UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             Washington, D.C. 20549

                                   FORM 10-KSB

[X]  ANNUAL REPORT  PURSUANT TO SECTION 13 OR 15(D) OF THE  SECURITIES  EXCHANGE
     ACT OF 1934

     FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999

                                       OR

[ ]  TRANSITION  REPORT  PURSUANT  TO  SECTION  13 OR 15 (D)  OF THE  SECURITIES
     EXCHANGE ACT OF 1934

     FOR THE TRANSITION PERIOD FROM ________________ TO ______________________


                         COMMISSION FILE NUMBER: 0-24849

                           FIRST NILES FINANCIAL, INC.
--------------------------------------------------------------------------------
                 (Name of small business issuer in its charter)

           DELAWARE                                     34-1870418
--------------------------------            ------------------------------------
(State or other jurisdiction of             (I.R.S. Employer Identification No.)
 incorporation or organization)

  55 NORTH MAIN STREET, NILES,  OHIO                      44446-5097
--------------------------------------------------------------------------------
(Address of principal executive offices)                  (Zip Code)

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

           Securities Registered Pursuant to Section 12(b) of the Act:

                                      NONE
                                      ----

           Securities Registered Pursuant to Section 12(g) of the Act:

                     COMMON STOCK, PAR VALUE $0.01 PER SHARE
                     ---------------------------------------
                                (Title of class)

Check  whether the issuer (1) filed all reports  required to be filed by Section
13 or 15(d) of the Securities Exchange Act of 1934 during the past 12 months (or
for such shorter  period that the  registrant was required to file such reports)
and (2) has been subject to such filing requirements for the past 90 days.
YES X. NO ___.

Check if there is no disclosure of delinquent  filers in response to Item 405 of
Regulation S-B contained  herein,  and no disclosure  will be contained,  to the
best of registrant's  knowledge,  in definitive proxy or information  statements
incorporated  by reference  in Part III of this Form 10-KSB or any  amendment to
this Form 10-KSB. [X]

State the issuer's revenues for its most recent fiscal year: $5.6 million.

The  aggregate  market value of the voting stock held by  non-affiliates  of the
registrant,  computed by  reference  to the average of the closing bid and asked
price of such  stock on the  Nasdaq  System as of March  15,  2000,  was  $14.85
million. (The exclusion from such amount of the market value of the shares owned
by any  person  shall not be deemed an  admission  by the  registrant  that such
person is an affiliate of the registrant.)

As of March 15, 2000, there were issued and outstanding  1,660,749 shares of the
Registrant's Common Stock.

                       DOCUMENTS INCORPORATED BY REFERENCE

PART II of Form 10-KSB -- Portions of the Annual Report to Stockholders  for the
fiscal year ended  September 30, 1999.

PART III of Form 10-K -- Portions of the Proxy  Statement for the Annual Meeting
of  Shareholders  to be held during  April  2000.

          Transitional Small Business Disclosure Format: Yes ____; No X

<PAGE>



                 DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

     This document,  including information incorporated by reference,  contains,
and future  filings by First Niles  Financial,  Inc. on Form 10-QSB and Form 8-K
and  future  oral and  written  statements  by  First  Niles  Financial  and its
management may contain,  forward-looking  statements about First Niles Financial
and its  subsidiary  which we  believe  are within  the  meaning of the  Private
Securities  Litigation  Reform  Act of 1995.  These  forward-looking  statements
include,  without  limitation,  statements  with respect to  anticipated  future
operating and financial performance, growth opportunities,  interest rates, cost
savings  and  funding  advantages  expected  or  anticipated  to be  realized by
management.   Words  such  as  "may,"  "could,"  "should,"  "would,"  "believe,"
"anticipate," "estimate," "expect," "intend," "plan" and similar expressions are
intended  to  identify   these   forward-looking   statements.   Forward-looking
statements  by First Niles  Financial and its  management  are based on beliefs,
plans, objectives, goals, expectations,  anticipations, estimates and intentions
of  management  and  are not  guarantees  of  future  performance.  First  Niles
Financial  disclaims  any  obligation  to update or revise  any  forward-looking
statements  based  on the  occurrence  of  future  events,  the  receipt  of new
information,  or otherwise. The important factors we discuss below and elsewhere
in  this  document,  as  well as  other  factors  discussed  under  the  caption
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations" in our Annual Report to  Stockholders  (attached to this document as
Exhibit  13) and  identified  in our  filings  with the SEC and those  presented
elsewhere by our  management  from time to time,  could cause actual  results to
differ materially from those indicated by the forward-looking statements made in
this document:

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

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


                                        2
<PAGE>



                                     PART I

ITEM 1.  DESCRIPTION OF BUSINESS

GENERAL

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

     The business  and  management  of First Niles  consists of the business and
management of Home Federal. At December 31, 1999, we had $80.4 million of assets
and  stockholders'  equity of $18.5  million  (or 23.02% of total  assets).  Our
common stock is traded on The Nasdaq SmallCap Market under the symbol "FNFI".

     Home  Federal  is  a  federally   chartered   stock   savings   association
headquartered in Niles,  Ohio. Its deposits are insured up to applicable  limits
by the Federal Deposit Insurance  Corporation (the "FDIC") and are backed by the
full faith and credit of the United States.

     Our  principal  business is  attracting  retail  deposits  from the general
public and investing those funds primarily in permanent and  construction  loans
secured by first mortgages on owner-occupied, one- to four-family residences. We
also  originate,  to a  lesser  extent,  loans  secured  by first  mortgages  on
non-owner-occupied  one- to four-family  residences,  permanent and construction
commercial and multi-family real estate loans, and consumer loans.  Excess funds
are generally invested in investment  securities and mortgage-backed and related
securities.

     Our profitability  depends  primarily on net interest income,  which is the
difference between interest and dividend income on interest-earning  assets, and
interest  expense  on  interest-bearing  liabilities.   Interest-earning  assets
include principally loans,  investment  securities,  mortgage-backed and related
securities and  interest-earning  deposits in other  institutions.  Net interest
income is  dependent  upon the level of  interest  rates and the extent to which
such  rates are  changing.  Our  profitability  is also  dependent,  to a lesser
extent,  on  the  level  of  noninterest  income,  provision  for  loan  losses,
noninterest  expense and income taxes.  Our  operations  and  profitability  are
subject to changes in interest rates,  applicable statutes and regulations,  and
general economic conditions, as well as other factors beyond our control.

     Our offices are located at 55 North Main Street, Niles, Ohio 44446-5097 and
our telephone number is (330) 652-2539.


                                        3

<PAGE>



RECENT LEGISLATION

     On November 12, 1999,  the  Gramm-Leach-Bliley  Act,  which  modernizes the
financial  services  industry  by,  among  other  things,   permitting  banking,
insurance  and  securities  companies  to  combine,  was signed  into law. It is
unclear what impact this legislation  will have on our operations,  although the
anticipated creation of larger and stronger financial services competitors could
materially affect our operations.

MARKET AREA

     Our primary market area is Niles,  Ohio. Our primary  lending area consists
generally of the area within a 30 mile radius of the City of Niles.  Although we
may grant loans outside of this 30 mile radius upon the approval of our Board of
Directors, we do not grant loans outside the State of Ohio.

     Trumbull  County,  where Home  Federal is located,  consists  primarily  of
suburban and rural  communities with  manufacturing  and wholesale  distribution
activities  serving as the basis of the local  economy.  Major  employers in the
area  include  General  Motors  Corp.  and WCI Steel,  Inc.  Our market area has
experienced a higher current  unemployment rate than Ohio and the United States.
In December 1999,  Trumbull County had an unemployment rate of 4.2%, compared to
an unemployment rate of 4.0% in Ohio, and 4.1% in the United States.

