SEE ACCOMPANYING NOTES AND ACCOUNTANTS' REPORT.

SEE ACCOMPANYING NOTES AND ACCOUNTANTS' REPORT.

SEE ACCOMPANYING NOTES AND ACCOUNTANTS' REPORT.

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies followed by First Niles are in accordance with generally accepted accounting principles and conform to general practices within the savings and loan industry.

The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-QSB and, therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with generally accepted accounting principles. Management believes that all normal recurring adjustments that are necessary for a fair presentation of interim period financial information have been reflected in these financial statements.

NOTE B -- STOCK CONVERSION

On October 26, 1998, First Niles began trading as a public company on the Nasdaq SmallCap Market. First Niles issued 1,754,411 shares, $.01 par value 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. Home Federal Savings and Loan Association of Niles converted to a federal stock savings and loan association and simultaneously received proceeds of $8.5 million in exchange for all of its common stock to First Niles. This transaction was accounted for using historical cost in a manner similar to that in a pooling of interests.

NOTE C -- EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average shares outstanding, which exclude treasury shares, less weighted-average shares in the ESOP that are unallocated and committed to be released. The following table sets forth the computation of basic earnings per share for the three and nine month periods ended September 30, 2000 (income in thousands):

To the Board of Directors and Stockholders
  of First Niles Financial, Inc.
Niles, Ohio

       We have reviewed the accompanying consolidated statement of financial condition of First Niles Financial, Inc. and its subsidiary as of September 30, 2000, the related consolidated statements of income for the three-month and nine-month periods then ended, and the related consolidated statements of comprehensive income and cash flows for the nine-month period then ended. These financial statements are the responsibility of the Company's management.

       We conducted our review in accordance with standards established by the American Institute of Certified Public Accountants. A review of interim financial information consists principally of applying analytical procedures to financial data and of making inquiries of persons responsible for financial and accounting matters. It is substantially less in scope than an audit conducted in accordance with generally accepted auditing standards, the objective of which is the expression of an opinion regarding the financial statements taken as a whole. Accordingly, we do not express such an opinion.

       Based on our review, we are not aware of any material modifications that should be made to the accompanying financial statements for them to be in conformity with generally accepted accounting principles.

       We have previously audited, in accordance with generally accepted auditing standards, the consolidated balance sheet of First Niles Financial, Inc. and its subsidiary as of December 31, 1999, and the related consolidated statements of income, stockholders' equity, and cash flows for the year then ended (not presented herein); and in our report dated January 24, 2000, we expressed an unqualified opinion on those consolidated financial statements.

       The accompanying consolidated statements of income for the three-month and nine-month periods ended September 30, 1999 and the related consolidated statements of comprehensive income and cash flows for the nine-month period then ended have not been audited, reviewed, or compiled by us and, accordingly, we assume no responsibility for them.

General

First Niles Financial, Inc., a Delaware corporation, was formed in July 1998 to act as the holding company for Home Federal Saving and Loan Association of Niles upon the completion of Home Federal's 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-QSB to "we", "us", and "our" refer to First Niles and/or Home Federal as the context requires.

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.

The following discussion compares our consolidated financial condition at September 30, 2000 and December 31, 1999 and the results of operations for the three month and nine month periods ended September 30, 2000 with the three month and nine month periods ended September 30, 1999. This discussion should be read in conjunction with the consolidated financial statements and footnotes included herein.

Changes in Financial Condition from December 31, 1999 to September 30, 2000

Total assets decreased by $7.2 million, or 8.9%, to $73.3 million at September 30, 2000 from $80.4 million at December 31, 1999. The decrease in cash and cash equivalents of $3.8 million was primarily attributable to the repayment of borrowings totaling $6.0 million. Additionally, total securities decreased $2.2 million and loans receivable decreased $1.0 million. These additional asset reductions also assisted in the repayment of the remaining borrowings and provided funds for the decrease in deposits, repurchases of our common stock and payment of cash dividends to our shareholders.

