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, 1999
OR
[ ] TRANSITION REPORT PURSUANT TO SECTION 13 OR 15 (D) OF THE SECURITIES
EXCHANGE ACT OF 1934
FOR THE TRANSITION PERIOD FROM ________________ TO ______________________
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 (I.R.S. Employer Identification No.)
incorporation or organization)
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
---------------------------------------
(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: $5.6 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 15, 2000, was $14.85
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 15, 2000, there were issued and outstanding 1,660,749 shares of the
Registrant's Common Stock.
DOCUMENTS INCORPORATED BY REFERENCE
PART II of Form 10-KSB -- Portions of the Annual Report to Stockholders for the
fiscal year ended September 30, 1999.
PART III of Form 10-K -- Portions of the Proxy Statement for the Annual Meeting
of Shareholders to be held during April 2000.
Transitional Small Business Disclosure Format: Yes ____; No X
<PAGE>
DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS
This document, including information incorporated by reference, contains,
and future filings by First Niles Financial, Inc. on Form 10-QSB and Form 8-K
and future oral and written statements by First Niles Financial and its
management may contain, forward-looking statements about First Niles Financial
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 these forward-looking statements. Forward-looking
statements by First Niles Financial and its management are based on beliefs,
plans, objectives, goals, expectations, anticipations, estimates and intentions
of management and are not guarantees of future performance. First Niles
Financial 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 our Annual Report to Stockholders (attached to this document as
Exhibit 13) 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:
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.
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, 1999, we had $80.4 million of assets
and stockholders' equity of $18.5 million (or 23.02% 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>
RECENT LEGISLATION
On November 12, 1999, the Gramm-Leach-Bliley Act, which modernizes the
financial services industry by, among other things, permitting banking,
insurance and securities companies to combine, was signed into law. It is
unclear what impact this legislation will have on our operations, although the
anticipated creation of larger and stronger financial services competitors could
materially affect our operations.
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 1999, Trumbull County had an unemployment rate of 4.2%, compared to
an unemployment rate of 4.0% in Ohio, and 4.1% in the United States.
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, 1999, our net loan portfolio totaled $36.9
million, which constituted 45.8% 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, 1999, the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was approximately $3.4 million.
At December 31, 1999, 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 $2.1 million of which approximately $217,000
was unfunded at December 31, 1999. Of the nine loans, six loans were for the
construction or development of residential housing, including condominiums, and
three loans were secured by apartment rental units and commercial office space.
the second largest lending relationship at December 31, 1999, consisted of two
purchased participation loans totaling $1.9 million for the construction of an
apartment complex and a completed warehouse/office and retail complex in
Columbus, Ohio. Approximately $383,000 of the $1.0 million apartment complex
participation construction loan was unfunded at December 31, 1999. The third
largest lending relationship at December 31, 1999, consisted of a purchased
participation loan for $1.0 million, secured by a warehouse under construction
in Columbus, Ohio. Approximately $267,000 of this loan was unfunded as of
December 31, 1999. Our next largest lending relationship at December 31, 1999,
totaled $992,000 and consisted of a purchased participation loan secured by two
separate apartment complexes in Wooster, Ohio. Our fifth largest lending
relationship as of December 31, 1999 consisted of a purchased participation loan
secured by single-family rental units in Columbus, Ohio. Each of the foregoing
loans was current and performing in accordance with its terms at December 31,
1999.
We had nine other lending relationships which exceeded $400,000 at December
31, 1999. 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 consisted of four loans aggregating $675,000 that had one loan
with a balance of $263,000 on nonaccrual status.
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.
5
<PAGE>
December 31,
--------------------------------------
1999 1998
------------------ -----------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
Real Estate Loans:
One- to four-family................. $25,946 66.86% $25,474 66.81%
Commercial.......................... 5,903 15.21 5,042 13.23
Multi-family........................ 1,924 4.96 1,298 3.40
Construction or development......... 3,622 9.33 5,104 13.39
------- ------ ------- ------
Total real estate loans......... 37,395 96.36 36,918 96.83
------- ------ ------- ------
Other Loans:
Consumer Loans:
Home equity......................... 751 1.94 915 2.40
Other............................... 462 1.19 82 0.21
------- ------ ------- ------
Total consumer loans............ 1,213 3.13 997 2.61
Commercial business loans........... 199 0.51 213 0.56
------- ------ ------- ------
Total other loans............... 1,412 3.64 1,210 3.17
------- ------ ------- ------
Total loans..................... 38,807 100.00% 38,128 100.00%
====== ======
Less:
Loans in process.................... 1,390 1,212
Deferred fees and discounts......... 5 ---
Allowance for losses................ 549 784
------- -------
1,944 1,996
------- -------
Total loans receivable, net......... $36,863 $36,132
======= =======
6
<PAGE>
The following table shows the composition of our loan portfolio by fixed-
and adjustable-rate at the dates indicated.
<TABLE>
<CAPTION>
December 31,
--------------------------------------------------------------
1999 1998
------------------------- --------------------------
Amount Percent Amount Percent
------ ------- ------ -------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Fixed-Rate Loans:
Real estate:
One- to four-family ..................... $14,708 37.90% $13,710 35.96%
Commercial .............................. 323 0.83 318 0.84
Multi-family ............................ 107 0.28 188 0.49
Construction or development ............. 1,978 5.10 3,698 9.70
------- ------ ------- ------
Total real estate loans .............. 17,116 44.11 17,914 46.99
------- ------ ------- ------
Consumer ................................. 827 2.13 997 2.61
Commercial business ...................... 199 0.51 213 0.56
------- ------ ------- ------
1,026 2.64 1,210 3.17
------- ------ ------- ------
Total fixed-rate loans ............... 18,142 46.75 19,124 50.16
Adjustable-Rate Loans:
Real estate:
One- to four-family ..................... 11,238 28.96 11,764 30.85
Commercial .............................. 5,580 14.38 4,724 12.39
Multi-family ............................ 1,817 4.68 1,110 2.91
Construction or development ............. 1,644 4.24 1,406 3.69
------- ------ ------- ------
Total real estate loans .............. 20,279 52.26 19,004 49.84
Consumer ................................. 386 0.99 -- --
------ ------- ------
Total adjustable-rate loans .......... 20,665 53.25 19,004 49.84
------- ------ ------- ------
Total loans .......................... 38,807 100.00% 38,128 100.00%
======= ======
Less:
Loans in process.......................... 1,390 1,212
Deferred fees and discounts............... 5 --
Allowance for loan losses................. 549 784
------- -------
1,944 1,996
------- -------
Total loans receivable, net............ $36,863 $36,132
======= =======
</TABLE>
7
<PAGE>
The following schedule illustrates the contractual maturity of our real
estate construction and commercial business loan portfolios at December 31, 1999
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)
<S> <C> <C> <C> <C> <C> <C>
Due During Periods
Ending December 31,
- -------------------
2000(1)...................... $1,493 8.04% $ 1 7.50% $1,494 8.04%
2001 to 2004................. 1,945 7.98 97 8.47 2,042 8.01
After 2004................... 184 7.91 101 7.91 285 7.91
------- ---- ------
Totals.................. $3,622 8.00% $199 8.18% $3,821 8.01%
====== ==== ======
</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, 2000
which have fixed interest rates is $1.7 million, while the total amount of loans
due after such date which have floating or adjustable interest rates is
$612,000.
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, 1999, one- to four-family residential mortgage loans totaled
$25.9 million, or 66.9% 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 stated margin
over such indices for pricing of adjustable-rate mortgage loans. During the year
ended December 31, 1999, we originated $1.5 million of one- to four-family
adjustable-rate mortgage loans and $3.3 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 our Annual
Report to Stockholders.
Fixed-rate loans secured by one- to four-family residences have maximum
maturities of 30 years, and are fully amortizing, with payments due monthly.
8
<PAGE>
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, 1999, commercial real estate loans totaled $5.9 million or 15.2% of
our gross loan portfolio and multi-family real estate loans totaled $1.9 million
or 5.0% 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 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.
9
<PAGE>
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, 1999, we had $3.6 million in
construction and development loans outstanding, representing 9.3% of our gross
loan portfolio. At December 31, 1999, our two largest construction lending
relationships consisted of participation interests secured by an apartment
complex and a warehouse, both located in Columbus, Ohio. The apartment complex
participation interest totaled $1.0 million, with approximately $383,000
unfunded at December 31, 1999. The warehouse participation interest totaled $1.0
million, with approximately $267,000 unfunded at December 31, 1999. Both of
these loans were performing in accordance with terms at December 31, 1999.
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, 1999, $768,000 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 of the borrower and the value of the
underlying property. At December 31, 1999, we had $1.1 million of loans secured
by building lots and raw land.
10
<PAGE>
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.
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,
-----------------------
1999 1998
---- ----
(In Thousands)
Originations by type:
Adjustable rate:
Real estate - one- to four-family ................. $ 1,499 $ 2,000
- commercial ................... 400 1,188
- multi-family ................. 64 --
-------- --------
Total adjustable-rate ..................... 1,963 3,188
-------- --------
Fixed rate:
Real estate - one- to four-family ................. 3,297 3,555
- commercial ................... -- --
- multi-family ................. -- 675
- land and development ......... 38 371
Non-real estate - consumer ........................ 890 803
- commercial business .......... 111 62
-------- --------
Total fixed-rate .......................... 4,336 5,466
-------- --------
Total loans originated .................... 6,299 8,654
-------- --------
Purchases:
Real estate - one- to four-family ................. -- --
- commercial ................... 1,000 --
- multi-family ................. 2,000 1,000
- land and development ......... -- 525
-------- --------
Total loans purchased ..................... 3,000 1,525
Mortgage-backed and related securities ............ 9,917 9,541
-------- --------
Total purchased ........................... 12,917 11,066
-------- --------
Repayments:
Principal repayments .............................. 14,278 20,223
-------- --------
Total reductions .......................... 14,278 20,223
Decrease in other items, net ...................... (441) (37)
-------- --------
Net increase (decrease) ................... $ 4,497 $ (540)
======== ========
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 repayment plan to bring the loan current within
12
<PAGE>
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, 1999.