     Our market area  comprises a broad range of income and  educational  levels
and  employment  sectors.  In both Niles and Trumbull  County,  the services and
manufacturing  sectors represent  approximately equal shares of the business and
employment base, followed by the wholesale/retail sector. The level of financial
competition  in both  Niles  and  Trumbull  County is strong  and  dominated  by
commercial   banks,   with   financial   institutions   of  varying   sizes  and
characteristics  operating  in  and  around  our  market  area.  These  economic
conditions  and strong  competition  have also  resulted in reduced  loan demand
which, in turn, has resulted in a high  concentration  of investment  securities
and  mortgage-backed and related securities in our portfolio compared to typical
savings  institutions.  In the event  current  economic  and  market  conditions
persist or worsen, and loan demand remains weak, no assurances can be given that
we will be able to maintain or increase our mortgage loan portfolio, which could
adversely affect our operations and financial results.

LENDING ACTIVITIES

     GENERAL.  Our primary lending  activity is the origination of loans secured
by first mortgages on one- to four-family residential  properties.  We also make
permanent and construction loans on multi-family and commercial properties,  and
a limited number of consumer and commercial  business loans.  Our mortgage loans
carry  either  a fixed  or an  adjustable  interest  rate.  Mortgage  loans  are
generally  long-term and amortize on a monthly basis with principal and interest
due each month.  At December  31, 1999,  our net loan  portfolio  totaled  $36.9
million, which constituted 45.8% of our total assets.

                                        4

<PAGE>




     Management  originates all loans,  which are subject to ratification by the
Board of  Directors.  Commercial  real estate loans and  multi-family  loans are
generally reviewed by the Board before we extend a lending commitment. Unless we
are aware of factors that may lead to an environmental  concern, we generally do
not  require  any  environmental  study  at  the  time  a loan  is  made.  If an
environmental  problem were discovered to exist after a loan has been originated
and the loan has  become  delinquent,  we may  choose  not to  foreclose  on the
property if the  potential  environmental  liability  would  render  foreclosure
imprudent.

     Management is responsible for presenting to the Board information about the
credit-worthiness of a borrower and the estimated value of the subject property.
Information  relating to credit-worthiness of a borrower generally consists of a
summary of the borrower's credit history, employment,  employment stability, net
worth and income.  The  estimated  value of the property must be supported by an
appraisal report prepared in accordance with our appraisal policy.

     At December 31, 1999,  the maximum amount which we could have loaned to any
one borrower and the borrower's related entities was approximately $3.4 million.
At December  31, 1999,  we had no loans or groups of loans to related  borrowers
with  outstanding  balances in excess of this amount.  At that date, our largest
lending  relationship  to a  single  borrower  or a group of  related  borrowers
consisted of nine loans  totaling $2.1 million of which  approximately  $217,000
was  unfunded at December 31,  1999.  Of the nine loans,  six loans were for the
construction or development of residential housing, including condominiums,  and
three loans were secured by apartment rental units and commercial  office space.
the second largest lending  relationship at December 31, 1999,  consisted of two
purchased  participation  loans totaling $1.9 million for the construction of an
apartment  complex  and a  completed  warehouse/office  and  retail  complex  in
Columbus,  Ohio.  Approximately  $383,000 of the $1.0 million  apartment complex
participation  construction  loan was unfunded at December  31, 1999.  The third
largest  lending  relationship  at December 31,  1999,  consisted of a purchased
participation  loan for $1.0 million,  secured by a warehouse under construction
in  Columbus,  Ohio.  Approximately  $267,000  of this loan was  unfunded  as of
December 31, 1999. Our next largest  lending  relationship at December 31, 1999,
totaled $992,000 and consisted of a purchased  participation loan secured by two
separate  apartment  complexes  in  Wooster,  Ohio.  Our fifth  largest  lending
relationship as of December 31, 1999 consisted of a purchased participation loan
secured by single-family  rental units in Columbus,  Ohio. Each of the foregoing
loans was current and  performing in  accordance  with its terms at December 31,
1999.

     We had nine other lending relationships which exceeded $400,000 at December
31, 1999. As of that date, all of these lending  relationships  were current and
performing  generally in accordance with their loan terms except for one lending
relationship that consisted of four loans aggregating $675,000 that had one loan
with a balance of $263,000 on nonaccrual status.

         LOAN PORTFOLIO COMPOSITION.  The following table sets forth information
concerning  the  composition  of our loan  portfolio  in dollar  amounts  and in
percentages as of the dates  indicated.  The dollar amounts and percentages were
calculated before  deductions for loans in process,  deferred fees and discounts
and allowances for losses.


                                        5

<PAGE>



                                                      December 31,
                                         --------------------------------------
                                               1999                 1998
                                         ------------------   -----------------
                                         Amount    Percent    Amount    Percent
                                         ------    -------    ------    -------
                                                 (Dollars in Thousands)
Real Estate Loans:
 One- to four-family.................   $25,946     66.86%   $25,474     66.81%
 Commercial..........................     5,903     15.21      5,042     13.23
 Multi-family........................     1,924      4.96      1,298      3.40
 Construction or development.........     3,622      9.33      5,104     13.39
                                        -------    ------    -------    ------
     Total real estate loans.........    37,395     96.36     36,918     96.83
                                        -------    ------    -------    ------

Other Loans:
 Consumer Loans:
 Home equity.........................       751      1.94        915      2.40
 Other...............................       462      1.19         82      0.21
                                        -------    ------    -------    ------
     Total consumer loans............     1,213      3.13        997      2.61
 Commercial business loans...........       199      0.51        213      0.56
                                        -------    ------    -------    ------
     Total other loans...............     1,412      3.64      1,210      3.17
                                        -------    ------    -------    ------
     Total loans.....................    38,807    100.00%    38,128    100.00%
                                                   ======               ======

Less:
 Loans in process....................     1,390                1,212
 Deferred fees and discounts.........         5                  ---
 Allowance for losses................       549                  784
                                        -------              -------
                                          1,944                1,996
                                        -------              -------
 Total loans receivable, net.........   $36,863              $36,132
                                        =======              =======


                                        6

<PAGE>



     The following  table shows the  composition of our loan portfolio by fixed-
and adjustable-rate at the dates indicated.

<TABLE>
<CAPTION>
                                                                             December 31,
                                                  --------------------------------------------------------------
                                                             1999                                1998
                                                  -------------------------           --------------------------
                                                   Amount           Percent           Amount             Percent
                                                   ------           -------           ------             -------
                                                                        (Dollars in Thousands)
<S>                                               <C>                <C>              <C>                 <C>
Fixed-Rate Loans:
 Real estate:
  One- to four-family .....................       $14,708            37.90%           $13,710             35.96%
  Commercial ..............................           323             0.83                318              0.84
  Multi-family ............................           107             0.28                188              0.49
  Construction or development .............         1,978             5.10              3,698              9.70
                                                  -------           ------            -------            ------
     Total real estate loans ..............        17,116            44.11             17,914             46.99
                                                  -------           ------            -------            ------

 Consumer .................................           827             2.13                997              2.61
 Commercial business ......................           199             0.51                213              0.56
                                                  -------           ------            -------            ------
                                                    1,026             2.64              1,210              3.17
                                                  -------           ------            -------            ------
     Total fixed-rate loans ...............        18,142            46.75             19,124             50.16

Adjustable-Rate Loans:
 Real estate:
  One- to four-family .....................        11,238            28.96             11,764             30.85
  Commercial ..............................         5,580            14.38              4,724             12.39
  Multi-family ............................         1,817             4.68              1,110              2.91
  Construction or development .............         1,644             4.24              1,406              3.69
                                                  -------           ------            -------            ------
     Total real estate loans ..............        20,279            52.26             19,004             49.84
 Consumer .................................           386             0.99                 --                --
                                                                    ------            -------            ------
     Total adjustable-rate loans ..........        20,665            53.25             19,004             49.84
                                                  -------           ------            -------            ------
     Total loans ..........................        38,807           100.00%            38,128            100.00%
                                                                                      =======            ======

Less:
 Loans in process..........................         1,390                               1,212
 Deferred fees and discounts...............             5                                  --
 Allowance for loan losses.................           549                                 784
                                                  -------                             -------
                                                    1,944                               1,996
                                                  -------                             -------
    Total loans receivable, net............       $36,863                             $36,132
                                                  =======                             =======
</TABLE>

                                        7

<PAGE>



     The following  schedule  illustrates the  contractual  maturity of our real
estate construction and commercial business loan portfolios at December 31, 1999
before net items.  Mortgage loans that have adjustable or renegotiable  interest
rates are shown as maturing in the period  during which the contract is due. The
schedule does not reflect the effects of possible  prepayments or enforcement of
due-on-sale clauses.

