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 September 30, 1999
[ ] 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 34-1870418
- -------------------------------- ------------------------------------
(State or other jurisdiction of (I.R.S. Employer Identification No.)
incorporation or organization)
55 North Main Street, Niles, Ohio 44446
- ---------------------------------------- ----------
(Address of principal executive offices) (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
November 6, 1999: 1,688,411
Transitional Small business Disclosure Format (check one): Yes [ ] No [X]
PART I - FINANCIAL INFORMATION
ITEM 1. FINANCIAL STATEMENTS
CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands, except share data)
(Unaudited)
September 30, December 31,
1999 1998
------------ ------------
ASSETS
Cash and cash equivalents:
Noninterest bearing $ 1,678 $ 995
Interest bearing 2,933 16,129
-------- --------
Total cash and equivalents 4,611 17,124
Securities available for sale -
at market 23,043 19,751
Securities to be held to maturity -
at cost 17,449 12,432
Loans receivable, net of allowance
for loan losses 37,384 36,132
Accrued interest receivable 387 282
Federal Home Loan Bank stock, at cost 335 317
Real estate investment, limited partnership -
at equity 351 383
Prepaid expenses and other assets 315 47
Prepaid federal income taxes 96 --
Premises and equipment, at cost less
accumulated depreciation 255 256
-------- --------
TOTAL ASSETS $ 84,226 $ 86,724
======== ========
LIABILITIES
Deposits $ 53,680 $ 54,837
Accrued interest payable 99 110
Accounts payable and other liabilities 1,298 1,236
Note payable 300 300
Federal income tax payable -- 46
Deferred federal income tax liability -- 272
-------- --------
TOTAL LIABILITIES 55,377 56,801
-------- --------
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
Paid in capital 16,897 16,897
Retained earnings 13,162 12,709
Net unrealized gains on securities
available for sale 886 1,586
Common stock purchased by the Employee
Stock Ownership Plan (1,287) (1,287)
Treasury stock, 59,000 shares at cost (827) --
-------- --------
TOTAL STOCKHOLDERS' EQUITY 28,849 29,923
-------- --------
TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY $ 84,226 $ 86,724
======== ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
2
CONSOLIDATED STATEMENTS OF INCOME
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands, except share data)
(Unaudited)
Three Months Ended Nine Months Ended
September 30, September 30,
1999 1998 1999 1998
-------- -------- -------- --------
Interest income:
Loans receivable
First mortgage loans $ 690 $ 701 $2,055 $2,167
Consumer and other loans 32 24 80 73
Mortgage-backed and related securities 277 192 732 568
Investments 332 236 913 722
Interest-bearing deposits 34 68 289 194
------ ------ ------ ------
TOTAL INTEREST INCOME 1,365 1,221 4,069 3,724
Interest expense:
Deposits 480 606 1,456 1,824
Borrowings 6 8 18 26
------ ------ ------ ------
TOTAL INTEREST EXPENSE 486 614 1,474 1,850
------ ------ ------ ------
NET INTEREST INCOME 879 607 2,595 1,874
Provision for loan losses -- -- 0 20
------ ------ ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES 879 607 2,595 1,854
Noninterest income:
Gain on sale of securities -- -- 117 461
Service fees and other income 8 7 26 20
------ ------ ------ ------
TOTAL NONINTEREST INCOME 8 7 143 481
Noninterest expense:
Equity in loss of limited partnership 11 11 32 22
Loss on sale of real estate owned -- -- 9 --
General and administrative:
Compensation and benefits 245 195 758 1,366
Occupancy and equipment 21 21 63 68
Federal deposit insurance premiums 8 9 25 27
Legal and audit 25 6 121 16
Franchise taxes 77 58 237 123
Other operating expense 60 57 185 165
------ ------ ------ ------
TOTAL NONINTEREST EXPENSE 447 357 1,430 1,787
------ ------ ------ ------
INCOME BEFORE INCOME TAXES 440 257 1,308 548
Federal income taxes 131 65 388 117
------ ------ ------ ------
NET INCOME $ 309 $ 192 $ 920 $ 431
====== ====== ====== ======
EARNINGS PER SHARE $ 0.20 NA $ 0.57 NA
====== ====== ====== ======
DILUTED EARNINGS PER SHARE $ 0.20 NA $ 0.57 NA
====== ====== ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
3
CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
(Unaudited)