The decline in assets was related to a $6.9 million decrease in total liabilities and a $303,000 decrease in total equity. Deposits decreased by $889,000, or 1.6% in the first nine months of 2000. The decline in savings accounts, money market deposit accounts and NOW accounts during the first nine months of 2000 was $2.5 million. This decline was partially offset by an increase in certificates of deposit of $1.6 million during the first nine months of 2000. Accrued interest payable and accounts payable and other liabilities increased $33,000 during the first nine months of 2000.

Total equity at September 30, 2000 was $18.2 million, a $303,000, or 1.6% decrease from December 31, 1999. The decrease in total equity, was primarily the result of an $814,000 increase in treasury stock, and the payment of $447,000 in common stock dividends, partially offset by $395,000 in net income, a $292,000 increase in net unrealized gains on securities available for sale, and a $264,000 reduction in unearned compensation. The reduction in unearned compensation was a direct result of stock awards granted during the first quarter of 2000, pursuant to our Recognition and Retention Plan, as approved by shareholders. First Niles repurchased 77,300 shares of its common stock in theh open market during the nine months ended September 30, 2000 at an average price of $10.53 per share. Book value per share was $10.99 at September 30, 2000, compared to $10.70 at December 31, 1999. At September 30, 2000 there were 1,652,549 shares of First Niles common stock outstanding as compared to 1,729,848 shares outstanding at December 31, 1999.

Nonperforming assets, consisting of nonaccruing loans and loans delinquent more than 90 days, totaled $648,000 at September 30, 2000, or 1.8% of net loans receivable and 0.9% of total assets compared to $826,000, or 2.2% of net loans receivable and 1.0% of total assets as of December 31, 1999. The allowance for loan losses was $579,000 at September 30, 2000, representing coverage of 89.4% of non-performing assets and 1.4% of net loans receivable. At December 31, 1999, the allowance for loan losses totaled $549,000, or 66.4% of non-performing loans and 1.5% of net loans receivable. We did not have any foreclosed or repossessed assets as of either date discussed above.

Results of Operations for the Three-Month Period Ended September 30, 2000 and September 30, 1999

General. Our results of operations depend primarily on our net interest income, which is determined by (i) the difference between interest earned on interest-earning assets, consisting primarily of mortgage loans, collateralized mortgage obligations, other investments and interest-earning deposits in other institutions, and interest expense on interest-bearing liabilities, primarily deposits 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 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.

Net Income. For the three months ended September 30, 2000 First Niles recorded net income of $190,000, resulting in an annualized return on average assets for the period of 1.03% compared to 1.45% in the same period one year prior. The annualized return on average shareholders' equity for the three months ended September 30, 2000 was 4.25% compared to 4.22% in the three months ended September 30, 1999. Net income decreased by $119,000, or 38.5%, for the three months ended September 30, 2000 as compared to the respective 1999 period. The decrease in net income for the aforementioned comparative periods was primarily comprised of a $162,000 decrease in net interest income, and a $33,000 increase in noninterest expense, partially offset by a $9,000 increase in non-interest income and a $67,000 decrease in federal income tax expense. The decrease in net income for the three months ended September 30, 2000 as compared to same period in 1999 was primarily attributable to a decrease in earning assets related to a $10.2 million return of capital paid to shareholders during the fourth quarter of 1999, an increase in the cost of deposits, related to rising market interest rates, and moderately increased non-interest expense. Earnings per share for the three months ended September 30, 2000 was $0.12, compared to $0.20 for the three months ended September 30, 1999.

Net Interest Income. Net interest income decreased by $162,000, or 18.4%, for the three month period ended September 30, 2000 as compared to the respective 1999 period. For the three months ended September 30, 2000 total interest income decreased by $107,000 and total interest expense increased by $55,000 as compared to the same period in 1999. For the three months ended September 30, 2000 the interest rate spread was 3.03% and the net interest margin was 4.01%. For the three months ended September 30, 2000 the yield on interest earning assets was 7.01% and the overall cost of funds was 3.98%. The decline in net interest income was primarily attributable to a decrease in earning assets related to the $10.2 million return of capital paid to shareholders during the fourth quarter of 1999. The yield on earning assets actually increased 42 basis points from the 1999 to 2000 comparative periods. The primary reason for the increase in interest expense for the current compared to the prior three month period is the general rise in market interest rates experienced during this time. For the three months ended September 30, 1999 the Association's cost of funds was 3.59%

Provision for Loan Losses. There was no provision for loan losses in the quarter ended September 30, 2000 or for the quarter ended September 30, 1999.