<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 15 $ 724 2.79% 11 $ 307 1.18% 26 $1,031 3.97%
Commercial ........ 1 33 0.56 1 252 4.27 2 285 4.83
Multi-family ...... -- -- -- -- -- -- -- -- --
Construction or
development ..... 2 108 2.98 1 263 7.26 3 371 10.24
Consumer ............. 6 27 2.23 1 4 0.33 7 31 2.56
Commercial ........... 1 21 10.55 -- -- -- 1 21 10.55
----- ----- ----- ------ ------ ----- ------ ------ -----
Total ........... 25 $ 913 2.35% 14 $ 826 2.13% 39 $1,739 4.48%
====== ====== ===== ====== ====== ===== ====== ====== =====
</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,
-------------------
1999 1998
---- ----
(Dollars in Thousands)
Non-accruing loans:
One- to four-family .............................. $ -- $ --
Construction or development ...................... 263 648
---- ----
Total ......................................... 263 648
---- ----
Accruing loans delinquent more than 90 days:
One- to four-family .............................. 307 206
Multi-family ..................................... -- --
Commercial real estate ........................... 252 --
Construction or development ...................... -- 95
Consumer ......................................... 4 6
Commercial business .............................. -- --
---- ----
Total ......................................... 563 307
---- ----
Total non-performing loans ......................... $826 $955
==== ====
Total as a percentage of gross loans receivable .... 2.21% 2.59%
==== ====
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 $250,000.
Included in the table above is a commercial real estate loan with an
outstanding balance of $263,000 at December 31, 1999. 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 nine single-family lots
having been sold as of December 31, 1999. Lot sales remain slow. The condominium
sites were released during 1999 in exchange for a $276,000 pay down of the loan.
For the year ended December 31, 1999, gross interest income which would
have been recorded had the non-accruing loans been current in accordance with
their original terms amounted to $63,000, none of which was included in interest
income.
OTHER LOANS OF CONCERN. In addition to the non-performing assets set forth
in the table above as of December 31, 1999, there was one loan, secured by an
individual commercial property, with an outstanding balance of $530,000 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
borrower to comply with present loan repayment terms and which may result in the
future inclusion of this item in the non-performing asset categories. This loan
14
<PAGE>
was originated in December 1994 for $582,000 and at December 31, 1999 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. This loan has been considered in management's
determination of the adequacy of our allowance for loan losses.
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, 1999, we had
classified $802,000 of our assets as substandard, which represents 4.3% of
stockholders' equity and 1.0% of total assets. No assets were classified as
doubtful or as loss.
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
15
<PAGE>
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, 1999, our total allowance for loan losses represented coverage
of 66.5% of non-performing loans. See Notes A and C of the Notes to Consolidated
Financial Statements contained in our Annual Report to Stockholders.
The following table sets forth an analysis of our allowance for loan
losses.
<TABLE>
<CAPTION>
At and For the Years
Ended December 31,
--------------------
1999 1998
---- ----
(In Thousands)
<S> <C> <C>
Balance at beginning of period ........................... $ 784 $ 854
Charge-offs: One- to four-family ......................... 300 21
----- -----
Total charge-offs .................................... 300 21
Recoveries: .............................................. -- 54
----- -----
Net (charge-offs) recoveries .......................... (300) 33
Additions charged (reductions credited) to operations .... 65 (103)
----- -----
Balance at end of period ................................. $ 549 $ 784
===== =====
Ratio of net charge-offs (recoveries) during the period to
average loans outstanding during the period ............. 0.80% (0.09)%
===== =====
Ratio of net charge-offs (recoveries) during the period to
average non-performing loans ............................ 31.03% (2.27)%
===== =====
</TABLE>
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. During the year ended December
31, 1999 we charged off $300,000, with $291,000 attributable to the bankruptcy
of one borrower, whose loans were collateralized by residential rental real
estate. The properties collateralizing these loans were disposed of through
bankruptcy action. During 1999 we also added $65,000 to the allowance for loan
losses to partially offset the charge-offs and to adequately reflect
management's assessment of the risks inherent in the loan portfolio.
16
<PAGE>
The distribution of our allowance for loan losses at the dates indicated is
summarized as follows:
<TABLE>
<CAPTION>
December 31,
-----------------------------------------------------------------------------------
1999 1998
------------------------------------- --------------------------------------
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 ....... $ 69 $25,946 66.86% $ 154 $25,474 66.81%
Multi-family, commercial,
real estate, construction
or development .......... 121 11,449 29.50 142 11,444 30.02
Consumer and commercial
business ................ 1 1,412 3.64 1 1,210 3.17
Unallocated ............... 358 -- -- 487 -- --
------- ------- ------ ------- ------- ------
Total ................ $ 549 $38,807 100.00% $ 784 $38,128 100.00%
======= ======= ====== ======= ======= ======
</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 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, 1999, our liquidity ratio
was 13.80%. The liquidity ratio represents liquid assets as a percentage of net
withdrawable savings deposits and current short-term 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. 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
17
<PAGE>
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 our Annual Report to Stockholders.
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, although the contractual life may exceed 20
years. Premiums associated with 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, 1999, we held
collateralized mortgage obligations totaling $16.2 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, 1999,
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.
18
<PAGE>
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, 1999, 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.
<TABLE>
<CAPTION>
December 31,
---------------------------------------------------------
1999 1998
------------------------ ------------------------
Book % of Book % of
Value Total Value Total
----- ----- ----- -----
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Investment securities:
Mutual funds(1) ............................... $ 14,712 82.40% $ 15,333 76.40%
Freddie Mac stock ............................. 1,788 10.02 2,577 12.85
Corporate debt securities ..................... -- -- 1,826 9.10
U.S. agency securities ........................ 1,000 5.60 -- --
Federal Home Loan Bank stock .................. 340 1.90 317 1.58
Other ......................................... 15 0.08 15 0.07
-------- ------ -------- ------
Total investment securities and Federal Home
Loan Bank stock .......................... $ 17,855 100.00% $ 20,068 100.00%
======== ====== ======== ======
Mortgage-backed and related securities:
Collateralized mortgage obligations ........... $ 16,276 100.13% $ 12,385 99.62%
Freddie Mac ................................... 34 0.21 60 0.48
Government National Mortgage Association ...... 12 0.07 27 0.22
-------- ------ -------- ------
16,322 100.41 12,472 100.32
Unamortized discounts, net ...................... (67) (0.41) (40) (0.32)
-------- ------ -------- ------
Total mortgage-backed securities ........... $ 16,255 100.00% $ 12,432 100.00%
======== ====== ======== ======
Other interest-earning investments:
Money market mutual fund ...................... $ 1,438 22.68% $ 5,404 33.50%
Interest-bearing deposits with banks .......... 1,800 28.40 1,500 9.30
Federal funds sold ............................ 3,100 48.92 9,225 57.20
-------- ------ -------- ------
Total ...................................... $ 6,338 100.00% $ 16,129 100.00%
======== ====== ======== ======
</TABLE>
- -------------------------------------------------------------
(1) Mutual funds invest primarily in obligations of the U.S. Government and its
agencies.
19
<PAGE>
The following table sets forth the contractual maturities of our
mortgage-backed and related securities at December 31, 1999.
<TABLE>
<CAPTION>
Due in December
------------------------------------------------------------------------------ 31, 1999
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 ........... $ -- $ -- $ -- $ -- $ 3,915 $ 945 $11,349 $16,209
Freddie Mac ........... -- -- 34 -- -- -- -- 34
Government National
Mortgage Association -- -- 12 -- -- -- -- 12
------ ------ ------- ------ ------- ------- ------- -------
Total .............. $ -- $ -- $ 46 $ -- $ 3,915 $ 945 $11,349 $16,255
====== ====== ======= ====== ======= ======= ======= =======
</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.
Deposit balances remained relatively stable during 1999.
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.
20
<PAGE>
The following table sets forth the deposit flows at Home Federal during the
periods indicated.
Years Ended December 31,
------------------------------
1999 1998
---- ----
(Dollars in Thousands)
Opening balance ...................... $ 54,837 $ 57,854
Deposits ............................. 41,952 41,048
Withdrawals .......................... (43,888) (46,223)
Interest credited .................... 1,644 2,158
-------- --------
Ending balance ....................... $ 54,545 $ 54,837
======== ========
Net increase (decrease) .............. $ (292) $ (3,017)
-------- --------
Percent increase (decrease) .......... (0.53)% (5.21)%
======== ========
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,
----------------------------------------
1999 1998
----------------- ------------------
Percent Percent
Amount of Total Amount of Total
------ -------- ------ --------
(Dollars in Thousands)
<S> <C> <C> <C> <C>
Transactions and Savings Deposits:
Passbook and statement savings accounts (2.50%)(1) $20,736 38.02% $20,763 37.86%
NOW accounts (2.50%)(1) .......................... 3,409 6.25 3,081 5.62
Money market accounts (2.55%)(1) ................. 3,971 7.28 3,811 6.95
------- ------ ------- ------
Total non-certificates ........................... 28,116 51.55 27,655 50.43
------- ------ ------- ------
Certificates:
2.00 - 3.99% .................................... -- -- 228 0.42
4.00 - 5.99% .................................... 25,829 47.35 26,954 49.15
6.00 - 7.99% .................................... 600 1.10 -- --
------- ------ ------- ------
Total certificates ............................... 26,429 48.45 27,182 49.57
------- ------ ------- ------
Total deposits ................................... $54,545 100.00% $54,837 100.00%
======= ====== ======= ======
</TABLE>
- ------------------------------
(1) Interest rates stated apply to December 31, 1999.
21
<PAGE>
The following table shows rate and maturity information for our
certificates of deposit as of December 31, 1999.
<TABLE>
<CAPTION>
2.00- 4.00- 6.00- Percent
3.99% 5.99% 7.99% Total of Total
----- ----- ----- ----- --------
(Dollars in Thousands)
<S> <C> <C> <C> <C> <C>
Certificate accounts maturing in quarter ending:
March 31, 2000............................................ $ --- $ 8,482 $ --- $ 8,482 32.09%
June 30, 2000............................................. --- 7,180 --- 7,180 27.17
September 30, 2000........................................ --- 3,500 --- 3,500 13.24
December 31, 2000......................................... --- 2,537 600 3,137 11.87
March 31, 2001............................................ --- 1,312 --- 1,312 4.97
June 30, 2001............................................. --- 1,703 --- 1,703 6.44
September 30, 2001........................................ --- 220 --- 220 0.83
December 31, 2001......................................... --- 152 --- 152 0.58
March 31, 2002............................................ --- 217 --- 217 0.82
June 30, 2002............................................. --- 117 --- 117 0.44
September 30, 2002........................................ --- 145 --- 145 0.55
December 31, 2002......................................... --- 264 --- 264 1.00
Thereafter................................................ --- --- --- --- ---
----- ------- ---- ------- ------
Total.................................................. $ --- $25,829 $600 $26,429 100.00%
===== ======= ==== ======= ======
Percent of total....................................... ---% 97.73% 2.27% 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, 1999.