Nine Months Ended September 30,
-------------------------------
1999 1998
---- ----
Net income $ 920 $ 431
Other comprehensive income:
Unrealized gains (losses) on securities:
Unrealized gains (losses) arising for period (943) 447
Related income tax 320 (152)
----- -----
(623) 295
Reclassification adjustment:
Gain included in net income (117) (461)
Related income tax 40 157
----- -----
(77) (304)
----- -----
Other comprehensive income (700) (9)
----- -----
COMPREHENSIVE INCOME $ 220 $ 422
===== =====
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENTS OF CASH FLOWS
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
(In thousands)
(Unaudited)
Nine Months
Ended September 30,
-----------------------
1999 1998
---- ----
CASH FLOWS FROM OPERATING ACTIVITIES
Net income $ 920 $ 431
Adjustments to reconcile net income to net cash
provided by (used in) operating activities
Deferred income taxes 92 (124)
Depreciation 30 37
Amortization of discounts and premiums on
investments and mortgage-backed and
related securities (3) (17)
Gain on sale of securities (117) (461)
Provision for loan losses -- 20
Equity in loss of limited partnership 32 21
Federal Home Loan Bank dividends (17) (18)
-------- --------
937 (111)
Net increase in accrued interest receivable,
prepaid expenses and other assets (280) (413)
Net increase (decrease) in accrued interest,
accounts payable and other liabilities 4 558
-------- --------
NET CASH PROVIDED BY OPERATING ACTIVITIES 661 34
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available
for sale 119 470
Purchase of securities available for sale (4,984) --
Proceeds from maturities of securities
available for sale 614 --
Proceeds from principal payments on
mortgage-backed and related securities 4,918 7,393
Purchase of mortgage-backed and related
securities (9,916) (6,569)
Net (increase) decrease in interest-bearing
deposits with banks 13,196 (2,143)
Net (increase) decrease in loans (1,445) 505
Additions to premises and equipment (29) (11)
-------- --------
NET CASH PROVIDED BY (USED IN) INVESTING ACTIVITIES 2,473 (355)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings accounts,
MMDAs and NOW accounts (305) 341
Net increase (decrease) in certificates of
deposit (852) 215
Purchase of treasury shares (827) --
Cash dividends paid (467) --
-------- --------
NET CASH PROVIDED BY (USED IN) FINANCING ACTIVITIES (2,451) 556
-------- --------
NET INCREASE IN CASH 683 235
CASH AT BEGINNING OF PERIOD 995 819
-------- --------
CASH AT END OF PERIOD $ 1,678 $ 1,054
======== ========
Cash paid during the period for:
Interest on deposits $ 1,472 $ 1,825
Income taxes $ 442 $ 249
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
NOTES TO FINANCIAL STATEMENTS
FIRST NILES FINANCIAL, INC. AND SUBSIDIARY
September 30, 1999 and 1998 (Unaudited)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by First Niles are in accordance
with generally accepted accounting principles and conform to general practices
within the savings and loan industry.
The accompanying unaudited financial statements were prepared in accordance with
instructions for Form 10-QSB and, therefore do not include information or
footnotes necessary for a complete presentation of financial position, results
of operations and cash flows in conformity with generally accepted accounting
principles. Management believes that all normal recurring adjustments that are
necessary for a fair presentation of interim period financial information have
been reflected in these financial statements. 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.
NOTE B -- STOCK CONVERSION
On October 26, 1998, First Niles Financial, Inc. began trading as a public
company on the Nasdaq SmallCap Market. First Niles issued 1,754,411 shares, $.01
par value common stock, at $10.00 per share, raising $15.5 million, net of
shares acquired by the newly formed Employee Stock Ownership Plan (the "ESOP")
and net of the costs of the conversion. Home Federal Savings and Loan
Association of Niles converted to a federal stock savings and loan association
and simultaneously received proceeds of $8.5 million in exchange for all of its
common stock to First Niles. This transaction was accounted for using historical
cost in a manner similar to that in a pooling of interests.
