First Niles Financial (FNFI) 10QSB 2002 Q2 Quarterly report (small business)

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION
WASHINGTON, D.C. 20549
_______________________________________________

FORM 10-QSB

[X]	QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934
	For the quarterly period ended June 30, 2002
[   ]	TRANSITION REPORT UNDER 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.(Exact name of small business issuer as specified in its charter)

Delaware(State or other jurisdiction of incorporation or organization)	34-1870418(I.R.S. Employer Identification No.)
55 North Main Street, Niles, Ohio(Address of principal executive offices)	44446(Zip Code)

Issuer's telephone number, including area code: (330) 652-2539

              Check whether the issuer (1) filed all reports required to be filed by Section 13 or 15(d) of the Exchange Act during the past 12 months (or for such shorter period that the issuer was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. Yes [X]         No [    ]

              Shares of common stock, par value $.01 per share, outstanding as of July 31, 2002: 1,486,340

              Transitional Small business Disclosure Format (check one): Yes [   ]        No [X]


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PART I - FINANCIAL INFORMATION

Item 1. Financial Statements

CONDENSED CONSOLIDATED STATEMENTS OF FINANCIAL CONDITIONFIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands, except share data)

			June 30, 2002	December 31, 2001
			(Unaudited)
ASSETS
Cash and cash equivalents:
	Noninterest bearing		$  2,086	$  1,167
	Interest bearing		7,811	5,080
		Total cash and equivalents	9,897	6,247
Securities available for sale - at market			38,692	39,080
Securities to be held to maturity - at cost			6,178	8,866
Loans receivable, net of allowance for loan losses of $738 and $676			40,118	39,508
Accrued interest receivable			717	735
Federal Home Loan Bank stock, at cost			1,028	1,005
Real estate investment, limited partnership - at equity			172	208
Prepaid expenses and other assets			133	108
Prepaid federal income taxes			-	2
Premises and equipment, at cost less accumulated depreciation			340	348
		TOTAL ASSETS	$97,275	$96,107
LIABILITIES
Deposits			$57,786	$57,061
Accrued interest payable			146	173
Accounts payable and other liabilities			1,323	1,240
Federal Home Loan Bank advances			19,500	19,500
Federal income tax payable			13	-
Deferred federal income tax liability			306	167
		TOTAL LIABILITIES	79,074	78,141
SHAREHOLDERS' 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
Paid in capital			6,810	6,797
Retained earnings			13,560	13,506
Net unrealized gains on securities available for sale			1,649	1,337
Common stock purchased by the Employee Stock Ownership Plan			(935)	(935)
Treasury stock - 246,771 shares and 238,343 shares			(2,901)	(2,757)
		TOTAL SHAREHOLDERS' EQUITY	18,201	17,966
TOTAL LIABILITIES AND SHAREHOLDERS' EQUITY			$97,275	$96,107

SEE ACCOMPANYING NOTES

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CONDENSED CONSOLIDATED STATEMENTS OF INCOMEFIRST NILES FINANCIAL, INC. AND SUBSIDIARY(In thousands, except share data)(Unaudited)

				Three Months Ended June 30,		Six Months Ended June 30,
				2002	2001	2002	2001
Interest income:
	Loans receivable
		First mortgage loans		$   670	$   665	$1,330	$1,355
		Consumer and other loans		38	31	74	58
	Mortgage-backed and related securities			139	181	296	383
	Investments			576	547	1,130	949
	Interest-bearing deposits			28	54	58	124
			TOTAL INTEREST INCOME	1,451	1,478	2,888	2,869
Interest expense:
	Deposits			436	551	904	1,090
	Borrowings			222	181	443	288
			TOTAL INTEREST EXPENSE	658	732	1,347	1,378
			NET INTEREST INCOME	793	746	1,541	1,491
Provision for loan losses				24	30	54	60
			NET INTEREST INCOME AFTER
			PROVISION FOR LOAN LOSSES	769	716	1,487	1,431
Noninterest income:
	Gain on sale of securities			38	59	37	122
	Service fees and other income			12	8	25	20
			TOTAL NONINTEREST INCOME	50	67	62	142
Noninterest expense:
	Equity in loss of limited partnership			14	9	36	18
	General and administrative:
		Compensation and benefits		275	252	558	796
		Occupancy and equipment		20	17	43	36
		Federal deposit insurance premiums		2	3	5	6
		Legal and audit		52	32	96	63
		Franchise taxes		42	59	88	118
		Other operating expense		80	75	147	137
			TOTAL NONINTEREST EXPENSE	485	447	973	1,174
			INCOME BEFORE INCOME TAXES	334	336	576	399
Federal income taxes				97	95	162	100
			NET INCOME	$ 237	$ 241	$ 414	$ 299
			EARNINGS PER SHARE	$0.17	$0.17	$0.30	$0.21
			DILUTED EARNINGS PER SHARE	$0.17	$0.17	$0.29	$0.21