<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........... $7,497 $5,846 $5,404 $4,130 $22,877
Certificates of deposit of $100,000 or more.......... 985 1,334 1,233 --- 3,552
------ ------ ------ ------ -------
Total certificates of deposit........................ $8,482 $7,180 $6,637 $4,130 $26,429
====== ====== ====== ====== =======
</TABLE>
22
<PAGE>
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, 1999, we had borrowings totaling
$6.0 million. The average balance of our borrowings during this period was
$690,000. Our current borrowings relate to a three-year term note payable to
another financial institution that was obtained to facilitate the $10.1 million
return of capital distribution paid to shareholders during late 1999. See Note H
of Notes to Consolidated Financial Statements contained in our Annual Report to
Stockholders.
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 $1.6 million at December 31, 1999 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, 1999, 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
23
<PAGE>
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 December 31, 1999 our
lending limit under this restriction was $3.4 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'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, 1999 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 6 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 2 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, 1999 we had
tangible capital of $22.2 million, or 28.2% of adjusted total assets, which is
approximately $20.6 million above the minimum requirement of 1.5% of adjusted
total assets in effect on that date.
24
<PAGE>
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, 1999 we had core
capital equal to $22.2 million, or 28.2% of adjusted total assets, which is
$19.1 million above the minimum leverage ratio requirement of 4% 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, 1999 we had total risk-based capital of approximately $23.2
million, including $22.2 million in core capital and $1.0 million in qualifying
supplementary capital, and risk-weighted assets of $40.5 million, or total
capital of 57.1% of risk-weighted assets. This amount was $20.0 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
25
<PAGE>
maintained for the liquidation account established in connection with its mutual
to stock conversion.
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, 1999 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
26
<PAGE>
examined for compliance under the Community Reinvestment Act in August 1999 and
received a rating of "satisfactory."
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.
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 is registered with the SEC
under the Securities Exchange Act of 1934. First Niles is subject 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, 1999, we had
$340,000 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 7.06% for 1999.
27
<PAGE>
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, 1999, 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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<PAGE>
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 68, 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 77, 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 50, 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, 1999, we had a total of 13 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, 1999 was $245,000. 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, 1999 was $41,000.
29
<PAGE>
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
A special meeting of shareholders of First Niles was held on December 15,
1999 at our office in Niles, Ohio. At that meeting the shareholders were asked
to and voted upon (i) approval of the adoption of the First Niles Financial,
Inc. 1999 Stock Option and Incentive Plan ("Proposal I") and (ii) approval of
the adoption of the First Niles Financial, Inc. 1999 Recognition and Retention
Plan ("Proposal II"). The voting on such matters was as follows:
Votes Votes Broker
For Against Abstentions Non-votes
--------------------------------------------------------
Proposal I 971,516 203,634 17,125 ---
Proposal II 945,462 229,247 17,425 ---
PART II
ITEM 5. MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS
Page 43 of the 1999 Annual Report to Stockholders 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 13 of the 1999 Annual Report to Stockholders attached to this
document as Exhibit 13 is incorporated herein by reference.
30
<PAGE>
ITEM 7. FINANCIAL STATEMENTS
The following information appearing in First Niles' 1999 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 15
Consolidated Balance Sheets as of December 31, 1999 and 1998 16
Consolidated Statements of Income for the Years 17
Ended December 31, 1999 and 1998
Consolidated Statements of Changes in Shareholders' Equity 18
for the Years Ended December 31, 1999 and 1998
Consolidated Statements of Cash Flows for the Years 19
Ended December 31, 1999 and 1998
Notes to Consolidated Financial Statements 20-42
With the exception of the aforementioned information, First Niles' Annual
Report to Stockholders for the year ended December 31, 1999, 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.
31
<PAGE>
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 2000, 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, 1999.
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 2000, 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 2000, a
copy of which will be filed not later than 120 days after the close of the
fiscal year.
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<PAGE>
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 2000, 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
On November 15, 1999, First Niles filed a Current Report on Form 8-K with
the SEC containing a copy of a press release dated November 15, 1999 announcing
the declaration of a special cash distribution of $6.00 per share payable on
December 13, 1999 to shareholders of record on November 29, 1999.
33
<PAGE>
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 27, 2000 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 27, 2000
- --------------------------------------------- --------------
William L. Stephens, Chairman of the Board,
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)
/s/ George J. Swift Date: March 27, 2000
- --------------------------------------------- --------------
George J. Swift, Vice President and Secretary
(PRINCIPAL FINANCIAL AND OPERATING OFFICER)
/s/ P. James Kramer Date: March 27, 2000
- --------------------------------------------- --------------
P. James Kramer, Director
/s/ Horace L. McLean Date: March 27, 2000
- --------------------------------------------- --------------
Horace L. McLean, Director
/s/ Ralph A. Zuzolo Date: March 27, 2000
- --------------------------------------------- --------------
Ralph A. Zuzolo, Sr., Director
/s/ Thomas G. Maley Date: March 27, 2000
- --------------------------------------------- --------------
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 Registrants operating bank
subsidiary and William L. Stephens, George J. Swift and
Lawrence Safarek filed as Exhibits 10.1, 10.2 and 10.3 to
Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (File No. 0-24849), is incorporated herein
by reference.
10.2 Registrant's 1999 Stock Option and Incentive Plan, filed on
November 12, 1999 as Appendix A to Registrant's Proxy
Statement on Schedule 14A (File No. 0-24849), is incorporated
herein by reference.
10.3 Registrant's 1999 Recognition and Retention Plan filed on
November 12, 1999 as Appendix B to Registrant's Proxy
Statement on Schedule 14A (File No. 0-24849), is incorporated
herein by reference.
13 Annual Report to Stockholders
21 Subsidiaries of the Registrant filed as Exhibit 21 to
Registrant's Report on Form 10-KSB for the fiscal year ended
December 31, 1998 (File No. 0-24849), is incorporated herein
by reference.
23 Consent of Accountants
27 Financial Data Schedule (electronic filing only)
- --------------------------------------------------------------------------------
1999 ANNUAL REPORT
- --------------------------------------------------------------------------------
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
Disclosure Regarding Forward-Looking Statements.......................... 13
Consolidated Financial Statements........................................ 15
Stockholder Information.................................................. 43
Corporate Information.................................................... 44
<PAGE>
[FIRST NILES FINANCIAL, INC. LETTERHEAD]
March 15, 2000
To Our Stockholders:
It is my pleasure to present the Annual Report to Stockholders of First
Niles Financial, Inc. The past year has once again been one of significant
challenge. The approach of the new millennium kept us and the industry occupied
and challenged for much of 1999 as we went through extensive preparation to
ensure the integrity of our data processing systems. Our staff worked hard in
assuring uninterrupted service to our customers during this past year.
Providing value to our stockholders was a new, but welcome challenge in
1999, our first complete year as a public company. We feel this challenge was
met with full dedication and attention. During the spring of 1999 we announced
the repurchase of up to 5.0% of our outstanding shares in the open market. This
repurchase, totaling 87,720 shares, was completed during the fourth quarter of
1999. During 1999 we paid quarterly dividends to stockholders totaling $0.37 per
share for the year. In addition shortly after one year since the date of
becoming a public company, we also paid a special capital distribution to
stockholders in the amount of $6.00 per share. All of the dividends and
distributions paid by the Company to our stockholders to date have been
accounted for by the Company as a return of capital, rather than as taxable
dividends. Our company's strong financial condition provided us with this
tremendous opportunity and still leaves First Niles with ample capital. At
December 31, 1999, stockholders' equity totaled approximately $18.5 million, or
23.0% of total assets.
Your Board, management and employees are committed to building stockholder
value, while continuing our commitment to the customers and community we serve.
As always, we are dedicated to making your investment in First Niles a rewarding
one. Thank you for your past support and faith in our future.
Sincerely,
/s/ William L. Stephens
WILLIAM L. STEPHENS
CHAIRMAN OF THE BOARD, PRESIDENT AND CEO
<PAGE>
<TABLE>
<CAPTION>
SELECTED CONSOLIDATED FINANCIAL INFORMATION
December 31,
----------------------------------------
1999 1998 1997
---- ---- ----
Selected Financial Condition Data: (In Thousands)
- ----------------------------------
<S> <C> <C> <C>
Total assets ........................................................ $80,418 $86,724 $72,497
Loans receivable, net ............................................... 36,863 36,132 36,744
Securities - held to maturity ....................................... 17,255 12,432 12,359
Securities - available for sale and FHLB stock ...................... 16,855 20,068 17,741
Deposits ............................................................ 54,545 54,837 57,854
Total borrowings .................................................... 6,000 300 400
Stockholders' equity ................................................ 18,510 29,923 13,163
</TABLE>
<TABLE>
<CAPTION>
Years Ended December 31,
------------------------------------------
1999 1998 1997
---- ---- ----
(In Thousands)
Selected Operations Data:
- -------------------------
<S> <C> <C> <C>
Total interest income ................................................. $ 5,425 $ 5,221 $ 5,002
Total interest expense ................................................ 1,999 2,435 2,476
------- ------- -------
Net interest income ................................................ 3,426 2,786 2,526
Provision (recovery) for loan losses .................................. 65 (103) 700
------- ------- -------
Net interest income after provision for loan losses ................. 3,361 2,889 1,826
Fees and service charges .............................................. 26 19 18
Gain on sales of investment securities ................................ 116 461 4
Other non-interest income ............................................. 6 7 5
------- ------- -------
Total non-interest income ............................................. 148 487 27
Total non-interest expense ............................................ 2,086 2,290 1,380
------- ------- -------
Income before taxes and extraordinary item .......................... 1,423 1,086 473
Income tax provision .................................................. 411 276 87
------- ------- -------
Net income .......................................................... $ 1,012 $ 810 $ 386
======= ======= =======
Earnings per share - basic and diluted ................................ $ 0.63 NM NA
Dividends per share ................................................... $ 0.37(1) -- NA
</TABLE>
- ---------------------------------------------------
(1) Does not reflect the $6.00 per share capital distribution paid by the
Company to stockholders on the common stock during the quarter ended
December 31, 1999.
NM - Not meaningful.
NA - Not applicable.