NOTE C -- EARNINGS PER SHARE
Basic earnings per share is computed by dividing net income by the
weighted-average shares outstanding, which exclude treasury shares, less
weighted-average shares in the ESOP that are unallocated and committed to be
released. The following table sets forth the computation of basic earnings per
share for the three and nine month periods ended September 30, 1999 (income in
thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
--------------------- ---------------------
1999 1998 1999 1998
---------- ------- ---------- -------
BASIC
Net income $ 309 $ 192 $ 920 $ 431
---------- ------- ---------- -------
Earnings applicable to basic
earnings per share 309 N/A 920 N/A
========== ======= ========== =======
Average common shares 1,706,968 N/A 1,736,437 N/A
Less average unallocated
ESOP shares 122,042 N/A 125,745 N/A
---------- ------- ---------- -------
Average common shares
outstanding 1,584,926 N/A 1,610,692 N/A
========== ======= ========== =======
Earnings per share $ 0.20 N/A $ 0.57 N/A
========== ======= ========== =======
First Niles has no potential dilution of earnings per share arising from
contracts or other securities which can be exercised or converted into common
stock.
Earnings per share is not presented for 1998 as First Niles completed its
conversion to stock form in October 1998.
6
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 is attracting retail deposits from the general public and
investing those funds primarily in permanent and construction loans secured by
first mortgages on owner-occupied, one-to-four family residences. We also
originate, to a lesser extent, loans secured by first mortgages on
non-owner-occupied one-to-four family residences, permanent and construction
commercial and multi-family real estate loans, and consumer loans. Excess funds
are generally invested in investment securities and mortgage-backed and related
securities.
The following discussion compares our consolidated financial condition at
September 30, 1999 and December 31, 1998 and the results of operations for the
three month and nine month periods ended September 30, 1999 with the three month
and nine month periods ended September 30, 1998. This discussion should be read
in conjunction with the consolidated financial statements and footnotes included
herein.
COMPARISON OF FINANCIAL CONDITION AT SEPTEMBER 30, 1999 AND DECEMBER 31, 1998
Total assets decreased by $2.5 million, or 2.9%, to $84.2 million at September
30, 1999 from $86.7 million at December 31, 1998. Cash and cash equivalents
decreased by $12.5 million as we invested these funds into loans and mortgage
backed and investment securities. Total securities increased $8.3 million and
loans receivable increased $1.3 million. The balance of the $12.5 million
decrease was used to fund the decrease in deposits, repurchases of our common
stock and payment of cash dividends to our shareholders.
This decrease was primarily attributable to increases of $8.3 million in total
securities, $1.3 million in net loans receivable and $469,000 in prepaid
expenses and other assets, accrued interest receivable and prepaid federal
income taxes, more than offset by a decrease of $12.5 million in cash and cash
equivalents.
The decline in assets was related to a $1.4 million decrease in total
liabilities and a $1.1 million decrease in total equity. Deposits decreased by
$1.2 million, or 2.1% in the first nine months of 1999. The decline in savings
accounts, money market deposit accounts
7
("MMDA") and NOW accounts during the first nine months of 1999 was $305,000.
Additionally, certificates of deposit declined by $852,000 during the first nine
months of 1999. Management attributes the decline in deposits to its decision to
lower rates paid on savings and transaction accounts by 50 basis points during
late 1998. Accrued interest payable and accounts payable and other liabilities
increased by $51,000 and federal income tax payable and deferred federal income
tax liability declined by $318,000 for the first nine months of 1999.
