interest
rates are shown as maturing in the period during which the contract is due. The
schedule does not reflect the effects of possible prepayments or enforcement of
due-on-sale clauses.
<TABLE>
<CAPTION>
Real Estate Construction Commercial
or Development Business Total
------------------------ --------------------- ---------------------
Weighted Weighted Weighted
Average Average Average
Amount Rate Amount Rate Amount Rate
------ ---- ------ ---- ------ ----
(Dollars in Thousands)
Due During Periods
Ending December 31,
- -------------------
<S> <C> <C> <C> <C> <C> <C>
1999(1) ............. 734 8.50 2 7.50 736 8.50
2000 to 2003......... 2,047 8.24 38 8.35 2,085 8.24
After 2003........... 2,323 8.21 173 8.13 2,496 8.20
----- ---- ----- ---- ----- ----
Totals 5,104 8.26 213 8.17 5,317 8.26
</TABLE>
- -----------------------
(1) Includes demand loans, non-accrual loans, loans having no stated maturity
and overdraft loans.
The total amount of loans in the above table due after December 31,
1999 which have fixed interest rates is $3.2 million, while the total amount of
loans due after such date which have floating or adjustable interest rates is
$1.4 million.
ONE- TO FOUR-FAMILY RESIDENTIAL REAL ESTATE LENDING. Residential loan
originations are generated by our marketing efforts, present and walk-in
customers, and referrals from real estate brokers and builders. We have focused
our lending efforts primarily on the origination of loans secured by first
mortgages on owner-occupied, one- to four-family residences in our market area.
At December 31, 1998, one- to four-family residential mortgage loans totaled
$25.5 million, or 66.8% of our gross loan portfolio.
Home Federal currently originates one- to four-family mortgage loans on
either a fixed or adjustable basis, as consumer demand dictates. The pricing
strategy for fixed-rate mortgage loans revolves around setting interest rates
that are competitive with other local financial institutions. Adjustable-rate
mortgage loans are offered with either one-year or three-year repricing periods.
Due to their wide availability and market rate sensitivity, we currently use the
one-year and three-year U.S. Treasury Security Constants plus a margin of 250
basis points for pricing of adjustable-rate mortgage loans. During the year
ended December 31, 1998, we originated $2.0 million of one- to four-family
adjustable-rate mortgage loans and $3.6 million of one- to four-family,
fixed-rate mortgage loans. We have not sold any mortgage loans. See
"Management's Discussion and Analysis of Financial Condition and Results of
Operations - Asset and Liability Management; Market Risk Analysis"in the Annual
Report attached as Exhibit 13 to this Annual Report on Form 10-KSB.
8
<PAGE>
Fixed-rate loans secured by one- to four-family residences have maximum
maturities of 30 years, and are fully amortizing, with payments due monthly.
These loans normally remain outstanding, however, for a substantially shorter
period of time because of refinancing and other prepayments. A significant
change in the current level of interest rates could alter the average life of a
residential loan in our portfolio considerably. Our one- to four-family loans
are not assumable, do not contain prepayment penalties and do not permit
negative amortization of principal. Our real estate loans generally contain a
"due on sale" clause allowing us to declare the unpaid principal balance due and
payable upon the sale of the security property.
Our one- to four-family residential adjustable-rate mortgage loans are
fully amortizing with contractual maturities of up to 30 years, and payments due
monthly. Our adjustable-rate mortgage loans provide for specified minimum and
maximum interest rates. As a consequence of using caps, the interest rates on
these loans may not be as rate sensitive as our cost of funds. Our
adjustable-rate mortgage loans are generally not convertible into fixed-rate
loans.
Adjustable-rate mortgage loans generally pose different credit risks
than fixed-rate loans, primarily because as interest rates rise, the borrower's
payment rises, and thus, increases the potential for default. We have not
experienced significant delinquencies concerning these loans. See "- Asset
Quality -- Non-Performing Assets" and "-Asset Quality -- Classified Assets."
As mentioned above, we have primarily concentrated our lending
activities on the origination of owner-occupied, one- to four-family residences.
In recent years, however, loans secured by nonowner occupied, one-to four-family
residences have accounted for a growing share of total loan volume. Generally,
these loans are underwritten using the same criteria as owner-occupied, one- to
four-family residential loans, but typically are originated at higher rates and
lower loan-to-value ratios than owner-occupied loans.
We generally underwrite our one- to four-family loans based on the
applicant's employment, credit history, and appraised value of the subject
property. Presently, we lend up to 90% of the lesser of the appraised value or
purchase price for one- to four-family loans. Properties securing our one- to
four-family loans are appraised by independent fee appraisers approved and
qualified by our Board of Directors. We generally require our borrowers to
obtain title insurance and fire, property and flood insurance, if necessary, in
an amount not less than the value of the security property.
COMMERCIAL AND MULTI-FAMILY REAL ESTATE LENDING. We are engaged in
commercial and multi-family real estate lending. These loans are secured
primarily by small retail establishments, small office buildings and other
non-residential and residential properties located in our market area. At
December 31, 1998, commercial real estate loans totaled $5.0 million or 13.2% of
our gross loan portfolio and multi-family real estate loans totaled $1.3 million
or 3.4% of our gross loan portfolio.
Our loans secured by commercial and multi-family real estate are
originated with either a fixed or adjustable interest rate. The interest rate on
adjustable-rate loans is based on a variety of indices, which are generally
determined upon negotiation with the borrower. Loan-to-value ratios on our
commercial and multi-family loans typically do not exceed 80% of the appraised
value of the property securing the loan. These loans typically require monthly
payments and have maximum
9
<PAGE>
maturities of 30 years. While maximum maturities may extend to 30 years, loans
frequently have shorter maturities that generally range from 10 to 15 years.
Loans secured by commercial and multi-family real estate are granted
based on the income producing potential of the property and the financial
strength of the borrower. The net operating income, which is the income derived
from the operation of the property less all operating expenses, must be
sufficient to cover the payments related to the outstanding debt. We generally
require personal guaranties of the borrowers in addition to the security
property as collateral for such loans. Appraisals on properties securing
commercial and multi-family real estate loans are performed by independent fee
appraisers approved by our Board of Directors. See "- Loan Originations,
Purchases and Repayments."
Loans secured by commercial and multi-family real estate properties are
generally larger and involve a greater degree of credit risk than one- to
four-family residential mortgage loans because they typically involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by commercial and multi-family real estate properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse conditions in the real estate market or
the economy. If the cash flow from the project is reduced, the borrower's
ability to repay the loan may be impaired. For example, cash flow from the
project is reduced if leases are not obtained or renewed. See "- Asset Quality
- -- Nonperforming Loans."
CONSTRUCTION AND DEVELOPMENT LENDING. We originate residential
construction loans to individuals as well as loans secured by building lots or
raw land held for development. Presently, all of these loans are secured by
property located within our market area. At December 31, 1998, we had $5.1
million in construction and development loans outstanding, representing 13.4% of
our gross loan portfolio. At December 31, 1998, our two largest construction
loans or lending relationships consisted of participation interests secured by
two separate apartment complexes located in Columbus, Ohio. One of the
participation interests totaled $1.0 million, with approximately $601,000
unfunded at December 31, 1998. The other participation interest totaled $756,000
with $191,000 unfunded at December 31, 1998.
Construction loans to individuals for their residences generally are
structured to be converted to permanent loans at the end of the construction
phase, which typically runs six months. These construction loans have rates and
terms that match the one- to four-family loans then offered by Home Federal,
except that during the construction phase the borrower pays only interest on the
loan. Residential construction loans are generally underwritten pursuant to the
same guidelines used for originating permanent residential loans. At December
31, 1998, $350,000 of our construction loans were to borrowers intending to live
in the properties upon completion of construction.
Loans secured by building lots or raw land held for development are
generally granted with terms of up to five years and are available at a fixed
interest rate. Payments on loans secured by building lots are due monthly and
amortized on a 20-year basis, resulting in a balloon payment at maturity.
Payments on raw land held for development are due monthly, and are interest
only. Loans secured by building lots or raw land for development are granted
based on both the financial strength
10
<PAGE>
of the borrower and the value of the underlying property. At December 31, 1998,
we had $1.9 million of loans secured by building lots and raw land.
Construction loans are obtained principally through continued business
from builders who have previously borrowed from Home Federal, as well as
referrals from existing and walk-in customers. The application process includes
submission of accurate plans, specifications and costs of the project to be
constructed. These items are used as a basis to determine the appraised value of
the subject property. Loans are based on the lesser of current appraised value
and/or the cost of construction (land plus building). We also conduct periodic
inspections of the construction project being financed.
There are uncertainties inherent in estimating construction costs and
the market for the project upon completion. Accordingly, it is relatively
difficult to evaluate accurately the total loan funds required to complete a
project, the related loan-to-value ratios and the likelihood of success of the
project. Construction loans to borrowers other than owner-occupants also involve
many of the same risks discussed above regarding commercial real estate loans
and tend to be more sensitive to general economic conditions than many other
types of loans.
OTHER LENDING. We also originate a nominal amount of consumer and
commercial business loans, generally as an accommodation to our customers. Our
consumer loan portfolio consists almost entirely of personal loans secured by
first or second mortgages on real estate. These loans are offered at fixed rates
of interest with terms not exceeding ten years.
LOAN ORIGINATIONS, PURCHASES AND REPAYMENTS
We originate loans through our marketing efforts, existing and walk-in
customers and referrals from real estate brokers and builders. While we
originate both adjustable-rate and fixed-rate loans, our ability to originate
loans is dependent upon the relative customer demand for loans in our market.
Demand is affected by local competition and the interest rate environment.
During the last several years, our dollar volume of fixed-rate, one- to
four-family loans has exceeded the dollar volume of the same type of
adjustable-rate loans. Although our primary business is the origination of one-
to four-family mortgage loans, competition from other financial institutions
continues to limit the volume of loans we have been able to originate and place
in our portfolio. As a result, we have purchased mortgage loans and investment
and mortgage-backed and related securities to supplement our portfolios. We do
not sell loans and our loans are not originated according to secondary market
guidelines. Furthermore, during the past few years, like many other financial
institutions, we have experienced significant prepayments on loans and
mortgage-backed and related securities due to the sustained low interest rate
environment prevailing in the United States.
In periods of economic uncertainty, the ability of financial
institutions, including Home Federal, to originate large dollar volumes of real
estate loans may be substantially reduced or restricted, with a resultant
decrease in interest income.
11
<PAGE>
The following table shows our loan origination, purchase and repayment
activities for the periods indicated.
Year Ended December 31,
----------------------------
1998 1997
--------- ---------
(In Thousands)
ORIGINATIONS BY TYPE:
- ---------------------
Adjustable rate:
Real estate - one- to four-family ....... $ 2,000 $ 2,876
- commercial ......... 1,188 360
- multi-family ....... -- --
-------- --------
Total adjustable-rate ........... 3,188 3,236
-------- --------
Fixed rate:
Real estate - one- to four-family ....... 3,555 3,188
- commercial ......... -- --
- multi-family ....... 675 --
- land and development 371 95
Non-real estate - consumer .............. 575 462
- commercial business 62 56
-------- --------
Total fixed-rate ................ 5,238 3,801
-------- --------
Total loans originated .......... 8,426 7,037
-------- --------
PURCHASES:
- ----------
Real estate - one- to four-family ....... -- 1,000
- commercial ......... -- 900
- multi-family ....... 1,000 1,000
- land and development 525 --
-------- --------
Total loans purchased ........... 1,525 2,900
Mortgage-backed and related securities .. 9,541 7,872
-------- --------
Total purchased ................. 11,066 10,772
-------- --------
REPAYMENTS:
- -----------
Principal repayments .................... 20,223 13,645
-------- --------
Total reductions ................ 20,223 13,645
Increase (decrease) in other items, net . (37) (668)
-------- --------
Net increase (decrease) ......... $ (540) $ 3,496
======== ========
ASSET QUALITY
When a borrower fails to make a payment on a loan on or before the
default date, the loan is considered 30 days past due. At that time, we
generally send out a delinquent notice to the borrower. All delinquent accounts
are reviewed by our collection officer, and at his or her discretion, we attempt
to cause the delinquency to be cured by contacting the borrower. If the loan
becomes 60 days delinquent, the collection officer will generally send a
personal letter to the borrower requesting payment of the delinquent amount in
full, or the establishment of an acceptable
12
<PAGE>
repayment plan to bring the loan current within 90 days. If the account becomes
90 days delinquent, and an acceptable repayment plan has not been agreed upon,
the collection officer will generally refer the account to legal counsel, with
instructions to prepare a notice of intent to foreclose. The notice of intent to
foreclose allows the borrower up to 30 days to bring the account current. During
this 30 day period, the collection officer may accept a written repayment plan
from the borrower which would bring the account current within 90 days. Once the
loan becomes 120 days delinquent, and an acceptable repayment plan has not been
agreed upon, the collection officer, after receiving consent from our Board of
Directors, will turn over the account to our legal counsel with instructions to
initiate foreclosure.
DELINQUENT LOANS. The following table sets forth our loan delinquencies
by type, number, amount and percentage of type at December 31, 1998.
<TABLE>
<CAPTION>
Loans Delinquent For:
-----------------------------------------------------------
30-89 Days 90 Days and Over Total Delinquent Loans
--------------------------- --------------------------- ---------------------------
Percent Percent Percent
of Loan of Loan of Loan
Number Amount Category Number Amount Category Number Amount Category
------ ------ -------- ------ ------ -------- ------ ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C> <C>
Real Estate:
One- to four-family 45 $1,388 5.45% 8 $ 206 0.81% 53 $1,594 6.26%
Commercial ........ 1 35 0.69 -- -- -- 1 35 0.69
Multi-family ...... -- -- -- -- -- -- -- -- --
Construction or
development ..... 2 182 3.57 2 743 14.55 4 925 18.12
Consumer ............. 1 3 0.30 1 6 0.60 2 9 0.90
Commercial ........... 2 50 23.47 -- -- -- 2 50 23.47
--- ------ --- ------ --- ------
Total ........... 51 $1,658 4.35% 11 $ 955 2.50% 62 $2,613 6.85%
=== ====== === ====== === ======
</TABLE>
NON-PERFORMING ASSETS. The table below sets forth the amounts and
categories of our non-performing assets. Loans are placed on non-accrual status
when the collection of principal and/or interest becomes doubtful. For all years
presented, we have had no foreclosed assets and no troubled debt restructurings
which involve forgiving a portion of interest or principal on any loans or
making loans at a rate materially less than that of market rates.
13
<PAGE>
December 31,
---------------------
1998 1997
------- -------
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .............................. $ -- $ --
Construction or development ...................... 648 875
------ ------
Total ......................................... 648 875
------ ------
Accruing loans delinquent more than 90 days:
One- to four-family .............................. 206 95
Multi-family ..................................... -- --
Commercial real estate ........................... -- 653
Construction or development ...................... 95 33
Consumer ......................................... 6 6
Commercial business .............................. -- --
------ ------
Total ......................................... 307 787
------ ------
Total non-performing loans ......................... $ 955 $1,662
====== ======
Total as a percentage of gross loans receivable .... 2.59% 4.42%
====== ======
Except as discussed below, there were no nonperforming loans to any one
borrower or group of related borrowers that exceeded either individually or in
the aggregate $300,000.
Included in the table above is a commercial real estate loan with an
outstanding balance of $648,000 at December 31, 1998. This loan is for the
development of 34 single-family lots and 23 condominium sites for the eventual
construction of 56 condominium units. This loan was originated in June 1994 for
$1.0 million with a loan-to-value ratio of approximately 79%. The development
consists of three phases. The first phase is for the development of 34
single-family residential lots and phase two is for the development of 23
condominium sites. Phase three, for which we have not granted any financing
commitment, is for the development of 37 additional single-family lots. The
borrower initially projected that phase one would be completed in early 1995,
with sales occurring during 1995 and 1996. As a result of construction delays,
phases one and two were completed during the first quarter of 1997. Lot sales
have been significantly slower than projected with only seven single-family lots
and six condominium sites having been sold as of December 31, 1998. Lot sales
remain slow.
For the year ended December 31, 1998, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $95,000. The amounts that were included in
interest income on such loans were $2,000.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set
forth in the table above as of December 31, 1998, there was an aggregate of $1.0
million in net book value of loans with respect to which known information about
the possible credit problems of the borrowers have caused management to have
doubts as to the ability of the borrowers to comply with present loan
14
<PAGE>
repayment terms and which may result in the future inclusion of such items in
the non-performing asset categories. These loans have been considered in
management's determination of the adequacy of our allowance for loan losses.
The largest loan of concern consists of a $542,000 loan secured by an
individual commercial property. This loan was originated in December 1994 for
$582,000 and at December 31, 1998 was current and performing in accordance with
its loan terms. Management is monitoring this loan based on its evaluation of
the borrower's cash flow and financial condition, which raises concerns
regarding the borrower's ability to service this loan in the future.
The other lending relationship of concern consisted of 19 loans to a
single borrower totaling $486,000 at December 31, 1998. Each loan is secured by
a residential rental property. Each of the loans comprising this lending
relationship was approximately 30 days delinquent at December 31, 1998.
Management is monitoring these loans as a result of the borrower's cash flow
problems resulting from higher than expected vacancies on the properties.
CLASSIFIED ASSETS. Federal regulations provide for the classification
of loans and other assets, such as debt and equity securities considered by the
Office of Thrift Supervision to be of lesser quality, as "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying capacity of the obligor or of the
collateral pledged, if any. "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected. Assets classified as "doubtful" have all
of the weaknesses inherent in those classified "substandard," with the added
characteristic that the weaknesses present make "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable." Assets classified as "loss" are those considered
"uncollectible" and of such little value that their continuance as assets
without the establishment of a specific loss reserve is unwarranted.
When an insured institution classifies problem assets as either
substandard or doubtful, it may establish general allowances for loan losses in
an amount deemed prudent by management. General allowances represent loss
allowances which have been established to recognize the inherent risk associated
with lending activities, but unlike specific allowances, have not been allocated
to particular problem assets. When an insured institution classifies problem
assets as "loss," it is required either to establish a specific allowance for
losses equal to 100% of that portion of the asset so classified or to charge off
that particular amount. An institution's determination as to the classification
of its assets and the amount of its valuation allowances is subject to review by
the Office of Thrift Supervision and the FDIC, which may order the establishment
of additional general or specific loss allowances.
In connection with the filing of our periodic reports with the Office
of Thrift Supervision and in accordance with our classification of assets
policy, we regularly review the problem assets in our portfolio to determine
whether any assets require classification in accordance with applicable
regulations. On the basis of management's review of our assets, at December 31,
1998, we had classified $1.5 million of our assets as substandard, which
represents 5.0% of shareholders' equity and 1.8% of total assets. No assets were
classified as doubtful or as loss.
15
<PAGE>
ALLOWANCE FOR LOAN LOSSES. The allowance for loan losses is established
through a provision for loan losses which is based on management's evaluation of
past loss experience, current trends in the level of delinquent and specific
problem loans, loan concentration to single borrowers, adverse situations that
may affect the borrower's ability to repay, the estimated value of any
underlying collateral, and current and anticipated economic conditions in our
market area. A significant portion of our loan portfolio is concentrated in one-
to four-family mortgage loans which, historically, has not led to any
significant loan losses. Management prepares quarterly analyses of loans
classified as substandard and non-performing, and evaluates these loans in
connection with its determination of the appropriate provision for loan losses
to be recorded for the period. Management also analyzes borrowers with
significant outstanding balances to reevaluate credit risk, the quality of the
loan and factors that may affect the borrowers' ability to pay. Accordingly, the
allowance represents managements's estimate of losses inherent in our loan
portfolio as of a specified date.
Although management believes that it uses the best information
available to determine the allowance, unforeseen market conditions could result
in adjustments and net earnings could be significantly affected if circumstances
differ substantially from the assumptions used in making the final
determination. Future additions to our allowance will be the result of periodic
loan, property and collateral reviews and thus, cannot be predicted in advance.
At December 31, 1998, our total allowance for loan losses represented coverage
of 82.1% of non-performing loans. See Notes A and C of the Notes to Consolidated
Financial Statements.
16
<PAGE>
The following table sets forth an analysis of our allowance for loan
losses.
At and For the Years
Ended December 31,
--------------------
1998 1997
-------- -------
(In Thousands)
Balance at beginning of period ........................... $ 854 $ 301
Charge-offs: One- to four-family ......................... 21 147
----- -----
Total charge-offs .................................... 21 147
Recoveries: .............................................. 54 --
----- -----
Net charge-offs ....................................... (33) 147
Additions charged (reductions credited) to operations .... (103) 700
----- -----
Balance at end of period ................................. $ 784 $ 854
===== =====
Ratio of net charge-offs (recoveries) during the period to
average loans outstanding during the period ............. (0.09)% 0.41%
===== =====
Ratio of net charge-offs during the period to
average non-performing loans ............................ (2.27)% 11.51%
===== =====
17
<PAGE>
During the year ended December 31, 1997, we recorded a provision for
loan losses of $700,000, increasing the allowance for loan losses to $854,000.
We increased the allowance to reflect the additional credit risk inherent in our
portfolio as a result of an increased amount of loans held in the portfolio, an
increased level of nonperforming loans, a charge-off of $147,000 arising from
the write-down of a loan to estimated net realizable value, as well as
management's continuing reassessment of the portfolio. The allowance was
increased to reflect the deterioration of loans made to four separate borrowers
where full collection of loan principal had become uncertain, including three
loans which had become impaired. The increased allowance also reflected
management's assessment of additional credit risk resulting from a significant
increase in loan concentrations to several borrowers for financing one- to
four-family rental properties that are dependent on future rent collections.
During the year ended December 31, 1998, we reduced the allowance for
loan losses to $784,000. To reduce the allowance, $103,000 was credited back to
operations through the provision for loan losses. We reduced the allowance to
reflect the decreased level of nonperforming loans and management's reassessment
of the loan portfolio as of December 31, 1998.