2
<PAGE>
<TABLE>
<CAPTION>
Years Ended December 31,
-------------------------------------
1999 1998 1997
---- ---- ----
<S> <C> <C> <C>
SELECTED FINANCIAL RATIOS AND OTHER DATA:
- -----------------------------------------
PERFORMANCE RATIOS:
Return on assets (ratio of net income to
average total assets) ............................................... 1.19% 1.06% 0.54%
Return on equity (ratio of net income to
average equity) ..................................................... 3.60 4.99 3.05
Interest rate spread:
Average during year ................................................. 2.85 2.68 2.78
End of year ......................................................... 2.61 2.54 2.82
Net interest margin (net interest income divided
by average interest-earning assets) ................................ 4.10 3.68 3.56
Ratio of operating expense to average total assets .................... 2.40 2.94 1.86
Ratio of average interest-earning assets to average
interest-bearing liabilities ........................................ 1.53 1.31 1.22
QUALITY RATIOS:
Non-performing assets to total assets at end of year .................. 1.03% 1.10% 2.29%
Non-performing loans to loans receivable, net,
end of year ......................................................... 2.24 2.64 4.52
Allowance for loan losses to non-performing loans,
end of year ......................................................... 66.46 82.09 51.38
Allowance for loan losses to loans receivable, net,
end of year ......................................................... 1.49 2.17 2.32
CAPITAL RATIOS:
Equity to total assets at end of year ................................. 23.02%(1) 34.50% 18.16%
Average equity to average assets ...................................... 33.08 21.30 17.72
OTHER DATA:
Book value per common share outstanding ............................... $10.70(1) $17.06 NA
Dividends declared per share .......................................... $ 0.37(2) -- NA
Dividend payout ratio(3) .............................................. 58.73%(2) -- NA
Number of full-service offices ........................................ 1 1 1
</TABLE>
- ---------------------------------------
(1) Reflects the effect of the special capital distribution paid by the
Company to stockholders in the amount of $6.00 per share during December
1999.
(2) Does not reflect the special capital distribution paid by the Company to
stockholders in the amount of $6.00 per share during December 1999.
(3) 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
On October 26, 1998, Home Federal Savings and Loan Association of Niles
converted from the mutual to stock form of ownership, 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.
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 that of the State of Ohio and the United States averages and in
December 1999, Trumbull County also had an unemployment rate higher than that of
the State of 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.
FINANCIAL CONDITION
Assets totaled $80.4 million at December 31, 1999, a decrease of $6.3
million, or 7.3%, from total assets of $86.7 million at December 31, 1998. Cash
and cash equivalents decreased $9.2 million, or 53.6%, which is reflected in a
$1.6 million increase in mortgage-backed and related securities and investment
securities, a $731,000 increase in net loans receivable, and a $292,000 decrease
in total deposits. The remaining decrease in cash and cash equivalents was
primarily attributable to an $11.4 million reduction in total equity, including
a $10.1 million return of capital distribution to stockholders in December,
1999. The reduction in cash and cash equivalents, as well as total equity, was
also affected by share repurchases and cash dividends. An increase in borrowings
of $5.7 million also contributed funds to the capital management transactions
just described.
4
<PAGE>
The loan portfolio increased $731,000, or 2.0%, to $36.9 million at
December 31, 1999, compared to the prior year. The increase, though modest,
occurred despite a rising interest rate environment. During the year, real
estate loans increased by $294,000. Specifically, loans secured by residential
properties increased $1.1 million, commercial real estate loans increased
$590,000, partially offset by a $1.5 million decrease in loans for construction
or development.
Deposits totaled $54.5 million at December 31, 1999, compared to $54.8
million at December 31, 1998, representing a $292,000, or 0.5% decrease in
deposits. During the year ended December 31, 1999, certificates of deposit
decreased $754,000. Passbook, statement savings accounts and money market
deposit accounts increased by a collective $134,000, while NOW accounts
increased $328,000 during the year ended December 31, 1999. The decrease in
deposits, though modest, was primarily attributable to strong competition from
local financial institutions and the strength in the equity markets.
Accounts payable and other liabilities remained unchanged at $1.2 million
at December 31, 1999 as compared to December 31, 1998. Notes payable increased
to $6.0 million at December 31, 1999 from $300,000 at December 31, 1998. A loan
in the amount of $6.0 million was obtained from another financial institution
during the last quarter of 1999 as a means of facilitating the $10.1 million
return of capital paid to stockholders during the last quarter of 1999. The
$300,000 note payable at December 31, 1998 was paid off during 1999.
Total equity at December 31, 1999 was $18.5 million, or 23.0% of total
assets. This compares to total equity of $29.9 million, or 34.5% of total assets
at December 31, 1998. A return of capital distribution in the amount of $10.1
million, a $434,000 increase in shares acquired by stock benefit plans, a
$319,000 increase in treasury shares and a $930,000 decrease in net unrealized
gains on securities available for sale, partially offset by a $425,000 increase
in retained earnings, account for the change in total stockholders' 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, mortgage-backed
and related securities 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.
NET INCOME. We recorded net income of $1,012,000 for the year ended
December 31, 1999, an increase of $202,000 or 24.9% from the year ended December
31, 1998. The increase in net income was primarily due to a $640,000 increase in
net interest income, and a $204,000 reduction in non-interest expense, partially
offset by a $168,000 increase in the provision for loan losses, a decrease of
$345,000 in gain on sales of investment securities, and a $135,000 increase in
the provision for income taxes.
5
<PAGE>
Our return on assets was 1.19% for the year ended 1999, compared to 1.06%
for the year ended 1998. Return on equity was 3.60% for 1999, compared to 4.99%
for 1998. Average equity to average assets was 33.08% for the year ended 1999,
compared to 21.30% for the year ended 1998, reflecting the effect of becoming a
stock company during late 1998. During 1999 we paid regular quarterly cash
dividends on common stock totaling $587,000, or $0.37 per share, representing a
dividend payout ratio, dividends declared per share divided by net income per
share, of approximately 58.7%. Additionally, during the fourth quarter of 1999,
we paid a return of capital distribution of $10.1 million, or $6.00 per share.
The $0.37 per share and the $6.00 per share distributions paid by the Company to
stockholders during 1999 were accounted for by the Company as a return of
capital, rather than as taxable dividends. We did not declare or pay any
dividends, or make any capital distributions during 1998.
NET INTEREST INCOME. Net interest income increased $640,000, or 23.0%, from
$2.8 million last year to $3.4 million for the year ended December 31, 1999.
Total interest income increased $204,000, or 3.9%, from $5.2 million to $5.4
million. Most of this increase is attributable to a $7.9 million increase in the
overall average balance of the investment and mortgage-backed and related
securities portfolio resulting from the investment of the conversion proceeds
received during October 1998.
Total interest expense decreased $436,000, or 17.9%, from $2.4 million last
year to $2.0 million for the year ended December 31, 1999. An overall decline in
the rate paid on deposits and a slight decline in the aggregate balance of
deposits at Home Federal were the primary reasons for the decrease in interest
expense. The rate paid on our certificate of deposit accounts exhibited the
largest decline, declining to a 4.72% average rate for the year ended December
31, 1999 from 5.32% for the same period in 1998. Additionally, the average rate
on savings deposits and NOW accounts declined 52 basis points and 54 basis
points, respectively. Our overall cost of funds declined to 3.65% during 1999
from 4.21% during 1998.
Our net interest rate spread during 1999 was 2.85%, a 17 basis point
increase from 1998. Net interest margin increased to 4.10% during 1999 from
3.68% in 1998, an increase of 42 basis points. The primary reasons for the
increase in interest rate spread and net interest margin during 1999 as compared
to 1998 was an increase in the ratio of average interest-earning assets to
average interest-bearing liabilities to 1.53x from 1.31x and the decrease in the
cost of funds as mentioned above.
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,
---------------------------------------------------------------------------
1999 1998
------------------------------------- ----------------------------------
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)......................... $37,562 $2,855 7.60% $37,317 $3,074 8.24%
Mortgage-backed and related securities...... 15,391 993 6.45 12,467 767 6.15
Investment securities....................... 22,858 1,190 5.20 17,908 941 5.25
FHLB stock.................................. 326 23 7.06 306 22 7.19
Interest-bearing deposits................... 7,320 364 4.97 7,761 417 5.37
------- ------ ------- ------
Total interest-earning assets(1).......... 83,457 5,425 6.50 75,759 5,221 6.89
------
Non-interest earnings assets.................. 2,252 1,372
Allowance for loan losses..................... (720) (854)
------- -------
Total Assets ............................. $84,989 $76,277
======= =======
Interest-Bearing Liabilities:
Savings deposits............................ $24,324 613 2.52% $25,858 787 3.04%
Demand and NOW deposits..................... 3,143 78 2.49 3,069 93 3.03
Certificate accounts........................ 26,550 1,254 4.72 28,545 1,520 5.32
Borrowings.................................. 690 54 7.78 385 35 9.09
------- ------ ------- ------
Total interest-bearing liabilities........ 54,707 1,999 3.65 57,857 2,435 4.21
------ ------
Non-interest-bearing liabilities.............. 2,167 2,171
------- -------
Total Liabilities......................... 56,874 60,028
Stockholders' equity.......................... 28,115 16,249
------- -------
Total Liabilities and
Stockholders' Equity.................. $84,989 $76,277
======= =======
Net interest income........................... $3,426 $2,786
====== ======
Net interest rate spread ..................... 2.85% 2.68%
Net earning assets............................ $28,750 $17,902
======= =======
Net yield on average interest-earning
assets...................................... 4.10% 3.68%
Average interest-earning assets to average
interest-bearing liabilities................ 1.53x 1.31x
</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 table 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,
1999 vs. 1998
----------------------------------------------
Increase/(Decrease)
Due to Total
-------------------------- Increase
Volume Rate (Decrease)
(Dollars in Thousands)
<S> <C> <C> <C>
Interest-earning assets:
Loans receivable......................................... $ 20 $(239) $(219)
Mortgage-backed and related securities................... 187 39 226
Investment securities and FHLB stock..................... 259 (9) 250
Interest-bearing deposits and other...................... (21) (32) (53)
------ ------ ------
Total interest-earning assets.......................... $ 445 $(241) $ 204
===== ===== -----
Interest-bearing liabilities:
Savings deposits......................................... $ (45) $(129) $(174)
Demand and NOW deposits.................................. 2 (17) (15)
Borrowings............................................... 23 (4) 19
Certificate accounts..................................... (102) (164) (266)
------ ------ ------
Total interest-bearing liabilities.................... $(122) $(314) $(436)
===== ===== -----
Net interest income........................................ $ 640
=====
</TABLE>
PROVISION FOR LOAN LOSSES. The net provision for loan losses was $65,000
for the year ended December 31, 1999 compared to a net credit to operations of
$103,000 for the year ended December 31, 1998. The increase in the net provision
for loan losses of $168,000 from year to year was primarily related to a
significant increase in charge-offs in 1999 as compared to 1998. During 1999 we
charged off $300,000, with $291,000 attributable to the bankruptcy of one
borrower, whose loans were collateralized by residential rental real estate. The
properties collateralizing these loans were disposed of through bankruptcy
auction. During 1998, we experienced a net recovery of $33,000. Our level of
nonperforming loans, consisting of nonaccruing loans and loans delinquent more
than 90 days, decreased by $129,000 to $826,000 at December 31, 1999 from
$955,000 at December 31, 1998. Our nonperforming loans totaled 2.2% of net loans
receivable at December 31, 1999, compared to 2.6% of net loans receivable at
December 31, 1998. Our allowance for loan losses was $549,000 at December 31,
1999, representing 66.5% of non-performing loans and 1.5% of net loans
receivable. At December 31, 1998, the allowance for loan losses was $784,000,
representing 82.1% of non-performing loans and 2.2% of net loans receivable. We
did not have any real estate owned or other non-performing assets on our books
at December 31, 1999 and 1998.