Total equity at September 30, 1999 was $28.8 million, a $1.1 million, or 3.6%
decrease from December 31, 1998. The decrease in total equity, was comprised of
$920,000 in net income, which was more than offset by $467,000 in dividends paid
by First Niles on its common stock, a $700,000 decrease in net unrealized gains
on securities available for sale, and the repurchase of $827,000 of First Niles
common stock. First Niles repurchased 59,000 shares of its common stock in the
open market during the nine months ended September 30, 1999 at an average price
of $14.01 per share. Book value per share was $17.02 at September 30, 1999,
compared to $17.06 at December 31, 1998. At September 30, 1999 there were
1,695,411 shares of First Niles common stock outstanding as compared to
1,754,411 shares outstanding at December 31, 1998.
Nonperforming assets, consisting of nonaccruing loans and loans delinquent more
than 90 days, totaled $811,000 at September 30, 1999, or 2.2% of net loans
receivable and 1.0% of total assets compared to $955,000, or 2.6% of net loans
receivable and 1.1% of total assets as of December 31, 1998. The allowance for
loan losses was $532,000 at September 30, 1999, representing coverage of 65.6%
of non-performing assets and 1.4% of net loans receivable. At December 31, 1998,
the allowance for loan losses totaled $784,000, or 82.1% of non-performing loans
and 2.2% of net loans receivable. The decrease in the allowance for loan losses
was attributable to a $252,000 charge-off of loans secured by residential rental
property. These properties , owned by one borrower, were sold via a trustee at
bankruptcy auction. The principal balance of these loans aggregated $446,000
before the charge-off, and were previously categorized as nonperforming. The
remaining proceeds from the auction, in the amount of $193,000, are categorized
as an account receivable from the bankruptcy court. Management believes that the
current level of the allowance for loan losses remains adequate to absorb losses
resulting from uncollectible loans. However, there can be no assurances that
future losses will not exceed estimated amounts or that additional provisions
for loan losses will not be required in the future. We did not have any
foreclosed or repossessed assets at September 30, 1999.
RESULTS OF OPERATIONS FOR THE THREE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
GENERAL. Our results of operations depend primarily on our net interest income,
which is determined by (i) the difference between interest earned on
interest-earning assets, consisting primarily of mortgage loans, collateralized
mortgage obligations, other investments and interest-earning deposits in other
institutions, and interest expense on interest-bearing liabilities, primarily
deposits and (ii) the relative amounts of our interest-earning assets and
interest-bearing liabilities. The level of non-interest income, such as fees
received from customer service charges and gains on sales of investments, and
the level of non-interest expense, such as federal deposit insurance premiums,
salaries and benefits, office occupancy costs, and data processing costs, also
affect our results of operations. Finally, our results of operations may also be
affected significantly by general economic and competitive conditions,
particularly changes in market interest rates, government policies and actions
of regulatory authorities, all of which are beyond our control.
NET INCOME. For the three months ended September 30, 1999 First Niles recorded
net income of $309,000, resulting in an annualized return on average assets for
the period of 1.45%. The annualized return on average shareholders' equity for
the three months ended September 30, 1999 was 4.22%. Net income increased by
$117,000, or 60.9% for the three months ended September 30, 1999 as compared to
the respective 1998 period. The increase in net income for the three months
ended September 30, 1999 as compared to the same period in the prior year was
primarily due to a $272,000 increase in net interest income and a $1,000
increase in noninterest income, partially offset by a $90,000 increase in
noninterest expense and a $66,000 increase in federal income tax expense. The
increase in net income for the three months ended September 30, 1999 as compared
to same period in 1998 was primarily attributable to an increase in earning
assets related to the Association's conversion from mutual to stock form during
the last quarter of 1998, a decline in the overall cost of funds and a modest
increase in the size of the loan portfolio. Earnings per share for the three
months ended September 30, 1999 was $0.20.
NET INTEREST INCOME. Net interest income increased by $272,000, or 44.8% for the
three month period ended September 30, 1999 as compared to the respective 1998
period. For the three months ended September 30, 1999 total interest income
increased by $144,000 and total interest expense decreased by $128,000 as
compared to the same period in 1998. For the three months ended September 30,
1999 the interest rate spread was 3.00% and the net interest margin was 4.31%.