The distribution of our allowance for loan losses at the dates
indicated is summarized as follows:
<TABLE>
<CAPTION>
December 31,
----------------------------------------------------------------------------------
1998 1997
-------------------------------------- -------------------------------------
Percent Percent
of Loans of Loans
Loan in Each Loan in Each
Amount of Amounts Category Amount of Amounts Category
Loan Loss by to Total Loan Loss by to Total
Allowance Category Loans Allowance Category Loans
--------- -------- --------- --------- --------- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
One- to four-family ....... $ 154 $25,474 66.81% $ 115 $25,634 64.29%
Multi-family, commercial,
real estate, construction
or development 142 11,444 30.02 592 12,977 32.54
Consumer and commercial
business................. 1 1,210 3.17 1 1,265 3.17
Unallocated ............... 487 -- -- 146 -- --
------- ------- ------ ------- ------- ------
Total ................ $ 784 $38,128 100.00% $ 854 $39,876 100.00%
======= ======= ====== ======= ======= ======
</TABLE>
INVESTMENT ACTIVITIES
Home Federal must maintain minimum levels of investments that qualify
as liquid assets under Office of Thrift Supervision regulations. Liquidity may
increase or decrease depending upon the availability of funds and comparative
yields on investments in relation to the return on loans. Historically, we have
maintained liquid assets at levels above the minimum requirements imposed by
Office of Thrift Supervision regulations and above levels believed adequate to
meet the requirements
18
<PAGE>
of normal operations, including potential deposit outflows. Cash flow
projections are regularly reviewed and updated to assure that adequate liquidity
is maintained. At December 31, 1998, our liquidity ratio was 22.8%. The
liquidity ratio represents liquid assets as a percentage of net withdrawable
savings deposits and current borrowings.
Federally chartered savings institutions have the authority to invest
in various types of liquid assets, including U.S. Treasury obligations,
securities of various federal agencies, certain certificates of deposit of
insured banks and savings institutions, certain bankers' acceptances, repurchase
agreements and federal funds. Subject to various restrictions, federally
chartered savings institutions may also invest their assets in investment grade
commercial paper and corporate debt securities and mutual funds whose assets
conform to the investments that a federally chartered savings institution is
otherwise authorized to make directly. We generally invest in the foregoing
types of investments. See "Regulation - Federal Regulation of Savings
Associations" for a discussion of additional restrictions on our investment
activities.
President Stephens and Vice President Swift have the basic
responsibility for the management of our investment portfolio, subject to the
direction and guidance of the Board of Directors. These officers consider
various factors when making decisions, including the marketability, maturity and
tax consequences of the proposed investment. The maturity structure of
investments will be affected by various market conditions, including the current
and anticipated slope of the yield curve, the level of interest rates, the trend
of new deposit inflows, and the anticipated demand for funds via deposit
withdrawals and loans.
The general objectives of our investment portfolio are to: (i) provide
and maintain liquidity within the guidelines prescribed by Office of Thrift
Supervision regulations; (ii) provide liquidity when loan demand is high and to
assist in maintaining earnings when loan demand is low; and (iii) maximize
earnings while satisfactorily managing risk, including credit risk, reinvestment
risk, liquidity risk and interest rate risk. See "Management's Discussion and
Analysis of Financial Condition and Results of Operations - Asset and Liability
Management; Market Risk Analysis"in the Annual Report attached as Exhibit 13 to
this Annual Report on Form 10-KSB.
Our investment securities consist primarily of mutual funds that have
assets that conform to the investments that a federally chartered savings
institution is authorized to make directly. These funds offer professional
management, easy access to funds, continuous reinvestment and relatively low
historical price volatility. Currently, we are invested in three different
mutual funds.
Our mortgage-backed and related securities portfolio consists of
securities issued under government-sponsored agency programs. We hold primarily
collateralized mortgage obligations. Collateralized mortgage obligations are
special types of pass-through debt securities in which the principal and
interest payments on the underlying mortgages or mortgage-backed securities are
used to create classes with different maturities and, in some cases,
amortization schedules, as well as a residual interest, with each such class
possessing different risk characteristics.
Our policy is to purchase only collateralized mortgage obligations that
are in the first or second repayment tranche (investment class) and are AAA
rated. The expected life of our collateralized mortgage obligations is typically
under five years at the time of purchase. Premiums associated with
19
<PAGE>
collateralized mortgage obligations purchased are not significant; therefore,
the risk of significant yield adjustments because of accelerated prepayments is
limited. Yield adjustments are encountered as interest rates rise or decline,
which in turn slows or increases prepayment rates and affects the average lives
of the collateralized mortgage obligations. The purpose of our collateralized
mortgage obligation investment strategy is to: (i) assist in maintaining Home
Federal's qualified thrift lender status (see "Regulation - Qualified Thrift
Lender"); (ii) generate high cash flow so as to lessen liquidity and
reinvestment risk; (iii) preserve asset quality; and (iv) generate additional
interest income. At December 31, 1998, we held collateralized mortgage
obligations totaling $12.4 million, all of which were secured by underlying
collateral issued under government agency-sponsored programs. All of our
collateralized mortgage obligations and mortgage-backed securities are currently
classified as held to maturity. At December 31, 1998, our collateralized
mortgage obligations did not qualify as high risk mortgage securities under
Office of Thrift Supervision regulations.
While mortgage-backed and related securities, such as collateralized
mortgage obligations, carry reduced credit risk as compared to conventional
loans, mortgage-backed and related securities remain subject to the risk that a
fluctuating interest rate environment, along with other factors such as the
geographic distribution of the underlying mortgage loans, may alter the
prepayment rate of such mortgage loans and thus, affect both the prepayment
speed, and value, of such securities.
The following table sets forth the composition of our investment and
mortgage-backed and related securities portfolio at the dates indicated. Our
investment securities portfolio at December 31, 1998, contained neither
tax-exempt securities nor securities of any issuer with an aggregate book value
in excess of 10% of our retained earnings, excluding those issued by the U.S.
Government or its agencies and excluding our mutual fund investments.
20
<PAGE>
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1998 1997
------------------------ ------------------------
Book % of Book % of
Value Total Value Total
-------- ------ --------- ------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
Mutual funds(1) ............................... $ 15,333 76.40% $ 15,347 86.51%
Freddie Mac stock ............................. 2,577 12.85 2,085 11.75
Corporate debt securities ..................... 1,826 9.10 -- --
Federal Home Loan Bank stock .................. 317 1.58 294 1.66
Other ......................................... 15 0.07 15 0.08
-------- ------ -------- ------
Total investment securities and Federal Home
Loan Bank stock .......................... $ 20,068 100.00% $ 17,741 100.00%
======== ====== ======== ======
Mortgage-backed and related securities:
Collateralized mortgage obligations ........... $ 12,385 99.62% $ 12,238 99.02%
Freddie Mac ................................... 60 0.48 93 0.75
Government National Mortgage Association ...... 27 0.22 53 0.43
-------- ------ -------- ------
12,472 100.32 12,384 100.20
Unamortized discounts, net ...................... (40) (0.32) (25) (0.20)
-------- ------ -------- ------
Total mortgage-backed securities ........... $ 12,432 100.00% $ 12,359 100.00%
======== ====== ======== ======
Other interest-earning investments:
Money market mutual fund ...................... $ 5,404 33.50% $ -- --%
Interest-bearing deposits with banks .......... 1,500 9.30 727 17.92
Federal funds sold ............................ 9,225 57.20 3,330 82.08
-------- ------ -------- ------
Total ...................................... $ 16,129 100.00% $ 4,057 100.00%
======== ====== ======== ======
</TABLE>
- -----------------
(1) Mutual funds invest primarily in obligations of the U.S. Government and its
agencies.
21
<PAGE>
The following table sets forth the contractual maturities of our
mortgage-backed and related securities at December 31, 1998.
<TABLE>
<CAPTION>
Due in December
----------------------------------------------------------------------------- 31, 1998
6 Months 6 Months 1 to 3 3 to 5 5 to 10 10 to 20 Over 20 Balance
or Less to 1 Year Years Years Years Years Years Outstanding
-------- --------- ------- ------- ------- -------- ------- -----------
(In Thousands)
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Collateralized mortgage
obligations ........... $ -- $ 46 $ -- $ -- $ 4,167 $ 1,836 $ 6,296 $12,345
Freddie Mac ........... -- -- -- 60 -- -- -- 60
Government National
Mortgage Association -- -- 27 -- -- -- -- 27
------ ------- ------- ------- ------- ------- ------- -------
Total .............. $ -- $ 46 $ 27 $ 60 $ 4,167 $ 1,836 $ 6,296 $12,432
====== ======= ======= ======= ======= ======= ======= =======
</TABLE>
SOURCES OF FUNDS
GENERAL. Our sources of funds are deposits, payment of principal and
interest on loans, interest earned on or maturation of other investment
securities and short-term investments, and funds provided from operations.
DEPOSITS. We offer a variety of deposit accounts having a wide range of
interest rates and terms. Our deposits consist of passbook and statement savings
accounts, money market deposit accounts, NOW accounts and certificate of deposit
accounts currently ranging in terms from 91 days to three years. We only solicit
deposits from our market area and do not use brokers to obtain deposits. We
primarily rely on competitive pricing policies, advertising and customer service
to attract and retain these deposits.
The flow of deposits is influenced significantly by general economic
conditions, changes in market interest rates, and competition. Deposit balances
decreased in 1998 as a result of our customers using their funds deposited at
Home Federal to purchase shares of First Niles common stock in October 1998.
The variety of deposit accounts we offer has allowed us to be
competitive in obtaining funds and to respond with flexibility to changes in
consumer demand. We have become more susceptible to short-term fluctuations in
deposit flows, as customers have become more interest rate conscious. We
endeavor to manage the pricing of our deposits in keeping with our
asset/liability management, liquidity and profitability objectives. Based on our
experience, we believe that our savings and checking accounts are relatively
stable sources of funds. Our ability to attract and maintain certificates of
deposit and the rates paid on these deposits, however, has been and will
continue to be significantly affected by market conditions.
22
<PAGE>
The following table sets forth the deposit flows at Home Federal during
the periods indicated.
Years Ended December 31,
-----------------------------
1998 1997
--------- ----------
(Dollars in Thousands)
Opening balance .......................... $ 57,854 $ 57,673
Deposits ................................. 41,048 35,880
Withdrawals .............................. (46,223) (37,875)
Interest credited ........................ 2,158 2,176
-------- --------
Ending balance ........................... $ 54,837 $ 57,854
======== ========
Net increase (decrease) .................. $ (3,017) $ 181
-------- ========
Percent increase (decrease) .............. (5.21)% 0.31%
======== ========
The following table sets forth the dollar amount of savings deposits in
the various types of deposit programs we offered for the periods indicated.
<TABLE>
<CAPTION>
December 31,
------------------------------------------
1998 1997
------------------- ------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
Transactions and Savings Deposits:
- ----------------------------------
<S> <C> <C> <C> <C>
Passbook and statement savings accounts (2.50%)(1) $20,763 37.86% $22,289 38.53%
NOW accounts (2.50%)(1) .......................... 3,081 5.62 2,830 4.89
Money market accounts (2.55%)(1) ................. 3,811 6.95 4,145 7.16
------- ------ ------- ------
Total non-certificates ........................... 27,655 50.43 29,264 50.58
------- ------ ------- ------
Certificates:
- -------------
2.00-3.99% ...................................... 228 0.42 53 0.10
4.00-5.99% ...................................... 26,954 49.15 27,426 47.40
6.00-7.99% ...................................... -- -- 1,111 1.92
------- ------ ------- ------
Total certificates ............................... 27,182 49.57 28,590 49.42
------- ------ ------- ------
Total deposits ................................... $54,837 100.00% $57,854 100.00%
======= ====== ======= ======
</TABLE>
- ---------------------
(1) Interest rates stated apply to December 31, 1998.
23
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of December 31, 1998.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
------ ------ ------ ------- --------
(Dollars in Thousands)
Certificate Accounts Maturing in Quarter Ending:
- ------------------------------------------------
<S> <C> <C> <C> <C> <C>
March 31, 1999 ............................... 28 9,017 -- 9,045 33.28%
June 30, 1999 ................................ -- 6,989 -- 6,989 25.71
September 30, 1999 ........................... -- 3,102 -- 3,102 11.41
December 31, 1999 ............................ 200 3,313 -- 3,513 12.92
March 31, 2000 ............................... -- 1,733 -- 1,733 6.38
June 30, 2000 ................................ -- 1,489 -- 1,489 5.48
September 30, 2000 ........................... -- 289 -- 289 1.06
December 31, 2000 ............................ -- 330 -- 330 1.21
March 31, 2001 ............................... -- 197 -- 197 0.73
June 30, 2001 ................................ -- 137 -- 137 0.50
September 30, 2001 ........................... -- 212 -- 212 0.78
December 31, 2001 ............................ -- 146 -- 146 0.54
Thereafter ................................... -- -- -- -- --
------- ------- ----- ------- ------
Total ..................................... $ 228 $26,954 $ -- $27,182 100.00%
======= ======= ===== ======= ======
Percent of total........................... 0.84% 99.166% --% 100.00%
======= ======= ===== =======
</TABLE>
The following table indicates the amount of our certificates of deposit
and other deposits by time remaining until maturity as of December 31, 1998.
<TABLE>
<CAPTION>
Maturity
---------------------------------------------
Over Over
3 Months 3 to 6 6 to12 Over 12
or Less Months Months Months Total
-------- ------ ------- ------- -------
(In Thousands)
<S> <C> <C> <C> <C> <C>
Certificates of deposit less than $100,000........... $7,636 $6,034 $5,695 $4,533 $23,898
Certificates of deposit of $100,000 or more.......... 1,409 955 920 -- 3,284
------ ------ ------ ------ -------
Total certificates of deposit........................ $9,045 $6,989 $6,615 $4,533 $27,182
====== ====== ====== ====== =======
</TABLE>
BORROWINGS. Although deposits are our primary source of funds, we may
utilize borrowings when they are a less costly source of funds, and can be
invested at a positive interest rate spread or when we desire additional
capacity to fund loan demand. At December 31, 1998, we had borrowings
24
<PAGE>
totaling $300,000. The average balance of our borrowings during this period was
$385,000. Our current borrowings relate to a five-year term note payable to a
third party in connection with Home Federal's capital contribution to a limited
partnership formed to construct multi-family housing units. See "-Subsidiary and
Other Activities" and Note D of Notes to Consolidated Financial Statements.
SUBSIDIARY AND OTHER ACTIVITIES
As a federally chartered savings association, Home Federal is permitted
by Office of Thrift Supervision regulations to invest up to 2% of its total
assets, or $1.7 million at December 31, 1998, in the stock of, or unsecured
loans, to service corporation subsidiaries. Home Federal may invest an
additional 1% of its assets in service corporations where such additional funds
are used for inner-city or community development purposes. At December 31, 1998,
Home Federal had no subsidiaries.
In 1996, we acquired a fractional interest of 17.5% in an Ohio limited
partnership formed to construct multi-family housing units. Under the terms of
the limited partnership agreement, we will make a total capital contribution to
the partnership of $500,000 and are allocated tax losses and affordable housing
federal income tax credits. See Note D of Notes to Consolidated Financial
Statements.
REGULATION
GENERAL. Home Federal is a federally chartered savings association, the
deposits of which are federally insured by the FDIC and backed by the full faith
and credit of the U.S. Government. Accordingly, we are subject to broad federal
regulation and oversight extending to all our operations. We are a member of the
Federal Home Loan Bank of Cincinnati and are subject to certain limited
regulation by the Board of Governors of the Federal Reserve System ("Federal
Reserve Board"). As the savings and loan holding company of Home Federal, First
Niles is also subject to federal regulation and oversight.
FEDERAL REGULATION OF SAVINGS ASSOCIATIONS. The Office of Thrift
Supervision has extensive authority over the operations of savings associations.
As part of this authority, we are required to file periodic reports with the
Office of Thrift Supervision and are subject to periodic examinations by the
Office of Thrift Supervision and the FDIC. The last regular Office of Thrift
Supervision examination of Home Federal was as of November 1998. When these
examinations are conducted by the Office of Thrift Supervision and the FDIC, the
examiners may require us to provide for higher general or specific loan loss
reserves. All savings associations are subject to a semi-annual assessment,
based upon the savings association's total assets, to fund the operations of the
Office of Thrift Supervision.
The Office of Thrift Supervision also has extensive enforcement
authority over all savings institutions and their holding companies, including
Home Federal and First Niles. This enforcement authority includes, among other
things, the ability to assess civil money penalties, to issue cease-and- desist
or removal orders and to initiate injunctive actions.
Our general permissible lending limit for loans-to-one-borrower is
equal to the greater of $500,000 or 15% of unimpaired capital and surplus. If
the loans are fully secured by certain readily marketable collateral, the
lending limit is increased to 25% of unimpaired capital and surplus. At
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December 31, 1998, our lending limit under this restriction was $3.3 million. We
are in compliance with the loans-to-one-borrower limitation.
INSURANCE OF ACCOUNTS AND REGULATION BY THE FEDERAL DEPOSIT INSURANCE
CORPORATION. As insurer, the FDIC imposes deposit insurance premiums and is
authorized to conduct examinations of and to require reporting by FDIC insured
institutions. It also may prohibit any FDIC insured institution from engaging in
any activity the FDIC determines by regulation or order to pose a serious risk
to the Savings Association Insurance Fund or the Bank Insurance Fund. The FDIC
also has the authority to initiate enforcement actions against savings
associations, after giving the Office of Thrift Supervision an opportunity to
take action, and may terminate deposit insurance if it determines that an
institution has engaged in unsafe or unsound practices or is in an unsafe or
unsound condition.
The FDIC's deposit insurance premiums are assessed through a risk-based
system under which all insured depository institutions are placed into one of
nine categories and assessed insurance premiums based upon their level of
capital and supervisory evaluation. Under the system, institutions classified as
well capitalized (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to risk-weighted assets ("Tier 1 risk-based capital") of at
least 6% and a risk-based capital ratio of at least 10%) and considered healthy
pay the lowest premium while institutions that are less than adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based capital ratio of less than 8%) and considered of substantial
supervisory concern pay the highest premium. Risk classification of all insured
institutions is made by the FDIC semi-annually. At December 31, 1998, we were
classified as a well-capitalized institution.
Effective January 1, 1997, the premium schedule for Bank Insurance Fund
and Savings Association Insurance Fund insured institutions ranged from 0 to 27
basis points. However, Savings Association Insurance Fund-insured institutions
and Bank Insurance Fund-insured institutions are required to pay a Financing
Corporation assessment, in order to fund the interest on bonds issued to resolve
thrift failures in the 1980s. In 1998, this amount was equal to about six basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund-insured institutions paid an assessment equal
to about 1.50 basis points for each $100 in domestic deposits. The savings
institutions assessment is expected to be reduced to about two basis points no
later than January 1, 2000, when Bank Insurance Fund- insured institutions fully
participate in the assessment. These assessments, which may be revised based
upon the level of Bank Insurance Fund and Savings Association Insurance Fund
deposits, will continue until the bonds mature in the year 2017.
REGULATORY CAPITAL REQUIREMENTS. All federally insured savings
institutions are required to maintain minimum capital standards, including a
tangible capital, a leverage ratio (or core capital) and a risk-based capital
requirement. The capital regulations require tangible capital of at least 1.5%
of adjusted total assets, as defined by regulation. At December 31, 1998, we had
tangible capital of $21.2 million, or 27.0% of adjusted total assets, which is
approximately $20.0 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
The capital standards also require core capital equal to at least 3% to
4% of adjusted total assets, depending on an institution's supervisory rating.
Core capital generally consists of tangible capital. At December 31, 1998, we
had core capital equal to $21.2 million, or 27.0% of adjusted total
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assets, which is $18.8 million above the minimum leverage ratio requirement of
3% as in effect on that date.
The Office of Thrift Supervision risk-based requirement requires
savings associations to have total capital of at least 8% of risk-weighted
assets. Total capital consists of core capital, as defined above, and
supplementary capital. Supplementary capital consists of certain permanent and
maturing capital instruments that do not qualify as core capital and general
valuation loan and lease loss allowances up to a maximum of 1.25% of
risk-weighted assets. Supplementary capital may be used to satisfy the
risk-based requirement only to the extent of core capital.
In determining the amount of risk-weighted assets, all assets,
including certain off-balance sheet items, will be multiplied by a risk weight,
ranging from 0% to 100%, based on the risk inherent in the type of asset. For
example, the Office of Thrift Supervision has assigned a risk weight of 50% for
prudently underwritten permanent one- to four-family first lien mortgage loans
not more than 90 days delinquent and having a loan-to-value ratio of not more
than 80% at origination unless insured to such ratio by an insurer approved by
Fannie Mae or Freddie Mac.
On December 31, 1998, we had total risk-based capital of approximately
$22.8 million, including $21.2 million in core capital and $1.6 million in
qualifying supplementary capital, and risk- weighted assets of $41.1 million, or
total capital of 55.3% of risk-weighted assets. This amount was $19.5 million
above the 8% requirement in effect on that date.
The Office of Thrift Supervision is authorized to impose capital
requirements in excess of these standards on individual associations on a
case-by-case basis. The Office of Thrift Supervision and the FDIC are authorized
and, under certain circumstances required, to take certain actions against
savings associations that fail to meet their capital requirements. These actions
may include submission of a capital restoration plan and various limitations on
an institution's growth and operations, depending upon an institution's capital
category. In certain cases the FDIC or the Office of Thrift Supervision may
appoint a conservator or receiver for the institution.
The Office of Thrift Supervision is also generally authorized to
reclassify an institution into a lower capital category and impose the
restrictions applicable to such category if the institution is engaged in unsafe
or unsound practices or is in an unsafe or unsound condition.
The imposition by the Office of Thrift Supervision or the FDIC of any
of these measures on Home Federal may have a substantial adverse effect on its
operations and profitability.
LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS. Office of
Thrift Supervision regulations impose various restrictions on savings
associations with respect to their ability to make distributions of capital,
which include dividends, stock redemptions or repurchases, cash-out mergers and
other transactions charged to the capital account. Office of Thrift Supervision
regulations also prohibit a savings association from declaring or paying any
dividends or from repurchasing any of its stock if, as a result, the regulatory
capital of the association would be reduced below the amount required to be
maintained for the liquidation account established in connection with its mutual
to stock conversion.
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Office of Thrift Supervision recently revised regulations provide that
a savings association may make a capital distribution without notice to the
Office of Thrift Supervision, unless it is a subsidiary of a holding company,
provided that it has a regulatory rating in the two top examination categories,
is not of supervisory concern, and would remain well-capitalized, as defined in
the Office of Thrift Supervision prompt corrective action regulations, following
the proposed distribution, and the distribution does not exceed its net income
for the calendar year-to-date plus retained net income for the previous two
calendar years (less any dividends previously paid). Savings associations that
would remain adequately capitalized following the proposed distribution and meet
the other noted requirements must notify the Office of Thrift Supervision 30
days prior to declaring a capital distribution. All other institutions or those
seeking to exceed the noted amounts must file an application before making the
distribution.
