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, 1998
[X] 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 [ ] No [ X ]
Shares of common stock, par value $.01 per share, outstanding as of
September 30, 1998: None
Transitional Small business Disclosure Format (check one):
Yes [ ] No [X]
INTRODUCTION
In July 1998, Home Federal Savings and Loan Association of Niles (the
"Association") incorporated First Niles Financial, Inc., a Delaware corporation
(the "Company") to facilitate the conversion of the Association from mutual to
stock form (the "Conversion"). The Conversion was consummated on October 26,
1998, at which time the Company became the holding company for the Association
by acquiring all of the capital stock of the Association in exchange for 50% of
the net Conversion proceeds and simultaneously therewith issued 1,754,411 shares
of its common stock to persons who submitted orders in the offering at a price
of $10.00 per share, for aggregate gross proceeds of $17,544,110.
The only significant assets of the Company are the capital stock of the
Association, the Company's loan to the ESOP, and the remainder of the net
Conversion proceeds retained by the Company. Initially, the business and
management of the Company will consist of the business and management of the
Association. Initially, the Company will neither own nor lease any property, but
will instead use the premises, equipment and furniture of the Association. At
the present time, the Company does not intend to employ any persons other than
officers of the Association, and the Company will utilize the support staff of
the Association from time to time. Additional employees will be hired as
appropriate to the extent the Company expands or changes its business in the
future. To date, the Company has not engaged in any business activities other
than those related to the Conversion.
The accompanying financial statements are of the Association since, as
of September 30, 1998, the Company had not yet issued any stock, had no assets,
no liabilities and had not conducted any business other than that of an
organizational nature. The Association's 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. However, all
adjustments (consisting only of normal recurring accruals) which, in the opinion
of management, are necessary for a fair presentation of the financial statements
have been included.
Interim Financial Information required by Rule 10-01 of Regulation S-X
and Item 303 of Regulation S-B is included in this Form 10-QSB under Part I,
Item 1 below.
The Company and the Association may from time to time make written or
oral "forward-looking statements", including statements contained in the
Company's filings with the Securities and Exchange Commission (including this
Quarterly Report on Form 10-QSB and the Exhibits hereto and thereto), in its
reports to stockholders and in other communications by the Company, which are
made in good faith by the Company and the Association pursuant to the "safe
harbor" provisions of the Private Securities Litigation Reform Act of 1995.
These forward-looking statements include statements with respect to the
Company's and the Association's 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 the Company's and the Association's control). The words "may",
"could", "should", "would", "believe", "anticipate", "estimate", "expect",
"intend", "plan" and similar
2
expressions are intended to identify forward-looking statements. The following
factors, among others, could cause the Company's and the Association's 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 the Company and the Association 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 new products and services of the Association 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 the
Association's products and services; the success of the Association in gaining
regulatory approval of its 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 the success of the Company
and the Association at managing the risks involved in the foregoing.
The foregoing list of important factors is not exclusive. The Company
incorporates by reference those factors included in the Company's Registration
Statement on Form SB-2 (Reg. No. 333- 58883). The Company does 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 the Company or the Association.
3
PART I - FINANCIAL INFORMATION
Item 1. Financial Statements
CONSOLIDATED STATEMENTS OF FINANCIAL POSITION
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
September 30, 1998 and December 31, 1997
(In Thousands)
September 30, December 31,
1998 1997
------------- ------------
ASSETS
------
Cash and cash equivalents:
Noninterest bearing .............................. $ 1,054 $ 819
Interest bearing ................................. 6,200 4,057
------- -------
TOTAL CASH AND CASH EQUIVALENTS .............. 7,254 4,876
Securities available for sale - at market .......... 17,425 17,447
Securities to be held to maturity - at cost ........ 11,552 12,359
Loans receivable, net of allowance for loan