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 decreased $339,000 to $148,000 for
the year ended December 31, 1999, compared to $487,000 the prior year. Gain on
sale of investments was the primary contributor to non-interest income in each
period. During 1999, gain on sale of investments totaled $116,000, compared to
$461,000 in 1998. This decrease was the result of a difference in the number of
shares of Freddie Mac stock sold in each period and the average price realized
from the sales. During 1999, the company sold 2,000 shares of Freddie Mac common
stock at an average price of $59.45, resulting in a gain per share of $58.47.
During 1998, the company sold 9,728 shares of Freddie Mac common stock at an
average price of $48.37 per share, resulting in a gain per share of $47.39. The
cost basis per share of Freddie Mac stock in both periods was $0.98 per share.
Service fees and other non-interest income totaled $32,000 in 1999, $6,000
higher than in 1998.
NON-INTEREST EXPENSE. Non-interest expense decreased $204,000, or 8.9%, for
the year ended December 31, 1999 compared to the same period in 1998.
Compensation and benefits, our largest non-interest expense, decreased $411,000,
or 24.3%, in 1999 as compared to 1998. This decrease was primarily attributable
to special bonuses totaling $435,000 paid to Home Federal employees in 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. Partially offsetting these special compensation items in 1998
was $263,000 in compensation expense attributable to the establishment of the
Company's Recognition and Retention Plan during 1999. Legal and audit fees
increased to $194,000 in 1999 from $27,000 in 1998, a difference of $167,000, or
627%. The increase in legal and audit fees was attributable to the costs of
regulatory reporting associated with being a public company, fees associated
with the $10.1 million special return of capital distribution paid to
stockholders and the establishment of the Company's stock-based, incentive
compensation plans.
FEDERAL INCOME TAXES. The provision for federal income taxes totaled
$411,000 for the year ended December 31, 1999, an increase of $135,000, or 48.9%
from the $276,000 provision for 1998. The increase in the provision for federal
income taxes was primarily due to pre-tax income being $337,000 higher in 1999
than in 1998. Additionally, the effective tax rate increased to 28.9% for 1999
compared to 25.4% for 1998.
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
9
<PAGE>
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.
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,
1999, adjustable-rate mortgage loans totaled $19.3 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 below.
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
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
10
<PAGE>
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, 1999, 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, 1999
---------------------------------------------------------------------
Net Portfolio Value as % of
Net Portfolio Value Portfolio Value of Total Asset
------------------------------------- ------------------------------
Change Percentage
in Rate Amount Change Change NPV Ratio BP Change
- ------- -------- --------- ---------- --------- ---------
(Dollars in Thousands)
+300 $18,859 $(3,199) (14.5)% 25.69% (241)
+200 20,173 (1,885) (8.5) 26.77 (133)
+100 21,215 (843) (3.8) 27.54 (56)
--- 22,058 --- --- 28.10 ---
-100 22,831 773 3.5 28.60 50
-200 23,453 1,395 6.3 28.97 87
-300 24,048 1,990 9.0 29.33 123
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.
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.
11
<PAGE>
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, 1999, cash and cash
equivalents totaled $7.9 million compared to $17.1 million at December 31, 1998.
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, 1999, the total loan origination commitments outstanding
amounted to $914,000. At the same date, the unadvanced portion of construction
loans was $1.4 million. Certificates of deposit scheduled to mature in one year
or less at December 31, 1999, totaled $22.3 million. We had no investment and
mortgage-related securities scheduled to mature in one year or less at December
31, 1999. 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
Total equity was $18.5 million at December 31, 1999, or 23.0% of total
assets on that date. 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. As of December 31, 1999,
Home Federal exceeded all capital requirements of the Office of Thrift
Supervision. Our regulatory capital ratios at December 31, 1999 were as follows:
Tier I (leverage) capital, 28.2%; Tier I risk-based capital, 54.8%; and Total
risk-based capital, 57.1%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively.
RECENT ACCOUNTING PRONOUNCEMENTS
SFAS NO. 133, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING ACTIVITIES,
AS AMENDED BY SFAS NO. 137, ACCOUNTING FOR DERIVATIVE INSTRUMENTS AND HEDGING
ACTIVITIES - Deferral of the Effective Date of FASB Statement No. 133 requires
derivative instruments be carried at fair value on the balance sheet. The
statement continues to allow derivative instruments to used to hedge various
risks and sets forth specific criteria to determine when hedge accounting can be
used. The statement also provides for offsetting changes in fair value or cash
flows of both the derivative and the hedged asset or liability to be recognized
in earnings in the same period; however, any changes in fair value or cash flow
that represent the ineffective portion of a hedge are required to be recognized
in earnings and cannot be deferred. For derivative instruments not accounted for
as hedges, changes in fair value are required to be recognized in earnings. This
statement, as amended, is effective for quarterly and annual reporting beginning
January 1, 2001. Management does not believe that adoption of this statement
will have a material impact on the Company's financial condition and results of
operations.
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
12
<PAGE>
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
This document, including information incorporated by reference, contains,
and future 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
these forward-looking statements. Forward-looking statements by the Company and
its 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:
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.
13
<PAGE>
[LETTERHEAD OF ANNESS GERLACH & WILLIAMS]
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. and subsidiary as of December 31, 1999 and 1998, and the
related consolidated statements of income, stockholders' equity, and cash flows
for each of the two years in the period ended December 31, 1999. 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. and subsidiary as of December 31, 1999 and 1998, and the
consolidated results of its operations and its cash flows for the years then
ended in conformity with generally accepted accounting principles.
/s/ Anness, Gerlach & Williams
Youngstown, Ohio
January 24, 2000
15
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands, except share data)
December 31
-----------
1999 1998
---- ----
ASSETS
<S> <C> <C>
Cash and cash equivalents:
Noninterest bearing $ 1,610 $ 995
Interest bearing 6,338 16,129
-------- --------
TOTAL CASH AND CASH EQUIVALENTS 7,948 17,124
Securities:
Available for sale - at market 16,515 19,751
Held to maturity - at cost 17,255 12,432
Loans receivable 36,863 36,132
Accrued interest receivable 356 282
Federal Home Loan Bank stock, at cost 340 317
Real estate investment-limited partnership, at equity 340 383
Prepaid expenses and other assets 163 47
Prepaid federal income taxes 222 --
Deferred income tax benefit 171 --
Premises and equipment, at cost less accumulated depreciation 245 256
-------- --------
TOTAL ASSETS $ 80,418 $ 86,724
======== ========
LIABILITIES
Deposits $ 54,545 $ 54,837
Accrued interest payable 129 110
Accounts payable and other liabilities 1,234 1,236
Note payable 6,000 300
Federal income tax payable -- 46
Deferred federal income tax liability -- 272
-------- --------
TOTAL LIABILITIES 61,908 56,801
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 18 18
Additional paid-in capital 6,708 16,897
Retained earnings, substantially restricted 13,134 12,709
Accumulated other comprehensive income:
Net unrealized gains on securities available for sale, net of related tax
effects of $338 in 1999 and $817 in 1998 656 1,586
Common stock purchased by the Employee Stock Ownership Plan (1,159) (1,287)
Unearned compensation (528) --
Treasury stock - 24,563 shares - at cost (319) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 18,510 29,923
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 80,418 $ 86,724
======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
16
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF INCOME
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
Year Ended December 31
----------------------
1999 1998
---- ----
<S> <C> <C>
Interest income:
Loans receivable:
First mortgage loans $ 2,745 $ 2,967
Consumer and other loans 110 107
Mortgage-backed and related securities 993 767
Investments 1,213 963
Interest-bearing deposits 364 417
------- -------
TOTAL INTEREST INCOME 5,425 5,221
Interest expense:
Deposits 1,945 2,400
Borrowings 54 35
------- -------
TOTAL INTEREST EXPENSE 1,999 2,435
------- -------
NET INTEREST INCOME 3,426 2,786
Provision for (recoveries of) loan losses 65 (103)
------- -------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 3,361 2,889
Noninterest income:
Gain on sale of securities 116 461
Service fees and other 32 26
------- -------
TOTAL NONINTEREST INCOME 148 487
Noninterest expense:
Equity in loss of limited partnership 43 43
General and administrative:
Compensation and benefits 1,278 1,689
Occupancy and equipment 86 89
Federal deposit insurance premiums 33 35
Other operating expense 646 434
------- -------
TOTAL NONINTEREST EXPENSE 2,086 2,290
------- -------
INCOME BEFORE INCOME TAXES 1,423 1,086
Federal income taxes 411 276
------- -------
NET INCOME $ 1,012 $ 810
======= =======
EARNINGS PER SHARE - BASIC AND DILUTED $ .63 N/A
======= =======
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL
PART OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
17
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
For the years ended December 31, 1999 and 1998
(In thousands)
Net Common Stock
Unrealized Purchased
Gains on by Employees
` Additional Securities Stock
Common Paid-in Retained Available Ownership Unearned Treasury
Stock Capital Earnings for Sale Plan Compensation Stock Total
----- ------- -------- -------- ---- ------------ ----- -----
<S> <C> <C> <C> <C> <C> <C> <C> <C>
Balance, January 1, 1998 $ -- $ -- $ 11,899 $ 1,264 $ -- $ -- $ -- $ 13,163
Reorganization to common stock form
and issuance of 1,754,411 shares 18 16,884 -- -- (1,404) -- -- 15,498
Comprehensive income:
Net income -- -- 810 -- -- -- -- 810
Other comprehensive income, net
of tax:
Change in unrealized gains and
losses on securities of $626,
net of reclassification
adjustment for gains included
in net income of $304 -- -- -- 322 _- -- -- 322
-------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 810 322 -- -- -- 1,132
ESOP shares allocated to employees -- 13 -- -- 117 -- -- 130
-------- -------- -------- -------- -------- -------- -------- --------
Balance, December 31, 1998 18 16,897 12,709 1,586 (1,287) -- -- 29,923
Comprehensive income:
Net income -- -- 1,012 -- -- -- -- 1,012
Other comprehensive income, net
of tax:
Change in unrealized gains and
losses on securities of $1,007,
net of reclassification
adjustment for gains included
in net income of $77 -- -- -- (930) -- -- -- (930)