QUALIFIED THRIFT LENDER TEST. All savings institutions are required to
meet a qualified thrift lender test to avoid certain restrictions on their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly average for nine out of every 12 months on a rolling basis. As an
alternative, the savings institution may maintain 60% of its assets in those
assets specified in Section 7701(a)(19) of the Internal Revenue Code. Under
either test, these assets primarily consist of residential housing related loans
and investments. At December 31, 1998, we met the test and have always met the
test since it became effective.
Any savings institution that fails to meet the qualified thrift lender
test must convert to a national bank, unless it requalifies as a qualified
thrift lender and remains a qualified thrift lender. If an institution has not
yet requalified or converted to a national bank, its new investments and
activities are limited to those permissible for both a savings institution and a
national bank, and it is limited to national bank branching rights in its home
state. In addition, the institution is immediately ineligible to receive any new
Federal Home Loan Bank borrowings. If the institution has not requalified or
converted to a national bank within three years after the failure, it must sell
all investments and stop all activities not permissible for a national bank. In
addition, it must repay promptly any outstanding Federal Home Loan Bank
borrowings, which may result in prepayment penalties. If any institution that
fails the qualified thrift lender test is controlled by a holding company, then
within one year after the failure, the holding company must register as a bank
holding company and become subject to all restrictions on bank holding
companies. See "- Holding Company Regulation."
COMMUNITY REINVESTMENT ACT. Under the Community Reinvestment Act, every
FDIC insured institution has a continuing and affirmative obligation consistent
with safe and sound banking practices to help meet the credit needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act requires the Office of Thrift Supervision, in connection with
the examination of Home Federal, to assess the institution's record of meeting
the credit needs of its community and to take this record into account in its
evaluation of certain applications, such as a merger or the establishment of a
branch, by Home Federal. An unsatisfactory rating may be used as the basis for
the denial of an application by the Office of Thrift Supervision. We were
examined for compliance under the Community Reinvestment Act in March 1997 and
received a rating of "satisfactory."
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HOLDING COMPANY REGULATION. First Niles is a unitary savings and loan
holding company subject to regulatory oversight by the Office of Thrift
Supervision. First Niles is required to register and file reports with the
Office of Thrift Supervision and is subject to regulation and examination by the
Office of Thrift Supervision. In addition, the Office of Thrift Supervision has
enforcement authority over First Niles and its non-savings association
subsidiaries which also permits the Office of Thrift Supervision to restrict or
prohibit activities that are determined to be a serious risk to the subsidiary
savings association.
As a unitary savings and loan holding company, First Niles generally is
not subject to activity restrictions. If First Niles acquires control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan holding company, and the activities of First Niles and any of its
subsidiaries (other than Home Federal or any other Savings Association Insurance
Fund-insured savings association) would generally become subject to additional
restrictions.
If we fail the qualified thrift lender test, within one year First
Niles must register as, and will become subject to, the significant activity
restrictions applicable to bank holding companies.
FEDERAL SECURITIES LAW. The stock of First Niles will be registered
with the SEC under the Securities Exchange Act of 1934. First Niles will be
subject also to the information, proxy solicitation, insider trading
restrictions and other requirements of the SEC under the Securities Exchange Act
of 1934.
First Niles stock held by persons who are affiliates, generally
including the executive officers, directors and 10% stockholders, of First Niles
may not be resold without registration or unless sold in accordance with certain
resale restrictions. If First Niles meets specified current public information
requirements, each affiliate of the company is able to sell in the public
market, without registration, a limited number of shares in any three-month
period.
FEDERAL HOME LOAN BANK SYSTEM. We are a member of the Federal Home Loan
Bank of Cincinnati, which is one of 12 regional Federal Home Loan Banks that
administers the home financing credit function of savings institutions. Each
Federal Home Loan Bank serves as a reserve or central bank for its members
within its assigned region. It makes loans to members in accordance with
policies and procedures, established by the board of directors of the Federal
Home Loan Bank, which are subject to the oversight of the Federal Housing
Finance Board. All advances from the Federal Home Loan Bank are required to be
fully secured by sufficient collateral as determined by the Federal Home Loan
Bank. In addition, all long-term advances must be used for residential home
financing.
As a member, we are required to purchase and maintain a minimum amount
of stock in the Federal Home Loan Bank of Cincinnati. At December 31, 1998, we
had $317,000 in Federal Home Loan Bank stock, which was in compliance with this
requirement. We receive dividends on our Federal Home Loan Bank stock. These
dividends averaged 7.19% for 1998.
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FEDERAL AND STATE TAXATION
FEDERAL TAXATION. In August 1996, legislation was enacted that repealed
the percentage of taxable income method used by many thrifts to calculate their
bad debt reserve for federal income tax purposes. As a result, small thrifts
must recapture that portion of the reserve that exceeds the amount that could
have been taken under the experience method for tax years beginning after
December 31, 1987. Due to certain limitations as to allowable additions to the
bad debt reserve, Home Federal has not made additions to its allowance since
1987 and will not be subject to federal income tax recapture.
In addition to the regular income tax, corporations, including savings
institutions, generally are subject to a minimum tax. An alternative minimum tax
is imposed at a minimum tax rate of 20% on alternative minimum taxable income,
which is the sum of a corporation's regular taxable income (with certain
adjustments) and tax preference items, less any available exemption. The
alternative minimum tax is imposed to the extent it exceeds the corporation's
regular income tax and net operating losses can offset no more than 90% of
alternative minimum taxable income.
A portion of our reserves for losses on loans which are presented on
the statement of financial condition as retained earnings, may not, without
adverse tax consequences, be utilized for the payment of cash dividends or other
distributions to a shareholder, including distributions on redemption,
dissolution or liquidation, or for any other purpose except to absorb bad debt
losses. As of December 31, 1998, the portion of our reserves subject to this
treatment for tax purposes totaled approximately $2.54 million.
We file federal income tax returns on a fiscal year basis using the
accrual method of accounting. First Niles does not anticipate filing
consolidated federal income tax returns with Home Federal.
The federal income tax returns of Home Federal for the last three years
are open to possible audit by the Internal Revenue Service. No returns are being
audited by the Internal Revenue Service at the current time. In the opinion of
management, any examination of still open returns, including returns of
predecessors or entities merged into Home Federal, would not result in a
deficiency which could have a material adverse effect on the financial condition
of Home Federal.
OHIO TAXATION. We are subject to the Ohio corporate franchise tax. As a
financial institution, we compute our franchise tax based on our net worth.
Under this method, we will compute our Ohio corporate franchise tax by
multiplying our net worth, as specifically adjusted pursuant to Ohio law, by the
applicable tax rate, which is currently 1.4%. First Niles will also be subject
to the Ohio corporate franchise tax. The tax imposed is the greater of the tax
on net worth, or the tax on net income.
DELAWARE TAXATION. As a Delaware holding company, First Niles is
exempted from Delaware corporate income tax but is required to file an annual
report with and pay an annual fee to the State of Delaware. First Niles is also
subject to an annual franchise tax imposed by the State of Delaware.
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COMPETITION
We face strong competition in originating real estate and other loans
and in attracting deposits. Competition in originating real estate loans comes
primarily from other savings institutions, commercial banks, credit unions and
mortgage bankers. Other savings institutions, commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.
We attract all of our deposits through Home Federal's one office in
Niles, Ohio. Competition for those deposits is principally from other savings
institutions, commercial banks and credit unions located in our market area, as
well as mutual funds. We compete for these deposits by offering a variety of
deposit accounts at competitive rates and superior service.
EXECUTIVE OFFICERS OF FIRST NILES
WILLIAM L. STEPHENS. Mr. Stephens, age 67, serves as Chairman of the
Board, President and Chief Executive Officer of Home Federal and First Niles. He
has served in such capacities for Home Federal since 1969 and for First Niles
since its formation in October 1998.
GEORGE J. SWIFT. Mr. Swift, age 76, is Vice President and Secretary of
Home Federal and First Niles. He has served in such capacities with Home Federal
since 1969 and for First Niles since its formation in October 1998.
LAWRENCE SAFAREK. Mr. Safarek, age 49, currently serves as Vice
President and Treasurer of Home Federal and First Niles. He has served in such
capacities with Home Federal since 1995 and for First Niles since its formation
in October 1998. Mr. Safarek has been employed with Home Federal in numerous
other capacities since 1971.
EMPLOYEES
At December 31, 1998, we had a total of 14 employees, including one
part-time employee. Our employees are not represented by any collective
bargaining group. Management considers its employee relations to be good.
ITEM 2. DESCRIPTION OF PROPERTY
We conduct our business through Home Federal's only office located in
Niles, Ohio, which is owned by Home Federal. We believe that our current
facilities are adequate to meet the present and foreseeable needs of Home
Federal and First Niles. The total net book value of Home Federal's premises and
equipment, including land, building and leasehold improvements and furniture,
fixtures and equipment, at December 31, 1998 was $256,000. See Note E of Notes
to Consolidated Financial Statements.
We maintain an on-line data base with a service bureau servicing
financial institutions. The net book value of the data processing and computer
equipment utilized by Home Federal at December 31, 1998 was $33,000.
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ITEM 3. LEGAL PROCEEDINGS
From time to time First Niles is involved as plaintiff or defendant in
various legal actions arising in the normal course of business. Presently, First
Niles is not involved in any legal proceedings that are expected to have a
material adverse impact on its consolidated financial position.
ITEM 4. SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS
No matter was submitted to a vote of security holders, through the
solicitation of proxies or otherwise, during the quarter ended December 31,
1998.
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 45 of the 1998 Annual Report to Shareholders attached to this
document as Exhibit 13 is incorporated herein by reference.
ITEM 6. MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION
Pages 4 to 16 of the 1998 Annual Report to Shareholders attached to
this document as Exhibit 13 is incorporated herein by reference.
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in First Niles' 1998 Annual Report
to Stockholders attached hereto as Exhibit 13 is incorporated herein by
reference.
Annual Report Section Pages in Annual Report
- --------------------- ----------------------
Report of Independent Auditors 17
Consolidated Balance Sheets as of December 31, 1998 and 1997 18
Consolidated Statements of Income for the Years 19
Ended December 31, 1998 and 1997
Consolidated statements of Comprehensive Income for the 20
Years Ended December 31, 1998 and 1997
Consolidated Statements of Changes in Shareholders' Equity 21
for the Years Ended December 31, 1998 and 1997
Consolidated Statements of Cash Flows for the Years 22
Ended December 31, 1998 and 1997
Notes to Consolidated Financial Statements 23 - 44
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With the exception of the aforementioned information, First Niles'
Annual Report to Shareholders for the year ended December 31, 1998, is not
deemed filed as part of this Annual Report on Form 10-KSB.
ITEM 8. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND
FINANCIAL DISCLOSURE
There has been no Current Report on Form 8-K filed within 24 months
prior to the date of the most recent financial statements reporting a change of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.
PART III
ITEM 9. DIRECTORS, EXECUTIVE OFFICERS, PROMOTERS AND CONTROL PERSONS;
COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT
DIRECTORS
Information concerning Directors of First Niles is incorporated herein
by reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held in April 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
EXECUTIVE OFFICERS
Information concerning Executive Officers of First Niles is contained
under the caption "Executive Officers of First Niles" in Part I of this Form
10-KSB, and is incorporated herein by this reference.
COMPLIANCE WITH SECTION 16(A)
Section 16(a) of the Securities Exchange Act of 1934, as amended,
requires First Niles' directors and executive officers, and persons who own more
than 10% of a registered class of its equity securities, to file with the SEC
initial reports of ownership and reports of changes in ownership of common stock
and other equity securities of First Niles. Officers, directors and greater than
10% stockholders are required by SEC regulation to furnish First Niles with
copies of all Section 16(a) forms they file.
To First Niles' knowledge, based solely on a review of the copies of
such reports furnished to the company and written representations that no other
reports were required, all Section 16(a) filing requirements applicable to its
officers, directors and greater than 10 percent beneficial owners were complied
with during the fiscal year ended December 31, 1998.
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ITEM 10. EXECUTIVE COMPENSATION
Information concerning executive compensation is incorporated herein
by reference from the definitive proxy statement for the Annual Meeting of
Stockholders to be held in April 1999, a copy of which will be filed not later
than 120 days after the close of the fiscal year.
ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT
Information concerning security ownership of certain beneficial owners
and management is incorporated herein by reference from the definitive proxy
statement for the Annual Meeting of Stockholders to be held in April 1999, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS
Information concerning certain relationships and related transactions
is incorporated herein by reference from the definitive proxy statement for the
Annual Meeting of Stockholders to be held in April 1999, a copy of which will be
filed not later than 120 days after the close of the fiscal year.
ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K
(A) EXHIBITS
See Index to Exhibits
(B) REPORTS ON FORM 8-K
No reports on Form 8-K were filed during the three-month period ended
December 31, 1998.
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SIGNATURES
Pursuant to the requirements of Section 13 or 15(d) 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.
FIRST NILES FINANCIAL, INC.
Date: March 25, 1999 By: /s/ William L. Stephens
-------------- --------------------------------------
William L. Stephens
Chairman of the Board, President and Chief
Executive Officer
(DULY AUTHORIZED REPRESENTATIVE)
Pursuant to the requirements of the Securities Exchange Act of 1934, this
Report has been signed below by the following persons in the capacities and on
the dates indicated.
/s/ William L. Stephens Date: March 25, 1999
- --------------------------------------------------- --------------
William L. Stephens, Chairman of the Board,
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
/s/ George J. Swift Date: March 25, 1999
- --------------------------------------------------- --------------
George J. Swift, Vice President and Secretary
(PRINCIPAL FINANCIAL AND OPERATING OFFICER)
/s/ P. James Kramer Date: March 25, 1999
- --------------------------------------------------- --------------
P. James Kramer, Director
/s/ Horace L. Mclean Date: March 25, 1999
- --------------------------------------------------- --------------
Horace L. McLean, Director
/s/ Ralph A. Zuzolo Date: March 25, 1999
- --------------------------------------------------- --------------
Ralph A. Zuzolo, Sr., Director
/s/ Thomas G. Maley Date: March 25, 1999
- --------------------------------------------------- --------------
Thomas G. Maley, Controller
(PRINCIPAL ACCOUNTING OFFICER)
<PAGE>
INDEX TO EXHIBITS
Exhibit
Number Document
------ -------------------------------------------------------------
3 The Certificate of Incorporation and Bylaws, filed on July
10, 1998 as Exhibits 3.1 and 3.2, respectively, to
Registrant's Registration Statement on Form SB-2 (File No.
333-58883), are incorporated by reference.
4 Registrant's Specimen Stock Certificate, filed on July 10,
1998 as Exhibit 4 to Registrant's Registration Statement on
Form SB-2 (File No. 333-58883), is incorporated by reference.
10.1 Employment Agreement between the Bank and William L. Stephens
10.2 Employment Agreement between the Bank and George J. Swift
10.3 Employment Agreement between the Bank and Lawrence Safarek
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant
27 Financial Data Schedule (electronic filing only)
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 26th day of October 1998, by and between HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES, 55 North Main Street, Niles, Ohio (hereinafter referred to
as the "Association" whether in mutual or stock form), and WILLIAM L. STEPHENS
(the "Employee").
WHEREAS, the Employee is currently serving as President and Chief
Executive Officer of the Association; and
WHEREAS, the Association has adopted a plan of conversion whereby the
Association will convert to capital stock form as the subsidiary of First Niles
Financial, Inc. (the "Holding Company"), subject to the approval of the
Association's members and the Office of Thrift Supervision (the "Conversion");
and
WHEREAS, the Board of Directors of the Association believes it is in the
best interests of the Association to enter into this Agreement with the Employee
in order to assure continuity of management of the Association and to reinforce
and encourage the continued attention and dedication of the Employee; and
WHEREAS, the Board of Directors of the Association has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. EMPLOYMENT. The Employee is employed as President and Chief Executive
Officer of the Association. As President and Chief Executive Officer, Employee
shall render administrative and management services as are customarily performed
by persons situated in similar executive capacities, and shall have other powers
and duties as may from time to time be prescribed by the Board, provided that
such duties are consistent with the Employee's position as President and Chief
Executive Officer. The Employee shall continue to devote his best efforts and
substantially all his business time and attention to the business and affairs of
the Association and its subsidiaries and affiliated companies.
2. COMPENSATION.
(a) SALARY. The Association agrees to pay the Employee during the
term of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4 hereof)
shall be $142,440 per year. The Employee's salary shall be payable not less
frequently than monthly and not later than the tenth day following the
expiration of the month in question. The amount of the Employee's salary shall
be reviewed by the Board of Directors not less often than annually, beginning
not later than the date one year after the Commencement Date (as defined in
Section 4 hereof). Any adjustments in salary or other compensation shall in no
way limit or reduce any other obligation of the Association hereunder. The
Employee's salary in effect hereunder from time to time shall not thereafter be
reduced.
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(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors of the Association to its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board of
Directors.
(c) EXPENSES. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him in performing services hereunder, in accordance with
the Association's policies and procedures, provided that the Employee properly
accounts therefor in accordance with Association policy.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained for
the benefit of the Association's executive employees or for its employees
generally.
(b) FRINGE BENEFITS. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefit plans which are or may become applicable to the Association's executive
employees or to its employees generally.
4. TERM. The term of employment under this Agreement shall be a period of
three years commencing on the date of completion of the Conversion (the
"Commencement Date"), subject to earlier termination as provided herein.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one year in addition to the then-remaining term of
employment under this Agreement, unless either the Association or the Employee
gives contrary written notice to the other not less than 90 days in advance of
the date on which the term of employment under this Agreement would otherwise be
extended, PROVIDED that such term will not be automatically extended unless,
prior thereto, the Board of Directors of the Association explicitly reviews and
approves the extension. Reference herein to the term of employment under this
Agreement shall refer to both such initial term and such extended terms.
5. VACATIONS. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than four (4) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable
manner by the Employee and the Association; and
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(c) solely at the Employee's request, the Board of Directors shall
be entitled to grant to the Employee a leave or leaves of absence with or
without pay at such time or times and upon such terms and conditions as the
Board, in its discretion, may determine.
6. TERMINATION OF EMPLOYMENT; DEATH.
(a) The Association's Board of Directors may terminate the
Employee's employment at any time, but any termination by the Association's
Board of Directors other than termination for cause, shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. If the
employment of the Employee is involuntarily terminated, other than for "cause"
as provided in this Section 6(a) or pursuant to any of Sections 6(d) through
6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the
Employee shall be entitled to (i) his then applicable salary for the
then-remaining term of the Agreement as calculated in accordance with Section 4
hereof, payable in such manner and at such times as such salary would have been
payable to the Employee under Section 2 had he remained in the employ of the
Association, and (ii) health insurance benefits as maintained by the Association
for the benefit of its senior executive employees or its employees generally
over the then-remaining term of the Agreement as calculated in accordance with
Section 4 hereof.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent, other than retirement. In addition, a material diminution of or
interference with the Employee's duties, responsibilities and benefits as
President and Chief Executive Officer of the Association shall be deemed and
shall constitute an involuntary termination of employment to the same extent as
express notice of such involuntary termination. Any of the following actions
shall constitute such diminution or interference unless consented to in writing
by the Employee: (1) a change in the principal workplace of the Employee to a
location outside of a 30 mile radius from the Association's headquarters office
as of the date hereof; (2) a material demotion of the Employee, a material
reduction in the number or seniority of other Association personnel reporting to
the Employee, or a material reduction in the frequency with which, or in the
nature of the matters with respect to which, such personnel are to report to the
Employee, other than as part of a Association- or Holding Company-wide reduction
in staff; (3) a material adverse change in the salary, perquisites, benefits,
contingent benefits or vacation time which had previously been provided to the
Employee, other than as part of an overall program applied uniformly and with
equitable effect to all members of the senior management of the Association or
the Holding Company; and (4) a material permanent increase in the required hours
of work or the workload of the Employee.
In case of termination of the Employee's employment for cause, the
Association shall pay the Employee his salary through the date of termination,
and the Association shall have no further obligation to the Employee under this
Agreement. For purposes of this Agreement, termination for "cause" shall include
termination for personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the
3
<PAGE>
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Association at a meeting of the Board called and held
for such purpose (after reasonable notice to the Employee and an opportunity for
the Employee, together with the Employee's counsel, to be heard before the
Board), stating that in the good faith opinion of the Board the Employee was
guilty of conduct constituting "cause" as set forth above and specifying the
particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Association or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Association. In the event of such voluntary termination, the
Association shall be obligated to continue to pay the Employee his salary and
benefits only through the date of termination, at the time such payments are
due, and the Association shall have no further obligation to the Employee under
this Agreement.
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Association the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"),
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Association's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(e) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and
(g)(1), all obligations of the Association under this Agreement shall terminate
as of the effective date of the order, but vested rights of the contracting
parties shall not be affected.
(f) If the Association is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Association: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation ("RTC") enters into an agreement to provide assistance to or on
behalf of the Association under the authority contained in Section 13(c) of the
FDIA; or (ii) by the Director or his or her designee, at the time the Director
or his or her designee approves a supervisory merger to
4
<PAGE>
resolve problems related to operation of the Association or when the Association
is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by any such action.
(h) In the event the Association purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction or by an
arbitrator pursuant to Section 16 that cause did not exist for such termination,
or if in any event it is determined by any such court or arbitrator that the
Association has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
7. DISABILITY. If the Employee shall become disabled as defined in the
Association's then current disability plan or if the Employee shall be otherwise
unable to serve as President and Chief Executive Officer, the Employee shall be
entitled to receive group and other disability income benefits of the type then
provided by the Association for other executive employees.
8. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION.
(a) Notwithstanding any other provision of this Agreement, if the
value and amounts of benefits under this Agreement, together with any other
amounts and the value of benefits received or to be received by the Employee
would cause any amount to be nondeductible by the Association or the Holding
Company for federal income tax purposes pursuant to Section 280G of the Code,
then amounts and benefits under this Agreement shall be reduced (not less than
zero) to the extent necessary so as to maximize amounts and the value of
benefits to the Employee without causing any amount to become nondeductible by
the Association or the Holding Company pursuant to or by reason of such Section
280G. The Employee shall determine the allocation of such reduction among
payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
9. NO MITIGATION. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Association will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
5
<PAGE>
substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Association would be required to perform it if no such
succession or assignment had taken place. For purposes of implementing the
provisions of this Section 10(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Association
shall be sent to its home office, directed to the attention of the Board of
Directors of the Association, with a copy to the Secretary of the Association.