For the three months ended September 30, 1999 the yield on interest earning
assets was 6.59% and the overall cost of funds was 3.59%. The infusion of
proceeds from Home Federal's mutual to stock conversion into non-loan
interest-earning assets was the primary reason for the increase in interest
income as described above. The primary reasons for the decline in interest
expense include a $1.2 million decrease in deposits, and a 62 basis point
decline in the cost of funds that has taken place since December 31, 1998. The
basis point decline in the cost of funds was primarily due to management's
decision to lower the interest rate paid on savings accounts, MMDAs and NOW
accounts by 50 basis points as of December 1, 1998. Management believes that our
rates on savings and transaction accounts remain competitive. There was no
provision for loan losses in the quarter ended September 30, 1999 or in the
quarter ended September 30, 1998.
NONINTEREST INCOME. Noninterest income of $8,000 for the three months ended
September 30, 1999 was $1,000, or 14.3% higher than during the same period in
1998. This increase was the result of higher service fee income.
8
NONINTEREST EXPENSE. Noninterest expense increased $90,000, or 25.2% for the
three months ended September 30, 1999 as compared to the same period in 1998.
Compensation and benefits increased by $50,000 from period to period, primarily
due to routine salary increases, the addition of one full-time employee and the
costs associated with our Employee Stock Ownership Plan. Legal and audit fees,
franchise taxes and other operating expenses increased by $41,000, from
quarterly period to quarterly period, primarily due to increased franchise taxes
associated with significantly increased capital levels, and increased
professional fees associated with increased regulatory reporting related to
being a public company.
FEDERAL INCOME TAXES. The provision for federal income taxes increased by
$66,000 for the three months ended September 30, 1999 as compared to the same
period in 1998, primarily due to an increase in pre-tax income of $183,000. The
effective tax rate was 29.8% in the current three month period. For the three
months ended September 30, 1998 the effective tax rate was 25.3%.
RESULTS OF OPERATIONS FOR THE NINE-MONTH PERIODS ENDED SEPTEMBER 30, 1999 AND
SEPTEMBER 30, 1998
NET INCOME. First Niles recorded net income of $920,000 for the nine months
ended September 30, 1999. This net income resulted in an annualized return on
average assets for the nine-month period of 1.44% and an annualized return on
average shareholders' equity of 4.14%. Net income increased by $489,000, or
113.5% for the nine months ended September 30, 1999 as compared to the nine
months ended September 30, 1998. The increase in net income for the nine months
ended September 30, 1999 as compared to the nine months ended September 30, 1998
was primarily due to a $721,000 increase in net interest income, a $357,000
decrease in noninterest expense, partially offset by a $338,000 decrease in
noninterest income and a $271,000 increase in federal income tax expense. The
same factors cited above regarding the increase in net income for the three
months ended September 30, 1999 as compared to the same period in 1998 primarily
contributed to the increase in net income for the nine months ended September
30, 1999 as compared to the same period in 1998. Earnings per share for the nine
months ended September 30, 1999 was $0.57.
NET INTEREST INCOME. Net interest income increased by $721,000, or 38.5% for the
nine months ended September 30, 1999 as compared to the respective 1998 period.
For the nine months ended September 30, 1999 total interest income increased by
$345,000 and total interest expense decreased by $376,000 as compared to the
same period in 1998. For the nine months ended September 30, 1999 the interest
rate spread was 2.81% and the net interest margin was 4.04%. For the nine months
ended September 30, 1999 the yield on interest earning assets was 6.44% and the
overall cost of funds was 3.63%. The infusion of proceeds from Home Federal's
mutual to stock conversion into non-loan interest-earning assets was the primary
reason for the increase in interest income as described above. The primary
reasons for the decline in interest expense for the nine month period ended
September 30, 1999 are essentially the same factors as described for the decline
in interest expense for the three month period ended September 30, 1999, and
9
include a decrease in interest bearing liabilities and a decline in the cost of
funds. There was no provision for loan losses in the nine months ended September
30, 1999 compared to $20,000 in the nine months ended September 30, 1998.