losses of $853 and $854 .......................... 36,219 36,744
Accrued interest receivable ........................ 1 1
Federal Home Loan Bank stock, at cost .............. 312 294
Real estate investment - limited partnership,
at equity ........................................ 405 426
Prepaid expenses and other assets .................. 435 36
Prepaid federal income taxes ....................... 33 20
Premises and equipment, at cost less accumulated
depreciation ..................................... 268 294
------- -------
TOTAL ASSETS ................................. $73,904 $72,497
======= =======
LIABILITIES
-----------
Deposits ........................................... $58,410 $57,854
Accrued interest payable ........................... 124 127
Accounts payable and other liabilities ............. 1,359 798
Note payable ....................................... 400 400
Deferred federal income tax liability .............. 26 155
------- -------
TOTAL LIABILITIES ............................ 60,319 59,334
EQUITY
------
Retained earnings substantially restricted ......... 12,330 11,899
Net unrealized gains on securities available for
sale, net of related tax effects of $651 and $646 1,255 1,264
------- -------
TOTAL EQUITY ................................. 13,585 13,163
------- -------
TOTAL LIABILITIES AND EQUITY ................. $73,904 $72,497
======= =======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
4
CONSOLIDATED STATEMENTS OF INCOME
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
(In Thousands)
Three Months Ended Nine Months Ended
September 30 September 30
------------------ -----------------
1998 1997 1998 1997
-------- -------- -------- -------
Interest income:
Loans receivable:
First mortgage loans ................. $ 701 $ 719 $2,167 $2,089
Consumer and other loans ............. 24 28 73 81
Mortgage-backed and related securities . 186 141 568 475
Investments .............................. 237 262 722 920
Interest-bearing deposits ................ 75 91 194 160
------ ------- ------ ------
TOTAL INTEREST INCOME .............. 1,223 1,241 3,724 3,725
Interest expense:
Deposits ............................... 606 618 1,824 1,811
Borrowings ............................. 8 11 26 36
------ ------- ------ ------
TOTAL INTEREST EXPENSE ............. 614 629 1,850 1,847
------ ------- ------ ------
NET INTEREST INCOME ................ 609 612 1,874 1,878
Provision for loan losses ................ -- 246 20 246
------ ------- ------ ------
NET INTEREST INCOME AFTER
PROVISION FOR LOAN LOSSES ........ 609 366 1,854 1,632
Noninterest income:
Gain on sale of investments ............ -- -- 461 --
Service fees and other ................. 6 6 20 21
------ ------- ------ ------
TOTAL NONINTEREST INCOME ........... 6 6 481 21
Noninterest expense:
Equity in loss of limited partnership .. 11 9 22 29
General and administrative:
Compensation and benefits ............ 201 214 1,409 660
Occupancy and equipment .............. 22 23 74 73
Federal deposit insurance premiums ... 8 10 26 21
Other operating expense .............. 116 86 256 253
------ ------- ------ ------
TOTAL NONINTEREST EXPENSE .......... 358 342 1,787 1,036
------ ------- ------ ------
INCOME BEFORE INCOME TAXES ......... 257 30 548 617
Federal income taxes (credit) ............ 65 (10) 117 148
------ ------- ------ ------
NET INCOME ......................... $ 192 $ 40 $ 431 $ 469
====== ======= ====== ======
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
5
CONSOLIDATED STATEMENTS OF EQUITY
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Nine months ended September 30, 1998 and 1997
(In Thousands)
Retained Accumulated Other Total
Earnings Comprehensive Income Equity
-------- -------------------- --------
Balance at January 1, 1997 .................... $11,513 $ 650 $ 12,163
Comprehensive income:
Net income for the nine month period ........ 469 -- 469
Other comprehensive income:
Unrealized gains on securities available for
sale, net of related tax effects of $225 .. -- 319 319
------- ------- --------
COMPREHENSIVE INCOME .................... 469 319 788
------- ------- --------
BALANCE SEPTEMBER 30, 1997 .............. $11,982 $ 969 $ 12,951
======= ======= ========
Balance at January 1, 1998 .................... $11,899 $ 1,264 $ 13,163
Comprehensive income:
Net income for the nine month period ........ 431 -- 431
Other comprehensive income:
Unrealized gains on securities available for
sale, net of related tax effects of $152 .. -- 295 295
Less reclassification adjustments, net of
related tax effects of $157 ............... -- (304) (304)
------- ------- --------
COMPREHENSIVE INCOME .................... 431 (9) 422
------- ------- --------
BALANCE SEPTEMBER 30, 1998 .............. $12,330 $ 1,255 $ 13,585
======= ======= ========
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
6
CONSOLIDATED STATEMENTS OF CASH FLOWS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
Nine months ended September 30, 1998 and 1997
(In Thousands)
September 30
-------------------
1998 1997
------- --------
CASH FLOWS FROM OPERATING ACTIVITIES