SEE ACCOMPANYING NOTES.

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CONDENSED CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOMEFIRST NILES FINANCIAL, INC. AND SUBSIDIARY(In thousands)(Unaudited)

				Six Months Ended June 30,
				2002	2001
Net income				$414	$299
Other comprehensive income:
	Unrealized gains (losses) on securities:
		Unrealized gains (losses) arising for period		513	(291)
		Related income tax		(174)	99
				339	(192)
	Reclassification adjustment:
		Gain included in net income		(37)	(122)
		Related income tax		12	41
				(25)	(81)
Other comprehensive income				314	(273)
			COMPREHENSIVE INCOME	$728	$26

SEE ACCOMPANYING NOTES.




















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CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWSFIRST NILES FINANCIAL, INC. AND SUBSIDIARY(In thousands)(Unaudited)

				Six Months Ended June 30,
				2002	2001
CASH FLOWS FROM OPERATING ACTIVITIES
Net income				$   414	$   299
Adjustments to reconcile net income to net cash provided by operating activities
	Deferred income taxes			(21)	(25)
	Depreciation			16	14
	Amortization of deferred loan fees and costs			(4)	(7)
	Amortization of discounts and premiums on investments and
		mortgage-backed and related securities		(8)	(12)
	Recognition and Retention Plan shares			-	264
	Gain on sale of securities			(38)	(123)
	ESOP shares allocated			-	(1)
	Equity in loss of limited partnership			36	19
	Provision for loan losses			54	60
	Federal Home Loan Bank stock dividends			(23)	(22)
				426	466
Net increase in accrued interest receivable, prepaid expenses
	and other assets			(6)	(429)
Net increase in accrued interest, accounts payable and
	other liabilities			73	112
			NET CASH PROVIDED BY
			OPERATING ACTIVITIES	493	149
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale				2,065	2,156
Purchase of FHLB stock				-	(526)
Purchase of securities available for sale				(7,470)	(19,988)
Proceeds from maturity of securities available for sale				6,153	2,000
Proceeds from principal payments on mortgage-backed
	and related securities			2,847	2,813
Net (increase) decrease in interest-bearing deposits with banks				(2,731)	194
Net increase in loans				(660)	(1,076)
Additions to premises and equipment				(8)	(11)
			NET CASH PROVIDED BY (USED IN)
			INVESTING ACTIVITIES	196	(14,438)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase in savings accounts, MMDAs and NOW accounts				1,760	409
Net increase (decrease) in certificates of deposits				(1,035)	1,506
Purchase of treasury shares				(245)	(520)
Cash dividends paid on common stock				(360)	(319)
Proceeds from FHLB Advances				-	13,000
Common stock options exercised				110	-
			NET CASH PROVIDED BY
			FINANCING ACTIVITIES	230	14,076
			NET INCREASE (DECREASE) IN CASH	919	(213)
CASH AT BEGINNING OF PERIOD				1,167	969
			CASH AT END OF PERIOD	$2,086	$756
Cash paid during the period for:
	Interest			$1,373	$1,405
	Income taxes			$165	$125

SEE ACCOMPANYING NOTES

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NOTES TO FINANCIAL STATEMENTSFIRST NILES FINANCIAL, INC. AND SUBSIDIARYJune 30, 2002 and 2001 (Unaudited)

NOTE A -- SIGNIFICANT ACCOUNTING POLICIES

The accounting and reporting policies followed by First Niles Financial, Inc. ("First Niles") are in accordance with accounting principles generally accepted in the United States of America and conform to general practices within the savings and loan industry.