NONINTEREST INCOME. Noninterest income of $143,000 for the nine months ended
September 30, 1999 was $338,000 lower than during the same period in 1998. Gain
on sale of investment securities was $117,000 for the nine months ended
September 30, 1999 as compared to $461,000 for the nine months ended September
30, 1998, a difference of $334,000. The sale of 2,000 shares and 9,728 shares of
Freddie Mac stock accounted for the entire gain on sale of investments recorded
in each respective nine month period in 1999 and 1998. Service fees and other
income increased to $26,000 during the nine months ended September 30, 1999 as
compared to $20,000 for the nine months ended September 30, 1998. The increase
in service fee and other income is primarily attributable to increases in fees
charged for specific customer services.
NONINTEREST EXPENSE. Noninterest expense decreased $357,000, or 20.0%, for the
nine months ended September 30, 1999 as compared to the same period in 1998.
Compensation and benefits decreased by $608,000 from period to period, primarily
due to the occurrence in 1998 of one-time compensation items, including a
special bonus paid to all employees and lump sum accruals made to deferred
compensation plans of senior executives in exchange for the termination of
further contributions to these plans. Legal and audit fees, franchise taxes and
other operating expenses increased by $239,000, from period to period, primarily
due to increased franchise taxes associated with significantly increased capital
levels, and increased professional fees associated with increased regulatory
reporting related to being a public company.
FEDERAL INCOME TAXES. The provision for federal income taxes increased by
$271,000 for the nine months ended September 30, 1999 as compared to the same
period in 1998. The increase in the provision for federal income taxes as
compared to the same period in 1998 was primarily due to an increase in pre-tax
income of $760,000. The effective tax rate was 29.7% for the nine month period
ended September 30, 1999 compared to 21.4% in the same nine month period in
1998.
LIQUIDITY AND CAPITAL RESOURCES
Our main source of funds are deposits, in addition to loan and securities
repayments. While scheduled loan repayments and maturing investments are
relatively predictable, deposit flows and loan prepayments are more influenced
by interest rates, general economic conditions and competition. Federal
regulations require us to maintain cash and eligible investments at levels that
assure our ability to meet demands for deposit withdrawals and the repayment
requirements of short-term borrowings, if any. We believe that sufficient funds
are available for us to meet our current liquidity needs. Total cash and cash
equivalents amounted to $4.6 million at September 30, 1999. At September 30,
1999 we had a regulatory liquidity ratio of 7.91%, significantly exceeding the
4.0% minimum requirement.
10
Our capital resources are used to meet ongoing funding commitments, including
various types of deposit withdrawals, investments in securities, funding of
existing and future loan commitments, the preservation of liquidity, and to pay
operating expenses. At September 30, 1999 we had outstanding commitments to
extend credit totaling $2.0 million.
Home Federal is required to maintain minimum regulatory capital sufficient to
meet tangible, core and risk-based capital ratios of 1.50%, 3.00% and 8.00%,
respectively. As of September 30, 1999, Home Federal significantly exceeded its
regulatory capital requirements, with tangible, core, and risk-based capital
ratios of 28.36%, 28.36% and 56.03%, respectively.
SHARE REPURCHASE
During the quarter ended September 30, 1999 First Niles continued with the share
repurchases first authorized by the Board of Directors during the three months
ended June 30, 1999. At that time the Board of Directors authorized the
repurchase of up to 5.0%, or 87,720 of the outstanding shares of First Niles in
the open market. At September 30, 1999 a total of 59,000 shares, aggregating
$827,000 and representing an average price of $14.01, had been repurchased.
YEAR 2000 ISSUES
The approaching millennium is causing organizations of all types to review their
computer systems for the ability to properly accommodate the year 2000. When
computer systems were first developed, two digits were used to designate the
year in date calculations and "19" was assumed for the century. As a result,
there is significant concern about the integrity of date sensitive calculations
when the calendar reaches January 1, 2000. An antiquated system could interpret
01/01/00 as January 1, 1900, potentially causing major problems in the
calculation of interest as well as payment, delinquency and maturity dates.