Net income ............................................. $ 431 $ 469
Adjustments to reconcile net income to net cash
provided by (used in) operating activities:
Deferred income taxes credit ....................... (124) (104)
Depreciation ....................................... 37 33
Amortization of discounts on investments and
mortgage-backed and related securities ........... (17) (24)
Gain on sale of securities available for sale ...... (461) (4)
Equity in loss of limited partnership .............. 21 29
Provision for loan losses .......................... 20 246
Income reinvested from liquid asset mutual funds ... -- (510)
Federal Home Loan Bank stock dividends ............. (18) (14)
Net increase in accrued interest receivable and
prepaid expenses and other assets ................ (413) (1)
Net increase in accrued interest, accounts
payable and other liabilities .................... 558 83
------- -------
NET CASH PROVIDED BY OPERATING ACTIVITIES ...... 34 203
CASH FLOWS FROM INVESTING ACTIVITIES
Proceeds from sale of securities available for sale .... 470 4,819
Proceeds from principal payments on mortgage-backed
and related securities ............................... 7,393 7,326
Purchase of mortgage-backed and related securities ..... (6,569) (5,871)
Net increase in interest-bearing deposits with banks ... (2,143) (2,563)
Net (increase) decrease in loans ....................... 505 (4,077)
Additions to premises and equipment .................... (11) (62)
------- -------
NET CASH USED IN INVESTING ACTIVITIES .......... (355) (428)
CASH FLOWS FROM FINANCING ACTIVITIES
Net increase (decrease) in savings accounts ............ 341 (227)
Net increase in certificates of deposit ................ 215 529
------- -------
NET CASH PROVIDED BY FINANCING ACTIVITIES ...... 556 302
------- -------
NET INCREASE IN CASH ........................... 235 77
CASH AT BEGINNING OF PERIOD .............................. 819 656
------- -------
CASH AT END OF PERIOD .................................... $ 1,054 $ 733
======= =======
Cash paid during the period for:
Interest on deposits ................................... $ 1,825 $ 1,818
Income taxes ........................................... $ 249 $ 351
THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
7
NOTES TO FINANCIAL STATEMENTS
HOME FEDERAL SAVINGS AND LOAN ASSOCIATION
OF NILES AND SUBSIDIARY
September 30, 1998 and 1997 (Unaudited)
NOTE A -- SIGNIFICANT ACCOUNTING POLICIES
The accounting and reporting policies followed by the Home Federal Savings
and Loan Association (a mutual association) 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 representation of interim period financial information have
been reflected in these financial statements.
Comprehensive Income:
Statement of Financial Accounting Standards No. 130, Reporting
Comprehensive Income, is effective for fiscal years beginning after
December 15, 1997. This statement establishes standards for the
determination, reporting and presentation of comprehensive income and its
components in financial statements. The Association adopted this statement
in 1998. The only component of comprehensive income included in the
financial statements is unrealized gains on securities available for sale.
8
Item 2. Management's Discussion and Analysis of Financial Condition and
Results of Operations
General
The profitability of Home Federal Savings and Loan Association of Niles
("Home Federal" or the "Association") depends primarily on its net interest
income, which is the difference between interest and dividend income on
interest-earning assets, principally loans, investment securities
mortgage-backed and related securities and interest-earning deposits in other
institutions, and interest expense on interest-bearing deposits. Net interest
income is dependent upon the level of interest rates and the extent to which
such rates are changing. Home Federal's profitability also is dependent, to a
lesser extent, on the level of its noninterest income, provision for loan
losses, noninterest expense and income taxes.
The Association's operations and profitability are subject to changes
in interest rates, applicable statutes and regulations and general economic
conditions, as well as other factors beyond the Association's control.
Changes in Financial Condition
The Association's total assets increased by $1.4 million, or 1.9%, to
$73.9 million at September 30, 1998 from $72.5 million at December 31, 1997.
Cash and cash equivalents increased $2.4 million as a result of the net
repayment of loans, investment securities, and mortgage-backed and related
securities and an increase in deposits. Loans receivable decreased $525,000 and
investment, mortgage-backed and related securities decreased $829,000. In
addition, prepaid expenses and other assets increased $399,000, primarily in
connection with the Association's conversion from mutual to stock form. As
market yields dropped and the yield flattened during most of 1998, the
Association built liquidity, shortening the duration of its assets and lowering
its interest rate risk exposure.