The accompanying unaudited financial statements were prepared in accordance with instructions for Form 10-QSB and, therefore do not include information or footnotes necessary for a complete presentation of financial position, results of operations and cash flows in conformity with accounting principles generally accepted in the United States of America. Management believes that all normal recurring adjustments that are necessary for a fair presentation of interim period financial information have been reflected in these financial statements. The results of operations for the interim periods discussed herein are not necessarily indicative of the results that may be expected for a full year. These interim financial statements should be read in conjunction with the consolidated financial statements and notes included in the First Niles Financial, Inc. Annual Report on Form 10-KSB for the year ended December 31, 2001.

NOTE B -- STOCK CONVERSION

On October 26, 1998, First Niles began trading as a public company on the Nasdaq SmallCap Market. First Niles issued 1,754,411 shares, $.01 par value common stock, at $10.00 per share, raising $15.5 million, net of shares acquired by the newly formed Employee Stock Ownership Plan (the "ESOP") and net of the costs of the conversion. Home Federal Savings and Loan Association of Niles converted to a federal stock savings and loan association and simultaneously received proceeds of $8.5 million in exchange for all of its common stock to First Niles. This transaction was accounted for using historical cost in a manner similar to that in a pooling of interests.

NOTE C -- EARNINGS PER SHARE

Basic earnings per share is computed by dividing net income by the weighted-average shares outstanding, during the period, less weighted-average shares in the ESOP that are unallocated and not committed to be released. Diluted earnings per share reflect the potential effect of stock options and is calculated using the treasury stock method. For the quarter ended June 30, 2002 the market price of First Niles stock exceeded the exercise price of all outstanding options; the resulting dilution, however, did not result in a reduction from basic earnings per share, as rounded to the nearest whole cent.

The following table sets forth the computation of earnings per share for the three month and six month periods ended June 30, 2002 and June 30, 2001 (income in thousands):

		Three Months Ended June 30,		Six Months Ended June 30,
		2002	2001	2002	2001
Net income		$237	$241	$414	$299
Earnings applicable to basic earnings per share		237	241	414	299
Average common shares		1,512,568	1,581,967	1,514,422	1,601,970
Less average unallocated ESOP shares		122,752	142,504	125,155	145,016
Average common shares outstanding - basic		1,389,816	1,439,464	1,389,267	1,456,954
Average common shares outstanding - diluted		1,411,107	1,439,464	1,406,328	1,456,954
Earnings per share	- basic	$0.17	$0.17	$0.30	$0.21
	- diluted	$0.17	$0.17	$0.29	$0.21

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Item 2. Management's Discussion and Analysis of Financial Condition
and Results of Operations

General

First Niles Financial, Inc., a Delaware corporation, was formed in July 1998 to act as the holding company for Home Federal Saving and Loan Association of Niles upon the completion of Home Federal's conversion from mutual to stock form. The conversion was completed on October 26, 1998. All references to First Niles or Home Federal, unless otherwise indicated, on or before October 26, 1998, refer to Home Federal before its conversion from mutual to stock form. References in this Form 10-QSB to "we", "us", and "our" refer to First Niles and/or Home Federal as the context requires.

Our principal business consists of 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. Additionally, we borrow funds from the FHLB and reinvest the proceeds in investment securities at favorable interest rate spreads.

The following discussion compares our consolidated financial condition at June 30, 2002 to December 31, 2001 and the results of operations for the three month and six month periods ended June 30, 2002 with the same periods ended June 30, 2001. This discussion should be read in conjunction with the consolidated financial statements and footnotes included herein.

Changes in Financial Condition from June 30, 2002 to December 31, 2001

Total assets increased by $1.2 million, or 1.2%, to $97.3 million at June 30, 2002 from $96.1 million at December 31, 2001. This increase was primarily reflected in a $3.7 million increase in cash and cash equivalents and a $610,000 increase in net loans receivable, partially offset by a $3.1 million decrease in total securities. The increase in cash and cash equivalents is expected to be temporary, at least until suitable investment alternatives arise.