An internal committee, comprised of two officers and an outside director has
been formed to measure, monitor and address the potential risk that the year
2000 computer situation poses to us. Additionally, we have been assured by our
data processing service bureau that their computer services will function
properly on and after January 1, 2000. While we are attempting to ensure that
our computer dependent operations are year 2000 compliant and we do not
anticipate any significant year 2000 issues with respect to our premises or
other non-information systems, we cannot assure that some year 2000 problems
will not occur. If some year 2000 problems do occur, we cannot predict the
extent and effect of such problems on our business operations.
However, as an additional safeguard, we have developed a contingency plan that
would allow us to operate using a manual customer transaction system should the
year 2000 problem render our data processing system inoperable. Under the plan,
general ledger and various other records will also be posted and maintained
manually. Management
11
believes that such a manual system is sustainable given our relatively small
size, our one office location, the relative simplicity of our products and the
experience of our staff.
Through September 30, 1999, we have spent approximately $27,000 on computer
equipment and software in order to be year 2000 compliant, with no material
costs incurred in the latest quarter. We do not expect any further significant
costs to be incurred in this area based on our current evaluation of our year
2000 preparedness.
In addition to expenses related to our own operations, we could incur losses if
loan payments are delayed due to year 2000 problems affecting any of our
significant borrowers or if payroll systems of employers in our area become
impaired. We have been communicating with our vendors to assess their progress
in evaluating their data processing systems and their corrective action required
for them to be prepared for the year 2000. We have also corresponded with
selected borrowers regarding their year 2000 preparedness. These borrowers were
selected based on the aggregate amounts owed to us, the type of loans
outstanding and the perceived year 2000 risk based on our knowledge of their
operations. To date, such parties have yet to advise us that they do not have
plans in place to address and correct issues associated with the year 2000
problem; however, no assurance can be given as to the adequacy of these plans or
to the timeliness of their implementation. Currently, due to the types of
borrowers doing business with us and the nature of our loans with these
borrowers, the year 2000 issue is not considered as part of our underwriting
criteria.
CAUTIONARY FORWARD-LOOKING STATEMENTS
First Niles Financial, Inc. and its wholly-owned subsidiary, Home Federal
Savings and Loan Association of Niles, may from time to time make written or
oral "forward-looking statements", including statements contained in its filings
with the Securities and Exchange Commission. These forward-looking statements
may be included in this quarterly report on Form 10-QSB and the exhibits
attached to it, in First Niles' reports to stockholders and in other
communications by the company, which are made in good faith by us pursuant to
the "safe harbor" provisions of the Private Securities Litigation Reform Act of
1995.
These forward-looking statements include statements about our beliefs, plans,
objectives, goals, expectations, anticipations, estimates and intentions, that
are subject to significant risks and uncertainties, and are subject to change
based on various factors (some of which are beyond our control). The words
"may", "could", "should", "would", "believe", "anticipate", "estimate",
"expect", "intend", "plan" and similar expressions are intended to identify
forward-looking statements. The following factors, among others, could cause
First Niles' and Home Federal's financial performance to differ materially from
the plans, objectives, expectations, estimates and intentions expressed in the
forward-looking statements:
* the strength of the United States economy in general and the strength
of the local economies in which we conduct operations;
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* 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;
* technological changes;
* acquisitions;
* changes in consumer spending and saving habits; and
* our success at managing the risks involved in the foregoing.
The list of important factors stated above is not exclusive. We incorporate by
reference those risk factors included in First Niles' Registration Statement on
Form SB-2 (Reg. No. 333-58883). We do not undertake to update any
forward-looking statement, whether written or oral, that may be made from time
to time by or on behalf of First Niles or Home Federal.
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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:
There are no matters required to be reported under this item.
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:
EXHIBIT NO. DESCRIPTION
27.1 Financial Data Schedule
(b) Reports on Form 8-K:
No reports on Form 8-K were filed by the Registrant during the quarter
ended September 30, 1999.
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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: November 11, 1999 By: /s/ William L. Stephens
-------------------------------------
William L. Stephens
President and Chief Executive Officer
(DULY AUTHORIZED REPRESENTATIVE)
Date: November 11, 1999 By: /s/ Thomas G. Maley
-------------------------------------
Thomas G. Maley
Controller
(PRINCIPAL ACCOUNTING OFFICER)
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