Total liabilities increased $985,000 to $60.3 million at September 30,
1998. Deposits increased by $556,000, or 1.0%, in the first nine months of 1998.
Accounts payable and other liabilities increased by $561,000, or 70.3%, for the
first nine months of 1998. The increase in accounts payable was primarily due to
the accrual of a $384,000 obligation under certain executive deferred
compensation plans, $288,000 of which was associated with a final installment,
lump sum payment to the plans. Additionally, escrow accounts associated with
conversion subscriptions totaled $234,000 at September 30, 1998.
Total equity increased $422,000 to $13.6 million at September 30, 1998.
The increase in total equity, which represented a 3.2% increase for the first
nine months of 1998, was comprised of $431,000 in net income and a $9,000
decrease in net unrealized gains on securities available for sale.
The Association's nonperforming assets, consisting of nonaccruing loans
and loans delinquent more than 90 days, totaled $1.2 million at September 30,
1998, or 1.7% of total assets compared to $1.7 million, or 2.3% of total assets
as of December 31, 1997. The allowance for loan losses was $853,000 at September
30, 1998, equivalent to 69.1% of non-performing assets and 2.3% of total loans.
See "Results of Operations - Provision for Loan Losses."
9
Results of Operations
General. For the three months and nine months ended September 30, 1998
Home Federal Savings and Loan Association of Niles (Home Federal or the
"Association") recorded net income of $192,000 and $431,000, respectively. These
net income figures resulted in an annualized return on average assets of 1.05%
and 0.79% for the three and nine month periods ended September 30, 1998,
respectively. The annualized return on retained earnings for the three and nine
months ended September 30, 1998 was 6.28% and 4.73%, respectively.
Net Income. Net income increased by $152,000, or 380.0%, for the three
months ended September 30, 1998, but decreased by $38,000, or 8.1% for the nine
months ended September 30, 1998 as compared to the respective 1997 periods. The
increase in net income for the three months ended September 30, 1998 was
primarily due to a $246,000 reduction in the provision for loan losses,
partially offset by an increase in federal income tax expense of $75,000 as
compared to the same period one year prior. The decrease in net income for the
first nine months of 1998 was primarily due to a $751,000 increase in
noninterest expense, partially offset by a $461,000 gain on the sale of
investments and a decrease of $226,000 in the provision for loan losses compared
to the same nine month period in 1997.
Net Interest Income. Net interest income decreased $3,000 to $609,000
for the three months and $4,000 to $1,874,000 for the nine months ended
September 30, 1998, compared to the same three and nine month periods in 1997.
Interest income decreased $18,000 to $1,223,000 for the three months ended
September 30, 1998, primarily as a result of a 23 basis point decline in the
yield on the Association's loan portfolio, as its adjustable-rate loan portfolio
adjusted downward and borrowers refinanced existing fixed-rate loans in
connection with general lower market interest rates. Interest income for the
nine months ended September 30, 1998 remained relatively unchanged compared to
the same nine month period in 1997; however, interest income earned on loans
increased $70,000 for the nine month period in 1998 compared to the same period
in 1997, primarily as a result of a $1.4 million increase in the average balance
of the loan portfolio. This increase was more than offset by a $71,000 decline
in interest earned on other interest-earning assets (consisting of investment
securities, mortgage-backed and related securities and interest-bearing deposits
with other institutions). Interest on other interest-earning assets declined as
a result a $436,000 decline in the average-balance of these assets resulting
from prepayments and maturities of the Association's investment securities and
mortgage-backed and related securities, as well as a 20 basis point decline in
the yield earned on such assets as a result of a general decline in market
interest rates.
Interest expense declined $15,000 to $614,000 for the three months and
increased $3,000 to $1,850,000 for the nine months ended September 30, 1998,
compared to the same three and nine month periods in 1997. The decrease in
interest expense for the three month period was the result of a 14 basis point
decline in the average rate paid on interest-bearing liabilities, offset
slightly by a higher outstanding balance of interest-bearing liabilities in
1998.
Provision for Loan Losses. No provision for loan losses was recorded
for the three months ended September 30, 1998 compared to a $246,000 provision
for the same three month period in 1997. A $20,000 provision for loan losses was
recorded for the nine months ended September 30, 1998 compared to a $246,000
provision for the same nine month period in 1997. The provision for loan losses
is a result of management's periodic analysis of risks inherent in the
Association's loan portfolio from time to time, as well as the adequacy of the
allowance for loan losses.
It is the Association's 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 the Association's 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 Association's allowance for
loan losses and make future additions to the allowance through the provision for
loan losses as economic conditions dictate. Although the Association maintains
its allowance for loan losses at a level which it considers 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.