The aforementioned increase in assets was primarily related to a $235,000 increase in shareholders' equity and a $933,000 increase in total liabilities. Deposits increased $725,000 during this time period. The increase in deposits was comprised of a $1.8 million increase in savings accounts and NOW accounts, partially offset by a decline of $1.0 million in certificates of deposit. The increase in deposits during the period is primarily attributable to Management's decision to maintain interest rates paid on deposits at slightly higher levels than rates paid by our competitors in our market area. This strategy has allowed us to gain market share in a low interest rate environment.

Shareholders' equity at June 30, 2002 was $18.2 million, a $235,000, or 1.3% increase from December 31, 2001. The increase in shareholders' equity was primarily the result of a $312,000 increase in net unrealized gains on securities available for sale, partially offset by a $135,000 increase in treasury stock. The company repurchased 17,200 of its shares during the six month period ended June 30, 2002 at an average price of $14.26. This repurchase was partially offset by the exercise of options to purchase 8,772 shares of the Company's common stock, resulting in a net change in treasury stock of 8,428 shares.

The repurchase of the aforementioned shares completed the 5.0% share repurchase program originally authorized in June 2001. During July, 2002, the Company's Board of Directors authorized another

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twelve-month share repurchase program, up to a maximum of 5.0%, or 75,382 shares, of the total outstanding shares of the Company.

Book value per common share was $12.07 at June 30, 2002, compared to $11.85 at December 31, 2001. The dividend paid during each the first two quarters was equivalent to $0.13 per common share. At June 30, 2002 and December 31, 2001, there were 1,507,640 and 1,516,068 shares of common stock outstanding, respectively.

Nonperforming loans, consisting of nonaccruing loans and loans delinquent more than 90 days, totaled $1.0 million at June 30, 2002, or 1.1% of total assets, compared to $1.4 million, or 1.5% of total assets as of December 31, 2001. The allowance for loan losses was $738,000 at June 30, 2002, representing coverage of 70.4% of non-performing loans and 1.8% of net loans receivable. At December 31, 2001, the allowance for loan losses represented coverage of 48.1% of nonperforming loans and 1.7% of net loans receivable. Management believes that the current level of the allowance for loan losses remains adequate to absorb losses resulting from uncollectible loans. At June 30, 2002 we had no foreclosed assets as compared to $53,000 at December 31, 2001.

Results of Operations for the Three-Month Period Ended June 30, 2002 Compared To
June 30, 2001

General.Our results of operations depend primarily on our net interest income, which is determined by (i) the difference between interest earned on interest-earning assets, consisting primarily of mortgage loans, collateralized mortgage obligations, other investments and interest-bearing deposits in other institutions, and interest expense on interest-bearing liabilities, primarily 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.For the three months ended June 30, 2002, First Niles recorded net income of $237,000. This net income resulted in an annualized return on average assets of 0.99% as compared to 1.08% for the same period one year ago. The annualized return on shareholders' equity for the three months ended June 30, 2002 was 5.47% compared to 5.19% for the three months ended June 30, 2001. Net income decreased by $4,000, or 1.7%, for the three months ended June 30, 2002 as compared to the respective 2001 period. Earnings per share and diluted earnings per share for the three months ended June 30, 2002 was $0.17, unchanged from the same three month period in 2001.

Net Interest Income.Net interest income increased by $47,000, or 6.3%, for the three month period ended June 30, 2002 as compared to the respective 2001 period. For the three months ended June 30, 2002 the interest rate spread was 2.79% as compared to 2.51% for the same period one year prior. The net interest margin for the current period was 3.40%, unchanged from the same period one year ago.

For the three months ended June 30, 2002 total interest income decreased by $27,000, or 1.8%, as compared to the same period in 2001. Specifically, interest income on interest bearing deposits and mortgage-backed and related securities decreased a collective $68,000 for the three month period ended June 30, 2002 as compared to the same period in 2001. A $41,000 collective increase in interest on loans receivable and investments for the three month period ended June 30, 2002 as compared to the same period in 2001 partially offset the aforementioned decrease.