<TABLE>
<CAPTION>
                                     Real Estate Construction        Commercial
                                          or Development              Business                     Total
                                     -------------------------  -----------------------     ---------------------
                                                    Weighted                  Weighted                  Weighted
                                                     Average                   Average                   Average
                                      Amount          Rate      Amount          Rate        Amount        Rate

                                                             (Dollars in Thousands)
<S>                                   <C>             <C>        <C>            <C>         <C>           <C>
Due During Periods
Ending December 31,
-------------------
2000(1)......................         $1,493          8.04%      $  1           7.50%       $1,494        8.04%
2001 to 2004.................          1,945          7.98         97           8.47         2,042        8.01
After 2004...................            184          7.91        101           7.91           285        7.91
                                     -------                     ----                       ------
     Totals..................         $3,622          8.00%      $199           8.18%       $3,821        8.01%
                                      ======                     ====                       ======
</TABLE>

-----------------------------

(1) Includes demand loans,  non-accrual  loans,  loans having no stated maturity
and overdraft loans.

     The total  amount of loans in the above table due after  December  31, 2000
which have fixed interest rates is $1.7 million, while the total amount of loans
due after  such  date  which  have  floating  or  adjustable  interest  rates is
$612,000.

     ONE- TO  FOUR-FAMILY  RESIDENTIAL  REAL ESTATE  LENDING.  Residential  loan
originations  are  generated  by our  marketing  efforts,  present  and  walk-in
customers,  and referrals from real estate brokers and builders. We have focused
our lending  efforts  primarily  on the  origination  of loans  secured by first
mortgages on owner-occupied,  one- to four-family residences in our market area.
At December 31, 1999,  one- to  four-family  residential  mortgage loans totaled
$25.9 million, or 66.9% of our gross loan portfolio.

     Home Federal  currently  originates  one- to four-family  mortgage loans on
either a fixed or adjustable  basis,  as consumer demand  dictates.  The pricing
strategy for fixed-rate  mortgage loans revolves  around setting  interest rates
that are competitive  with other local financial  institutions.  Adjustable-rate
mortgage loans are offered with either one-year or three-year repricing periods.
Due to their wide availability and market rate sensitivity, we currently use the
one-year and three-year U.S.  Treasury  Security  Constants plus a stated margin
over such indices for pricing of adjustable-rate mortgage loans. During the year
ended  December  31, 1999,  we  originated  $1.5 million of one- to  four-family
adjustable-rate  mortgage  loans  and  $3.3  million  of  one-  to  four-family,
fixed-rate   mortgage  loans.   We  have  not  sold  any  mortgage  loans.   See
"Management's  Discussion  and  Analysis of Financial  Condition  and Results of
Operations - Asset and Liability Management; Market Risk Analysis" in our Annual
Report to Stockholders.

         Fixed-rate loans secured by one- to four-family residences have maximum
maturities  of 30 years,  and are fully  amortizing,  with payments due monthly.

                                        8

<PAGE>



These loans normally remain outstanding,  however,  for a substantially  shorter
period of time  because of  refinancing  and other  prepayments.  A  significant
change in the current level of interest  rates could alter the average life of a
residential loan in our portfolio  considerably.  Our one- to four-family  loans
are  not  assumable,  do not  contain  prepayment  penalties  and do not  permit
negative  amortization of principal.  Our real estate loans generally  contain a
"due on sale" clause allowing us to declare the unpaid principal balance due and
payable upon the sale of the security property.

     Our one- to  four-family  residential  adjustable-rate  mortgage  loans are
fully amortizing with contractual maturities of up to 30 years, and payments due
monthly.  Our  adjustable-rate  mortgage loans provide for specified minimum and
maximum  interest  rates.  As a consequence of using caps, the interest rates on
these  loans  may  not  be  as  rate  sensitive  as  our  cost  of  funds.   Our
adjustable-rate  mortgage loans are generally not  convertible  into  fixed-rate
loans.

     Adjustable-rate  mortgage loans generally pose different  credit risks than
fixed-rate  loans,  primarily  because as interest  rates rise,  the  borrower's
payment  rises,  and thus,  increases  the  potential  for default.  We have not
experienced  significant  delinquencies  concerning  these  loans.  See "- Asset
Quality -- Non-Performing Assets" and "-Asset Quality -- Classified Assets."

     As mentioned above, we have primarily  concentrated our lending  activities
on the origination of owner-occupied,  one- to four-family residences. In recent
years,  however,   loans  secured  by  nonowner  occupied,   one-to  four-family
residences  have accounted for a growing share of total loan volume.  Generally,
these loans are underwritten using the same criteria as owner-occupied,  one- to
four-family  residential loans, but typically are originated at higher rates and
lower loan-to-value ratios than owner-occupied loans.

     We  generally  underwrite  our  one-  to  four-family  loans  based  on the
applicant's  employment,  credit  history,  and  appraised  value of the subject
property.  Presently,  we lend up to 90% of the lesser of the appraised value or
purchase price for one- to four-family  loans.  Properties  securing our one- to
four-family  loans are  appraised by  independent  fee  appraisers  approved and
qualified  by our Board of  Directors.  We  generally  require our  borrowers to
obtain title insurance and fire, property and flood insurance,  if necessary, in
an amount not less than the value of the security property.

     COMMERCIAL  AND  MULTI-FAMILY  REAL  ESTATE  LENDING.  We  are  engaged  in
commercial  and  multi-family  real  estate  lending.  These  loans are  secured
primarily  by small retail  establishments,  small  office  buildings  and other
non-residential  and  residential  properties  located  in our market  area.  At
December 31, 1999, commercial real estate loans totaled $5.9 million or 15.2% of
our gross loan portfolio and multi-family real estate loans totaled $1.9 million
or 5.0% of our gross loan portfolio.

     Our loans secured by commercial and multi-family real estate are originated
with  either  a  fixed  or  adjustable  interest  rate.  The  interest  rate  on
adjustable-rate  loans is based on a variety  of  indices,  which are  generally
determined  upon  negotiation  with the  borrower.  Loan-to-value  ratios on our
commercial and  multi-family  loans typically do not exceed 80% of the appraised
value of the property  securing the loan. These loans typically  require monthly
payments and have maximum  maturities of 30 years.  While maximum maturities may
extend to 30 years,  loans  frequently  have shorter  maturities  that generally
range from 10 to 15 years.

                                        9

<PAGE>




     Loans secured by commercial and multi-family  real estate are granted based
on the income producing  potential of the property and the financial strength of
the borrower.  The net operating  income,  which is the income  derived from the
operation of the property  less all  operating  expenses,  must be sufficient to
cover the  payments  related  to the  outstanding  debt.  We  generally  require
personal  guaranties  of the  borrowers in addition to the security  property as
collateral  for such loans.  Appraisals on properties  securing  commercial  and
multi-family  real estate loans are  performed  by  independent  fee  appraisers
approved by our Board of  Directors.  See "- Loan  Originations,  Purchases  and
Repayments."

     Loans secured by commercial  and  multi-family  real estate  properties are
generally  larger  and  involve  a greater  degree  of credit  risk than one- to
four-family  residential  mortgage  loans because they  typically  involve large
balances to single borrowers or groups of related borrowers. Because payments on
loans secured by commercial and  multi-family  real estate  properties are often
dependent on the successful operation or management of the properties, repayment
of such loans may be subject to adverse  conditions in the real estate market or
the  economy.  If the cash flow from the  project  is  reduced,  the  borrower's
ability  to repay  the loan may be  impaired.  For  example,  cash flow from the
project is reduced if leases are not obtained or renewed.  See "- Asset  Quality
-- Nonperforming Loans."