10
Noninterest Income. Noninterest income of $6,000 was unchanged for the
three months ended September 30, 1998 as compared to the same period in 1997.
Noninterest income for the nine months ended September 30, 1998 was $481,000
compared to $21,000 for the same period in 1997. This $460,000 increase was
primarily due to a gain on sale of investment securities.
Noninterest Expense. Noninterest expense increased $16,000, or 4.7%,
for the three months ended September 30, 1998 as compared to the same period in
1997. Noninterest expense increased $751,000, or 72.5%, for the nine months
ended September 30, 1998, as compared to the same period in 1997. The primary
component of this increase was compensation and benefits, which increased by
$749,000, or 113.5%, from the same nine month period in 1997. This increase was
primarily attributable to a $435,000 bonus paid all employees in April 1998 and
a $288,000 lump-sum contribution to executive deferred compensation plans in
exchange for the suspension of further contributions to the executives under
such plans.
Federal Income Taxes. The provision for federal income taxes increased
by $75,000 in the three months ended September 30, 1998 and decreased by $31,000
for the nine months ended September 30, 1998 as compared to the same periods in
1997. For the three month period ended September 30, 1998 the increase in the
provision for federal income taxes as compared to the same period in 1997 was
primarily due to significantly higher pre-tax income and a significant increase
in the effective tax rate. The effective tax rate increased to 25.3% in the
current three month period compared to a federal income tax benefit level in the
same period one year prior. Tax credits generated by the Association's
investment in a limited partnership more than offset federal income tax
liability in the 1997 period.
Liquidity and Capital Resources
As of September 30, 1998 the Association had a regulatory liquidity
ratio of 11.06%, noticeably in excess of the current minimum regulatory
requirement of 4.0%. Total cash and cash equivalents amounted to $7.2 million as
of September 30, 1998.
Cash was generated by the Association's operating activities during the
first nine months of 1998 and 1997 primarily as a result of net income in each
period. The adjustments to reconcile net income to net cash provided by
operations during the periods presented consisted of deferred income tax
credits, depreciation, the amortization of discounts on investments and mortgage
backed and related securities, the gain on sale of securities available for
sale, equity in loss of limited partnership, provision for loan losses, income
reinvested from liquid asset mutual funds, Federal Home Loan Bank stock
dividends and changes in various receivable accounts, payable accounts and
prepaid expenses. Investing activities used net cash in each of the nine month
periods presented. The purchase of mortgage-backed and related securities and an
increase in interest bearing deposits with banks were the primary investing
activities undertaken in the nine month period ended September 30, 1998. The
aforementioned two items plus a net increase in loans were the primary
investment activities undertaken in the nine month period ended September 30,
1997. The primary financing activity of the Association consists of accepting
deposits from the public. An increase in deposits provided funds in each of the
nine month periods presented.
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 September 30, 1998,
11
Home Federal significantly exceeded its regulatory capital requirements, with
tangible, core, and risk-based capital ratios of 16.83%, 16.83% and 31.53%,
respectively.
Impact of Inflation and Changing Prices
The financial statements and related financial data presented herein
have been prepared in accordance with generally accepted accounting principles
which generally 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 Home Federal's assets and
liabilities are monetary in nature. As a result, interest rates generally have a
more significant impact on Home Federal's performance than does the effect of
inflation. Interest rates do not necessarily move in the same direction or in
the same magnitude as the prices of goods and services, since such prices are
affected by inflation to a larger extent than interest rates.
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 ("Y2K"). When computer systems were first developed, two digits were used
to designate the year in date calculations and "19" was assumed for the century.
As a result, there is significant concern about the integrity of date sensitive
calculations when the calendar rolls over to January 1, 2000. An older system
could interpret 01/01/00 as January 1, 1900 potentially causing major problems
calculating interest, payment, delinquency or maturity dates. An internal
committee of the Association, comprised of two officers and an outside director,
has been formed to address the potential risk that Y2K poses for the
Association.
Financial institution regulators recently have increased their focus
upon Y2K compliance issues and have issued guidance concerning the
responsibilities of senior management and directors. The Federal Financial
Institutions Examination Council has issued several interagency statements on
Y2K Project Management Awareness. These statements require financial
institutions to, among other things, examine the Y2K issue on their customers,
suppliers and borrowers. These statements also require each federally insured
regulated financial institution to survey its exposure, measure its risk and
prepare a plan to address the Y2K issue. In addition, the federal banking
regulators have issued safety and soundness guidelines to be followed by insured
depository institutions, such as the Association, to assure resolution of any
Y2K problems. The federal banking agencies have asserted that Y2K testing and
certification is a key safety and soundness issue in conjunction with regulatory
examinations and, thus, that an institution's failure to address appropriately
the Y2K issue could result in supervisory action, including the reduction of the
institution's supervisory ratings, the denial of applications for approval of
mergers or acquisitions, or the imposition of civil money penalties.