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Total interest expense decreased by $74,000, or 10.1%, as compared to the same period one year prior. Total interest on deposits decreased $115,000 from period to period. The cost of funds for the quarter ended June 30, 2002 was 3.43%, an 81 basis point decrease from the same quarter one year ago.

These decreases affecting both the asset and liability sides of the balance sheet as described above were generally attributable to the dramatic downward movement in market interest rates experienced during the respective time periods. The decrease in total interest income was partially offset by increased loan and investment balances.

The cost of funds would have decreased further if not for the Company's borrowings from the FHLB. The cost of these borrowings were 4.58% at June 30, 2002, unchanged from June 30, 2001. These borrowings were obtained for subsequent reinvestment into investment securities (leverage strategy). The resulting net interest rate spread and net interest margin on this leveraged strategy is generally lower than the same measures derived from core operations. The interest rate spread and net interest margin on the leverage strategy was approximately 190 basis points as of June 30, 2002. This leverage strategy requires a negligible amount of administrative expense and is the primary reason that such an activity can be undertaken at a reduced interest rate spread and net interest margin as compared to core operations, while making a significant contribution to net income.

Provision for Loan Losses. For the three months ended June 30, 2002 the provision for loan losses was $24,000, $6,000 less than for the same period in 2001. This decline is generally attributable to an improvement in the overall asset quality of our loan portfolio. Additionally, the Company had an $8,000 recovery that increased the allowance for loan losses during the quarter. The provision for loan losses is a result of management's periodic analysis of risks inherent in our loan portfolio from time to time, as well as the adequacy of the allowance for loan losses. It is our policy to provide valuation allowances for estimated losses on loans based upon past loss experience, current trends in the level of delinquent and specific problem loans, loan concentrations to single borrowers, adverse situations that may affect the borrower's ability to repay, the estimated value of any underlying collateral, and current and anticipated economic conditions in our market area. Accordingly, the calculation of the adequacy of the allowance for loan losses is not based directly on the level of non-performing assets.

Management will continue to monitor the allowance for loan losses and make future additions to the allowance through the provision for loan losses as economic conditions dictate. Although we maintain the 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, management's 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.

Noninterest Income. Noninterest income of $50,000 for the three months ended June 30, 2002 was $17,000 lower than during the same period in 2001. This decrease was essentially the result of a $21,000 decrease in gain on sale of investment securities in the current quarter as compared to previous comparative quarter. Service fees and other income increased by $4,000 to $12,000 during the current quarter as compared to the same quarter in 2001.

Noninterest Expense. Noninterest expense increased $38,000, or 8.5%, for the three months ended June 30, 2002 as compared to the same period in 2001. This increase was primarily attributable to a $23,000 increase in compensation expense generally related to increased Employee Stock Ownership Plan costs and higher health insurance premiums. Additionally, legal and audit expenses were $20,000 higher in the current quarter as compared to the same quarter one year ago.


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Federal Income Taxes. The provision for federal income taxes increased by $2,000 in the three months ended June 30, 2002 as compared to the same period in 2001, resulting in a tax provision of $97,000. The effective tax rate in the current three month period was 29.0%. For the respective three-month period, one year prior, the effective tax rate was 28.3%.
The above effective tax rates differ from the statutory rate of 34% primarily due to our ownership interest in a low income housing tax credit program. The tax credits from this program are expected to last through 2006.

Results of Operations for the Six-Month Periods Ended June 30, 2002 Compared to
June 30, 2001

Net Income.First Niles recorded net income of $414,000 for the six months ended June 30, 2002. This net income resulted in an annualized return on average assets for the six-month period of 0.86%, compared to 0.70% for the same period one year ago, and an annualized return on average shareholders' equity of 4.70%, as compared to 3.20% for the same period one year ago. Net income increased by $115,000, or 38.5% for the six months ended June 30, 2002 as compared to the six months ended June 30, 2001. The increase in net income was primarily comprised of a $50,000 increase in net interest income, a $201,000 decrease in noninterest expense and a $6,000 decrease in the provision for loan losses partially offset by a $80,000 decrease in noninterest income and a $62,000 increase in federal income tax expense. Earnings per share, on a basic and diluted basis, for the six months ended June 30, 2002 was $0.30 and $0.29, respectively, as compared to $0.21 for the same six month period in 2001.