-------- -------- -------- -------- -------- -------- -------- --------
Total comprehensive income -- -- 1,012 (930) -- -- -- 82
Cash dividends - $.37 per share -- -- (587) -- -- -- -- (587)
Return of capital distribution - $6
per share -- (10,131) -- -- -- -- -- (10,131)
ESOP shares allocated to employees -- 43 -- -- 128 -- -- 171
Purchase of shares for treasury -- -- -- -- -- -- (1,211) (1,211)
Shares issued for recognition and
retention plan -- (101) -- -- -- (528) 892 263
-------- -------- -------- -------- -------- -------- -------- --------
BALANCE DECEMBER 31, 1999 $ 18 $ 6,708 $ 13,134 $ 656 ($ 1,159) ($ 528) ($ 319) $ 18,510
======== ======== ======== ======== ======== ======== ======== ========
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
18
<PAGE>
<TABLE>
<CAPTION>
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
Year Ended December 31
----------------------
1999 1998
---- ----
<S> <C> <C>
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 1,012 $ 810
Adjustments to reconcile net income to net cash provided by
(used in) operating activities:
Deferred income taxes 36 (49)
Depreciation 43 49
Amortization of deferred loan fees and costs 1 --
Amortization of discounts and premiums on investments and
mortgage-backed and related securities, net (7) (22)
Recognition and Retention Plan shares 263 --
Gain on sale of securities (116) (461)
ESOP shares allocated 170 130
Equity in loss of limited partnership 43 43
Provision for (recoveries of) loan losses 65 (103)
Federal Home Loan Bank stock dividends (23) (23)
Net increase in accrued interest receivable and
prepaid expenses and other assets (411) (272)
Net increase (decrease) in accrued interest, accounts payable
and other liabilities (29) 467
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 1,047 569
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale 5,908 471
Purchase of securities available for sale (3,984) (1,827)
Proceeds from principal payments on mortgage-backed
and related securities 6,121 9,490
Purchase of mortgage-backed and related securities (10,918) (9,540)
Net (increase) decrease in interest-bearing deposits with banks 9,791 (12,072)
Net (increase) decrease in loans (797) 715
Additions to premises and equipment (32) (11)
-------- --------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 6,089 (12,774)
CASH FLOWS FROM FINANCING ACTIVITIES
Issuance of common stock - net -- 15,498
Return of capital distribution (10,131) --
Purchase of treasury stock (1,211) --
Dividends paid (587) --
Net increase (decrease) in savings accounts 461 (1,609)
Net decrease in certificates of deposit (753) (1,408)
Proceeds of note payable 6,000 --
Repayment of note payable (300) (100)
-------- --------
NET CASH PROVIDED BY
(USED IN)FINANCING ACTIVITIES (6,521) 12,381
-------- --------
NET INCREASE IN CASH 615 176
CASH AT BEGINNING OF YEAR 995 819
-------- --------
CASH AT END OF YEAR $ 1,610 $ 995
======== ========
Cash paid during the period for:
Interest $ 1,980 $ 2,451
Income taxes $ 642 $ 259
</TABLE>
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
19
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
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 N. 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. A material
estimate that is particularly susceptible to significant change in the near term
relates to the determination of the allowance for loan losses.
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, 1999 and 1998, for the year 1999 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.
20
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
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, 1999 and 1998, the Company's equity accounts
reflected net unrealized gains of $656,000 and $1,586,000, 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, 1999 and 1998, 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.
21
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
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.
At December 31, 1999 and 1998, the Association identified one loan with a
carrying value of $263,000 and $648,000, respectively, which was considered
impaired due to delinquent payments. Accrual of interest on this loan has been
suspended. All payments received are applied to principal. Contractual interest
not recognized for 1999 and 1998 was $63,000 and $75,000, respectively. No
portion of the allowance for losses of loans is attributable to the impaired
loan.
22
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
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 Company 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. Diluted earnings per share is
computed taking into consideration common shares outstanding and potential
dilutive common shares to be issued under the Corporation's stock option plan.
Earnings per share is not presented for 1998 as the Company completed its
conversion to stock form in October 1998.
23
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (continued)
A reconciliation of the weighted-average common shares outstanding on a
basic and diluted basis for 1999 is as follows:
Basic weighted-average shares 1,600,492
Effective of diluted shares:
Stock options 127
---------
Diluted weighted-average shares 1,600,619
=========
Subsequent to December 31, 1999, the Company has acquired 69,100 shares of
stock for the treasury at a cost of $740,000.
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.
Recent Accounting Pronouncements:
SFAS No. 133, "Accounting for Derivative Instruments and Hedging
Activities," as amended by SFAS No. 137, "Accounting for Derivative Instruments
and Hedging Activities -- Deferral of the Effective Date of FASB Statement No.
133," requires derivative instruments be carried at fair value on the balance
sheet. The statement continues to allow derivative instruments to be used to
hedge various risks and sets forth specific criteria to determine when hedge
accounting can be used. The statement also provides for offsetting changes in
fair value or cash flows of both the derivative and the hedged asset or
liability to be recognized in earnings in the same period; however, any changes
in fair value or cash flow that represent the ineffective portion of a hedge are
required to be recognized in earnings and cannot be deferred. For derivative
instruments not accounted for as hedges, changes in fair value are required to
be recognized in earnings. This statement, as amended, is effective for
quarterly and annual reporting beginning January 1, 2001. Management does not
believe that adoption of this statement will have a material impact on the
Company's financial condition and results of operations.
24
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE B - INVESTMENTS SECURITIES
The amortized cost and estimated fair values of investment securities are
summarized as follows:
<TABLE>
<CAPTION>
December 31
-----------------------------------------------------
1999 1998
----------------------- ------------------------
Estimated Estimated
Amortized Fair Amortized Fair
Cost Value Cost Value
--------- --------- --------- ---------
(In thousands)
<S> <C> <C> <C> <C>
Available for sale securities:
FHLMC common stock $ 36 $ 1,788 $ 39 $ 2,577
Asset management funds:
Income Trust 5,668 5,342 5,668 5,624
ARMS 4,006 3,840 4,006 3,872
GNMA Trust 5,795 5,530 5,795 5,837
Corporate bonds:
Due within one year -- -- 1,271 1,271
Due after one to ten years -- -- 555 555
Other 15 15 15 15
------- ------- ------- -------
TOTALS $15,520 $16,515 $17,349 $19,751
======= ======= ======= =======
</TABLE>
The amortized cost, gross unrealized gains, gross unrealized losses and
estimated fair values for securities held to maturity are summarized as follows:
<TABLE>
<CAPTION>
December 31, 1999
------------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss Value
---- ----- ---- -----
(In thousands)
<S> <C> <C> <C> <C>
Held to maturity securities:
Mortgage-backed and related securities:
Government National Mortgage Association
participation certificates $ 12 $ -- $ -- $ 12
Federal National Mortgage Association
collateralized mortgage obligations 9,900 -- 248 9,652
Federal Home Loan Mortgage Corporation:
Participation certificates 34 2 6 30
Collateralized mortgage obligations 6,309 -- 221 6,088
Federal Home Loan Bank bond - due
March, 2001 1,000 -- 14 986
------- ------- ------- -------
TOTALS $17,255 $ 2 $ 489 $16,768
======= ======= ======= =======
</TABLE>
25
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE B - INVESTMENTS SECURITIES (CONTINUED)
<TABLE>
<CAPTION>
December 31, 1998
-----------------------------------------------------
Gross Gross Estimated
Amortized Unrealized Unrealized Fair
Cost Gains Loss 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>
NOTE C - LOANS RECEIVABLE
The composition of the loan portfolio is as follows:
December 31
---------------------------
1999 1998
---- ----
(In thousands)
Real estate mortgage (primarily one-to
four-family residential) $27,879 $26,735
Construction and development 2,490 3,930
Commercial real estate 5,631 5,041
Consumer and other 1,336 1,128
Loans on deposits 76 82
------- -------
37,412 36,916
Less allowance for loan losses 549 784
------- -------
TOTALS $36,863 $36,132
======= =======
26
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
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 at
December 31, 1999 and 1998. During the year ended December 31, 1999, loans of
$27,000 were made to officers, directors and their related interests while
principal repayments of approximately $47,000 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 $27.9 million, or 75%, of the total loan portfolio at
December 31, 1999, and $26.7 million, or 72% of the total portfolio at December
31, 1998. 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
---------------------
1999 1998
---- ----
(In thousands)
Balance at beginning of year $ 784 $ 854
Provision (credit) reflected in operations 65 (103)
Less loans charged off (300) (21)
Recovery -- 54
----- -----
Balance at end of year $ 549 $ 784
===== =====
27
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE D - REAL ESTATE INVESTMENT - LIMITED PARTNERSHIP
The Association holds 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, 1997. The interest is payable semiannually
through November, 2001, at a fixed rate of 8.875%. The note payable is
collateralized by ten membership shares of the limited partnership. The note
balance of $300,000 was paid in full in November, 1999.
Condensed financial information for the entire partnership is summarized as
of and for the years ended December 31, 1999 and 1998 as follows:
1999 1998
---- ----
(In thousands)
Balance Sheet:
Investment in real estate $4,747 $4,945
Total assets 4,858 5,086
Mortgage payable 2,851 2,874
Partners' equity 1,552 1,927
Operations:
Rental income 439 512
Net loss 357 222
28
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE E - PREMISES AND EQUIPMENT
Premises and equipment are summarized as follows:
December 31
-----------------
1999 1998
---- ----
(In thousands)
Land $ 32 $ 32
Buildings 359 359
Furniture, equipment and vehicles 373 381
---- ----
764 772
Less accumulated depreciation 519 516
---- ----
TOTALS $245 $256
==== ====
NOTE F - DEPOSITS
Substantially all deposit amounts are interest bearing. The type of deposit
accounts are summarized as follows:
December 31
------------------------
1999 1998
---- ----
(In thousands)
Savings and transaction accounts $28,116 $27,655
Certificates of deposit 26,429 27,182
------- -------
TOTALS $54,545 $54,837
======= =======
Deposits in excess of $100,000 are not federally insured. At December 31,
1999 and 1998, the aggregate amount of individual deposits in excess of $100,000
was $8,067,000 and $6,318,000, respectively.