     CONSTRUCTION AND DEVELOPMENT LENDING. We originate residential construction
loans to  individuals as well as loans secured by building lots or raw land held
for development.  Presently,  all of these loans are secured by property located
within  our  market  area.  At  December  31,  1999,  we  had  $3.6  million  in
construction and development loans  outstanding,  representing 9.3% of our gross
loan  portfolio.  At December 31,  1999,  our two largest  construction  lending
relationships  consisted  of  participation  interests  secured by an  apartment
complex and a warehouse,  both located in Columbus,  Ohio. The apartment complex
participation   interest  totaled  $1.0  million,  with  approximately  $383,000
unfunded at December 31, 1999. The warehouse participation interest totaled $1.0
million,  with  approximately  $267,000  unfunded at December 31, 1999.  Both of
these loans were performing in accordance with terms at December 31, 1999.

     Construction  loans to  individuals  for  their  residences  generally  are
structured  to be converted to  permanent  loans at the end of the  construction
phase, which typically runs six months.  These construction loans have rates and
terms that match the one- to  four-family  loans then  offered by Home  Federal,
except that during the construction phase the borrower pays only interest on the
loan. Residential  construction loans are generally underwritten pursuant to the
same guidelines used for originating  permanent  residential  loans. At December
31, 1999, $768,000 of our construction loans were to borrowers intending to live
in the properties upon completion of construction.

     Loans  secured  by  building  lots or raw  land  held for  development  are
generally  granted  with terms of up to five years and are  available at a fixed
interest  rate.  Payments on loans  secured by building lots are due monthly and
amortized  on a 20-year  basis,  resulting  in a balloon  payment  at  maturity.
Payments on raw land held for  development  are due  monthly,  and are  interest
only.  Loans  secured by building lots or raw land for  development  are granted
based  on both the  financial  strength  of the  borrower  and the  value of the
underlying property.  At December 31, 1999, we had $1.1 million of loans secured
by building lots and raw land.

                                       10

<PAGE>




     Construction loans are obtained principally through continued business from
builders who have  previously  borrowed from Home Federal,  as well as referrals
from existing and walk-in customers. The application process includes submission
of accurate  plans,  specifications  and costs of the project to be constructed.
These items are used as a basis to determine the appraised  value of the subject
property.  Loans are based on the lesser of current  appraised  value and/or the
cost of construction (land plus building).  We also conduct periodic inspections
of the construction project being financed.

     There are uncertainties  inherent in estimating  construction costs and the
market for the project upon completion.  Accordingly, it is relatively difficult
to evaluate accurately the total loan funds required to complete a project,  the
related  loan-to-value  ratios and the  likelihood  of  success of the  project.
Construction loans to borrowers other than  owner-occupants also involve many of
the same risks discussed  above regarding  commercial real estate loans and tend
to be more  sensitive to general  economic  conditions  than many other types of
loans.

     OTHER  LENDING.  We  also  originate  a  nominal  amount  of  consumer  and
commercial business loans,  generally as an accommodation to our customers.  Our
consumer loan portfolio  consists  almost  entirely of personal loans secured by
first or second mortgages on real estate. These loans are offered at fixed rates
of interest with terms not exceeding ten years.

LOAN ORIGINATIONS, PURCHASES AND REPAYMENTS

     We originate  loans  through our  marketing  efforts,  existing and walk-in
customers  and  referrals  from  real  estate  brokers  and  builders.  While we
originate both  adjustable-rate  and fixed-rate  loans, our ability to originate
loans is dependent  upon the relative  customer  demand for loans in our market.
Demand is affected  by local  competition  and the  interest  rate  environment.
During  the last  several  years,  our  dollar  volume  of  fixed-rate,  one- to
four-family   loans  has  exceeded  the  dollar  volume  of  the  same  type  of
adjustable-rate  loans. Although our primary business is the origination of one-
to four-family  mortgage loans,  competition  from other financial  institutions
continues to limit the volume of loans we have been able to originate  and place
in our portfolio.  As a result, we have purchased  mortgage loans and investment
and mortgage-backed  and related securities to supplement our portfolios.  We do
not sell loans and our loans are not  originated  according to secondary  market
guidelines.

     In periods of economic uncertainty,  the ability of financial institutions,
including Home Federal,  to originate  large dollar volumes of real estate loans
may be  substantially  reduced  or  restricted,  with a  resultant  decrease  in
interest income.


                                       11

<PAGE>



     The  following  table shows our loan  origination,  purchase and  repayment
activities for the periods indicated.


                                                         Year Ended December 31,
                                                         -----------------------
                                                           1999          1998
                                                           ----          ----
                                                              (In Thousands)
Originations by type:
 Adjustable rate:
 Real estate - one- to four-family .................     $  1,499      $  2,000
                    - commercial ...................          400         1,188
                    - multi-family .................           64            --
                                                         --------      --------
         Total adjustable-rate .....................        1,963         3,188
                                                         --------      --------
 Fixed rate:
 Real estate - one- to four-family .................        3,297         3,555
                    - commercial ...................           --            --
                    - multi-family .................           --           675
                    - land and development .........           38           371
 Non-real estate - consumer ........................          890           803
                    - commercial business ..........          111            62
                                                         --------      --------
         Total fixed-rate ..........................        4,336         5,466
                                                         --------      --------
         Total loans originated ....................        6,299         8,654
                                                         --------      --------

Purchases:
 Real estate - one- to four-family .................           --            --
                    - commercial ...................        1,000            --
                    - multi-family .................        2,000         1,000
                    - land and development .........           --           525
                                                         --------      --------
         Total loans purchased .....................        3,000         1,525
 Mortgage-backed and related securities ............        9,917         9,541
                                                         --------      --------
         Total purchased ...........................       12,917        11,066
                                                         --------      --------

Repayments:
 Principal repayments ..............................       14,278        20,223
                                                         --------      --------
         Total reductions ..........................       14,278        20,223
 Decrease in other items, net ......................         (441)          (37)
                                                         --------      --------
         Net increase (decrease) ...................     $  4,497      $   (540)
                                                         ========      ========

ASSET QUALITY

     When a borrower  fails to make a payment on a loan on or before the default
date,  the loan is considered 30 days past due. At that time, we generally  send
out a delinquent notice to the borrower. All delinquent accounts are reviewed by
our collection  officer,  and at his or her discretion,  we attempt to cause the
delinquency to be cured by contacting the borrower.  If the loan becomes 60 days
delinquent,  the collection officer will generally send a personal letter to the
borrower   requesting   payment  of  the  delinquent  amount  in  full,  or  the
establishment  of an acceptable  repayment plan to bring the loan current within

                                       12

<PAGE>



90 days. If the account becomes 90 days delinquent,  and an acceptable repayment
plan has not been agreed upon, the collection  officer will generally  refer the
account to legal  counsel,  with  instructions  to prepare a notice of intent to
foreclose.  The notice of intent to foreclose  allows the borrower up to 30 days
to bring the account current.  During this 30 day period, the collection officer
may accept a written  repayment  plan from the  borrower  which  would bring the
account current within 90 days. Once the loan becomes 120 days  delinquent,  and
an acceptable  repayment plan has not been agreed upon, the collection  officer,
after receiving consent from our Board of Directors,  will turn over the account
to our legal counsel with instructions to initiate foreclosure.

     DELINQUENT LOANS. The following table sets forth our loan  delinquencies by
type, number, amount and percentage of type at December 31, 1999.