Net Interest Income.Net interest income increased by $50,000, or 3.4% for the six months ended June 30, 2002 as compared to the respective 2001 period. For the six months ended June 30, 2002 total interest income increased by $19,000 and total interest expense decreased by $31,000 as compared to the same period in 2001. For the six months ended June 30, 2002, the interest rate spread was 2.63% as compared to 2.60% for the six months ended June 30, 2001. For the six months ended June 30, 2002, the net interest margin was 3.29% as compared to 3.55% for the six months ended June 30, 2001. For the six months ended June 30, 2002, the yield on interest earning assets was 6.16% as compared to 6.85% for the six months ended June 30, 2001, a decline of 69 basis points. The overall cost of funds was 3.53% for the six months ended June 30, 2002 as compared to 4.25% for the same period in 2001, a decline of 72 basis points. A significant decrease in market interest rates was the primary reason for the decline in the yield on interest earning assets as well as the decline in our overall cost of funds.

Provision for Loan Losses. The provision for loan losses in the six months ended June 30, 2002 was $54,000, compared to $60,000 in the six months ended June 30, 2001.

Noninterest Income.Noninterest income totaled $62,000 for the six months ended June 30, 2002 as compared to $142,000 during the same period in 2001. Most of this decrease was attributable to an $85,000 decline in gain on sale of investment securities in the current period as compared to the prior comparative period. Gain on sale of investment securities was $37,000 for the six months ended June 30, 2002 as compared to $122,000 for the six months ended June 30, 2001. The sale of 500 and 2,000 shares of Freddie Mac stock accounted for most of the gain on sale of investments recorded in each of the respective six month periods discussed. Service fees and other income increased to $25,000 during the six months ended June 30, 2002 as compared to $20,000 for the six months ended June 30, 2001.

Noninterest Expense.Noninterest expense decreased $201,000, or 17.1%, for the six months ended June 30, 2002 as compared to the same period one year earlier. Compensation and benefits, franchise taxes and federal deposit insurance premiums decreased by $238,000, $30,000 and $1,000, respectively. Occupancy and equipment expense, legal and audit fees, equity in loss of limited partnership and other operating expenses increased by a collective $68,000 from period to period. The decrease in compensation was primarily related to a $280,000 expense incurred during the first quarter of 2001 in

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conjunction with shares awarded to officers, directors and employees as part of the Company's Recognition and Retention Plan, as approved by shareholders. There was no comparable expense during the current period. The decrease in franchise taxes was attributable to decreased capital levels at the subsidiary level.

Federal Income Taxes.The provision for federal income taxes increased by $62,000 for the six months ended June 30, 2002 as compared to the same period in 2001. The increase in the provision for federal income taxes was primarily due to an increase in pre-tax income of $177,000. The effective tax rate was 28.1% for the six month period ended June 30, 2002 compared to 25.1% in the same period one year earlier. The above effective tax rates differ from the statutory rate of 34% primarily due to our ownership interest in a low income housing tax credit program. The tax credits from this program are expected to last through 2006.

Liquidity and Capital Resources

Our main source of funds are deposits, and loan and securities repayments. While scheduled loan repayments and maturing investments are relatively predictable, deposit flows and loan prepayments are more influenced by interest rates, general economic conditions and competition. Safe and sound banking practices require us to maintain cash and eligible investments at levels that assure our ability to meet demands for deposit withdrawals and the repayment requirements of short-term borrowings, if any. We believe that sufficient funds are available for us to meet our current liquidity needs. Total cash and cash equivalents amounted to $9.9 million at June 30, 2002.

We use our capital resources to meet ongoing commitments to fund various types of deposit withdrawals, to invest in securities, to fund existing and future loan commitments, to maintain liquidity, and to meet operating expenses. At June 30, 2002 we had outstanding commitments to extend credit totaling $4.9 million, including $2.6 million of unused consumer lines of credit.