Accurate data processing is essential to the Association's operations
and a lack of accurate processing by its vendors or by the Association could
have a significant adverse impact on the Association's financial condition and
results of operations. The Association has been assured by its data processing
service bureau that their computer services will function properly on and after
January 1, 2000. If by the end of 1998 it appears that the Association's primary
data processing service bureau will be unable to resolve the Y2K problem in a
timely manner, a secondary data processing service provider will be found to
complete the task. If such a contingency provider
12
cannot be found, the Association will identify and implement those steps
necessary to minimize the negative impact of the Y2K problem. The Association
has also received Y2K updates from most of its material non-information system
providers, including but not limited to security cameras, credit card and ATM
card processors, the vault alarm, check printers, telephone systems,
participation loan servicers, and institutions it invests through or with, and
based on these updates does not anticipate any significant Y2K issues. At this
time the expense that Home Federal may incur in relation to handling Y2K issues
cannot be determined.
In addition to expenses related to the Association's own systems, it
could incur losses if loan payments are delayed due to Y2K problems affecting
any of its significant borrowers or impairing the payroll systems of large
employers in its market area. The Association has been communicating with its
vendors to assess their progress in evaluating their systems and implementing
any corrective measures required by them to be prepared for the year 2000. The
Association has also sent Y2K readiness request letters to certain borrowers.
These borrowers were selected based on the aggregate amounts owed to the
Association, the type of loans outstanding, and the perceived Y2K risk based on
management's knowledge of the loan customers and their operations. To date, the
Association has not been advised by such parties that they do not have plans in
place to address and correct the issues associated with the Y2K problem;
however, no assurance can be given as to the adequacy of such plans or to the
timeliness of their implementation. Currently, due to the types of borrowers
doing business with the Association and the nature of its loans with such
borrowers, the Association does not consider the Y2K issue as part of its
underwriting criteria.
PART II - OTHER INFORMATION
Item 1. Legal Proceedings:
There are no matters required to be reported under this item.
Item 2. Changes in Securities:
On September 11, 1998, the Company's Registration on Form SB-2 (File
No.333-58883) covering up to 2,645,000 shares of common stock at $10.00 per
share to be issued in connection with the Company's initial public offering was
declared effective. The offering commenced on September 23, 1998 and terminated
on October 14, 1998. The offering closed on October 26, 1998 and 1,754,411
shares of Company stock, par value $0.01 per share, were sold at a price of
$10.00 per share. Charles Webb & Company, a division of Keefe, Bruyette & Woods,
Inc. ("Webb") acted as Investment Advisor to the Company and assisted in the
sale of the Company's common stock on a "best efforts" basis.
Since the effective date of the registration statement, the Company
incurred $588,000 in expenses in connection with the issuance and distribution
of the securities registered. $250,000 was paid to or on behalf of Webb and
$338,000 represented other expenses of the offering. No such payments were made
either directly or indirectly to directors or officers of the Company or their
associates, persons owning ten percent or more of any class of equity securities
of the Company, or to affiliates of the Company.
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In connection with the offering, the Company received $16.956 million
in proceeds after deducting expenses. The Company intends to utilize $7.074
million of the net proceeds as working capital. Initially, the Company has
invested those funds in short-term liquid assets. The Company loaned $1.404
million of the net proceeds to the Employee Stock Ownership Plan to purchase
Company common stock and $8.478 million of the net proceeds was used to purchase
all of the stock of the Company's wholly-owned subsidiary, Home Federal Savings
and Loan Association of Niles. No direct or indirect payments to directors or
officers of the Company or their associates, or ten percent owners of the
Company, or affiliates of the Company were made by the Company from the net
proceeds.
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, 1998.
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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 16, 1998 By: /s/ William L. Stephens
-------------------------------------
William L. Stephens
President and Chief Executive Officer
(Duly Authorized Representative)
Date: November 16, 1998 By: /s/ Lawrence Safarek
-------------------------------------
Lawrence Safarek
Vice President and Treasurer
(Principal Accounting Officer)
11