All notices to the Employee shall be sent to the home or other address the
Employee has most recently provided in writing to the Association.
12. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended.
13. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
16. ARBITRATION. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
By: /s/ Ralph A. Zuzolo, Sr.
------------------------
Ralph A. Zuzolo, Sr.
EMPLOYEE
/s/ William L. Stephens
-----------------------
William L. Stephens
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 26th day of October 1998, by and between HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES, 55 North Main Street, Niles, Ohio (hereinafter referred to
as the "Association" whether in mutual or stock form), and GEORGE J. SWIFT (the
"Employee").
WHEREAS, the Employee is currently serving as Vice President and Secretary
of the Association; and
WHEREAS, the Association has adopted a plan of conversion whereby the
Association will convert to capital stock form as the subsidiary of First Niles
Financial, Inc. (the "Holding Company"), subject to the approval of the
Association's members and the Office of Thrift Supervision (the "Conversion");
and
WHEREAS, the Board of Directors of the Association believes it is in the
best interests of the Association to enter into this Agreement with the Employee
in order to assure continuity of management of the Association and to reinforce
and encourage the continued attention and dedication of the Employee; and
WHEREAS, the Board of Directors of the Association has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. EMPLOYMENT. The Employee is employed as Vice President and Secretary of
the Association. As Vice President and Secretary, Employee shall render
administrative and management services as are customarily performed by persons
situated in similar executive capacities, and shall have other powers and duties
as may from time to time be prescribed by the Board, provided that such duties
are consistent with the Employee's position as Vice President and Secretary. The
Employee shall continue to devote his best efforts and substantially all his
business time and attention to the business and affairs of the Association and
its subsidiaries and affiliated companies.
2. COMPENSATION.
(a) SALARY. The Association agrees to pay the Employee during the
term of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4 hereof)
shall be $142,440 per year. The Employee's salary shall be payable not less
frequently than monthly and not later than the tenth day following the
expiration of the month in question. The amount of the Employee's salary shall
be reviewed by the Board of Directors not less often than annually, beginning
not later than the date one year after the Commencement Date (as defined in
Section 4 hereof). Any adjustments in salary or other compensation shall in no
way limit or reduce any other obligation of the Association hereunder. The
Employee's salary in effect hereunder from time to time shall not thereafter be
reduced.
<PAGE>
(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors of the Association to its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board of
Directors.
(c) EXPENSES. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him in performing services hereunder, in accordance with
the Association's policies and procedures, provided that the Employee properly
accounts therefor in accordance with Association policy.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained for
the benefit of the Association's executive employees or for its employees
generally.
(b) FRINGE BENEFITS. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefit plans which are or may become applicable to the Association's executive
employees or to its employees generally.
4. TERM. The term of employment under this Agreement shall be a period of
three years commencing on the date of completion of the Conversion (the
"Commencement Date"), subject to earlier termination as provided herein.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one year in addition to the then-remaining term of
employment under this Agreement, unless either the Association or the Employee
gives contrary written notice to the other not less than 90 days in advance of
the date on which the term of employment under this Agreement would otherwise be
extended, PROVIDED that such term will not be automatically extended unless,
prior thereto, the Board of Directors of the Association explicitly reviews and
approves the extension. Reference herein to the term of employment under this
Agreement shall refer to both such initial term and such extended terms.
5. VACATIONS. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than six (6) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable
manner by the Employee and the Association; and
2
<PAGE>
(c) solely at the Employee's request, the Board of Directors shall
be entitled to grant to the Employee a leave or leaves of absence with or
without pay at such time or times and upon such terms and conditions as the
Board, in its discretion, may determine.
6. TERMINATION OF EMPLOYMENT; DEATH.
(a) The Association's Board of Directors may terminate the
Employee's employment at any time, but any termination by the Association's
Board of Directors other than termination for cause, shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. If the
employment of the Employee is involuntarily terminated, other than for "cause"
as provided in this Section 6(a) or pursuant to any of Sections 6(d) through
6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the
Employee shall be entitled to (i) his then applicable salary for the
then-remaining term of the Agreement as calculated in accordance with Section 4
hereof, payable in such manner and at such times as such salary would have been
payable to the Employee under Section 2 had he remained in the employ of the
Association, and (ii) health insurance benefits as maintained by the Association
for the benefit of its senior executive employees or its employees generally
over the then-remaining term of the Agreement as calculated in accordance with
Section 4 hereof.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent, other than retirement. In addition, a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Vice
President and Secretary of the Association shall be deemed and shall constitute
an involuntary termination of employment to the same extent as express notice of
such involuntary termination. Any of the following actions shall constitute such
diminution or interference unless consented to in writing by the Employee: (1) a
change in the principal workplace of the Employee to a location outside of a 30
mile radius from the Association's headquarters office as of the date hereof;
(2) a material demotion of the Employee, a material reduction in the number or
seniority of other Association personnel reporting to the Employee, or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other than
as part of a Association- or Holding Company-wide reduction in staff; (3) a
material adverse change in the salary, perquisites, benefits, contingent
benefits or vacation time which had previously been provided to the Employee,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Association or the Holding
Company; and (4) a material permanent increase in the required hours of work or
the workload of the Employee.
In case of termination of the Employee's employment for cause, the
Association shall pay the Employee his salary through the date of termination,
and the Association shall have no further obligation to the Employee under this
Agreement. For purposes of this Agreement, termination for "cause" shall include
termination for personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the
3
<PAGE>
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Association at a meeting of the Board called and held
for such purpose (after reasonable notice to the Employee and an opportunity for
the Employee, together with the Employee's counsel, to be heard before the
Board), stating that in the good faith opinion of the Board the Employee was
guilty of conduct constituting "cause" as set forth above and specifying the
particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Association or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Association. In the event of such voluntary termination, the
Association shall be obligated to continue to pay the Employee his salary and
benefits only through the date of termination, at the time such payments are
due, and the Association shall have no further obligation to the Employee under
this Agreement.
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Association the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"),
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Association's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(e) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and
(g)(1), all obligations of the Association under this Agreement shall terminate
as of the effective date of the order, but vested rights of the contracting
parties shall not be affected.
(f) If the Association is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Association: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation ("RTC") enters into an agreement to provide assistance to or on
behalf of the Association under the authority contained in Section 13(c) of the
FDIA; or (ii) by the Director or his or her designee, at the time the Director
or his or her designee approves a supervisory merger to
4
<PAGE>
resolve problems related to operation of the Association or when the Association
is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by any such action.
(h) In the event the Association purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction or by an
arbitrator pursuant to Section 16 that cause did not exist for such termination,
or if in any event it is determined by any such court or arbitrator that the
Association has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
7. DISABILITY. If the Employee shall become disabled as defined in the
Association's then current disability plan or if the Employee shall be otherwise
unable to serve as Vice President and Secretary, the Employee shall be entitled
to receive group and other disability income benefits of the type then provided
by the Association for other executive employees.
8. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION.
(a) Notwithstanding any other provision of this Agreement, if the
value and amounts of benefits under this Agreement, together with any other
amounts and the value of benefits received or to be received by the Employee
would cause any amount to be nondeductible by the Association or the Holding
Company for federal income tax purposes pursuant to Section 280G of the Code,
then amounts and benefits under this Agreement shall be reduced (not less than
zero) to the extent necessary so as to maximize amounts and the value of
benefits to the Employee without causing any amount to become nondeductible by
the Association or the Holding Company pursuant to or by reason of such Section
280G. The Employee shall determine the allocation of such reduction among
payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
9. NO MITIGATION. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Association will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
5
<PAGE>
substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Association would be required to perform it if no such
succession or assignment had taken place. For purposes of implementing the
provisions of this Section 10(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Association
shall be sent to its home office, directed to the attention of the Board of
Directors of the Association, with a copy to the Secretary of the Association.
All notices to the Employee shall be sent to the home or other address the
Employee has most recently provided in writing to the Association.
12. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended.
13. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
16. ARBITRATION. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
By: /s/ Ralph A. Zuzolo, Sr.
------------------------
Ralph A. Zuzolo, Sr.
EMPLOYEE
/s/ George J. Swift
-----------------------
George J. Swift
7
EMPLOYMENT AGREEMENT
THIS EMPLOYMENT AGREEMENT ("Agreement") is made and entered into as of
this 26th day of October 1998, by and between HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES, 55 North Main Street, Niles, Ohio (hereinafter referred to
as the "Association" whether in mutual or stock form), and LAWRENCE SAFAREK (the
"Employee").
WHEREAS, the Employee is currently serving as Vice President and Treasurer
of the Association; and
WHEREAS, the Association has adopted a plan of conversion whereby the
Association will convert to capital stock form as the subsidiary of First Niles
Financial, Inc. (the "Holding Company"), subject to the approval of the
Association's members and the Office of Thrift Supervision (the "Conversion");
and
WHEREAS, the Board of Directors of the Association believes it is in the
best interests of the Association to enter into this Agreement with the Employee
in order to assure continuity of management of the Association and to reinforce
and encourage the continued attention and dedication of the Employee; and
WHEREAS, the Board of Directors of the Association has approved and
authorized the execution of this Agreement with the Employee to take effect as
stated in Section 4 hereof;
NOW, THEREFORE, in consideration of the foregoing and of the respective
covenants and agreements of the parties herein contained, it is AGREED as
follows:
1. EMPLOYMENT. The Employee is employed as Vice President and Treasurer of
the Association. As Vice President and Treasurer, Employee shall render
administrative and management services as are customarily performed by persons
situated in similar executive capacities, and shall have other powers and duties
as may from time to time be prescribed by the Board, provided that such duties
are consistent with the Employee's position as Vice President and Treasurer. The
Employee shall continue to devote his best efforts and substantially all his
business time and attention to the business and affairs of the Association and
its subsidiaries and affiliated companies.
2. COMPENSATION.
(a) SALARY. The Association agrees to pay the Employee during the
term of this Agreement a salary established by the Board of Directors. The
salary hereunder as of the Commencement Date (as defined in Section 4 hereof)
shall be $62,400 per year. The Employee's salary shall be payable not less
frequently than monthly and not later than the tenth day following the
expiration of the month in question. The amount of the Employee's salary shall
be reviewed by the Board of Directors not less often than annually, beginning
not later than the date one year after the Commencement Date (as defined in
Section 4 hereof). Any adjustments in salary or other compensation shall in no
way limit or reduce any other obligation of the Association hereunder. The
Employee's salary in effect hereunder from time to time shall not thereafter be
reduced.
<PAGE>
(b) DISCRETIONARY BONUSES. The Employee shall be entitled to
participate in an equitable manner with all other executive officers of the
Association in discretionary bonuses as authorized and declared by the Board of
Directors of the Association to its executive employees. No other compensation
provided for in this Agreement shall be deemed a substitute for the Employee's
right to participate in such bonuses when and as declared by the Board of
Directors.
(c) EXPENSES. During the term of his employment hereunder, the
Employee shall be entitled to receive prompt reimbursement for all reasonable
expenses incurred by him in performing services hereunder, in accordance with
the Association's policies and procedures, provided that the Employee properly
accounts therefor in accordance with Association policy.
3. BENEFITS.
(a) PARTICIPATION IN RETIREMENT AND EMPLOYEE BENEFIT PLANS. The
Employee shall be entitled while employed hereunder to participate in, and
receive benefits under, all plans relating to pension, thrift, profit-sharing,
group life insurance, medical coverage, education, cash bonuses, and other
retirement or employee benefits or combinations thereof, that are maintained for
the benefit of the Association's executive employees or for its employees
generally.
(b) FRINGE BENEFITS. The Employee shall be eligible while employed
hereunder to participate in, and receive benefits under, any other fringe
benefit plans which are or may become applicable to the Association's executive
employees or to its employees generally.
4. TERM. The term of employment under this Agreement shall be a period of
three years commencing on the date of completion of the Conversion (the
"Commencement Date"), subject to earlier termination as provided herein.
Beginning on the first anniversary of the Commencement Date, and on each
anniversary thereafter, the term of employment under this Agreement shall be
extended for a period of one year in addition to the then-remaining term of
employment under this Agreement, unless either the Association or the Employee
gives contrary written notice to the other not less than 90 days in advance of
the date on which the term of employment under this Agreement would otherwise be
extended, PROVIDED that such term will not be automatically extended unless,
prior thereto, the Board of Directors of the Association explicitly reviews and
approves the extension. Reference herein to the term of employment under this
Agreement shall refer to both such initial term and such extended terms.
5. VACATIONS. The Employee shall be entitled, without loss of pay, to
absent himself voluntarily from the performance of his employment under this
Agreement, all such voluntary absences to count as vacation time, provided that:
(a) the Employee shall be entitled to an annual vacation of not less
than four (4) weeks per year;
(b) the timing of vacations shall be scheduled in a reasonable
manner by the Employee and the Association; and
2
<PAGE>
(c) solely at the Employee's request, the Board of Directors shall
be entitled to grant to the Employee a leave or leaves of absence with or
without pay at such time or times and upon such terms and conditions as the
Board, in its discretion, may determine.
6. TERMINATION OF EMPLOYMENT; DEATH.
(a) The Association's Board of Directors may terminate the
Employee's employment at any time, but any termination by the Association's
Board of Directors other than termination for cause, shall not prejudice the
Employee's right to compensation or other benefits under this Agreement. If the
employment of the Employee is involuntarily terminated, other than for "cause"
as provided in this Section 6(a) or pursuant to any of Sections 6(d) through
6(g), or by reason of death or disability as provided in Sections 6(c) or 7, the
Employee shall be entitled to (i) his then applicable salary for the
then-remaining term of the Agreement as calculated in accordance with Section 4
hereof, payable in such manner and at such times as such salary would have been
payable to the Employee under Section 2 had he remained in the employ of the
Association, and (ii) health insurance benefits as maintained by the Association
for the benefit of its senior executive employees or its employees generally
over the then-remaining term of the Agreement as calculated in accordance with
Section 4 hereof.
The terms "termination" or "involuntarily terminated" in this Agreement
shall refer to the termination of the employment of Employee without his express
written consent, other than retirement. In addition, a material diminution of or
interference with the Employee's duties, responsibilities and benefits as Vice
President and Treasurer of the Association shall be deemed and shall constitute
an involuntary termination of employment to the same extent as express notice of
such involuntary termination. Any of the following actions shall constitute such
diminution or interference unless consented to in writing by the Employee: (1) a
change in the principal workplace of the Employee to a location outside of a 30
mile radius from the Association's headquarters office as of the date hereof;
(2) a material demotion of the Employee, a material reduction in the number or
seniority of other Association personnel reporting to the Employee, or a
material reduction in the frequency with which, or in the nature of the matters
with respect to which, such personnel are to report to the Employee, other than
as part of a Association- or Holding Company-wide reduction in staff; (3) a
material adverse change in the salary, perquisites, benefits, contingent
benefits or vacation time which had previously been provided to the Employee,
other than as part of an overall program applied uniformly and with equitable
effect to all members of the senior management of the Association or the Holding
Company; and (4) a material permanent increase in the required hours of work or
the workload of the Employee.
In case of termination of the Employee's employment for cause, the
Association shall pay the Employee his salary through the date of termination,
and the Association shall have no further obligation to the Employee under this
Agreement. For purposes of this Agreement, termination for "cause" shall include
termination for personal dishonesty, incompetence, willful misconduct, breach of
a fiduciary duty involving personal profit, intentional failure to perform
stated duties, willful violation of any law, rule, or regulation (other than
traffic violations or similar offenses) or final cease-and-desist order, or
material breach of any provision of this Agreement. Notwithstanding the
foregoing, the Employee shall not be deemed to have been terminated for cause
unless and until there shall have been delivered to the Employee a copy of a
resolution, duly adopted by the
3
<PAGE>
affirmative vote of not less than a majority of the entire membership of the
Board of Directors of the Association at a meeting of the Board called and held
for such purpose (after reasonable notice to the Employee and an opportunity for
the Employee, together with the Employee's counsel, to be heard before the
Board), stating that in the good faith opinion of the Board the Employee was
guilty of conduct constituting "cause" as set forth above and specifying the
particulars thereof in detail.
(b) The Employee's employment may be voluntarily terminated by the
Employee at any time upon 90 days written notice to the Association or upon such
shorter period as may be agreed upon between the Employee and the Board of
Directors of the Association. In the event of such voluntary termination, the
Association shall be obligated to continue to pay the Employee his salary and
benefits only through the date of termination, at the time such payments are
due, and the Association shall have no further obligation to the Employee under
this Agreement.
(c) In the event of the death of the Employee during the term of
employment under this Agreement and prior to any termination hereunder, the
Employee's estate, or such person as the Employee may have previously designated
in writing, shall be entitled to receive from the Association the salary of the
Employee through the last day of the calendar month in which his death shall
have occurred, and the term of employment under this Agreement shall end on such
last day of the month.
(d) If the Employee is suspended and/or temporarily prohibited from
participating in the conduct of the Association's affairs by a notice served
under Section 8(e)(3) or (g)(1) of the Federal Deposit Insurance Act ("FDIA"),
12 U.S.C. ss. 1818(e)(3) and (g)(1), the Association's obligations under this
Agreement shall be suspended as of the date of service, unless stayed by
appropriate proceedings. If the charges in the notice are dismissed, the
Association may in its discretion (i) pay the Employee all or part of the
compensation withheld while its obligations under this Agreement were suspended
and (ii) reinstate in whole or in part any of its obligations which were
suspended.
(e) If the Employee is removed and/or permanently prohibited from
participating in the conduct of the Association's affairs by an order issued
under Section 8(e)(4) or (g)(1) of the FDIA, 12 U.S.C. ss. 1818(e)(4) and
(g)(1), all obligations of the Association under this Agreement shall terminate
as of the effective date of the order, but vested rights of the contracting
parties shall not be affected.
(f) If the Association is in default (as defined in Section 3(x)(1)
of the FDIA), all obligations under this Agreement shall terminate as of the
date of default, but this provision shall not affect any vested rights of the
contracting parties.
(g) All obligations under this Agreement shall be terminated, except
to the extent determined that continuation of this Agreement is necessary for
the continued operation of the Association: (i) by the Director of the Office of
Thrift Supervision (the "Director") or his or her designee, at the time the
Federal Deposit Insurance Corporation ("FDIC") or the Resolution Trust
Corporation ("RTC") enters into an agreement to provide assistance to or on
behalf of the Association under the authority contained in Section 13(c) of the
FDIA; or (ii) by the Director or his or her designee, at the time the Director
or his or her designee approves a supervisory merger to
4
<PAGE>
resolve problems related to operation of the Association or when the Association
is determined by the Director to be in an unsafe or unsound condition. Any
rights of the parties that have already vested, however, shall not be affected
by any such action.
(h) In the event the Association purports to terminate the Employee
for cause, but it is determined by a court of competent jurisdiction or by an
arbitrator pursuant to Section 16 that cause did not exist for such termination,
or if in any event it is determined by any such court or arbitrator that the
Association has failed to make timely payment of any amounts owed to the
Employee under this Agreement, the Employee shall be entitled to reimbursement
for all reasonable costs, including attorneys' fees, incurred in challenging
such termination or collecting such amounts. Such reimbursement shall be in
addition to all rights to which the Employee is otherwise entitled under this
Agreement.
7. DISABILITY. If the Employee shall become disabled as defined in the
Association's then current disability plan or if the Employee shall be otherwise
unable to serve as Vice President and Treasurer, the Employee shall be entitled
to receive group and other disability income benefits of the type then provided
by the Association for other executive employees.
8. CERTAIN REDUCTION OF PAYMENTS BY THE ASSOCIATION.
(a) Notwithstanding any other provision of this Agreement, if the
value and amounts of benefits under this Agreement, together with any other
amounts and the value of benefits received or to be received by the Employee
would cause any amount to be nondeductible by the Association or the Holding
Company for federal income tax purposes pursuant to Section 280G of the Code,
then amounts and benefits under this Agreement shall be reduced (not less than
zero) to the extent necessary so as to maximize amounts and the value of
benefits to the Employee without causing any amount to become nondeductible by
the Association or the Holding Company pursuant to or by reason of such Section
280G. The Employee shall determine the allocation of such reduction among
payments and benefits to the Employee.
(b) Any payments made to the Employee pursuant to this Agreement, or
otherwise, are subject to and conditioned upon their compliance with 12 U.S.C.
1828(k) and any regulations promulgated thereunder.
9. NO MITIGATION. The Employee shall not be required to mitigate the
amount of any salary or other payment or benefit provided for in this Agreement
by seeking other employment or otherwise, nor shall the amount of any payment or
benefit provided for in this Agreement be reduced by any compensation earned by
the Employee as the result of employment by another employer, by retirement
benefits after the date of termination or otherwise.
10. NO ASSIGNMENTS.
(a) This Agreement is personal to each of the parties hereto, and
neither party may assign or delegate any of its rights or obligations hereunder
without first obtaining the written consent of the other party; provided,
however, that the Association will require any successor or assign (whether
direct or indirect, by purchase, merger, consolidation or otherwise) to all or
5
<PAGE>
substantially all of the business and/or assets of the Association, by an
assumption agreement in form and substance satisfactory to the Employee, to
expressly assume and agree to perform this Agreement in the same manner and to
the same extent that the Association would be required to perform it if no such
succession or assignment had taken place. For purposes of implementing the
provisions of this Section 10(a), the date on which any such succession becomes
effective shall be deemed the Date of Termination.
(b) This Agreement and all rights of the Employee hereunder shall
inure to the benefit of and be enforceable by the Employee's personal and legal
representatives, executors, administrators, successors, heirs, distributees,
devisees and legatees. If the Employee should die while any amounts would still
be payable to the Employee hereunder if the Employee had continued to live, all
such amounts, unless otherwise provided herein, shall be paid in accordance with
the terms of this Agreement to the Employee's devisee, legatee or other designee
or if there is no such designee, to the Employee's estate.
11. NOTICE. For the purposes of this Agreement, notices and all other
communications provided for in the Agreement shall be in writing and shall be
deemed to have been duly given when personally delivered or sent by certified
mail, return receipt requested, postage prepaid. All notices to the Association
shall be sent to its home office, directed to the attention of the Board of
Directors of the Association, with a copy to the Secretary of the Association.