<TABLE>
<CAPTION>
                                                    Loans Delinquent For:
                            -------------------------------------------------------------------

                                        30-89 Days                      90 Days and Over                Total Delinquent Loans
                            --------------------------------     ------------------------------     ------------------------------
                                                    Percent                            Percent                            Percent
                                                    of Loan                            of Loan                            of Loan
                              Number      Amount    Category     Number      Amount    Category     Number      Amount    Category
                              ------      ------    --------     ------      ------    --------     ------      ------    --------

                                                                     (Dollars in Thousands)
<S>                             <C>     <C>          <C>            <C>     <C>          <C>           <C>     <C>          <C>
Real Estate:
   One- to four-family          15      $  724       2.79%          11      $  307       1.18%         26      $1,031       3.97%
   Commercial ........           1          33       0.56            1         252       4.27           2         285       4.83
   Multi-family ......          --          --         --           --          --         --          --          --         --
   Construction or
     development .....           2         108       2.98            1         263       7.26           3         371      10.24
Consumer .............           6          27       2.23            1           4       0.33           7          31       2.56
Commercial ...........           1          21      10.55           --          --         --           1          21      10.55
                             -----       -----      -----       ------      ------      -----      ------      ------      -----

     Total ...........          25      $  913       2.35%          14      $  826       2.13%         39      $1,739       4.48%
                             ======      ======      =====      ======      ======      =====      ======      ======      =====
</TABLE>

     NON-PERFORMING   ASSETS.  The  table  below  sets  forth  the  amounts  and
categories of our non-performing  assets. Loans are placed on non-accrual status
when the collection of principal and/or interest becomes doubtful. For all years
presented,  we have had no foreclosed assets and no troubled debt restructurings
which  involve  forgiving  a portion of interest  or  principal  on any loans or
making loans at a rate materially less than that of market rates.

                                       13

<PAGE>




                                                                December 31,
                                                             -------------------
                                                             1999          1998
                                                             ----          ----

                                                          (Dollars in Thousands)
Non-accruing loans:
  One- to four-family ..............................         $ --          $ --
  Construction or development ......................          263           648
                                                             ----          ----
     Total .........................................          263           648
                                                             ----          ----

Accruing loans delinquent more than 90 days:
  One- to four-family ..............................          307           206
  Multi-family .....................................           --            --
  Commercial real estate ...........................          252            --
  Construction or development ......................           --            95
  Consumer .........................................            4             6
  Commercial business ..............................           --            --
                                                             ----          ----
     Total .........................................          563           307
                                                             ----          ----

Total non-performing loans .........................         $826          $955
                                                             ====          ====
Total as a percentage of gross loans receivable ....         2.21%         2.59%
                                                             ====          ====


     Except as discussed  below,  there were no  nonperforming  loans to any one
borrower or group of related  borrowers that exceeded either  individually or in
the aggregate $250,000.

     Included  in the  table  above is a  commercial  real  estate  loan with an
outstanding  balance of  $263,000  at December  31,  1999.  This loan is for the
development of 34 single-family  lots and 23 condominium  sites for the eventual
construction of 56 condominium  units. This loan was originated in June 1994 for
$1.0 million with a loan-to-value  ratio of  approximately  79%. The development
consists  of  three  phases.  The  first  phase  is for  the  development  of 34
single-family  residential  lots  and  phase  two is for the  development  of 23
condominium  sites.  Phase  three,  for which we have not granted any  financing
commitment,  is for the  development  of 37 additional  single-family  lots. The
borrower  initially  projected  that phase one would be completed in early 1995,
with sales occurring  during 1995 and 1996. As a result of construction  delays,
phases one and two were  completed  during the first quarter of 1997.  Lot sales
have been significantly  slower than projected with only nine single-family lots
having been sold as of December 31, 1999. Lot sales remain slow. The condominium
sites were released during 1999 in exchange for a $276,000 pay down of the loan.

     For the year ended  December 31, 1999,  gross  interest  income which would
have been recorded had the  non-accruing  loans been current in accordance  with
their original terms amounted to $63,000, none of which was included in interest
income.

     OTHER LOANS OF CONCERN. In addition to the non-performing  assets set forth
in the table above as of December  31, 1999,  there was one loan,  secured by an
individual  commercial  property,  with an outstanding  balance of $530,000 with
respect to which known  information  about the possible  credit  problems of the
borrowers  have  caused  management  to have  doubts  as to the  ability  of the
borrower to comply with present loan repayment terms and which may result in the
future inclusion of this item in the non-performing asset categories.  This loan

                                       14

<PAGE>



was  originated  in December  1994 for  $582,000  and at  December  31, 1999 was
current  and  performing  in  accordance  with its  loan  terms.  Management  is
monitoring  this loan based on its  evaluation of the  borrower's  cash flow and
financial  condition,  which raises concerns regarding the borrower's ability to
service this loan in the future.  This loan has been  considered in management's
determination of the adequacy of our allowance for loan losses.

     CLASSIFIED ASSETS.  Federal  regulations  provide for the classification of
loans and other  assets,  such as debt and equity  securities  considered by the
Office  of  Thrift  Supervision  to  be of  lesser  quality,  as  "substandard,"
"doubtful" or "loss." An asset is considered "substandard" if it is inadequately
protected by the current net worth and paying  capacity of the obligor or of the
collateral pledged, if any.  "Substandard" assets include those characterized by
the "distinct possibility" that the insured institution will sustain "some loss"
if the deficiencies are not corrected.  Assets classified as "doubtful" have all
of the weaknesses  inherent in those  classified  "substandard,"  with the added
characteristic  that the weaknesses  present make  "collection or liquidation in
full," on the basis of currently existing facts, conditions, and values, "highly
questionable and improbable."  Assets  classified as "loss" are those considered
"uncollectible"  and of such  little  value  that  their  continuance  as assets
without the establishment of a specific loss reserve is unwarranted.

     When an insured institution classifies problem assets as either substandard
or doubtful,  it may establish  general  allowances for loan losses in an amount
deemed prudent by management. General allowances represent loss allowances which
have been  established  to recognize the inherent risk  associated  with lending
activities,  but  unlike  specific  allowances,   have  not  been  allocated  to
particular problem assets. When an insured institution classifies problem assets
as "loss," it is required  either to establish a specific  allowance  for losses
equal to 100% of that portion of the asset so  classified  or to charge off that
particular  amount. An institution's  determination as to the  classification of
its assets and the amount of its  valuation  allowances  is subject to review by
the Office of Thrift Supervision and the FDIC, which may order the establishment
of additional general or specific loss allowances.

     In  connection  with the filing of our periodic  reports with the Office of
Thrift  Supervision and in accordance with our  classification of assets policy,
we regularly review the problem assets in our portfolio to determine whether any
assets require classification in accordance with applicable regulations.  On the
basis of  management's  review of our  assets,  at  December  31,  1999,  we had
classified  $802,000  of our assets as  substandard,  which  represents  4.3% of
stockholders'  equity and 1.0% of total  assets.  No assets were  classified  as
doubtful or as loss.

     ALLOWANCE FOR LOAN LOSSES.  The  allowance  for loan losses is  established
through a provision for loan losses which is based on management's evaluation of
past loss  experience,  current  trends in the level of delinquent  and specific
problem loans, loan  concentration to single borrowers,  adverse situations that
may  affect  the  borrower's  ability  to  repay,  the  estimated  value  of any
underlying  collateral,  and current and anticipated  economic conditions in our
market area. A significant portion of our loan portfolio is concentrated in one-
to  four-family  mortgage  loans  which,  historically,   has  not  led  to  any
significant  loan  losses.  Management  prepares  quarterly  analyses  of  loans
classified as  substandard  and  non-performing,  and  evaluates  these loans in

                                       15

<PAGE>



connection with its  determination of the appropriate  provision for loan losses
to  be  recorded  for  the  period.  Management  also  analyzes  borrowers  with
significant  outstanding  balances to reevaluate credit risk, the quality of the
loan and factors that may affect the borrowers' ability to pay. Accordingly, the
allowance  represents  managements's  estimate  of losses  inherent  in our loan
portfolio as of a specified date.