Scheduled maturities of certificates of deposit are as follows:
December 31
-----------------------
1999 1998
---- ----
(In thousands)
Within one year $22,582 $22,649
One to two years 3,387 3,841
Two to three years 460 692
------- -------
TOTALS $26,429 $27,182
======= =======
29
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE G - FEDERAL INCOME TAXES
Year Ended December 31
----------------------
1999 1998
---- ----
(In thousands)
Income tax expense is summarized as follows:
Federal:
Current $ 375 $ 325
Deferred 36 (49)
----- -----
TOTALS $ 411 $ 276
===== =====
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
----------------------
1999 1998
---- ----
(In thousands)
Federal taxes computed at statutory rate $ 483 $ 369
Increase (decrease) resulting from:
Limited partnership tax credits (86) (89)
Dividends received deduction (5) (4)
Other 19 --
----- -----
FEDERAL INCOME TAX PROVISION $ 411 $ 276
===== =====
Effective federal income tax rate 28.9% 25.4%
==== ====
The composition of the Company's net deferred tax liability is as follows:
<TABLE>
<CAPTION>
December 31
---------------------
1999 1998
---- ----
(In thousands)
<S> <C> <C>
Taxes (payable) refundable on temporary differences
at the expected statutory rate:
Deferred tax liabilities:
Federal Home Loan Bank stock dividends ($ 79) ($ 72)
Unrealized gains on securities available for sale (338) (817)
----- -----
TOTAL DEFERRED TAX LIABILITIES (417) (889)
Deferred tax assets:
Deferred compensation 351 351
Allowance for loan losses 186 266
Imputed loan interest 46 --
Other 5 --
----- -----
TOTAL DEFERRED TAX ASSETS 588 617
----- -----
NET DEFERRED FEDERAL
INCOME TAX BENEFIT (LIABILITY) $ 171 ($272)
===== =====
</TABLE>
30
<PAGE>
TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE G - FEDERAL INCOME TAXES (CONTINUED)
The Association was previously 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. If the amounts that qualified as
deductions for federal income tax purposes are later used for purposes other
than for 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, 1999, 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, 1999.
NOTE H - NOTE PAYABLE
In conjunction with the payment of the $10.1 million return of capital
distribution to stockholders, the Company borrowed $6.0 million from another
financial institution in December, 1999. The note bears interest at 7.50%,
requires interest payable monthly and principal payments of $1,177,000 and
$2,250,000 during the first and second quarters of 2000, respectively. The
remaining principal balance of $2,573,000 is scheduled to be repaid at $857,667
per year on January 15, 2001, 2002 and 2003. The lending agreement contains
covenants pertaining to compliance with various financial ratios and limitation
on the redemption of its stock beyond existing commitments. At December 31,
1999, management believes the Company is in compliance with all loan covenants.
The Company's borrowings at December 31, 1998 were comprised of a note payable
related to the Company's investment in a limited partnership (see Note D).
NOTE I - STOCKHOLDERS' EQUITY
In April 1999, the Board of Directors authorized the repurchase of up to
87,720 shares of its common stock in the open market or private transaction. The
repurchased shares are to be held in the treasury and used for general corporate
purposes including use in the Company's benefit plans. During 1999 the Company
purchased 87,720 shares at a total cost of $1,211,000.
In December, 1999, the stockholders approved various plans providing for
common stock-based awards to employees and non-employee directors. The plans
permit the granting of stock options, stock appreciation rights and stock
awards. Awards were granted to recognize prior service and retain future
services. The purchase price of stock options is set at the market price on the
date of the grant and expire in ten years for qualified options and 15 years for
non-qualified options from the date of the grant.
31
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
Recognition and Retention Plan:
On December 15, 1999 the Company issued 63,157 shares of its treasury stock
to satisfy the award to officers, directors and employees under the Recognition
and Retention Plan. Approximately one-third of the shares awarded vested with
plan participants in 1999 resulting in an annual charge of $263,000. The
remaining shares are presented as unearned compensation in stockholders' equity.
Stock Option Plan:
The Board of Directors adopted a Stock Option Plan that provided for the
issuance of 175,440 shares of authorized, but unissued shares of common stock at
fair value at the date of grant. During 1999, the Corporation granted options to
purchase 157,896 shares at an exercise price of $12.53 per share.
The Company accounts for its stock option plan in accordance with SFAS No.
123, "Accounting for Stock-Based Compensation," which contains a fair
value-based method for valuing stock-based compensation that entities may use,
which measures compensation cost at the grant date based on the fair value of
the award. Compensation is then recognized over the service period, which is
usually the vesting period. Alternatively, SFAS No. 123 permits entities to
continue to account for stock options and similar equity instruments under
Accounting Principles Board ("APB") Opinion No. 25, "Accounting for Stock Issued
to Employees." Entities that continue to account for stock options using APB
Opinion No. 25 are required to make pro forma disclosures of net earnings and
earnings per share, as if the fair value-based method of accounting defined in
SFAS No. 123 has been applied as discussed below.
1999
----
Net earnings (in thousands) As reported $1,012
======
Pro forma $ 838
======
Earnings per share:
Basic As reported $ .63
======
Pro forma $ .52
======
Diluted As reported $ .63
======
Pro forma $ .52
======
The fair value of each option grant is estimated on the date of grant using
the modified Black-Scholes options-pricing model with the following
weighted-average assumptions used for grants in fiscal 1999: dividend yield of
3.0%, expected volatility of 20.0%, a risk-free interest rate of 7.0% and
expected lives of ten and fifteen years.
32
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE I - STOCKHOLDERS' EQUITY (CONTINUED)
A summary of the status of the Company's stock option plan as of December
31, 1999 and changes during the period is as follows:
Weighted-Average
Shares Exercise Price
------ --------------
Outstanding at beginning of year -- $ --
Granted 157,896 12.53
Exercised -- --
Forfeited -- --
------- ------
Outstanding at end of year 157,896 $12.53
======= ======
Options exercisable at year-end 52,632 $12.53
======= ======
Weighted average fair value of
options granted during the year $ 3.86
======
The following information applies to options outstanding at December
31, 1999:
Number outstanding 157,896
Weighted-average exercise price $12.53
Weighted-average remaining contractual life 11.89 years
NOTE J - 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 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." The ESOP borrowed $1,403,000 from the Company to acquire
the shares to be allocated to the participants. SOP 93-6 requires the measure of
compensation expense recorded by employers to equal the average fair value of
ESOP shares allocated to participants during a fiscal year. The shares released
to participant accounts are based upon the principal and interest payments of
the underlying debt. As shares are committed to be released, the Company reports
compensation expense equal to the current market price of the shares and the
shares become outstanding for earnings per share computation. The expense
recognized for ESOP contribution totaled $170,000 and $130,000 for years 1999
and 1998, respectively. Dividends paid on unallocated shares are used to pay
debt service. During 1999, the ESOP purchased 65,618 shares on the open market
using the $6 per share return of capital payment. The shares purchased with
unallocated share funds were added to the original unallocated shares and are
being released with the original shares. At December 31, 1999, the ESOP held
170,173 unallocated shares with a fair market value of $2,212,000 and 31,412
allocated shares. The cost of the original unallocated shares at December 31,
1999 and 1998 is $1,159,000 and $1,287,000, respectively, which is presented as
common stock purchased by the Employee Stock Ownership Plan in stockholders'
equity.
33
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE J - EMPLOYEE RETIREMENT AND DEFERRED COMPENSATION PLANS
(CONTINUED)
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 was 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 for the
year ended December 31, 1998.
In November 1998, the Board of Directors voted to terminate a
noncontributory defined benefit pension plan covering all eligible employees.
The termination was effective January 31, 1999 and all participants became 100%
vested in the benefits accrued. The termination did not result in further
liability to the Company. Plan assets consisted of fully-insured retirement
income life insurance policies and cash deposit accounts. At plan year ended
August 31, 1998, the plan asset values were $1,049,000, which approximated the
actuarially computed value of vested and nonvested benefits. Pension cost
totaled $33,000 for the year ended December 31, 1998.
NOTE K - 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.
34
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE K - COMMITMENTS AND CONTINGENCIES (CONTINUED)
At December 31, 1998, the Association had outstanding commitments of
approximately $2.3 million to originate fixed and variable rate residential real
estate loans. The average interest rate of loan commitments was 7.9% at December
31, 1999. 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 L - FAIR VALUES OF FINANCIAL INSTRUMENTS
The following table shows carrying values and the related estimated fair
values of financial instruments at December 31, 1999 and 1998. Items which are
not financial instruments are not included.
<TABLE>
<CAPTION>
December 31
--------------------------------------------------
1999 1998
----------------------- ----------------------
Estimated Estimated
Carrying Fair Carrying Fair
Amounts Value Amounts Value
------- ----- ------- -----
(In thousands)
<S> <C> <C> <C> <C>
Cash and equivalents $ 7,948 $ 7,948 $ 17,124 $ 17,124
Securities:
Available for sale 16,515 16,515 19,751 19,751
Held to maturity 17,255 16,768 12,432 12,414
Federal Home Loan Bank stock 340 340 317 317
Loans 36,863 36,504 36,132 36,479
Accrued interest receivable 356 356 282 282
Deposits:
Checking, savings and money market (28,116) (28,116) (27,655) (27,655)
Certificates of deposit (26,429) (26,409) (27,182) (27,254)
Accrued interest payable (129) (129) (110) (110)
Note payable (6,000) (5,909) (300) (300)
</TABLE>
35
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE L - 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 (1998) 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, 1999 and 1998,
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, 1999 and 1998,
respectively, applied for the time period until maturity; the fair value of the
note payable at December, 1999 was determined with reference to rates in effect
for similar lending arrangements; 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 $340,000 and $383,000 at December 31, 1999 and 1998,
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, 1999 or 1998, 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,
1999 and 1998, should not necessarily be considered to apply at subsequent
dates.
NOTE M - REGULATORY CAPITAL
The Association is subject to minimum 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 Company'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 classifications are also subject to qualitative judgments by
the regulators about components, risk weightings, and other factors. Such
minimum capital standards generally require the maintenance of regulatory
capital sufficient to meet each of three tests, hereinafter described as the
tangible capital requirement, the core capital requirement and the risk-based
capital requirement. The tangible capital requirement provides for minimum
tangible capital (defined as stockholders' equity less all intangible assets)
equal to 1.5% of adjusted total assets. The core capital requirement provides
for minimum core capital (tangible capital plus certain forms of supervisory
goodwill and other qualifying intangible assets) generally equal to 4.0% of
adjusted total assets except for those associations with the highest examination
rating and acceptable levels of risk.
36
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE M - REGULATORY CAPITAL (CONTINUED)
The risk-based capital requirement currently provides for the maintenance
of core capital plus general loan loss allowances equal to 8.0% of risk-weighted
assets. In computing risk-weighted assets, the Association multiplies the value
of each asset on its statement of financial condition by a defined
risk-weighting factor, e.g., one-to four-family residential loans carry a
risk-weighted factor of 50%.