All notices to the Employee shall be sent to the home or other address the
Employee has most recently provided in writing to the Association.
12. AMENDMENTS. No amendments or additions to this Agreement shall be
binding unless in writing and signed by both parties, except as herein otherwise
provided. The parties hereto agree to amend this Agreement to comply with any
required provisions of 12 C.F.R. ss. 563.39(b), as the same may be amended.
13. PARAGRAPH HEADINGS. The paragraph headings used in this Agreement are
included solely for convenience and shall not affect, or be used in connection
with, the interpretation of this Agreement.
14. SEVERABILITY. The provisions of this Agreement shall be deemed
severable and the invalidity or unenforceability of any provision shall not
affect the validity or enforceability of the other provisions hereof.
15. GOVERNING LAW. This Agreement shall be governed by the laws of the
United States to the extent applicable and otherwise by the laws of the State of
Ohio.
16. ARBITRATION. Any dispute or controversy arising under or in connection
with this Agreement shall be settled exclusively by arbitration in accordance
with the rules of the American Arbitration Association then in effect. Judgment
may be entered on the arbitrator's award in any court having jurisdiction.
6
<PAGE>
IN WITNESS WHEREOF, the parties have executed this Agreement as of the day
and year first above written.
THIS AGREEMENT CONTAINS A BINDING ARBITRATION PROVISION WHICH MAY BE
ENFORCED BY THE PARTIES.
HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES
By: /s/ Ralph A. Zuzolo, Sr.
------------------------
Ralph A. Zuzolo, Sr.
EMPLOYEE
/s/ Lawrence Safarek
-----------------------
Lawrence Safarek
7
- --------------------------------------------------------------------------------
1998 ANNUAL REPORT
- --------------------------------------------------------------------------------
[LOGO]
FIRST NILES FINANCIAL, INC.
NILES, OHIO
<PAGE>
TABLE OF CONTENTS
Page No.
--------
President's Message...................................................... 1
Selected Consolidated Financial Information.............................. 2
Management's Discussion and Analysis of Financial
Condition and Results of Operation..................................... 4
Consolidated Financial Statements......................................... 17
Shareholder Information................................................... 45
Corporate Information..................................................... 46
<PAGE>
[FIRST NILES FINANCIAL, INC. LETTERHEAD]
March 17, 1999
To Our Shareholders:
It is my distinct pleasure to present to you our first Annual Report to
Shareholders of First Niles Financial, Inc. The past year has been one of the
most, if not the most, significant year in the 102 year history of the Home
Federal Savings and Loan Association of Niles, our wholly-owned operating
subsidiary.
Home Federal converted from mutual to stock form of ownership in
October 1998. First Niles, upon completion of Home Federal's conversion to stock
form, simultaneously acquired all of the common stock of Home Federal and issued
First Niles common stock to the public, raising over $16.9 million. At December
31, 1998, total shareholders' equity equaled approximately $29.9 million.
Your Board and management are committed to building shareholder value.
We will continue to be an organization which is committed to our customers and
to the community we serve. We are dedicated to making your investment in First
Niles a rewarding one.
I would also like to take this time to thank all of our loyal customers
and new constituents, our shareholders, for their past support and faith in our
future.
Sincerely,
WILLIAM L. STEPHENS
CHAIRMAN OF THE BOARD, PRESIDENT AND CEO
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31,
---------------------------------------
1998 1997 1996
------- -------- -------
Selected Financial Condition Data: (In Thousands)
- ----------------------------------
<S> <C> <C> <C>
Total assets.......................................... $86,724 $72,497 $71,213
Loans receivable, net................................. 36,132 36,744 33,183
Mortgage-backed and related securities................ 12,432 12,359 12,900
Investment securities................................. 20,068 17,741 22,098
Deposits.............................................. 54,837 57,854 57,673
Total borrowings...................................... 300 400 500
Shareholders' equity.................................. 29,923 13,163 12,163
Years Ended December 31,
---------------------------------------
1998 1997 1996
------- ------- -------
(In Thousands)
Selected Operations Data:
- -------------------------
Total interest income................................. $ 5,221 $ 5,002 $ 4,780
Total interest expense................................ 2,435 2,476 2,402
------- ------- -------
Net interest income................................ 2,786 2,526 2,378
Provision (recovery) for loan losses.................. (103) 700 40
------- ------- -------
Net interest income after provision for loan losses. 2,889 1,826 2,338
Fees and service charges.............................. 19 18 17
Gain on sales of investment securities................ 461 4 --
Other non-interest income............................. 7 5 6
------- ------- -------
Total non-interest income............................. 487 27 23
Total non-interest expense............................ 2,290 1,380 1,751
------- ------- -------
Income before taxes and extraordinary item.......... 1,086 473 610
Income tax provision.................................. 276 87 184
------- ------- -------
Net income.......................................... $ 810 $ 386 $ 426
======= ======= =======
Earnings per share.................................... NM NA NA
Dividends per share................................... -- NA NA
</TABLE>
- ---------------------------------------------------
NM - Not meaningful.
NA - Not applicable.
2
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
---------------------------------------
1998 1997 1996
------- ------- -------
<S> <C> <C> <C>
Selected Financial Ratios and Other Data:
- -----------------------------------------
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets)........................................ 1.06% 0.54% 0.60%
Return on equity (ratio of net income to
average equity).............................................. 4.99 3.05 3.58
Interest rate spread:
Average during year.......................................... 2.68 2.78 2.63
End of year.................................................. 2.54 2.82 2.85
Net interest margin (net interest income divided
by average interest-earning assets)......................... 3.68 3.56 3.39
Ratio of operating expense to average total assets............. 2.94 1.86 2.42
Ratio of average interest-earning assets to average
interest-bearing liabilities................................. 1.31 1.22 1.22
QUALITY RATIOS:
Non-performing assets to total assets at end of year........... 1.10 2.29 1.37
Non-performing loans to loans receivable, net,
end of year.................................................. 2.64 4.52 2.94
Allowance for loan losses to non-performing loans,
end of year.................................................. 82.09 51.38 30.90
Allowance for loan losses to loans receivable, net,
end of year.................................................. 2.17 2.32 0.91
CAPITAL RATIOS:
Equity to total assets at end of year.......................... 34.50 18.16 17.08
Average equity to average assets............................... 21.30 17.72 16.78
OTHER DATA:
Book value per common share outstanding........................ $17.06 NA NA
Dividends declared per share................................... -- NA NA
Dividend payout ratio(1)....................................... -- NA NA
Number of full-service offices................................. 1 1 1
</TABLE>
(1) Dividends per share divided by earnings per common share and common share
equivalent.
3
<PAGE>
MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
CONDITION AND RESULTS OF OPERATIONS
GENERAL
The most significant event of the last fiscal year was the October 26,
1998 conversion of Home Federal Savings and Loan Association of Niles from the
mutual to stock form of ownership. On that date, First Niles Financial, Inc.
issued 1,754,411 shares of common stock at $10.00 per share, raising $15.5
million, net of shares acquired by the newly formed Employee Stock Ownership
Plan (the "ESOP") and net of the costs of the Conversion. Concurrent with the
issuance of the shares, Home Federal converted from the mutual to stock form of
organization, and First Niles acquired 100% of the stock of Home Federal. First
Niles has no significant operations outside those of Home Federal. All
references to First Niles prior to October 26, 1998, except where otherwise
indicated, are to Home Federal. References in this Annual Report to "we", "us",
and "our" refer to First Niles and/or Home Federal as the context requires.
Home Federal was established in Niles, Ohio in 1897. We are a
community-oriented financial institution serving primarily the Niles, Ohio area
through our one office located in Niles. We provide financial services to
individuals, families and small businesses. Our principal business consists of
attracting retail deposits from the general public and investing those funds
primarily in permanent and construction loans secured by first mortgages on one-
to four-family residences. We also originate permanent and construction loans
secured by first mortgages on commercial and multi-family real estate. To a much
lesser extent, we originate consumer and commercial business loans. Competition
from other financial institutions has, however, limited the volume of loans we
have been able to originate and place in our portfolio. As a result, our excess
funds are invested in short-term, lower-yielding investment and mortgage-backed
and related securities.
Proceeds received from our public offering were initially invested in
interest-bearing deposits. We intend to invest these proceeds in the origination
of loans and the purchase of investment and mortgage-backed and related
securities, subject to market conditions. However, the level of financial
competition in our market area is strong and dominated by commercial banks, with
financial institutions of varying sizes and characteristics. In addition, Home
Federal operates a single office in the city of Niles, which is projected to
experience a continuing decrease in population and no meaningful increase in
households over the next several years. Niles and Trumbull County have per
capita income and median household income significantly lower than Ohio and the
United States and in December 1998, Trumbull County also had an unemployment
rate higher than Ohio and the United States. These economic conditions and
strong competition have resulted in reduced loan demand which, in turn, has
resulted in a high concentration of investment securities and mortgage-backed
and related securities in our portfolio compared to typical savings
institutions. In the event current economic and market conditions persist or
worsen, and loan demand remains weak, we can not give any assurances that we
will be able to maintain or increase our mortgage loan portfolio, which could
adversely affect our operations and financial results.
4
<PAGE>
FINANCIAL CONDITION
Assets totaled $86.7 million at December 31, 1998, an increase of $14.2
million, or 19.6%, from assets of $72.5 million at December 31, 1997. Assets
increased as a result of the $15.5 million received from the sale of First
Niles' common stock to the public in October 1998. These funds were invested in
cash equivalents which increased $12.2 million, or 251%, with the balance used
to fund a $2.4 million, or 8.0%, increase in mortgage-backed and investment
securities.
The loan portfolio decreased $612,000, or 1.7%, to $36.1 million at
December 31, 1998, compared to the prior year. This decline occurred because of
the prevailing low interest rate environment and strong competition for loans in
the area, which resulted in loan customers refinancing existing loans elsewhere.
During the year total real estate loans decreased by $1.7 million. Specifically,
loans secured by one to four-family and multi-family properties decreased by a
total of $3.0 million during the year ended December 31, 1998, partially offset
by a $1.3 million increase in loans secured by commercial real estate and for
construction and development.
Deposits totaled $54.8 million at December 31, 1998, compared to $57.8
million at December 31, 1997, representing a $3.0 million or 5.2% decrease in
deposits. During the year ended December 31, 1998, certificates of deposit
decreased $1.4 million. Passbook, statement savings accounts and money market
deposit accounts decreased by a collective $1.9 million, while NOW accounts
increased $251,000 during the year ended December 31, 1998. The decrease in
deposits experienced in every account category, except NOW accounts, is
primarily attributable to deposit funds that were used by customers to purchase
stock in our public offering.
Accounts payable and other liabilities increased by $438,000, or 54.9%,
to $1.2 million at December 31, 1998 from $798,000 at December 31, 1997. This
increase was primarily due to a $384,000 accrual to executive deferred
compensation plans, which were terminated as of August 31, 1998.
Net proceeds of $15.5 million from the sale of our common stock,
combined with net income of $810,000 accounted for substantially all of the net
increase in shareholders' equity.
RESULTS OF OPERATIONS
GENERAL. Our results of operations depend primarily on net interest
income, which is determined by (i) the difference between rates of interest we
earn on interest-earning assets, consisting primarily of mortgage loans,
collateralized mortgage obligations and other investments, and the rates we pay
on interest-bearing liabilities, consisting primarily of deposits and
borrowings, and (ii) the relative amounts of our interest-earning assets and
interest-bearing liabilities. The level of non-interest income, such as fees
received from customer deposit account service charges and gains on sales of
investments, and the level of non-interest expense, such as federal deposit
insurance premiums, salaries and benefits, office occupancy costs, and data
processing costs, also affect our results of operations. Finally, our results of
operations may also be affected significantly by general economic and
competitive conditions, particularly changes in market interest rates,
government policies and actions of regulatory authorities, all of which are
beyond our control.
5
<PAGE>
NET INCOME. We recorded net income of $810,000 for the year ended
December 31, 1998, an increase of $424,000 or 110% from the year ended December
31, 1997. The increase in net income was primarily due to a $260,000 increase in
net interest income, a $803,000 reduction in the provision for loan losses and a
$461,000 gain on sales of investment securities. These gains were partially
offset by a $910,000 increase in non-interest expense and a $189,000 increase in
federal income tax expense.
Our return on assets was 1.06% for the year ended 1998, compared to
.54% for the year ended 1997. Return on equity was 4.99% for 1998, compared to
3.05% for 1997. Average equity to average assets was 21.30% for the year ended
1998, compared to 17.72% for the year ended 1997. We did not declare or pay any
dividends during 1998.
NET INTEREST INCOME. Net interest income increased $260,000, or 10.3%,
from last year to $2.8 million for the year ended December 31, 1998. The
increase in net interest income was generated primarily by a $4.9 million
increase in average interest-earning assets resulting from the proceeds we
received in our public offering in October 1998. In addition, the average
outstanding balance in our loan portfolio increased $1.4 million, while the
overall average balance of the investment and mortgage-backed securities
portfolio remained relatively constant.
Total interest expense decreased $41,000, or 1.7%, from last year to
$2.4 million for the year ended December 31, 1998. An overall decline in the
rate paid on deposits at Home Federal was the primary reason for the decrease in
interest expense. The rate paid on our certificate of deposit accounts exhibited
the largest decline, declining to 5.32% for the year ended December 31, 1998
from 5.45% for the same period in 1997. The balance of average interest-bearing
liabilities remained relatively constant during 1998 and 1997.
See the tables below captioned "Average Balances, Interest Rates and
Yields" and "Rate/Volume Analysis of Net Interest Income" for more detailed
information regarding our net interest income.
6
<PAGE>
AVERAGE BALANCES, INTEREST RATES AND YIELDS
The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates. No tax equivalent adjustments were made.
All average balances are computed using monthly average balances.
<TABLE>
<CAPTION>
Year Ended December 31,
---------------------------------------------------------------------------
1998 1997
-------------------------------------- ---------------------------------
Average Interest Average Interest
Outstanding Earned/ Yield/ Outstanding Earned/ Yield/
Balance Paid Rate Balance Paid Rate
-------------------------------------- ---------------------------------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C> <C>
INTEREST-EARNING ASSETS:
Loans receivable(1)................................. $37,317 $3,074 8.24% $35,946 $2,959 8.23%
Mortgage-backed and related securities.............. 12,467 767 6.15 11,677 665 5.70
Investment securities............................... 17,908 941 5.25 19,210 1,150 5.99
FHLB stock.......................................... 306 22 7.19 283 20 7.07
Interest-bearing deposits........................... 7,761 417 5.37 3,791 208 5.49
------- ------- ------- -------
TOTAL INTEREST-EARNING ASSETS(1)................... $75,759 5,221 6.89 $70,907 5,002 7.05
======= ------- ======= -------
INTEREST-BEARING LIABILITIES:
Savings deposits.................................... $25,858 787 3.04 $26,340 806 3.06%
Demand and NOW deposits............................. 3,069 93 3.03 2,885 88 3.05
Certificate accounts................................ 28,545 1,520 5.32 28,231 1,539 5.45
Borrowings.......................................... 385 35 9.09 488 43 8.81
------- ------- ------- -------
TOTAL INTEREST-BEARING LIABILITIES................. $57,857 2,435 4.21 $57,944 2,476 4.27
======= ------- ======= -------
NET INTEREST INCOME.................................. $2,786 $2,526
====== ======
NET INTEREST RATE SPREAD............................. 2.68% 2.78%
==== ====
NET EARNING ASSETS................................... $17,902 $12,963
======= =======
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS......... 3.68% 3.56%
==== ====
AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-
BEARING LIABILITIES.................................. 1.31x 1.22x
==== ====
</TABLE>
- -----------------
(1) Calculated net of deferred loan fees, loan discounts and loans in process.
Includes non-accrual loans.
7
<PAGE>
RATE/VOLUME ANALYSIS OF NET INTEREST INCOME
The following schedule presents the dollar amount of changes in
interest income and interest expense for major components of interest-earning
assets and interest-bearing liabilities. It distinguishes between the changes
related to outstanding balances and that due to the changes in interest rates.
For each category of interest-earning assets and interest-bearing liabilities,
information is provided on changes attributable to (i) changes in volume (i.e.,
changes in volume multiplied by old rate) and (ii) changes in rate (i.e.,
changes in rate multiplied by old volume). For purposes of this table, changes
attributable to both rate and volume, which cannot be segregated, have been
allocated proportionately to the change due to volume and the change due to
rate.
<TABLE>
<CAPTION>
Years Ended December 31,
1998 VS. 1997
--------------------------------------
Increase/(decrease)
Due to Total
--------------------- Increase
Volume Rate (Decrease)
------ ------ ----------
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable ..................... $ 113 $ 2 $ 115
Mortgage-backed and related securities 46 56 102
Investment securities ................ (75) (134) (209)
Interest-bearing deposits and other .. 215 (4) 211
----- ----- -----
Total interest-earning assets ...... $ 299 $ (80) 219
===== ===== -----
Interest-bearing liabilities:
Savings deposits ..................... $ (15) $ (4) (19)
Demand and NOW deposits .............. 6 (1) 5
Borrowings ........................... (9) 1 (8)
Certificate accounts ................. 17 (36) (19)
----- ----- -----
Total interest-bearing liabilities $ (1) $ (40) (41)
===== ===== -----
Net interest income..................... $ 260
=====
</TABLE>
PROVISION FOR LOAN LOSSES. The net provision for loan losses was
($103,000) for the year ended December 31, 1998 compared to $700,000 for the
year ended December 31, 1997. The significant decrease in the net provision for
loan losses of $803,000 from year to year was primarily due to an improvement in
the general credit quality of the overall loan portfolio. Our level of
nonperforming loans, consisting of nonaccruing loans and loans delinquent more
than 90 days, decreased by $707,000 to $955,000 at December 31, 1998 from $1.7
million at December 31, 1997. Our nonperforming loans totaled 2.6% of net loans
receivable at December 31, 1998, compared to 4.5% of net loans receivable at
December 31, 1997. Our allowance for loan losses was $784,000 at December 31,
1998, representing 82.1% of non-performing loans and 2.2% of net loans
receivable. At December 31, 1997 the allowance for loan losses was $853,000,
representing 51.4% of non-performing loans and 2.3% of net loans receivable. We
did not have any real estate owned or other non-performing assets on our books
at December 31, 1998 and 1997.
8
<PAGE>
It is our policy to provide valuation allowances for estimated losses
on loans based upon past loss experience, current trends in the level of
delinquent and specific problem loans, loan concentrations to single borrowers,
adverse situations that may affect the borrower's ability to repay, the
estimated value of any underlying collateral, and current and anticipated
economic conditions in our market area. Accordingly, the calculation of the
adequacy of the allowance for loan losses is not based directly on the level of
non-performing assets.
We will continue to monitor our allowance for loan losses and make
future additions to the allowance through the provision for loan losses as
economic conditions dictate. Although we maintain our allowance for loan losses
at a level which we consider to be adequate to provide for losses, there can be
no assurance that future losses will not exceed estimated amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, our determination as to the amount of the allowance for loan losses is
subject to review by the Office of Thrift Supervision and the Federal Deposit
Insurance Corporation, as part of their examination process, which may result in
the establishment of an additional allowance.
NON-INTEREST INCOME. Non-interest income increased $460,000 to $487,000
for the year ended December 31, 1998 compared to $27,000 the prior year. This
$460,000 increase was the result of the sale of 9,728 shares of Freddie Mac
common stock during 1998.
NON-INTEREST EXPENSE. Non-interest expense increased $910,000, or
65.9%, for the year ended December 31, 1998 compared to the same period in 1997.
Compensation and benefits, our largest non-interest expense, increased $858,000,
or 103%, in 1998 as compared to 1997. This increase was primarily attributable
to bonuses totaling $435,000 paid to Home Federal employees in April 1998, and a
$288,000 lump-sum contribution to executive deferred compensation plans in
exchange for the suspension of further annual contributions to the executives
under such plans. Compensation and benefits also increased as a result of
contributions to the ESOP formed in connection with our conversion to the stock
form of organization and simultaneous public offering of First Niles common
stock.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$276,000 for the year ended December 31, 1998, an increase of $189,000, or 217%
from the $87,000 provision for 1997. The increase in the provision for federal
income taxes was due to significantly higher pre-tax income. Pre-tax income was
$613,000 higher in 1998 than in 1997. The effective tax rate increased to 25.4%
in the current one-year period compared to 18.4% in the same period one year
prior.
ASSET AND LIABILITY MANAGEMENT; MARKET RISK ANALYSIS
As stated above, we derive our income primarily from the excess of
interest collected over interest paid. The rates of interest we earn on assets
and pay on liabilities generally are established contractually for a period of
time. Market interest rates change over time. Accordingly, our results of
operations, like those of many financial institutions, are impacted by changes
in interest rates and the interest rate sensitivity of our assets and
liabilities. The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest rate risk and is Home Federal's
most significant market risk.
9
<PAGE>
Our operations are also affected by our level of income and expenses.
Non-interest income includes service charges and fees and gain on sale of
investments. Non-interest expenses primarily include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums and data processing
expenses. Our results of operations are also significantly affected by general
economic and competitive conditions, particularly changes in market interest
rates, government legislation and regulation and monetary and fiscal policy.
In an attempt to manage our exposure to changes in interest rates and
comply with applicable regulations, we monitor Home Federal's interest rate
risk. In monitoring interest rate risk we continually analyze and manage assets
and liabilities based on their payment streams and interest rates, the timing of
their maturities, and their sensitivity to actual or potential changes in market
interest rates.
An asset or liability is interest rate sensitive within a specific time
period if it will mature or reprice within that time period. If our assets
mature or reprice more rapidly or to a greater extent than our liabilities, then
the market value of our portfolio equity and our net interest income would tend
to increase during periods of rising interest rates and decrease during periods
of falling interest rates. Conversely, if our assets mature or reprice more
slowly or to a lesser extent than our liabilities, then the market value of our
portfolio equity and our net interest income would tend to decrease during
periods of rising interest rates and increase during periods of falling interest
rates. Our policy has been to address the interest rate risk inherent in the
historical savings institution business of originating long-term loans funded by
short-term deposits by maintaining sufficient liquid assets for material and
prolonged changes in interest rates. We believe that our liquidity position and
capital levels, which are well in excess of regulatory requirements, assist us
in reasonably limiting the effects of our interest rate risk exposure.