     Although management believes that it uses the best information available to
determine  the  allowance,   unforeseen   market   conditions  could  result  in
adjustments and net earnings could be  significantly  affected if  circumstances
differ   substantially   from  the   assumptions   used  in  making   the  final
determination.  Future additions to our allowance will be the result of periodic
loan,  property and collateral reviews and thus, cannot be predicted in advance.
At December 31, 1999, our total allowance for loan losses  represented  coverage
of 66.5% of non-performing loans. See Notes A and C of the Notes to Consolidated
Financial Statements contained in our Annual Report to Stockholders.

     The  following  table  sets forth an  analysis  of our  allowance  for loan
losses.

<TABLE>
<CAPTION>
                                                                  At and For the Years
                                                                   Ended December 31,
                                                                  --------------------
                                                                  1999           1998
                                                                  ----           ----
                                                                     (In Thousands)
<S>                                                               <C>            <C>
Balance at beginning of period ...........................        $ 784          $ 854

Charge-offs: One- to four-family .........................          300             21
                                                                  -----          -----
    Total charge-offs ....................................          300             21

Recoveries: ..............................................           --             54
                                                                  -----          -----
   Net (charge-offs) recoveries ..........................         (300)            33
Additions charged (reductions credited) to operations ....           65           (103)
                                                                  -----          -----
Balance at end of period .................................        $ 549          $ 784
                                                                  =====          =====

Ratio of net charge-offs (recoveries) during the period to
 average loans outstanding during the period .............         0.80%         (0.09)%
                                                                  =====          =====

Ratio of net charge-offs (recoveries) during the period to
 average non-performing loans ............................        31.03%         (2.27)%
                                                                  =====          =====
</TABLE>

     During the year ended  December 31, 1998, we reduced the allowance for loan
losses to $784,000.  To reduce the  allowance,  $103,000  was  credited  back to
operations  through the provision  for loan losses.  We reduced the allowance to
reflect the decreased level of nonperforming loans and management's reassessment
of the loan  portfolio as of December 31, 1998.  During the year ended  December
31, 1999 we charged off $300,000,  with $291,000  attributable to the bankruptcy
of one borrower,  whose loans were  collateralized  by  residential  rental real
estate.  The  properties  collateralizing  these loans were  disposed of through
bankruptcy  action.  During 1999 we also added $65,000 to the allowance for loan
losses  to  partially   offset  the  charge-offs   and  to  adequately   reflect
management's assessment of the risks inherent in the loan portfolio.

                                       16

<PAGE>




     The distribution of our allowance for loan losses at the dates indicated is
summarized as follows:

<TABLE>
<CAPTION>
                                                                          December 31,
                                   -----------------------------------------------------------------------------------
                                                   1999                                        1998
                                   -------------------------------------        --------------------------------------
                                                                Percent                                       Percent
                                                                of Loans                                     of Loans
                                                  Loan          in Each                         Loan          in Each
                                   Amount of     Amounts        Category        Amount of      Amounts       Category
                                   Loan Loss        by          to Total        Loan Loss        by          to Total
                                   Allowance     Category        Loans          Allowance     Category         Loans
                                   ---------     --------        -----          ---------     --------         -----
                                                                     (Dollars in Thousands)
<S>                                <C>            <C>             <C>           <C>            <C>             <C>
One- to four-family .......        $    69        $25,946         66.86%        $   154        $25,474         66.81%
Multi-family, commercial,
  real estate, construction
  or development ..........            121         11,449         29.50             142         11,444         30.02
Consumer and commercial
  business ................              1          1,412          3.64               1          1,210          3.17
Unallocated ...............            358             --            --             487             --            --
                                   -------        -------        ------         -------        -------        ------
     Total ................        $   549        $38,807        100.00%        $   784        $38,128        100.00%
                                   =======        =======        ======         =======        =======        ======
</TABLE>

INVESTMENT ACTIVITIES

     Home Federal must maintain  minimum levels of  investments  that qualify as
liquid  assets under Office of Thrift  Supervision  regulations.  Liquidity  may
increase or decrease  depending upon the  availability  of funds and comparative
yields on investments in relation to the return on loans. Historically,  we have
maintained  liquid  assets at levels above the minimum  requirements  imposed by
Office of Thrift  Supervision  regulations and above levels believed adequate to
meet  the  requirements  of  normal  operations,   including  potential  deposit
outflows.  Cash flow  projections  are regularly  reviewed and updated to assure
that adequate liquidity is maintained. At December 31, 1999, our liquidity ratio
was 13.80%.  The liquidity ratio represents liquid assets as a percentage of net
withdrawable savings deposits and current short-term borrowings.

     Federally  chartered  savings  institutions have the authority to invest in
various types of liquid assets, including U.S. Treasury obligations,  securities
of various federal  agencies,  certain  certificates of deposit of insured banks
and savings institutions,  certain bankers'  acceptances,  repurchase agreements
and federal funds. Subject to various restrictions,  federally chartered savings
institutions  may also invest their assets in investment  grade commercial paper
and  corporate  debt  securities  and mutual funds whose  assets  conform to the
investments  that  a  federally   chartered  savings  institution  is  otherwise
authorized to make  directly.  See  "Regulation - Federal  Regulation of Savings
Associations"  for a discussion of  additional  restrictions  on our  investment
activities.

     President  Stephens and Vice President Swift have the basic  responsibility
for the  management of our  investment  portfolio,  subject to the direction and
guidance of the Board of Directors. These officers consider various factors when
making decisions, including the marketability,  maturity and tax consequences of
the proposed investment.  The maturity structure of investments will be affected


                                       17

<PAGE>



by various market conditions, including the current and anticipated slope of the
yield curve, the level of interest rates, the trend of new deposit inflows,  and
the anticipated demand for funds via deposit withdrawals and loans.

     The general objectives of our investment  portfolio are to: (i) provide and
maintain  liquidity  within  the  guidelines  prescribed  by  Office  of  Thrift
Supervision regulations;  (ii) provide liquidity when loan demand is high and to
assist in  maintaining  earnings  when loan  demand is low;  and (iii)  maximize
earnings while satisfactorily managing risk, including credit risk, reinvestment
risk,  liquidity risk and interest rate risk. See  "Management's  Discussion and
Analysis of Financial  Condition and Results of Operations - Asset and Liability
Management; Market Risk Analysis"in our Annual Report to Stockholders.

     Our  investment  securities  consist  primarily  of mutual  funds that have
assets  that  conform to the  investments  that a  federally  chartered  savings
institution  is  authorized  to make  directly.  These funds offer  professional
management,  easy access to funds,  continuous  reinvestment  and relatively low
historical  price  volatility.  Currently,  we are  invested in three  different
mutual funds.

     Our mortgage-backed and related securities portfolio consists of securities
issued  under   government-sponsored   agency   programs.   We  hold   primarily
collateralized  mortgage  obligations.  Collateralized  mortgage obligations are
special  types of  pass-through  debt  securities  in which  the  principal  and
interest payments on the underlying mortgages or mortgage-backed  securities are
used  to  create  classes  with  different   maturities   and,  in  some  cases,
amortization  schedules,  as well as a residual  interest,  with each such class
possessing different risk characteristics.

     Our policy is to purchase only collateralized mortgage obligations that are
in the first or second repayment tranche  (investment  class) and are AAA rated.
The expected life of our collateralized  mortgage obligations is typically under
five years at the time of purchase,  although the contractual life may exceed 20
years.  Premiums associated with collateralized  mortgage obligations  purchased
are not  significant;  therefore,  the  risk of  significant  yield  adjustments
because of accelerated prepayments is limited. Yield adjustments are encountered
as interest rates rise or decline,  which in turn slows or increases  prepayment
rates and affects the average lives of the collateralized  mortgage obligations.
The purpose of our collateralized mortgage obligation investment strategy is to:
(i) assist in  maintaining  Home Federal's  qualified  thrift lender status (see
"Regulation - Qualified Thrift  Lender");  (ii) generate high cash flow so as to
lessen liquidity and reinvestment  risk; (iii) preserve asset quality;  and (iv)
generate   additional   interest   income.   At  December  31,  1999,   we  held
collateralized  mortgage  obligations  totaling $16.2 million, all of which were
secured  by  underlying  collateral  issued  under  government  agency-sponsored
programs.  All of our collateralized  mortgage  obligations and  mortgage-backed
securities are currently  classified as held to maturity.  At December 31, 1999,
our  collateralized  mortgage  obligations did not qualify as high risk mortgage
securities under Office of Thrift Supervision regulations.