Noninterest Income. Noninterest income of $17,000 for the three months ended September 30, 2000 was $9,000, or 112.5% higher than during the same period in 1999. This increase was the result of interest earned on the refund of overpaid Ohio franchise taxes.

Noninterest Expense. Noninterest expense increased $33,000, or 7.4% for the three months ended September 30, 2000 as compared to the same period in 1999. A $39,000 increase in the expenses related to our equity investment in a limited partnership as compared to the same quarter one year prior was essentially the reason for the increase in noninterest expense. Without this item, noninterest expense would have been slightly less than it was in the same period one year prior.

Federal Income Taxes. The provision for federal income taxes decreased by $67,000 for the three months ended September 30, 2000 as compared to the same period in 1999, primarily due to an decrease in pre-tax income of $186,000. The effective tax rate was 25.2% in the current three month period. For the three months ended September 30, 1999 the effective tax rate was 29.8%.

Results of Operations for the Nine-Month Periods Ended September 30, 2000 and September 30, 1999

Net Income. First Niles recorded net income of $395,000 for the nine months ended September 30, 2000. This net income resulted in an annualized return on average assets for the nine-month period of 0.71% and an annualized return on average shareholders equity of 2.93%. Net income decreased by $525,000, or 57.1% for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999. The decrease in net income for the nine months ended September 30, 2000 as compared to the nine months ended September 30, 1999 was comprised of a $419,000 decrease in net interest income, a $256,000 increase in noninterest expense, a $102,000 decrease in noninterest income, and a $30,000 increase in the provision for loan losses, partially offset by a $282,000 decrease in federal income tax expense. The decrease in earnings for the comparative nine month periods was primarily attributable to the factors described above for the comparative three month periods, as well as a $287,000 expense incurred during the first quarter of 2000 as a result of the vesting of restricted share awards granted under the Company's Recognition and Retention Plan in December 1999, a decrease in noninterest income and an increase in the provision for loan losses. Earnings per share for the nine months ended September 30, 2000 was $0.26 compared to $0.57 for the nine months ended September 30, 1999.

Net Interest Income.Net interest income decreased by $419,000, or 16.1%, for the nine months ended September 30, 2000 as compared to the respective 1999 period. For the nine months ended September 30, 2000 total interest income decreased by $265,000, or 6.5%, as compared to the same period one year prior. Total interest expense increased by $154,000, or 10.4%, as compared to the same period in 1999. For the nine months ended September 30, 2000 the interest rate spread was 3.04% and the net interest margin was 3.99%. For the nine months ended September 30, 2000 the yield on interest earning assets was 6.97% and the overall cost of funds was 3.93%. The primary reason for the decline in interest income was a reduction in earning assets related to the $10.2 million return of capital paid to shareholders during the fourth quarter of 1999.

The increase in interest expense for the nine month period ended September 30, 2000 was the cost of carrying a relatively high cost, temporary borrowing from another financial institution during the first five months of 2000, rising market interest rates on deposits and the shifting from savings and NOW accounts to certificates of deposit by our customers. The aforementioned borrowing, obtained at a fixed interest rate of 7.5%, was used to facilitate the payment of the return of capital as referred to above. During the first nine months of 2000 the average cost of certificates of deposits for Home Federal rose from 4.86% to 5.53%, an increase of 67 basis points.

Provision for Loan Losses.There was a $30,000 provision for loan losses in the nine months ended September 30, 2000 compared to none in the nine months ended September 30, 1999. The provision for loan losses is a result of management's periodic analysis of risks inherent in our loan portfolio from time to time, as well as the adequacy of the allowance for loan losses. 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.