Our Board of Directors is responsible for reviewing our asset and
liability position. The Board meets quarterly to review interest rate risk and
trends, liquidity and capital ratios and related regulatory requirements. In
addition, the Board reviews simulations of the effect of interest rates on Home
Federal's capital, net interest income and net income under various interest
rate scenarios. Management of Home Federal is responsible for implementing the
policies and decisions of the Board of Directors with respect to our asset and
liability goals and strategies.
To manage the interest rate risk, we attempt to originate
adjustable-rate loans; however, due to the low interest rate environment over
the past several years, customer demand for fixed-rate loans has been strong. At
December 31, 1998, adjustable-rate mortgage loans totaled $19.0 million or 49.9%
of our total gross loan portfolio. We also maintain a large portfolio of liquid
assets which includes investment securities. Maintaining liquid assets, however,
tends to reduce potential net income because liquid assets usually provide a
lower yield than other interest-earning assets. Despite these strategies we are
still more vulnerable to increases in interest rates than to decreases in
interest rates given current market interest rate levels, as illustrated in the
table on the following page.
In order to encourage institutions to reduce their interest rate risk,
the Office of Thrift Supervision adopted a rule incorporating an interest rate
risk component into the risk-based capital rules. This procedure for measuring
interest rate risk was developed by the Office of Thrift Supervision to replace
10
<PAGE>
the "gap" analysis, which is the difference between interest-earning assets and
interest-bearing liabilities that mature or reprice within a specific time
period. Net portfolio value is the present value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The calculation is intended
to illustrate the change in net portfolio value that will occur upon an
immediate change in interest rates of at least 200 basis points with no effect
given to any steps that management might take to counter the effect of that
interest rate movement.
The following table sets forth the change in Home Federal's net
portfolio value at December 31, 1998, based on internal assumptions, that would
occur upon an immediate change in interest rates, with no effect given to any
steps that management might take to counteract that change.
December 31, 1998
-------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Portfolio Value of Total Asset
-------------------------------------- ------------------------------
Change
in Rate $ Amount $ Change % Change NPV Ratio BP Change
- ------- -------- -------- -------- --------- ---------
(Dollars in Thousands)
+300 $20,455 $(3,336) (14.0)% 27.08% (238)
+200 21,861 (1,930) (8.1) 28.18 (128)
+100 22,956 (835) (3.5) 28.94 (52)
-- 23,791 -- -- 29.46 --
- -100 24,563 772 3.2 29.92 46
- -200 25,209 1,418 6.0 30.28 82
- -300 25,666 1,875 7.9 30.51 105
In the above table, the first column on the left presents the basis
point increments of yield curve shifts. The second column presents the overall
dollar amount of net portfolio value at each basis point increment. The third
and fourth columns present Home Federal's actual position in dollar change and
percentage change in net portfolio value at each basis point increment. The
remaining columns present Home Federal's percentage change and basis point
change in its net portfolio value as a percentage of portfolio value of total
assets.
Computations of prospective effects of hypothetical interest rate
changes are based on numerous assumptions, including interest rates, loan
prepayments, deposit decay rates, and the market values of certain assets under
the various interest rate scenarios and should not be relied upon as indicative
of actual results. Certain shortcomings are inherent in the method of analysis
presented in the computation of net portfolio value. Although certain assets and
liabilities may have similar maturities or periods within which they reprice,
they may react differently to changes in market interest rates. The interest
rates on certain types of assets and liabilities may fluctuate in advance of
changes in market interest rates, while interest rates on other types may lag
behind changes in market rates. In the event of a change in interest rates,
prepayments and early withdrawal levels could deviate significantly from those
assumed in making the calculations set forth above.
11
<PAGE>
LIQUIDITY AND COMMITMENTS
Home Federal's primary sources of funds are deposits, repayments and
prepayments of loans and securities and interest income. Although maturity and
scheduled amortization of loans and securities are relatively predictable
sources of funds, deposit flows and prepayments on loans and securities are
influenced significantly by general interest rates, economic conditions and
competition. Historically, we have been able to generate sufficient cash through
our deposits and have only utilized borrowings to a limited degree.
Liquidity management is an ongoing and long-term function of our
asset/liability management strategy. Excess funds generally are invested in
interest-bearing overnight deposits at other financial institutions and in
short-term investment securities. If we require funds beyond our ability to
generate deposits, additional sources of funds are available. Our most liquid
assets are cash and cash equivalents. At December 31, 1998, cash and cash
equivalents totaled $17.1 million compared to $4.9 million at December 31, 1997.
We monitor and review liquidity regularly and maintain a $2.0 million line of
credit with a commercial bank which can be accessed immediately.
At December 31, 1998, the total loan origination commitments
outstanding amounted to $2.1 million. At the same date, the unadvanced portion
of construction loans was $1.1 million. Certificates of deposit scheduled to
mature in one year or less at December 31, 1998, totaled $22.7 million.
Investment and mortgage-related securities scheduled to mature in one year or
less at December 31, 1998 totaled $1.3 million. Based on historical experience,
we believe that a significant portion of maturing deposits will remain with us.
We believe, based on our current balance sheet structure and our ability to
acquire funds from the Federal Home Loan Bank of Cincinnati and other sources,
that our liquidity is adequate.
CAPITAL
Consistent with our goals to operate a sound and profitable financial
organization, we actively seek to maintain a "well capitalized" institution in
accordance with regulatory standards. Total equity was $29.9 million at December
31, 1998, or 34.5% of total assets on that date. As of December 31, 1998, we
exceeded all capital requirements of the Office of Thrift Supervision. Our
regulatory capital ratios at December 31, 1998 were as follows: Tier I
(leverage) capital, 27.0%; Tier I risk-based capital, 51.4%; and Total
risk-based capital, 55.3%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
YEAR 2000 ISSUES
The approaching millennium is causing organizations of all types to
review their computer systems for the ability to properly accommodate the year
2000. When computer systems were first developed, two digits were used to
designate the year in date calculations and "19" was assumed for the century. As
a result, there is significant concern about the integrity of date sensitive
calculations when the calendar rolls over to January 1, 2000. An older system
could interpret 01/01/00 as January 1, 1900 potentially causing major problems
calculating interest, payment, delinquency or maturity dates. An internal
committee comprised of two officers and an outside director, has been formed to
address the potential risk that the year 2000 poses for Home Federal.
12
<PAGE>
Financial institution regulators recently have increased their focus
upon year 2000 compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council has issued several interagency statements on
Year 2000 Project Management Awareness. These statements require financial
institutions to, among other things, examine the year 2000 issue with respect to
their customers, suppliers and borrowers. These statements also require each
federally insured financial institution to survey its exposure, measure its risk
and prepare a plan to address the year 2000 issue. In addition, the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository institutions to assure resolution of any year 2000 problems.
The federal banking agencies have asserted that year 2000 testing and
certification is a key safety and soundness issue in conjunction with regulatory
exams and that an institution's failure to address appropriately the year 2000
issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions, or the imposition of civil money penalties.
Accurate data processing is essential to our operations and a lack of
accurate processing by our vendors or us could have a significant adverse impact
on our financial condition and results of operations. We have been assured by
our data processing service bureau that their computer services will function
properly on and after January 1, 2000. A contingency plan, however, has been
developed by Home Federal in the unlikely event that our data processing service
does not function properly on or after January 1, 2000. This plan focuses on
conducting operations in a manual mode, including the recording of transactions
on ledger cards.
We have also received year 2000 updates from most of our material,
non-information system providers, including but not limited to security cameras,
credit card and ATM card processors, the vault alarm, check printers, telephone
systems, participation loan servicers, and institutions we invest through or
with. Based on these updates, we do not anticipate any significant year 2000
issues. We expect software upgrades and new personal computers to be installed
by our data processing servicer during March 1999. Our anticipated expenditure
on this equipment is approximately $17,000.
In addition to expenses related to our own systems, we could incur
losses if loan payments are delayed due to year 2000 problems affecting any of
our significant borrowers or impairing the payroll systems of large employers in
our market area. We have been communicating with our vendors to assess their
progress in evaluating their systems and implementing any corrective measures
required by them to be prepared for the year 2000. We have also sent year 2000
readiness request letters to certain borrowers. These borrowers were selected
based on the aggregate amounts owed to Home Federal, the type of loans
outstanding, and the perceived year 2000 risk based on our knowledge of the loan
customers and their operations. To date, we have not been advised by such
parties that they do not have plans in place to address and correct the issues
associated with the year 2000 problem; however, no assurance can be given as to
the adequacy of these plans or to the timeliness of their implementation.
Currently, due to the types of borrowers doing business with Home Federal and
the nature of our loans with these borrowers, we do not consider the year 2000
issue as part of our underwriting criteria.
13
<PAGE>
RECENT ACCOUNTING PRONOUNCEMENTS
FASB STATEMENT ON REPORTING COMPREHENSIVE INCOME. In June 1997, the
Financial Accounting Standards Board ("FASB") issued Statement of Financial
Accounting Standards ("SFAS") No. 130. SFAS No. 130 will require First Niles to
classify items of other comprehensive income by their nature in the financial
statements and display the accumulated balance of other comprehensive income
separately from retained earnings and additional paid-in capital in the equity
section of the statement of equity. SFAS No. 130 is effective for fiscal years
beginning after December 15, 1997. The adoption of this standard did not have a
material impact on First Niles' consolidated financial statements.
FASB STATEMENT ON EARNINGS PER SHARE. In March 1997, FASB issued SFAS
No. 128. SFAS No. 128 establishes standards for computing and presenting
earnings per share and applies to entities with publicly held common stock or
potential common stock. This statement simplifies the standards for computing
earnings per share previously found in Accounting Principles Board ("APB")
Opinion No. 15, Earnings per Share ("EPS"), and makes them comparable to
international EPS standards. It replaces the presentation of primary EPS with a
presentation of basic EPS. It also requires dual presentation of basic and
diluted EPS on the face of the income statement for all entities with complex
capital structures and requires a reconciliation of the numerator and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares outstanding for the period. Diluted EPS reflects the potential dilution
that could occur if securities or other contracts to issue common stock were
exercised or converted into common stock or resulted in the issuance of common
stock that then shared in the earnings of the entity. Diluted EPS is computed
similarly to fully diluted EPS pursuant to APB Opinion No. 15. SFAS No. 128
supersedes Opinion 15 and AICPA Accounting Interpretation 1-102 of Opinion 15.
This statement is effective for financial statements issued for periods ending
after December 15, 1997, including interim periods. The adoption of this
standard did not have a material impact on First Niles' consolidated financial
statements.
FASB STATEMENT ON DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. In
February 1997, the FASB issued SFAS No. 129. SFAS No. 129 incorporates the
disclosure requirements of APB Opinion No. 15, Earnings per Share, and makes
them applicable to all public and nonpublic entities that have issued securities
addressed by the Statement. APB Opinion No. 15 requires disclosure of
descriptive information about securities that is not necessarily related to the
computation of earnings per share. This statement continues the previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus Opinion- 1966, and No. 15, Earnings per
Share, and FASB Statement No. 47, Disclosure of Long-Term Obligations, for
entities that were subject to the requirements of those standards. SFAS No. 129
eliminates the exemption of nonpublic entities from certain disclosure
requirements of Opinion 15 as provided by FASB Statement No. 21, Suspension of
the Reporting of Earnings per Share and Segment Information by Nonpublic
Enterprises. It supersedes specific disclosure requirements of Opinions No. 10
and No. 15 and FASB Statement No. 47 and consolidates them in this Statement for
ease of retrieval and for greater visibility to nonpublic entities. FASB No. 129
is effective for financial statements for periods ending after December 15,
1997. The adoption of this standard did not have a material impact on First
Niles' consolidated financial statements.
14
<PAGE>
FASB STATEMENT ON DISCLOSURES ABOUT SEGMENTS OF AN ENTERPRISE AND
RELATED INFORMATION. In June 1997, the FASB issued SFAS No. 131. SFAS No. 131
establishes standards for the way public enterprises are to report information
about operating segments in annual financial statements and requires those
enterprises to report selected information about operating segments in interim
financial reports. SFAS No. 131 is effective for financial statements for
periods beginning after December 15, 1997. The adoption of this standard did not
have a material impact on First Niles' consolidated financial statements.
FASB STATEMENT ON EMPLOYERS' DISCLOSURES ABOUT PENSIONS AND OTHER
POST-RETIREMENT BENEFITS. In February 1998, the FASB issued SFAS No. 132. SFAS
NO. 132 revises employers' disclosures about pension and other post-retirement
benefit plans. SFAS No. 132 does not change the measurement or recognition of
those plans and is effective for fiscal years beginning after December 15, 1997.
The adoption of this standard did not have a material impact on First Niles'
consolidated financial statements.
FASB STATEMENT ON ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES. In June 1998, the FASB issued SFAS No. 133. SFAS NO. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts (collectively referred to as
derivatives), and for hedging activities. SFAS No. 133 requires that any entity
recognize all derivatives as either asset or liabilities in the statement of
financial position and measure those instruments at fair value and is effective
for all fiscal quarters of fiscal years beginning after June 15, 1999. First
Niles intends to adopt SFAS No. 133 on its effective date. The adoption of this
standard is not expected to have a material impact on First Niles' consolidated
financial statements.
IMPACT OF INFLATION AND CHANGING PRICES
The financial statements and related data presented herein have been
prepared in accordance with generally accepted accounting principles which
require the measurement of financial position and operating results in terms of
historical dollars without considering changes in the relative purchasing power
of money over time due to inflation. The primary impact of inflation on our
operations is reflected in increased operating costs. Unlike most industrial
companies, virtually all of the assets and liabilities of a financial
institution are monetary in nature. As a result, interest rates, generally, have
a more significant impact on a financial institution's performance than does
inflation. Interest rates do not necessarily move in the same direction or to
the same extent as the prices of goods and services.
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
First Niles and Home Federal may from time to time make written or oral
"forward-looking statements." These forward-looking statements may be contained
in this Annual Report to Shareholders, in our filings with the Securities and
Exchange Commission, including our Annual Report on Form 10-KSB and the exhibits
thereto, and in other communications by us, which are made in good faith
pursuant to the "safe harbor" provisions of the Private Securities Litigation
15
<PAGE>
Reform Act of 1995. The words "may", "could", "should", "would", "believe",
"anticipate", "estimate", "expect", "intend", "plan" and similar expressions are
intended to identify forward-looking statements.
Forward-looking statements include statements with respect to our
beliefs, plans, objectives, goals, expectations, anticipations, estimates and
intentions, that are subject to significant risks and uncertainties. The
following factors, many of which are subject to change based on various other
factors beyond our control, could cause our financial performance to differ
materially from the plans, objectives, expectations, estimates and intentions
expressed in such forward-looking statements:
o the strength of the United States economy in general and the
strength of the local economies in which we conduct our
operations;
o the effects of, and changes in, trade, monetary and fiscal
policies and laws, including interest rate policies of the
Federal Reserve Board;
o inflation, interest rate, market and monetary fluctuations;
o the timely development of and acceptance of new products and
services of Home Federal and the perceived overall value of
these products and services by users, including the features,
pricing and quality compared to competitors' products and
services;
o the willingness of users to substitute competitors' products and
services for our products and services;
o the success of Home Federal in gaining regulatory approval of
its products and services, when required;
o the impact of changes in financial services' laws and
regulations (including laws concerning taxes, banking,
securities and insurance);
o the impact of technological changes;
o acquisitions;
o changes in consumer spending and saving habits; and
o our success at managing the risks involved in the foregoing.
The foregoing list of important factors is not exclusive. We
incorporate by reference those risk factors included in First Niles'
Registration Statement on Form SB-2 (Reg. No. 333-58883) filed with the
Securities and Exchange Commission under the Securities Act of 1933. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of First Niles or Home Federal.
16
<PAGE>
ANNESS GERLACH & WILLIAMS 1275 BOARDMAN-CANFIELD ROAD
CERTIFIED PUBLIC ACCOUNTANTS P.O. Box 3827
(A PROFESSIONAL CORPORATION) YOUNGSTOWN, OHIO 44513
(330) 758-5716
FAX (330) 758-0703
REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS
Board of Directors
First Niles Financial, Inc.
Niles, Ohio
We have audited the consolidated statements of financial condition of
First Niles Financial, Inc. (formerly Home Federal Savings and Loan Association
of Niles) as of December 31, 1998 and 1997, and the related consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the period ended December 31, 1998. These financial
statements are the responsibility of the Company's management. Our
responsibility is to express an opinion on these financial statements based on
our audits.
We conducted our audits in accordance with generally accepted auditing
standards. Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement. An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements. An audit also includes
assessing the accounting principles used and significant estimates made by
management, as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.
In our opinion, the financial statements referred to above present
fairly, in all material respects, the consolidated financial position of First
Niles Financial, Inc. as of December 31, 1998 and 1997, and the consolidated
results of its operations and its cash flows for each of the years in the period
ended December 31, 1998, in conformity with generally accepted accounting
principles.
/s/ Anness Gerlach & Williams
Youngstown, Ohio
January 20, 1999
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands, except share data)
DECEMBER 31
--------------------
1998 1997
-------- --------
<S> <C> <C>
ASSETS
Cash and cash equivalents:
Noninterest bearing $ 995 $ 819
Interest bearing 16,129 4,057
-------- --------
Total cash and cash equivalents 17,124 4,876
Securities available for sale - at market 19,751 17,447
Securities to be held to maturity - at cost 12,432 12,359
Loans receivable 36,132 36,744
Accrued interest receivable 282 1
Federal Home Loan Bank stock, at cost 317 294
Real estate investment-limited partnership, at equity 383 426
Prepaid expenses and other assets 47 36
Prepaid federal income taxes -- 20
Premises and equipment, at cost less accumulated depreciation 256 294
-------- --------
TOTAL ASSETS $ 86,724 $ 72,497
======== ========
LIABILITIES
Deposits $ 54,837 $ 57,854
Accrued interest payable 110 127
Accounts payable and other liabilities 1,236 798
Note payable 300 400
Federal income tax payable 46 --
Deferred federal income tax liability 272 155
-------- --------
TOTAL LIABILITIES 56,801 59,334
STOCKHOLDERS' EQUITY
Stockholders' equity:
Preferred stock, $.01 par value, authorized 500,000 shares; none outstanding -- --
Common stock, $.01 par value, authorized 6,000,000 shares;
1,754,411 shares issued and outstanding 18 --
Additional paid-in capital 16,897 --
Retained earnings, substantially restricted 12,709 11,899
Accumulated other comprehensive income:
Net unrealized gains on securities available for sale, net of related tax
effects of $817 in 1998 and $651 in 1997 1,586 1,264
Common stock purchased by the Employee Stock Ownership Plan (1,287) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 29,923 13,163
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 86,724 $ 72,497
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
18
<PAGE>
CONSOLIDATED STATEMENTS OF INCOME
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
YEAR ENDED DECEMBER 31
----------------------
1998 1997
-------- -------
Interest income:
Loans receivable:
First mortgage loans $ 2,967 $ 2,851
Consumer and other loans 107 108
Mortgage-backed and related securities 767 665
Investments 963 1,170
Interest-bearing deposits 417 208
------- -------
TOTAL INTEREST INCOME 5,221 5,002
Interest expense:
Deposits 2,400 2,433
Borrowings 35 43
------- -------
TOTAL INTEREST EXPENSE 2,435 2,476
------- -------
NET INTEREST INCOME 2,786 2,526
Provision for (recoveries of) loan losses (103) 700
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 2,889 1,826
Noninterest income:
Gain on sale of securities 461 --
Service fees and other 26 27
------- -------
TOTAL NONINTEREST INCOME 487 27
Noninterest expense:
Equity in loss of limited partnership 43 38
General and administrative:
Compensation and benefits 1,689 831
Occupancy and equipment 89 81
Federal deposit insurance premiums 35 30
Other operating expense 434 400
------- -------
TOTAL NONINTEREST EXPENSE 2,290 1,380
------- -------
INCOME BEFORE INCOME TAXES 1,086 473
Federal income taxes 276 87
------- -------
NET INCOME $ 810 $ 386
======= =======
EARNINGS PER SHARE N/A N/A
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
Year Ended December 31
----------------------
1998 1997
------- -------
Net income $ 810 $ 386
Other comprehensive income:
Unrealized gains on securities:
Unrealized gains arising for year 948 930
Related income tax (322) (316)
------- -------
626 614
Reclassification adjustment:
Gain included in net income, net of $157 income tax (304) --
------- -------
Other comprehensive income 322 614
------- -------
COMPREHENSIVE INCOME $ 1,132 $ 1,000
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
20
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
(In thousands, except share data)
Net Common Stock
Common Stock Unrealized Purchased by
---------------------- Gains On Employee
Number Additional Securities Stock
of Shares Paid-in Retained Available Ownership
Outstanding Amount Capital Earnings for Sale Plan Total
----------- ------ ---------- -------- -------- ----------- -----
<S> <C> <C> <C> <C> <C> <C> <C>
Balance at January 1, 1997 -- $ -- $ -- $ 11,513 $ 650 $ -- $ 12,163
Net income for the year -- -- -- 386 -- -- 386
Change in unrealized gains in
securities available for sale -- -- -- -- 614 -- 614
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1997 -- -- -- 11,899 1,264 -- 13,163
Reorganization to common
stock form and issuance of
1,754,411 shares 1,754,411 18 16,884 -- -- (1,404) 15,498
Net income for the year -- -- -- 810 -- -- 810
Change in unrealized gains in
securities available for sale -- -- -- -- 626 -- 626
Less reclassification adjustment
for gain realized -- -- -- -- (304) -- (304)
Amortization of ESOP expense -- -- -- -- -- 117 117
Difference between average fair value
and cost per share of ESOP shares
committed to be released -- -- 13 -- -- -- 13
--------- --------- --------- --------- --------- --------- ---------
Balance at December 31, 1998 1,754,411 $ 18 $ 16,897 $ 12,709 $ 1,586 $ (1,287) $ 29,923
========= ========= ========= ========= ========= ========= =========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>
21
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
YEAR ENDED DECEMBER 31
------------------------
1998 1997
-------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
<S> <C> <C>
Net income $ 810 $ 386
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income taxes (49) (268)
Depreciation 49 50
Amortization of discounts and premiums on investments and
mortgage-backed and related securities (22) (32)
Gain on sale of securities (461) (4)
ESOP shares committed to be released 130 --
Equity in loss of limited partnership 43 38
Provision for (recoveries of) loan losses (103) 700
Income reinvested from asset mutual funds -- (510)
Federal Home Loan Bank stock dividends (23) (20)
Net (increase) decrease in accrued interest receivable and
prepaid expenses and other assets (272) 22
Net increase in accrued interest, accounts payable and
other liabilities 467 154
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 569 516
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 471 4,821
Purchase of securities available for sale (1,827) --
Proceeds from maturities of held to maturity securities -- 1,000
Proceeds from principal payments on mortgage-backed
and related securities 9,490 8,445
Purchase of mortgage-backed and related securities (9,540) (7,872)
Net increase in interest-bearing deposits with banks (12,072) (2,480)
Net (increase) decrease in loans 715 (4,260)
Additions to premises and equipment (11) (88)
-------- --------
NET CASH USED IN INVESTING ACTIVITIES (12,774) (434)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - net 15,498 --
Net decrease in savings accounts (1,609) (653)
Net increase (decrease) in certificates of deposit (1,408) 834
Repayment of note payable (100) (100)
-------- --------
NET CASH PROVIDED BY FINANCING ACTIVITIES 12,381 81
-------- --------
NET INCREASE IN CASH 176 163
CASH AT BEGINNING OF YEAR 819 656
-------- --------
CASH AT END OF YEAR $ 995 $ 819
======== ========
Cash paid during the period for:
Interest on deposits $ 2,416 $ 2,419
Income taxes $ 259 $ 351
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
On July 6, 1998, the Board of Directors of Home Federal Savings and
Loan Association of Niles (the "Association") adopted a Plan of Conversion (the
"Plan") whereby the Association would convert to the stock form of ownership,
followed by the issuance of all of the Association's outstanding stock to a
newly formed holding company, First Niles Financial, Inc. (the "Company").