     While  mortgage-backed  and  related  securities,  such  as  collateralized
mortgage  obligations,  carry  reduced  credit risk as compared to  conventional
loans,  mortgage-backed and related securities remain subject to the risk that a
fluctuating  interest  rate  environment,  along with other  factors such as the
geographic  distribution  of  the  underlying  mortgage  loans,  may  alter  the
prepayment  rate of such  mortgage  loans and thus,  affect both the  prepayment
speed, and value, of such securities.


                                       18

<PAGE>



     The  following  table  sets forth the  composition  of our  investment  and
mortgage-backed  and related  securities  portfolio at the dates indicated.  Our
investment   securities  portfolio  at  December  31,  1999,  contained  neither
tax-exempt  securities nor securities of any issuer with an aggregate book value
in excess of 10% of our retained  earnings,  excluding  those issued by the U.S.
Government or its agencies and excluding our mutual fund investments.

<TABLE>
<CAPTION>
                                                                                  December 31,
                                                         ---------------------------------------------------------
                                                                    1999                            1998
                                                         ------------------------         ------------------------
                                                           Book            % of             Book          % of
                                                           Value          Total             Value         Total
                                                           -----          -----             -----         -----
                                                                             (Dollars in Thousands)
<S>                                                      <C>               <C>            <C>               <C>
Investment securities:
  Mutual funds(1) ...............................        $ 14,712          82.40%         $ 15,333          76.40%
  Freddie Mac stock .............................           1,788          10.02             2,577          12.85
  Corporate debt securities .....................              --             --             1,826           9.10
  U.S. agency securities ........................           1,000           5.60                --             --
  Federal Home Loan Bank stock ..................             340           1.90               317           1.58
  Other .........................................              15           0.08                15           0.07
                                                         --------         ------          --------         ------
     Total investment securities and Federal Home
       Loan Bank stock ..........................        $ 17,855         100.00%         $ 20,068         100.00%
                                                         ========         ======          ========         ======

Mortgage-backed and related securities:
  Collateralized mortgage obligations ...........        $ 16,276         100.13%         $ 12,385          99.62%
  Freddie Mac ...................................              34           0.21                60           0.48
  Government National Mortgage Association ......              12           0.07                27           0.22
                                                         --------         ------          --------         ------
                                                           16,322         100.41            12,472         100.32
Unamortized discounts, net ......................             (67)         (0.41)              (40)         (0.32)
                                                         --------         ------          --------         ------
     Total mortgage-backed securities ...........        $ 16,255         100.00%         $ 12,432         100.00%
                                                         ========         ======          ========         ======

Other interest-earning investments:
  Money market mutual fund ......................        $  1,438          22.68%         $  5,404          33.50%
  Interest-bearing deposits with banks ..........           1,800          28.40             1,500           9.30
  Federal funds sold ............................           3,100          48.92             9,225          57.20
                                                         --------         ------          --------         ------
     Total ......................................        $  6,338         100.00%         $ 16,129         100.00%
                                                         ========         ======          ========         ======
</TABLE>

-------------------------------------------------------------

(1) Mutual funds invest primarily in obligations of the U.S.  Government and its
agencies.



                                       19

<PAGE>



     The  following  table  sets  forth  the   contractual   maturities  of  our
mortgage-backed and related securities at December 31, 1999.


<TABLE>
<CAPTION>
                                                              Due in                                                      December
                          ------------------------------------------------------------------------------                  31, 1999
                          6 Months    6 Months        1 to 3         3 to 5      5 to 10        10 to 20     Over 20       Balance
                          or Less     to 1 Year        Years         Years        Years           Years       Years      Outstanding
                          ----------------------------------------------------------------------------------------------------------
                                                                  (In Thousands)
<S>                       <C>           <C>           <C>            <C>          <C>            <C>         <C>            <C>
Collateralized mortgage
obligations ...........   $   --        $   --        $    --        $   --       $ 3,915        $   945     $11,349        $16,209

Freddie Mac ...........       --            --             34            --            --             --          --             34

Government National
  Mortgage Association        --            --             12            --            --             --          --             12
                          ------        ------        -------        ------       -------        -------     -------        -------

   Total ..............   $   --        $   --        $    46        $   --       $ 3,915        $   945     $11,349        $16,255
                          ======        ======        =======        ======       =======        =======     =======        =======
</TABLE>

SOURCES OF FUNDS

     GENERAL.  Our  sources  of funds are  deposits,  payment of  principal  and
interest  on  loans,  interest  earned  on or  maturation  of  other  investment
securities and short-term investments, and funds provided from operations.

     DEPOSITS.  We offer a variety  of deposit  accounts  having a wide range of
interest rates and terms. Our deposits consist of passbook and statement savings
accounts, money market deposit accounts, NOW accounts and certificate of deposit
accounts currently ranging in terms from 91 days to three years. We only solicit
deposits  from our market  area and do not use  brokers to obtain  deposits.  We
primarily rely on competitive pricing policies, advertising and customer service
to attract and retain these deposits.

     The flow of  deposits  is  influenced  significantly  by  general  economic
conditions, changes in market interest rates, and competition.  Deposit balances
decreased in 1998 as a result of our  customers  using their funds  deposited at
Home Federal to purchase  shares of First Niles  common  stock in October  1998.
Deposit balances remained relatively stable during 1999.

     The variety of deposit  accounts we offer has allowed us to be  competitive
in  obtaining  funds and to respond  with  flexibility  to  changes in  consumer
demand.  We have become more  susceptible to short-term  fluctuations in deposit
flows,  as customers  have become more interest rate  conscious.  We endeavor to
manage  the  pricing  of  our  deposits  in  keeping  with  our  asset/liability
management,  liquidity and profitability objectives. Based on our experience, we
believe that our savings and checking  accounts are relatively stable sources of
funds. Our ability to attract and maintain certificates of deposit and the rates
paid on these deposits,  however, has been and will continue to be significantly
affected by market conditions.


                                       20

<PAGE>



     The following table sets forth the deposit flows at Home Federal during the
periods indicated.



                                                    Years Ended December 31,
                                                ------------------------------
                                                   1999                 1998
                                                   ----                 ----
                                                     (Dollars in Thousands)

Opening balance ......................           $ 54,837             $ 57,854
Deposits .............................             41,952               41,048
Withdrawals ..........................            (43,888)             (46,223)
Interest credited ....................              1,644                2,158
                                                 --------             --------

Ending balance .......................           $ 54,545             $ 54,837
                                                 ========             ========

Net increase (decrease) ..............           $   (292)            $ (3,017)
                                                 --------             --------

Percent increase (decrease) ..........              (0.53)%              (5.21)%
                                                 ========             ========


     The following table sets forth the dollar amount of savings deposits in the
various types of deposit programs we offered for the periods indicated.