During the calendar year 1999, the Association was notified by its
regulator that it was categorized as "well-capitalized" under the regulatory
framework for prompt corrective action. To be categorized as "well-capitalized,"
the Association must maintain minimum capital ratios as set forth in the
following table.
As of December 31, 1999 and 1998, management believes that the Association
met all capital adequacy requirements to which it was subject.
<TABLE>
<CAPTION>
1999: 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>
Tangible capital $22,207 28.2% =>$1,181 =>1.5% =>$3,932 => 5.0%
Core capital $22,207 28.2% =>$3,150 =>4.0% =>$4,725 => 6.0%
Risk-based capital $23,161 57.1% =>$3,243 =>8.0% =>$4,053 =>10.0%
</TABLE>
<TABLE>
<CAPTION>
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>
Tangible capital $21,159 27.0% =>$1,177 =>1.5% =>$3,923 => 5.0%
Core capital $21,159 27.0% =>$3,139 =>4.0% =>$4,708 => 6.0%
Risk-based capital $22,758 55.3% =>$3,291 =>8.0% =>$4,115 =>10.0%
</TABLE>
37
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE M - REGULATORY CAPITAL (CONTINUED)
The Association's management believes that, under the current regulatory
capital regulations, the Association will continue to meet its minimum capital
requirements in the foreseeable future. However, events beyond the control of
the Association, such as increased interest rates or a downturn in the economy
in the primary market area, could adversely affect future earnings and,
consequently, the ability to meet future minimum regulatory capital
requirements.
The Association is subject to regulations imposed by the OTS regarding the
amount of capital distributions payable to the Company. Generally, the
Association's payment of dividends is limited, without prior OTS approval, to
net earnings for the current calendar year plus the two preceding calendar
years, less capital distributions paid over the comparable time period. Insured
institutions are required to file an application with the OTS for capital
distributions in excess of this limitation.
38
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE N - 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, 1999 and 1998, and
the results of its operations and its cash flows for the year 1999 and the
period October 26, 1998 (date operations commenced) through December 31, 1998.
First Niles Financial, Inc.
STATEMENT OF FINANCIAL CONDITION
December 31, 1999 and 1998
(In thousands)
1999 1998
---- ----
ASSETS
Cash and cash equivalents:
Noninterest bearing $ 3 $ 15
Interest bearing 1,438 5,404
------- -------
1,441 5,419
Account receivable from Home Federal Savings
and Loan Association of Niles 263 --
Securities available for sale -- 1,826
Investment in Home Federal Savings and
Loan Association of Niles 22,863 22,745
Accrued interest and prepaid expense 20 20
------- -------
TOTAL ASSETS $24,587 $30,010
======= =======
LIABILITIES AND STOCKHOLDERS' EQUITY
Accounts payable to Home Federal Savings and
Loan Association of Niles $ -- $ 82
Accrued expense 77 5
Note payable 6,000 --
------- -------
TOTAL LIABILITIES 6,077 87
Stockholders' equity 18,510 29,923
------- -------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $24,587 $30,010
======= =======
39
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE N - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
(CONTINUED)
First Niles Financial, Inc.
CONDENSED STATEMENT OF INCOME
For the year ended December 31, 1999 and the period
October 26, 1998 (date operations commenced) through December 31, 1998
(In thousands)
1999 1998
---- ----
Revenue:
Interest income $ 321 $ 61
------- -------
TOTAL REVENUE 321 61
General and administrative expenses 375 60
------- -------
INCOME (LOSS) BEFORE INCOME TAX
AND EQUITY IN EARNINGS OF SUBSIDIARY (54) 1
Income tax 18 --
------- -------
INCOME (LOSS) BEFORE EQUITY
IN EARNINGS OF SUBSIDIARY (36) 1
Equity in earnings of subsidiary 1,048 272
------- -------
NET INCOME $ 1,012 $ 273
======= =======
40
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE N - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
(continued)
<TABLE>
<CAPTION>
First Niles Financial, Inc.
CONDENSED STATEMENT OF CASH FLOWS
For the year ended December 31, 1999 and the period
October 26, 1998 (date operations commenced) through December 31, 1998
(In thousands)
1999 1998
---- ----
<S> <C> <C>
Cash flows provided by (used in) operating activities:
Net income for the period $ 1,012 $ 273
Adjustments to reconcile net income to net cash
provided by operating activities:
Undistributed income of consolidated subsidiary (1,048) (272)
Amortization of premium on securities available for sale 20 1
Net (increase) decrease in due from subsidiary, accrued
interest and prepaid expenses 89 (20)
Increase in accounts payable and accrued expense 72 87
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 145 69
Cash flows provided by (used in) investing activities:
Investment in subsidiary -- (8,451)
Purchase of securities available for sale (3,984) (1,827)
Proceeds for sale of securities available for sale 5,790 --
Net (increase) decrease in interest bearing deposits 3,966 (5,404)
-------- --------
NET CASH PROVIDED BY
(USED IN) INVESTING ACTIVITIES 5,772 (15,682)
Cash flows provided by (used in) financing activities:
Dividends paid (587) --
Return of capital distribution (10,131) --
Purchase of treasury stock (1,211) --
Proceeds of note payable 6,000 --
Issuance of common stock - net -- 15,498
Proceeds from subsidiary for Employee Stock
Ownership Plan shares -- 130
-------- --------
NET CASH PROVIDED BY
(USED IN) FINANCING ACTIVITIES (5,929) 15,628
-------- --------
NET INCREASE IN CASH 12 15
Cash and cash equivalents at beginning of period 15 --
-------- --------
CASH AND CASH EQUIVALENTS AT END OF PERIOD $ 3 $ 15
======== ========
Noncash transaction:
Employee stock benefit plan transactions $ 434 $ --
======== ========
</TABLE>
41
<PAGE>
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
December 31, 1999 and 1998
NOTE O - 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 Savings Association Insurance Fund (SAIF) insured institutions.
42
<PAGE>
FIRST NILES FINANCIAL, INC.
STOCKHOLDER INFORMATION
================================================================================
ANNUAL MEETING
The annual meeting of stockholders will be held at 2:00 P.M. local time,
WEDNESDAY, APRIL 19, 2000, 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, 1999, there were 1,754,411 shares of
common stock issued, 1,729,849 shares of common stock outstanding and 502
stockholders of record.
The table below presents the quarterly range of high and low sales of First
Niles' common stock since becoming a public company on October 26, 1998, as well
as the amount of cash distributions declared during the stated periods. The
price information set forth in the table below was provided by the Nasdaq Stock
Market. A $6.00 per share return of capital distribution was paid on the common
stock during the quarter ended December 31, 1999. The $6.00 capital distribution
and the dividends paid by the Company to date have been accounted for by the
Company as a return of capital.
High Low Dividends Paid
---- --- --------------
Fourth Quarter (since October 26, 1998) $12.000 $ 9.750 $ ---
First Quarter (ended March 31, 1999) $11.250 $10.250 $0.07
Second Quarter (ended June 30, 1999) $13.875 $10.750 $0.10
Third Quarter (ended September 30, 1999) $15.750 $13.250 $0.10
Fourth Quarter (ended December 31, 1999) $21.000 $11.750 $6.10
Dividend payment decisions are made after considering a variety of factors
including earnings, financial condition, market considerations and regulatory
restrictions. Restrictions on dividend payments are described in Note M of the
Notes to Consolidated Financial Statements included in this Annual Report.
STOCKHOLDER 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 REPORT ON FORM 10-KSB
Copies of the Company's Annual Report on Form 10-KSB filed with the Securities
and Exchange Commission can be obtained, without cost, 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.
43
<PAGE>
FIRST NILES FINANCIAL, INC.
CORPORATE INFORMATION
================================================================================
<TABLE>
<CAPTION>
<S> <C>
COMPANY AND BANK ADDRESS
55 North Main Street Telephone: (330) 652-2539
Niles, Ohio 44446 Fax: (330) 652-0911
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>
44
CONSENT OF ACCOUNTANTS
We consent to the incorporation by reference in the Registration Statement
(File No. 333- 93677) of First Niles Financial, Inc.'s 1999 Recognition and
Retention Plan and 1999 Stock Option and Incentive Plan on Form S-8 of our
report, dated January 24, 2000, on the consolidated financial statements
incorporated by reference in First Niles' Annual Report on Form 10-KSB for the
fiscal year ended December 31, 1999.
/s/ ANNESS, GERLACH & WILLIAMS
Niles, Ohio
March 27, 2000
<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, 1999 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-31-1999
<PERIOD-END> Dec-31-1999
<CASH> 1,610
<INT-BEARING-DEPOSITS> 3,238
<FED-FUNDS-SOLD> 3,100
<TRADING-ASSETS> 0
<INVESTMENTS-HELD-FOR-SALE> 16,515
<INVESTMENTS-CARRYING> 17,255
<INVESTMENTS-MARKET> 16,768
<LOANS> 36,863
<ALLOWANCE> 549
<TOTAL-ASSETS> 80,418
<DEPOSITS> 54,545
<SHORT-TERM> 3,427
<LIABILITIES-OTHER> 1,363
<LONG-TERM> 2,573
0
0
<COMMON> 18
<OTHER-SE> 18,492
<TOTAL-LIABILITIES-AND-EQUITY> 80,418
<INTEREST-LOAN> 2,855
<INTEREST-INVEST> 2,206
<INTEREST-OTHER> 364
<INTEREST-TOTAL> 5,425
<INTEREST-DEPOSIT> 1,945
<INTEREST-EXPENSE> 1,999
<INTEREST-INCOME-NET> 3,426
<LOAN-LOSSES> 65
<SECURITIES-GAINS> 116
<EXPENSE-OTHER> 2,086
<INCOME-PRETAX> 1,423
<INCOME-PRE-EXTRAORDINARY> 1,012
<EXTRAORDINARY> 0
<CHANGES> 0
<NET-INCOME> 1,012
<EPS-BASIC> 0.63
<EPS-DILUTED> 0.63
<YIELD-ACTUAL> 4.10
<LOANS-NON> 263
<LOANS-PAST> 563
<LOANS-TROUBLED> 0
<LOANS-PROBLEM> 530
<ALLOWANCE-OPEN> 784
<CHARGE-OFFS> 300
<RECOVERIES> 0
<ALLOWANCE-CLOSE> 549
<ALLOWANCE-DOMESTIC> 549
<ALLOWANCE-FOREIGN> 0
<ALLOWANCE-UNALLOCATED> 0
</TABLE>