Home Federal is required to maintain minimum regulatory capital sufficient to meet tangible, core and risk-based capital ratios of 1.5%, 3.0% and 8.0%, respectively. As of June 30, 2002, Home Federal significantly exceeded its regulatory capital requirements, with tangible, core, and risk-based capital ratios of 14.80%, 14.80% and 36.48%, respectively.

Cautionary Forward-looking Statements

This document, including information incorporated by reference, contains, and filings by the Company on Form 10-KSB, Form 10-QSB, and Form 8-K and future oral and written statements by the Company and its management may contain, forward-looking statements about First Niles and its subsidiary which we believe are within the meaning of the Private Securities Litigation Reform Act of 1995. These forward-looking statements include, without limitation, statements with respect to anticipated future operating and financial performance, growth opportunities, interest rates, cost savings and funding advantages expected or anticipated to be realized by management. Words such as "may", "could", "should", "would", "believe", "anticipate", "estimate", "expect", "intend", "plan" and similar expressions are intended to identify forward-looking statements. Forward-looking statements by the Company and management are based on beliefs, plans, objectives, goals, expectations, anticipations, estimates and intentions of management and are not guarantees of future performance. The Company disclaims any obligation to update or revise any forward-looking statements based on the occurrence of future events, the receipt of new information, or otherwise. The important factors we discuss below and elsewhere in this document, as well as other factors discussed under the caption" Management's Discussion and Analysis of Financial Condition and Results of Operations" in this document and identified in our filings with the SEC and those presented elsewhere by our management from time to time, could cause actual

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results to differ materially from those indicated by the forward-looking statements made in this document:

The following factors, many of which are subject to change based on various other factors beyond our control, could cause our financial performance to differ materially from the plans, objectives, expectations, estimates and intentions expressed in such forward-looking statements:

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

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PART II - OTHER INFORMATION

 

Item 1.	Legal Proceedings:
	There are no matters required to be reported under this item.
Item 2.	Changes in Securities:
	There are no matters required to be reported under this item.
Item 3.	Defaults Upon Senior Securities:
	There are no matters required to be reported under this item.
Item 4.	Submission of Matters to a Vote of Security Holders:
	The annual meeting of shareholders of First Niles was held on April 17, 2002 at our office in Niles, Ohio. At that meeting the shareholders were asked to vote upon (i) the election of Director William S. Eddy, and (ii) the appointment of Anness, Gerlach & Williams as independent accountants for the fiscal year ending December 31, 2002. The voting on such matters was as follows:
	Director Election:
			Votes For	Votes Withheld
	Director Eddy		1,377,907	--
	Directors not subject to election at the annual meeting and continuing in office are William L. Stephens, George J. Swift, Paul J. Kramer and Ralph J. Zuzolo, Sr.
	Independent Auditor Ratification:
			Votes For	Votes Withheld	Abstentions
	Anness, Gerlach & Williams		1,368,923	1,554	24,214
Item 5.	Other Information:
	There are no matters required to be reported under this item.
Item 6.	Exhibits and Reports on Form 8-K:
	(a)	The following exhibit is filed herewith:
		See Exhibit Index.
	(b)	Reports on Form 8-K:
		No reports on Form 8-K were filed by the Registrant during the quarter ended June 30, 2002.

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


 

			FIRST NILES FINANCIAL, INC. Registrant
Date:	August 12, 2002	By:	/s/ William L. StephensWilliam L. Stephens President and Chief Executive Officer (Duly Authorized Representative)
Date:	August 12, 2002	By:	/s/ Thomas G. MaleyThomas G. Maley Controller (Principal Accounting Officer)

CERTIFICATION

Each of the undersigned hereby certifies in his capacity as an officer of First Niles Financial, Inc. (the "Company") that the Quarterly Report of the Company on Form 10-QSB for the period ended June 30, 2002 fully complies with the requirements of Section 13(a) of the Securities Exchange Act of 1934 and that the information contained in such report fairly presents, in all material respects, the financial condition of the Company at the end of such period and the results of operations of the Company for such period.

Dated:	August 12, 2002	/s/ William L. StevensWilliam L. Stevens Chief Executive Officer
Dated:	August 12, 2002	/s/ George J. SwiftGeorge J. Swift Vice President and Secretary (Principal Financial and Operating Officer)

14End.