Pursuant to the Plan, the Company offered common shares for sale to certain
depositors of the Association and members of the community. The conversion was
completed on October 26, 1998, and resulted in the issuance of 1,754,411 common
shares of the Company which, after consideration of offering expenses totaling
approximately $643,000, and share purchases by the Employee Stock Ownership Plan
("ESOP") totaling $1,404,000, resulted in net equity proceeds of $15.5 million.
Condensed financial statements of the Company are presented in Note M. Future
references are made either to the Company or the Association as applicable.
The Company is a savings and loan holding company whose activities are
primarily limited to holding the stock of the Association. The Association
conducts a general banking business in Niles, Ohio which consists of attracting
deposits from the general public and applying those funds to the origination of
loans for residential, consumer and nonresidential purposes. The Association's
profitability is significantly dependent on its net interest income, which is
the difference between interest income generated from interest-earning assets
(i.e. loans and investments) and the interest expense paid on interest-bearing
liabilities (i.e. customer deposits and borrowed funds). Net interest income is
affected by the relative amount of interest-earning assets and interest-bearing
liabilities and the interest received or paid on these balances. The level of
interest rates paid or received by the Association can be significantly
influenced by a number of environmental factors, such as governmental monetary
policy, that are outside of management's control.
The consolidated financial information presented herein has been
prepared in accordance with generally accepted accounting principles ("GAAP")
and general accounting practices within the financial services industry. In
preparing consolidated financial statements in accordance with GAAP, management
is required to make estimates and assumptions that affect the reported amounts
of assets and liabilities and the disclosure of contingent assets and
liabilities at the date of the financial statements and revenues and expenses
during the reporting period. Actual results could differ from such estimates.
The following is a summary of significant accounting policies which
have been consistently applied in the preparation of the accompanying financial
statements.
Principles of Consolidation:
The consolidated financial statements include the accounts of the
Company and the Association at December 31, 1998 and for the period October 26,
1998 through December 31, 1998. Prior to October 26, 1998, the consolidated
financial statements are those of the Association.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Investment Securities and Mortgage-Backed and Related Securities:
The Company accounts for investment securities and mortgage-backed and
related securities in accordance with Statement of Financial Accounting
Standards ("SFAS") No. 115, "Accounting for Certain Investments in Debt and
Equity Securities." SFAS No. 115 requires that investments be categorized as
held-to-maturity, trading or available for sale. Securities classified as
held-to- maturity are carried at cost only if the Association has the positive
intent and ability to hold these securities to maturity. Trading securities and
securities designated as available for sale are carried at fair value with
resulting unrealized gains or losses recorded to operations or equity,
respectively. At December 31, 1998 and 1997, the Company's equity accounts
reflected net unrealized gains of $1,586,000 and $1,264,000, respectively, on
securities designated as available for sale. Realized gains or losses on sales
of securities are recognized using the specific identification method.
Loans Receivable:
Loans held in portfolio are stated at the principal amount outstanding,
adjusted for the allowance for loan losses and unearned income. Interest is
accrued as earned, unless the collectibility of the loan is in doubt.
Uncollectible interest on loans that are contractually past due is charged off,
or an allowance is established based on management's periodic evaluation. The
allowance is established by a charge to interest income equal to all interest
previously accrued, and income is subsequently recognized only to the extent
that cash payments are received until, in management's judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in which case the loan is returned to accrual status. If the ultimate
collectibility of the loan is in doubt, in whole or in part, all payments
received on nonaccrual loans are applied to reduce principal until such doubt is
eliminated.
Loans held for sale are identified at origination and carried at the
lower of cost or market, determined in the aggregate. In computing cost,
deferred loan origination fees are deducted from the principal balance of the
related loan. At December 31, 1998 and 1997, there were no loans identified as
held for sale.
Loan Origination Fees and Costs:
The Association accounts for loan origination fees and costs in
accordance with SFAS No. 91, "Accounting for Nonrefundable Fees and Costs
Associated with Originating or Acquiring Loans and Initial Direct Costs of
Leases." Pursuant to the provisions of SFAS No. 91, all loan origination fees
received net of direct origination costs, are deferred and amortized to interest
income over the contractual lives of the loans using the level-yield method,
giving effect to actual loan prepayments. Additionally, SFAS No. 91 generally
limits the definition of loan origination costs to the direct costs attributable
to originating a loan.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Allowance for Losses on Loans:
It is the Association's policy to provide valuation allowances for
estimated losses on loans based on past loss experience, current trends in the
level of delinquent and specific problem loans, loan concentrations to single
borrowers, adverse situations that may affect the borrower's ability to repay,
the estimated value of any underlying collateral and current and anticipated
economic conditions in the primary market area. When the collection of a loan
becomes doubtful, or otherwise troubled, the Association records a loan loss
provision equal to the difference between the fair value of the property
securing the loan and the loan's carrying value. Major loans and major lending
areas are reviewed periodically to determine potential problems at an early
date. The allowance for loan losses is increased by charges to earnings and
decreased by charge-offs (net of recoveries).
The Association accounts for impaired loans in accordance with SFAS No.
114, "Accounting by Creditors for Impairment of a Loan." SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected future
cash flows discounted at the loan's effective interest rate or, as an
alternative, at the loan's observable market price or fair value of the
collateral.
A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the contractual terms of the loan agreement. In
applying the provisions of SFAS No. 114, the Association considers its
investment in one- to four-family residential loans and consumer installment
loans to be homogeneous and therefore excluded from separate identification for
evaluation of impairment. With respect to the Association's investment in
commercial real estate loans, and its evaluation of impairment thereof, such
loans are collateral dependent and, as a result, are carried as a practical
expedient at the lower of cost or fair value.
Loans which are more than ninety days delinquent are considered to
constitute more than a minimum delay in repayment and are evaluated for
impairment under SFAS No. 114 at that time.
The Association identified one loan at December 31, 1998, with a
carrying value of $648,000 and three loans at December 31, 1997 with a carrying
value of $1,062,000, which were considered impaired due to delinquent payments.
Accrual of interest on these loans has been suspended.
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Premises and Equipment:
Premises and equipment are recorded at cost and include expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred. For financial reporting, depreciation is
provided on the straight-line and accelerated methods over the estimated useful
lives of the assets, estimated to be forty to fifty years for buildings and
three to ten years for furniture and equipment.
Federal Income Taxes:
The Association accounts for federal income taxes pursuant to SFAS No.
109, "Accounting for Income Taxes." SFAS No. 109 established financial
accounting and reporting standards for the effects of income taxes that result
from the Association's activities within the current and previous years. In
accordance with SFAS No. 109, a deferred tax liability or deferred tax asset is
computed by applying the current statutory tax rates to net taxable or
deductible temporary differences between the tax basis of an asset or liability
and its reported amount in the financial statements that will result in net
taxable or deductible amounts in future periods. Deferred tax assets are
recorded only to the extent that the amount of net deductible temporary
differences or carryforward attributes may be utilized against current period
earnings, carried back against prior years' earnings, offset against taxable
temporary differences reversing in future periods, or utilized to the extent of
management's estimate of future taxable income. A valuation allowance is
provided for deferred tax assets to the extent that the value of net deductible
temporary differences and carryforward attributes exceeds management's estimates
of taxes payable on future taxable income. Deferred tax liabilities are provided
on the total amount of net temporary differences taxable in the future.
Deferral of income taxes results primarily from deferred compensation
accruals, Federal Home Loan Bank stock dividends, and book/tax differences in
the allowance for loan losses.
Cash and Cash Equivalents:
For purposes of reporting cash flows, cash includes noninterest bearing
cash which includes cash on hand and amounts due from correspondent banks.
Earnings Per Share:
Basic earnings per share is computed based upon the weighted-average
shares outstanding during the year less weighted-average shares in the ESOP that
are unallocated and not committed to be released.
Earnings per share is not presented for 1998 and 1997 as the Company
completed its conversion to stock form in October 1998.
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
Comprehensive Income:
The Company adopted SFAS No. 130, "Reporting Comprehensive Income," for
reporting periods as of January 1, 1997. The Statement establishes standards for
reporting and presentation of comprehensive income and its components in a full
set of general-purpose financial statements. It requires that all items that are
required to be recognized under accounting standards as components of
comprehensive income be reported in a financial statement that is presented with
the same prominence as other financial statements. SFAS No. 130 requires that
companies (i) classify terms of other comprehensive income by their nature in a
financial statement and (ii) display the accumulated balance of other
comprehensive income separately from retained earnings and additional paid-in
capital in the equity section of the statement of financial condition. Financial
statements for earlier periods have been reclassified for comparative purposes.
Recent Accounting Standards:
In June 1998, the FASB issued SFAS No. 133, "Accounting for Derivative
Instruments and Hedging Activities." This Statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts, (collectively referred to as
derivatives) and for hedging activities. It requires that any entity recognize
all derivatives as either assets or liabilities in the statement of financial
position and measure those instruments at fair value. If certain conditions are
met, a derivative may be specifically designated as (a) a hedge of the exposure
to changes in the fair value of a recognized asset or liability or an
unrecognized firm commitment, (b) a hedge of the exposure of variable cash flows
of a forecasted transaction, or (c) a hedge of the foreign currency exposure of
a net investment in a foreign operation, an unrecognized firm commitment, an
available-for-sale security, or a foreign-currency- denominated forecasted
transaction.
This Statement is effective for all fiscal quarters of fiscal years
beginning after June 15, 1999. Initial application of this Statement should be
as of the beginning of an entity's fiscal quarter; on that date, hedging
relationships must be designated anew and documented pursuant to the provisions
of the Statement. This Statement should not be applied retroactively to
financial statements of prior periods. Management does not believe that adoption
of this statement will have a material impact on the Company's financial
condition and results of operations.
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES
The amortized cost and estimated fair values of investment securities
are summarized as follows:
<TABLE>
<CAPTION>
December 31
--------------------------------------------------
1998 1997
----------------------- -----------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
FHLMC Common Stock $ 39 $ 2,577 $ 48 $ 2,085
Asset Management Funds:
Income Trust 5,668 5,624 5,668 5,602
ARMS 4,006 3,872 4,006 3,928
GNMA Trust 5,795 5,837 5,795 5,817
Corporate Bonds:
Due within one year 1,271 1,271 -- --
Due after one to ten years 555 555 -- --
Other 15 15 15 15
------- ------- ------- -------
TOTALS $17,349 $19,751 $15,532 $17,447
======= ======= ======= =======
</TABLE>
The amortized cost, gross unrelated gains, gross unrealized losses and
estimated fair values for mortgage-backed and related securities held to
maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1998
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity securities:
Mortgage-backed and related securities:
Government National Mortgage Association
participation certificates $ 27 $ -- $ 1 $ 26
Federal National Mortgage Association
collateralized mortgage obligations 6,292 9 22 6,279
Federal Home Loan Mortgage Corporation:
Participation certificates 60 1 7 54
Collateralized mortgage obligations 6,053 21 19 6,055
------- ------- ------- -------
TOTALS $12,432 $ 31 $ 49 $12,414
======= ======= ======= =======
</TABLE>
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1997
---------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Losses Value
--------- ---------- ---------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity securities:
Mortgage-backed and related securities:
Government National Mortgage Association
participation certificates $ 48 $ -- $ -- $ 48
Federal National Mortgage Association
collateralized mortgage obligations 8,482 6 12 8,476
Federal Home Loan Mortgage Corporation:
Participation certificates 92 -- 2 90
Collateralized mortgage obligations 3,737 9 25 3,721
------- ------- ------- -------
TOTALS $12,359 $ 15 $ 39 $12,335
======= ======= ======= =======
</TABLE>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
December 31
-------------------------
1998 1997
--------- --------
(In thousands)
Real estate mortgage (primarily one- to
four-family residential) $ 26,772 $ 29,777
Construction and development 5,104 4,231
Commercial real estate 5,042 4,603
Consumer and other 1,128 1,181
Loans on deposits 82 84
Loans in progress (1,212) (2,278)
-------- --------
36,916 37,598
Less allowance for loan losses 784 854
-------- --------
TOTALS $ 36,132 $ 36,744
======== ========
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE C - LOANS RECEIVABLE (CONTINUED)
In the ordinary course of business, the Association has granted loans
to some of the officers, directors and their related interests. Related party
loans are made on substantially the same terms, including interest rates and
collateral, as those prevailing at the time of comparable transactions with
unrelated persons and do not involve more than normal risk of collectibility.
The aggregate dollar amount of these loans was approximately $1.2 million and
$1.1 million at December 31, 1998 and 1997, respectively. During the year ended
December 31, 1998, loans of $159,000 were made to officers, directors and their
related interests while principal repayments of approximately $39,000 were
received from related parties.
The Association's lending efforts have historically focused on
one-to-four-family residential real estate loans and construction loans, which
comprise approximately $26.8 million, or 73%, of the total loan portfolio at
December 31, 1998, and $29.8 million, or 79% of the total portfolio at December
31, 1997. Historically, such loans have been conservatively underwritten with
cash down payments sufficient to provide the Association with adequate
collateral coverage in the event of default. Nevertheless, the Association, as
with any lending institution, is subject to the risk that real estate values or
economic conditions could deteriorate in its primary lending areas within Ohio,
thereby impairing collateral values. However, management is of the belief that
real estate values and economic conditions in the Association's primary lending
areas are presently stable.
The activity in the allowance for loan losses is summarized as follows:
December 31
-----------------
1998 1997
------ ------
(In thousands)
Balance at beginning of year $ 854 $ 301
Provision charged to operations (credit) (103) 700
Less loans charged off (21) (147)
Recovery 54 --
----- -----
BALANCE AT END OF YEAR $ 784 $ 854
===== =====
30
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE D - REAL ESTATE INVESTMENT - LIMITED PARTNERSHIP
In 1996, the Association acquired an interest in a limited partnership
formed to construct and operate multi-family housing units. Due to the ability
to exercise significant control over operations, the Association accounts for
the investment in the limited partnership using the equity method. Under the
terms of the limited partnership agreement, the Association has a total capital
contribution of $500,000 and is allocated tax losses and affordable housing
federal income tax credits based upon that investment.
The Association funded its partnership capital contribution through the
proceeds of a $500,000 term note payable to a bank in five annual installments
of $100,000 beginning November 15, 1997. The interest is payable semiannually
beginning May 15, 1997 and ending November 15, 2001, at a fixed rate of 8.875%.
The note payable is collateralized by ten membership shares of the limited
partnership.
Condensed financial information for the entire partnership is
summarized as of and for the years ended December 31, 1998 and 1997 as follows:
1998 1997
------ ------
(In thousands)
Balance Sheet:
Investment in real estate $4,945 $5,154
Total assets 5,086 5,274
Mortgage payable 2,874 2,891
Partners' equity 1,927 2,149
Operations:
Rental income 512 502
Net loss 222 235
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31
--------------------
1998 1997
---- ----
(In thousands)
Land $ 32 $ 32
Buildings 359 359
Furniture, equipment and vehicles 381 370
---- ----
772 761
Less accumulated depreciation 516 467
---- ----
TOTALS $256 $294
==== ====
NOTE F - DEPOSITS
A comparative summary of deposits is as follows:
<TABLE>
<CAPTION>
December 31
---------------------------------------------------
Weighted Average 1998 1997
Rate --------------------- ----------------------
At December 31, 1998 Amount Percent Amount Percent
------ ------- ------ -------
(In thousands)
<S> <C> <C> <C> <C> <C>
Savings:
Statement savings accounts 2.50% $ 194 -% $ 303 1%
Passbook savings accounts 2.50% 20,563 37% 21,980 38%
Christmas club 0.00% 6 -% 6 -%
Negotiable order of
withdrawal accounts 2.50% 3,081 6% 2,830 5%
Money market
deposit accounts 2.55% 3,811 7% 4,145 7%
------- ------- ------- -------
Total savings 27,655 50% 29,264 51%
Certificates of deposit:
Less than 1 year,
3.05% to 4.70% 4.40% 6,448 12% 8,784 15%
One to two years,
4.40% to 5.91% 5.17% 11,887 22% 12,877 22%
Over two years,
4.70% to 6.00% 5.66% 2,453 4% 2,767 5%
Jumbo - over $100,000 5.41% 3,284 6% 1,049 2%
IRA accounts, six months to
three years, 4.35% to 6.00% 5.34% 3,110 6% 3,113 5%
------- ------- ------- -------
Total certificates of deposit 27,182 50% 28,590 49%
------- ------- ------- -------
TOTAL DEPOSITS $54,837 100% $57,854 100%
======= ======= ======= =======
</TABLE>
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE F - DEPOSITS (CONTINUED)
Deposits in excess of $100,000 are not federally insured.
Scheduled maturities of certificates of deposit are as follows:
December 31
---------------------------
1998 1997
------- --------
(In thousands)
Within one year $22,649 $24,276
One to two years 3,841 2,941
Two to three years 692 1,373
------- -------
TOTALS $27,182 $28,590
======= =======
Interest expense on deposits is summarized as follows:
Year Ended December 31
------------------------
1998 1997
------ ------
(In thousands)
Passbook savings accounts $ 658 $ 663
Statement savings 8 10
Negotiable order of withdrawal accounts 92 88
Money market deposit accounts 121 133
Certificates of deposit 1,521 1,539
------ ------
TOTALS $2,400 $2,433
====== ======
NOTE G - FEDERAL INCOME TAXES
Income tax expense is summarized as follows:
Year Ended December 31
------------------------
1998 1997
------ ------
(In thousands)
Federal:
Current $ 325 $ 355
Deferred (49) (268)
----- -----
TOTALS $ 276 $ 87
===== =====
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE G - FEDERAL INCOME TAXES (CONTINUED)
The provision for federal income taxes on earnings differ from that
computed at the statutory rate of 34% is as follows:
Year Ended December 31
-------------------------
1998 1997
------ ------
(In thousands)
Federal taxes computed at statutory rate $ 369 $ 161
Decrease resulting from:
Limited partnership tax credits (89) (70)
Dividends received deduction (4) (4)
----- -----
FEDERAL INCOME TAX PROVISION $ 276 $ 87
===== =====
Effective federal income tax rate 25.4% 18.4%
===== =====
The composition of the Company's net deferred tax liability is as
follows:
December 31
-----------------
1998 1997
------ ------
(In thousands)
Taxes (payable) refundable on temporary differences
at the expected statutory rate:
Deferred tax liabilities:
Federal Home Loan Bank stock dividends $ (72) $ (64)
Unrealized gains on securities available for sale (817) (651)
----- -----
TOTAL DEFERRED TAX LIABILITIES (889) (715)
Deferred tax assets:
Deferred compensation 351 220
Allowance for loan losses 266 340
----- -----
TOTAL DEFERRED TAX ASSETS 617 560
----- -----
NET DEFERRED FEDERAL INCOME TAX LIABILITY $(272) $(155)
===== =====
Prior to 1996, the Association was allowed a special bad debt deduction
based on a percentage of earnings, generally limited to 8% of otherwise taxable
income, or the amount of qualifying and nonqualifying loans outstanding and
subject to certain limitations based on aggregate loans and savings account
balances at the end of the calendar year. The Association was subject to such
limitations during the year ended December 31, 1995, and, therefore, was
precluded from utilizing the percentage of earnings bad debt deduction. If the
amounts that qualified as deductions for federal income tax purposes are later
used for purposes other than for
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE G - FEDERAL INCOME TAXES (CONTINUED)
bad debt losses, including distributions in liquidation, such distributions will
be subject to federal income taxes at the then current corporate income tax
rate. Retained earnings at December 31, 1998, includes approximately $2.5
million for which federal income taxes have not been provided. The amount of the
unrecognized deferred tax liability relating to the cumulative percentage of
earnings bad debt deduction totaled approximately $863,000 at December 31, 1998.
See Note L for additional information regarding the Association's future bad
debt deductions.
NOTE H - EMPLOYEE RETIREMENT AND DEFERRED COMPENSATION PLANS
In conjunction with its reorganization to stock form in 1998, the
Company implemented an Employee Stock Ownership Plan ("ESOP"). The ESOP provides
retirement benefits for substantially all employees who have completed one year
of service and have attained the age of 21. The Company accounts for the ESOP in
accordance with Statement of Position ("SOP") 93-6, "Employers' Accounting for
Employee Stock Ownership Plans." SOP 93-6 requires the measure of compensation
expense recorded by employers to equal the fair value of ESOP shares allocated
to participants during a fiscal year. Expense recognized related to the ESOP
totaled $130,000 for 1998.
The Association has a noncontributory defined benefit pension plan
covering all eligible employees. Benefits are based on years of service and the
highest consecutive five-year average earnings preceding normal retirement date.
Plan assets consist of fully-insured retirement income life insurance policies
and cash deposit accounts. At plan years ended August 31, 1998 and 1997, the
plan asset values were $1,049,000 and $954,000, respectively, which approximates
the actuarially computed value of vested and nonvested benefits. The
Association's policy is to fund pension costs accrued. Pension costs totaled
approximately $33,000 for the years ended December 31, 1998 and 1997. In
November, 1998, the Board of Directors voted to terminate this plan effective
January 31, 1999 with all participants becoming 100% vested in the benefits
accrued. The termination will not result in further liability to the
Association.