Noninterest Income.Noninterest income of $41,000 for the nine months ended September 30, 2000 was $102,000 lower than during the same period in 1999. There was no gain on sale of investment securities for the nine months ended September 30, 2000 as compared to $117,000 for the nine months ended September 30, 1999. The sale of 2,000 shares of Freddie Mac stock accounted for the entire gain on sale of investments recorded in the nine month period ended September 30, 1999. Service fees and other income increased to $41,000 during the nine months ended September 30, 2000 as compared to $26,000 for the nine months ended September 30, 1999.

Noninterest Expense.Noninterest expense increased $256,000, or 17.9%, for the nine months ended September 30, 2000 as compared to the same period in 1999. This increase was essentially attributable to compensation and benefits increasing by $260,000 from period to period, primarily due to the vesting of restricted share awards granted pursuant to the Company's Recognition and Retention Plan in December 1999.

Federal Income Taxes.The provision for federal income taxes decreased by $282,000 for the nine months ended September 30, 2000 as compared to the same period in 1999. The decrease in the provision for federal income taxes as compared to the same period in 1999 was primarily due to a decrease in pre-tax income of $807,000. The effective tax rate was 21.2% for the nine month period ended September 30, 2000 compared to 29.7% in the same nine month period in 1999.

Liquidity and Capital Resources

Our main source of funds are deposits, in addition to loan and securities repayments. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions and competition. Federal regulations require us to maintain cash and eligible investments at levels that assure our ability to meet demands for deposit withdrawals and the repayment requirements of short-term borrowings, if any. We believe that sufficient funds are available for us to meet our current liquidity needs. Total cash and cash equivalents amounted to $4.1 million at September 30, 2000. At September 30, 2000 we had a regulatory liquidity ratio of 9.24%, comfortably exceeding the 4.0% minimum requirement.

Our capital resources are used to meet ongoing funding commitments, including various types of deposit withdrawals, investments in securities, funding of existing and future loan commitments, the preservation of liquidity, and to pay operating expenses. At September 30, 2000 we had outstanding commitments to extend credit totaling $1.7 million.

Home Federal is required to maintain minimum regulatory capital sufficient to meet tangible, core and risk-based capital ratios of 1.50%, 3.00% and 8.00%, respectively. As of September 30, 2000, Home Federal significantly exceeded its regulatory capital requirements, with tangible, core, and risk-based capital ratios of 22.69%, 22.69% and 45.66%, respectively.

Cautionary Forward-looking Statements

This document, including information incorporated by reference, contains, and filings by the Company on Form 10-KSB, Form 10-QSB, and Form 8-K and future oral and written statements by the Company and its management may contain, forward-looking statements about First Niles and its subsidiary which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management. Words such as "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements by the Company and management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. The

important factors we discuss below and elsewhere in this document, as well as other factors discussed under the caption" Management's Discussion and Analysis of Financial Condition and Results of Operations" in this document and identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause actual results to differ materially from those indicated by the forward-looking statements made in this document:

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:

• the strength of the United States economy in general and the strength of the local economies in which we conduct operations;
• the effects of, and changes in, trade, monetary and fiscal policies and laws, including interest rate policies of the Federal Reserve Board;
• inflation, interest rate, market and monetary fluctuations;
• 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;
• the willingness of users to substitute competitors' products and services for our products and services;
• our success in gaining regulatory approval of our products and services, when required;
• the impact of changes in financial services' laws and regulations (including laws concerning taxes, banking, securities and insurance);
• the impact of technological changes;
• acquisitions;
• changes in consumer spending and saving habits; and
• our success at managing the risks involved in the foregoing.

PART II - OTHER INFORMATION

        During the quarter ended September 30, 2000 the Registrant filed a Current Report on Form 8-K dated July 26, 2000 announcing a 5% stock repurchase program.

SIGNATURES

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

INDEX TO EXHIBITS

Exhibit
Number

   15               Letter re Unaudited Interim Financial Information

   27               Financial Data Schedule