The Directors of the Association had approved a non-qualified deferred
compensation plan for certain officers which provided for monthly retirement
benefits of specified amounts for each executive. The agreements had been
subject to annual renewal, however, the Directors elected to terminate this
agreement at the conclusion of the plan year ended August 31, 1998. In
conjunction with the termination, the officers were provided with an additional
twenty-four months of vesting, the cost of which has been included in 1998
operations. Accrued deferred compensation amounts are payable in a lump sum upon
the executive's death, disability, voluntary resignation, or termination by the
Association without cause. Deferred compensation expense was $384,000 and
$144,000 for the years ended December 31, 1998 and 1997, respectively.
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE I - COMMITMENTS AND CONTINGENCIES
The Association is a party to financial instruments with off-balance
sheet risk in the normal course of business to meet the financing needs of its
customers including commitments to extend credit. Such commitments involve, to
varying degrees, elements of credit and interest-rate risk in excess of the
amount recognized in the statement of financial position. The contract or
notional amounts of the commitments reflect the extent of the Association's
involvement in such financial instruments.
The Association's exposure to credit loss in the event of
nonperformance by the other party to the financial instrument for commitments to
extend credit is represented by the contractual notional amount of those
instruments. The Association uses the same credit policies in making commitments
and conditional obligations as those utilized for on-balance-sheet instruments.
At December 31, 1998, the Association had outstanding commitments of
approximately $2.1 million to originate fixed and variable rate residential real
estate loans. The average interest rate of loan commitments was 7.28% at
December 31, 1998. In the opinion of management, the outstanding loan
commitments equaled or exceeded prevalent market interest rates and such loans
were underwritten in accordance with normal underwriting policies, and all
commitments will be funded via cash flow from operations and existing excess
liquidity.
From time to time, and in the ordinary course of business, the
Association becomes a party to matters of litigation. In the opinion of the
Association's counsel, there are no claims, asserted or unasserted, the
resolution of which would have a material affect on the Association's
consolidated financial statements.
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated
fair values of financial instruments at December 31, 1998 and 1997. Items which
are not financial instruments are not included.
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1998 1997
----------------------- -----------------------
Estimated Fair Estimated
Carrying Fair Carrying Fair
Amounts Value Amounts Value
-------- --------- -------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Cash and equivalents $ 17,124 $ 17,124 $ 4,876 $ 4,876
Securities:
Available for sale 19,751 19,751 17,447 17,447
Held to maturity 12,432 12,414 12,359 12,335
Federal Home Loan Bank stock 317 317 294 294
Loans 36,132 36,479 36,744 36,957
Accrued interest receivable 282 282 1 1
Deposits:
Checking, savings and money market (27,655) (27,655) (29,264) (29,264)
Certificates of deposit (27,182) (27,254) (28,590) (28,984)
Accrued interest payable (110) (110) (127) (127)
Note payable (300) (300) (400) (400)
</TABLE>
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)
For purposes of the above disclosures of estimated fair value, the
following assumptions were used: the estimated fair value for cash and
equivalents, accrued interest and note payable was considered to approximate
cost; the estimated fair value for securities was based on quoted market values
for the individual securities or for equivalent securities; the estimated fair
value for loans was based on estimates of the rate the Association would charge
for similar loans at December 31, 1998 and 1997, respectively, applied over
estimated payment periods; the estimated fair value for demand and savings
deposits was based on their carrying value; the estimated fair value for
certificates of deposit was based on estimates of the rate the Company would pay
on such obligations at December 31, 1998 and 1997, respectively, applied for the
time period until maturity; and the estimated fair value of commitments was not
material. It was not practicable to estimate the fair value of a 17% partnership
interest in a non-traded real estate investment; that investment is carried at
equity of $383,000 and $426,000 at December 31, 1998 and 1997, respectively.
While these estimates of fair values are based on management's
judgment of appropriate factors, there is no assurance that, if the Company had
disposed of such items at December 31, 1998 or 1997, the estimated fair values
would necessarily have been achieved at that date, since market values may
differ depending on various circumstances. The estimated fair values at December
31, 1998 and 1997, should not necessarily be considered to apply at subsequent
dates.
In addition, other assets and liabilities of the Company that are not
defined as financial instruments were not included in the above disclosures,
such as property and equipment. Also, non-financial instruments typically not
recognized in financial statements (but which may have value) were not included
in the above disclosures. These include, among other items, the estimated
earning power of core deposit accounts, the value of a trained work force,
customer goodwill, and similar items.
NOTE K - REGULATORY CAPITAL
The Association is subject to the regulatory capital requirements
promulgated by the Office of Thrift Supervision (OTS). 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 Association's financial statements. Under capital
adequacy guidelines and the regulatory framework for prompt corrective action,
the Association must meet specific capital guidelines that involve quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory accounting practices. The Association's
capital amounts and classification are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors.
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE K - REGULATORY CAPITAL (CONTINUED)
The OTS has adopted risk-based capital ratio guidelines to which the
Association is subject. The guidelines establish a systematic analytical
framework that makes regulatory capital requirements more sensitive to
differences in risk profiles among banking organizations. Risk-based capital
ratios are determined by allocating assets and specified off-balance sheet
commitments to four risk-weighting categories, with higher levels of capital
being required for the categories perceived as representing greater risk.
These guidelines divide the capital into two tiers. The first tier
("Tier 1") includes common equity, certain non-cumulative perpetual preferred
stock (excluding auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries, less goodwill and certain other intangible assets
(except mortgage servicing rights and purchased credit card relationships,
subject to certain limitations). Supplementary ("Tier II") capital includes,
among other items, cumulative perpetual and long-term limited-life preferred
stock, mandatory convertible securities, certain hybrid capital instruments,
term subordinated debt and the allowance for loan losses, subject to certain
limitations, less required deductions. Savings associations are required to
maintain a total risk-based capital ratio of 8%, of which 4% must be Tier 1
capital. The OTS may, however, set higher capital requirements when particular
circumstances warrant. Savings associations experiencing or anticipating
significant growth are expected to maintain capital ratios, including tangible
OTS capital positions, well above the minimum levels.
In addition, the OTS established guidelines prescribing a minimum
Tier 1 leverage ratio (Tier 1 capital to adjusted total assets as specified in
the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings associations that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or anticipating
significant growth. All other banks are required to maintain a Tier 1 leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.
As of December 31, 1998 and 1997, management believes that the
Association met all capital adequacy requirements to which the Association was
subject.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE K - REGULATORY CAPITAL (CONTINUED)
<TABLE>
<CAPTION>
As of December 31, 1998
------------------------------------------------------------------------------------
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------ ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
<S> <C> <C> <C> <C> <C> <C>
Total capital
(to risk-weighted assets) $22,758 55.3% >=$3,291 >=8.0% >=$ 4,114 >=10.0%
Tier 1 capital
(to risk-weighted assets) $21,159 51.4% * * >=$ 2,468 >= 6.0%
Core (Tier 1) capital
(to adjusted total assets) $21,159 27.0% >=$2,354 >=3.0% >=$ 3,923 >= 5.0%
Tangible capital
(to adjusted total assets) $21,159 27.0% >=$1,177 >=1.5% * *
* Ratio not required under regulations.
As of December 31, 1997
------------------------------------------------------------------------------------
To be "well-
capitalized" under
For capital prompt corrective
Actual adequacy purposes action provisions
------------------ ---------------------- ----------------------
Amount Ratio Amount Ratio Amount Ratio
------ ----- ------ ----- ------ -----
(Dollars in thousands)
Total capital
(to risk-weighted assets) $12,392 31.4% >=$3,158 >=8.0% >=$3,948 >=10.0%
Tier 1 capital
(to risk-weighted assets) $11,899 30.1% * * >=$2,369 >= 6.0%
Core (Tier 1) capital
(to adjusted total assets) $11,899 16.7% >=$2,137 >=3.0% >=$3,561 >= 5.0%
Tangible capital
(to adjusted total assets) $11,899 16.7% >=$1,068 >=1.5% * *
* Ratio not required under regulations.
</TABLE>
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE K - REGULATORY CAPITAL (CONTINUED)
The following is a reconciliation of the Association's equity
reported in the consolidated financial statements under generally accepted
accounting principles to regulatory capital, as determined under OTS,
requirements.
<TABLE>
<CAPTION>
Core
Tangible (Tier 1) Risk-based
Capital Capital Capital
------- ------- -------
(In thousands)
<S> <C> <C> <C>
December 31, 1998:
Total equity of the Association $ 22,745 $ 22,745 $ 22,745
General allowance for loan losses -- -- 518
Limitation on gross unrealized gain on available
for sale securities -- -- (505)
Net unrealized gain on available for sale securities (1,586) (1,586) --
-------- -------- --------
Regulatory Capital $ 21,159 $ 21,159 $ 22,758
======== ======== ========
December 31, 1997:
Total equity of the Association $ 13,163 $ 13,163 $ 13,163
General allowance for loan losses -- -- 493
Net unrealized gain on available for sale securities (1,264) (1,264) (1,264)
-------- -------- --------
Regulatory Capital $ 11,899 $ 11,899 $ 12,392
======== ======== ========
</TABLE>
The Company may not declare or pay cash dividends on its shares of
common stock if the effect thereof would cause stockholders' equity to be
reduced below applicable regulatory capital maintenance requirements or if such
declaration and payment would otherwise violate regulatory requirements. At
December 31, 1998, approximately $9.3 million of the Company's retained earnings
was available to pay dividends to stockholders or to be used for other corporate
purposes.
NOTE L - LEGISLATIVE MATTERS
The deposit accounts of the Association and of other savings
associations are insured by the Federal Deposit Insurance Corporation ("FDIC")
through the Savings Association Insurance Fund ("SAIF"). The reserves of the
SAIF were below the level required by law, because a significant portion of the
assessments paid into the fund are used to pay the cost of prior thrift
failures. The deposit accounts of commercial banks are insured by the FDIC in
the Bank Insurance Fund ("BIF"), except to the extent such banks have acquired
SAIF deposits. The reserves of the BIF met the level required by law in May,
1995. As a result of the respective reserve levels of the funds, deposit
insurance assessments paid by healthy savings associations exceeded those paid
by healthy commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996, no BIF assessments were required for healthy commercial banks except
for a $2,000 minimum fee.
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE L - LEGISLATIVE MATTERS (CONTINUED)
During 1996, legislation was enacted to recapitalize the SAIF which
provided for a special assessment of $.657 per $100 of SAIF deposits held at
March 31, 1995. The Association had $58.0 million in deposits at March 31, 1995,
resulting in an assessment of $378,000, or $249,000 after-tax, which was
recorded during 1996.
A component of the recapitalization plan provides for the merger of
the SAIF and BIF on January 1, 2000, assuming the elimination of the thrift
charter or of the separate federal regulation of thrifts prior to the merger of
the deposit insurance funds. This legislation would require the Association to
be regulated as a bank under federal laws which would subject it to the more
restrictive activity limits imposed on national banks. In the opinion of
management, such restrictions would not materially affect the Association's
operations.
Under separate legislation related to the recapitalization plan, the
Association is required to recapture as taxable income any additions to its bad
debt reserve which were added after 1987 and is unable to utilize the percentage
of earnings method to compute its reserve in the future. However, the
Association has not made any additions to its bad debt reserve post-1987.
NOTE M - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
The following condensed financial statements summarize the financial
position of First Niles Financial, Inc. as of December 31, 1998, and the results
of its operations and its cash flows for the period October 26, 1998 (date
operations commenced) through December 31, 1998.
First Niles Financial, Inc.
STATEMENT OF FINANCIAL CONDITION
December 31, 1998
(In thousands)
ASSETS
Cash and cash equivalents:
Noninterest bearing $ 15
Interest bearing 5,404
-------
5,419
Securities available for sale 1,826
Investment in Home Federal Savings and
Loan Association of Niles 22,745
Accrued interest and prepaid expense 20
-------
TOTALS ASSETS $30,010
=======
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
(CONTINUED)
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to Home Federal Savings and
Loan Association of Niles $ 82
Accrued tax 5
--------
TOTAL LIABILITIES 87
Stockholders' equity:
Common Stock 18
Additional Paid-in Capital 16,897
Retained Earnings 12,709
Net unrealized gains on securities available for sale 1,586
Common stock purchased by the Employee Stock
Ownership Plan (1,287)
--------
TOTAL STOCKHOLDERS' EQUITY 29,923
--------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 30,010
========
First Niles Financial, Inc.
CONDENSED STATEMENT OF INCOME
For the period October 26, 1998
through December 31, 1998
(In thousands)
Revenue:
Equity in earnings of subsidiary $272
Interest income 61
----
TOTAL REVENUE 333
General and administrative expenses 60
----
INCOME BEFORE INCOME TAXES 273
Income taxes --
----
NET INCOME $273
====
42
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE M - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
(CONTINUED)
First Niles Financial, Inc.
CONDENSED STATEMENT OF CASH FLOWS
For the period October 26, 1998
through December 31, 1998
(In thousands)
Cash flows provided by operating activities:
Net income for the period $ 273
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of consolidated subsidiary (272)
Amortization of premium on securities available for sale 1
Increase in accrued interest and prepaid expenses (20)
Increase in accounts payable and accrued tax 87
--------
NET CASH PROVIDED BY OPERATING ACTIVITIES 69
Cash flows used in investing activities:
Investment in subsidiary (8,451)
Purchase of securities designated as available for sale (1,827)
Interest bearing cash account (5,404)
--------
NET CASH USED IN INVESTING ACTIVITIES (15,682)
Cash flows provided by financing activities:
Net proceeds from issuance of common stock 15,498
Proceeds from subsidiary for Employee Stock
Ownership Plan shares 130
-------
NET CASH PROVIDED BY FINANCING ACTIVITIES 15,628
NET INCREASE IN CASH 15
Cash and cash equivalents at beginning of period --
--------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 15
========
43
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1998 and 1997
NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM
On July 6, 1998, the Association's Board of Directors adopted a Plan
of Conversion whereby the Association would convert to the stock form of
ownership, followed by the issuance of all of the Association's outstanding
common stock to a newly formed holding company, First Niles Financial, Inc.
On October 26, 1998, the Association completed its conversion to the
stock form of ownership, and issued all of the Association's outstanding common
shares to the Company.
In connection with the conversion, the Company sold 1,754,411 shares
at a price of $10.00 per share which, after consideration of offering expenses
totaling approximately $643,000, and shares purchased by the ESOP totaling
$1,404,000, resulted in net equity proceeds of approximately $15.5 million.
At the date of the conversion, the Association established a
liquidation account in an amount equal to retained earnings reflected in the
statement of financial condition used in the conversion offering circular. The
liquidation account will be maintained for the benefit of eligible savings
account holders who maintained deposit accounts in the Association after
conversion. In the event of a complete liquidation (and only in such event),
each eligible savings account holder will be entitled to receive a liquidation
distribution from the liquidation account in the amount of the then current
adjusted balance of deposit accounts held, before any liquidation distribution
may be made with respect to common stock. Except for the repurchase of stock and
payment of dividends by the Association, the existence of the liquidation
account will not restrict the use or application of such retained earnings. The
Association may not declare, pay a cash dividend on, or repurchase any of its
common stock, if the effect thereof would cause retained earnings to be reduced
below either the amount required for the liquidation account or the regulatory
capital requirements for SAIF insured institutions.
44
<PAGE>
FIRST NILES FINANCIAL, INC.
SHAREHOLDER INFORMATION
- --------------------------------------------------------------------------------
ANNUAL MEETING
The annual meeting of shareholders will be held at 2:00 P.M. local time,
WEDNESDAY, APRIL 21, 1999, at the main office of First Niles, located at 55
North Main Street, Niles, Ohio.
COMMON STOCK AND DIVIDENDS
First Niles Financial, Inc.'s common stock trades on The Nasdaq SmallCap Market
under the symbol "FNFI". At December 31, 1998, there were 1,754,411 shares of
common stock issued and outstanding and 572 shareholders of record.
The table below presents the quarterly range of high and low bid prices of First
Niles' common stock since becoming a public company on October 26, 1998. The
price information set forth in the table below was provided by the Nasdaq Stock
Market. Such information reflects interdealer prices, without retail mark-up,
mark-down or commission and therefore may not represent actual transactions.
1998
---------------------
HIGH LOW
Fourth Quarter (since October 26, 1998)............. $12.00 $9.00
Dividend payment decisions are made with consideration of a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. At December 31, 1998, First Niles had not paid any dividends to
date. On February 22, 1999, First Niles Financial, Inc. declared a $.07 cash
dividend payable on March 26, 1999 to shareholders of record on March 12, 1999.
Restrictions on dividend payments are described in Note K of the Notes to
Consolidated Financial Statements included in this Annual Report.
SHAREHOLDER AND GENERAL INQUIRIES TRANSFER AGENT
Lawrence Safarek, Vice President Fifth Third Bank
First Niles Financial, Inc. Corporate Trust Services
55 North Main Street Mail Drop 10AT66
Niles, Ohio 44446 38 Fountain Square Plaza
(330) 652-2539 Cincinnati, Ohio 45263
(800) 837-2755 (toll free)
(513) 579-5320 (local)
ANNUAL AND OTHER REPORTS
You may obtain First Niles' Annual Report on Form 10-KSB and other information
by writing or calling: First Niles Financial, Inc. Investor Relations, Attn:
Lawrence Safarek, Vice President and Treasurer, 55 North Main Street, Niles,
Ohio 44446: (330) 652-2539.
45
<PAGE>
<TABLE>
<CAPTION>
FIRST NILES FINANCIAL, INC.
CORPORATE INFORMATION
- --------------------------------------------------------------------------------------------------------------
COMPANY AND BANK ADDRESS
55 North Main Street Telephone: (330) 652-2539
Niles, Ohio 44446 Fax: (330) 652-0911
<S> <C>
BOARD OF DIRECTORS EXECUTIVE OFFICERS
WILLIAM L. STEPHENS WILLIAM L. STEPHENS
CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
OFFICER OF FIRST NILES FINANCIAL, INC. AND OFFICER OF FIRST NILES FINANCIAL, INC. AND
HOME FEDERAL SAVINGS AND LOAN HOME FEDERAL SAVINGS AND LOAN
ASSOCIATION OF NILES ASSOCIATION OF NILES
GEORGE J. SWIFT GEORGE J. SWIFT
VICE PRESIDENT AND SECRETARY OF FIRST NILES VICE PRESIDENT AND SECRETARY OF FIRST NILES
FINANCIAL, INC. AND HOME FEDERAL SAVINGS FINANCIAL, INC. AND HOME FEDERAL SAVINGS
AND LOAN ASSOCIATION OF NILES AND LOAN ASSOCIATION OF NILES
P. JAMES KRAMER LAWRENCE SAFAREK
PRESIDENT, WILLIAM KRAMER & SON VICE PRESIDENT AND TREASURER OF FIRST NILES
FINANCIAL, INC. AND HOME FEDERAL SAVINGS
HORACE L. MCLEAN AND LOAN ASSOCIATION OF NILES
PRESIDENT, MCLEAN ENGINEERING, INC.
RALPH A. ZUZOLO, SR.
PARTNER, LAW FIRM OF ZUZOLO, ZUZOLO
& ZUZOLO
INDEPENDENT AUDITORS SPECIAL COUNSEL
ANNESS, GERLACH & WILLIAMS, SILVER, FREEDMAN & TAFF, L.L.P.
a Professional Corporation 1100 New York Avenue, N.W.
Certified Public Accountants Seventh Floor, East Tower
1275 Boardman-Canfield Road Washington, D.C. 20005
Youngstown, Ohio 44513
</TABLE>
46
Exhibit 21
<TABLE>
<CAPTION>
SUBSIDIARIES OF THE REGISTRANT
Subsidiary State of
Percent of Incorporation or
Parent Subsidiary Ownership Organization
--------------------------- ------------------------- ---------- -------------------
<S> <C> <C> <C>
First Niles Financial, Inc. Home Federal Savings and 100% Federal
Loan Association of Niles
</TABLE>
<TABLE> <S> <C>
<ARTICLE> 9
<LEGEND>
THE SCHEDULE CONTAINS SUMMARY FINANCIAL INFORMATION EXTRACTED FROM THE ANNUAL
REPORT ON FORM 10-KSB FOR THE FISCAL YEAR ENDED DECEMBER 31, 1998 AND IS
QUALIFIED IN ITS ENTIRETY BY REFERENCE TO SUCH FINANCIAL STATEMENTS.
</LEGEND>
<MULTIPLIER> 1000
<S> <C>
<PERIOD-TYPE> 12-MOS
<FISCAL-YEAR-END> Dec-31-1998
<PERIOD-END> Dec-31-1998
<CASH> 995
<INT-BEARING-DEPOSITS> 6,904
<FED-FUNDS-SOLD> 9,225
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 19,751
<INVESTMENTS-CARRYING> 12,432
<INVESTMENTS-MARKET> 12,414
<LOANS> 36,916
<ALLOWANCE> 784
<TOTAL-ASSETS> 86,724
<DEPOSITS> 54,837
<SHORT-TERM> 300
<LIABILITIES-OTHER> 1,664
<LONG-TERM> 0
<COMMON> 18
0
0
<OTHER-SE> 29,905
<TOTAL-LIABILITIES-AND-EQUITY> 86,724
<INTEREST-LOAN> 3,074
<INTEREST-INVEST> 1,730
<INTEREST-OTHER> 417
<INTEREST-TOTAL> 5,221
<INTEREST-DEPOSIT> 2,400
<INTEREST-EXPENSE> 2,435
<INTEREST-INCOME-NET> 2,786
<LOAN-LOSSES> (103)
<SECURITIES-GAINS> 461
<EXPENSE-OTHER> 2,290
<INCOME-PRETAX> 1,086
<INCOME-PRE-EXTRAORDINARY> 810
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 810
<EPS-PRIMARY> 0
<EPS-DILUTED> 0
<YIELD-ACTUAL> 6.89
<LOANS-NON> 648
<LOANS-PAST> 307
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 1,028
<ALLOWANCE-OPEN> 854
<CHARGE-OFFS> 21
<RECOVERIES> 54
<ALLOWANCE-CLOSE> 784
<ALLOWANCE-DOMESTIC> 297
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 487
</TABLE>