<TABLE>
<CAPTION>
                                                                    December 31,
                                                       ----------------------------------------
                                                             1999                  1998
                                                       -----------------     ------------------
                                                                 Percent                Percent
                                                       Amount   of Total     Amount    of Total
                                                       ------   --------     ------    --------
                                                                (Dollars in Thousands)

<S>                                                   <C>         <C>       <C>         <C>
Transactions and Savings Deposits:
Passbook and statement savings accounts (2.50%)(1)    $20,736     38.02%    $20,763     37.86%
NOW accounts (2.50%)(1) ..........................      3,409      6.25       3,081      5.62
Money market accounts (2.55%)(1) .................      3,971      7.28       3,811      6.95
                                                      -------    ------     -------    ------

Total non-certificates ...........................     28,116     51.55      27,655     50.43
                                                      -------    ------     -------    ------

Certificates:
 2.00 - 3.99% ....................................         --        --         228      0.42
 4.00 - 5.99% ....................................     25,829     47.35      26,954     49.15
 6.00 - 7.99% ....................................        600      1.10          --        --
                                                      -------    ------     -------    ------

Total certificates ...............................     26,429     48.45      27,182     49.57
                                                      -------    ------     -------    ------
Total deposits ...................................    $54,545    100.00%    $54,837    100.00%
                                                      =======    ======     =======    ======
</TABLE>

------------------------------

(1)  Interest rates stated apply to December 31, 1999.


                                       21

<PAGE>



     The  following   table  shows  rate  and  maturity   information   for  our
certificates of deposit as of December 31, 1999.


<TABLE>
<CAPTION>
                                                                2.00-      4.00-       6.00-                     Percent
                                                                3.99%      5.99%       7.99%       Total         of Total
                                                                -----      -----       -----       -----         --------
                                                                            (Dollars in Thousands)
<S>                                                             <C>      <C>            <C>       <C>              <C>
Certificate accounts maturing in quarter ending:

March 31, 2000............................................      $ ---    $ 8,482        $ ---     $ 8,482          32.09%
June 30, 2000.............................................        ---      7,180          ---       7,180          27.17
September 30, 2000........................................        ---      3,500          ---       3,500          13.24
December 31, 2000.........................................        ---      2,537          600       3,137          11.87
March 31, 2001............................................        ---      1,312          ---       1,312           4.97
June 30, 2001.............................................        ---      1,703          ---       1,703           6.44
September 30, 2001........................................        ---        220          ---         220           0.83
December 31, 2001.........................................        ---        152          ---         152           0.58
March 31, 2002............................................        ---        217          ---         217           0.82
June 30, 2002.............................................        ---        117          ---         117           0.44
September 30, 2002........................................        ---        145          ---         145           0.55
December 31, 2002.........................................        ---        264          ---         264           1.00
Thereafter................................................        ---        ---          ---         ---            ---
                                                                -----    -------         ----     -------         ------

   Total..................................................      $ ---    $25,829         $600     $26,429         100.00%
                                                                =====    =======         ====     =======         ======

   Percent of total.......................................        ---%     97.73%        2.27%     100.00%
                                                                =====      =====         ====      ======
</TABLE>


     The following table indicates the amount of our certificates of deposit and
other deposits by time remaining until maturity as of December 31, 1999.

<TABLE>
<CAPTION>
                                                                              Maturity
                                                           ---------------------------------------------

                                                                         Over         Over
                                                           3 Months     3 to 6       6 to12      Over 12
                                                           or Less      Months       Months       Months      Total
                                                           -------      ------       ------       ------      -----

                                                                              (In Thousands)

<S>                                                         <C>         <C>           <C>         <C>        <C>
Certificates of deposit less than $100,000...........       $7,497      $5,846        $5,404      $4,130     $22,877

Certificates of deposit of $100,000 or more..........          985       1,334         1,233         ---       3,552
                                                            ------      ------        ------      ------     -------

Total certificates of deposit........................       $8,482      $7,180        $6,637      $4,130     $26,429
                                                            ======      ======        ======      ======     =======
</TABLE>


                                       22

<PAGE>



     BORROWINGS.  Although  deposits  are our  primary  source of funds,  we may
utilize  borrowings  when they are a less  costly  source  of funds,  and can be
invested  at a  positive  interest  rate  spread  or when we  desire  additional
capacity to fund loan demand.  At December 31, 1999, we had borrowings  totaling
$6.0  million.  The  average  balance of our  borrowings  during this period was
$690,000.  Our current  borrowings  relate to a three-year  term note payable to
another financial  institution that was obtained to facilitate the $10.1 million
return of capital distribution paid to shareholders during late 1999. See Note H
of Notes to Consolidated  Financial Statements contained in our Annual Report to
Stockholders.

SUBSIDIARY AND OTHER ACTIVITIES

     As a federally chartered savings association,  Home Federal is permitted by
Office of Thrift Supervision regulations to invest up to 2% of its total assets,
or $1.6  million at December 31, 1999 in the stock of, or  unsecured  loans,  to
service  corporation  subsidiaries.  Home Federal may invest an additional 1% of
its assets in service  corporations  where  such  additional  funds are used for
inner-city or community development purposes. At December 31, 1999, Home Federal
had no subsidiaries.

     In 1996,  we acquired a  fractional  interest  of 17.5% in an Ohio  limited
partnership formed to construct  multi-family  housing units. Under the terms of
the limited partnership agreement,  we will make a total capital contribution to
the partnership of $500,000 and are allocated tax losses and affordable  housing
federal  income  tax  credits.  See Note D of Notes  to  Consolidated  Financial
Statements.

REGULATION

     GENERAL.  Home Federal is a federally  chartered savings  association,  the
deposits of which are federally insured by the FDIC and backed by the full faith
and credit of the U.S. Government.  Accordingly, we are subject to broad federal
regulation and oversight extending to all our operations. We are a member of the
Federal  Home  Loan  Bank of  Cincinnati  and are  subject  to  certain  limited
regulation  by the Board of Governors of the Federal  Reserve  System  ("Federal
Reserve Board"). As the savings and loan holding company of Home Federal,  First
Niles is also subject to federal regulation and oversight.

     FEDERAL   REGULATION  OF  SAVINGS   ASSOCIATIONS.   The  Office  of  Thrift
Supervision has extensive authority over the operations of savings associations.
As part of this  authority,  we are required to file  periodic  reports with the
Office of Thrift  Supervision  and are subject to periodic  examinations  by the
Office of Thrift  Supervision  and the FDIC.  The last regular  Office of Thrift
Supervision  examination  of Home  Federal was as of November  1998.  When these
examinations are conducted by the Office of Thrift Supervision and the FDIC, the
examiners  may  require us to provide for higher  general or specific  loan loss
reserves.  All savings  associations  are subject to a  semi-annual  assessment,
based upon the savings association's total assets, to fund the operations of the
Office of Thrift Supervision.

         The  Office  of  Thrift  Supervision  also  has  extensive  enforcement
authority over all savings  institutions and their holding companies,  including


                                       23

<PAGE>


Home Federal and First Niles. This enforcement  authority includes,  among other
things, the ability to assess civil money penalties,  to issue cease-and- desist
or removal orders and to initiate injunctive actions.

     Our general permissible lending limit for loans-to-one-borrower is equal to
the greater of $500,000 or 15% of unimpaired  capital and surplus.  If the loans
are fully secured by certain readily marketable collateral, the lending limit is
increased to 25% of  unimpaired  capital and  surplus.  At December 31, 1999 our
lending limit under this restriction was $3.4 million. We are in compliance with
the loans-to-one-borrower limitation.

     INSURANCE  OF ACCOUNTS  AND  REGULATION  BY THE FEDERAL  DEPOSIT  INSURANCE
CORPORATION.  As insurer,  the FDIC imposes  deposit  insurance  premiums and is
authorized to conduct  examinations of and to require  reporting by FDIC insured
institutions. It also may prohibit any FDIC insured institution from engaging in
any activity the FDIC  determines  by regulation or order to pose a serious risk
to the Savings Association Insurance Fund or the Bank Insurance Fund.

     The FDIC's  deposit  insurance  premiums are assessed  through a risk-based
system under which all insured  depository  institutions  are placed into one of
nine  categories  and  assessed  insurance  premiums  based upon their  level of
capital and supervisory evaluation. Under the system, institutions classified as
well  capitalized  (i.e., a core capital ratio of at least 5%, a ratio of Tier 1
or core capital to  risk-weighted  assets  ("Tier 1  risk-based  capital") of at
least 6% and a risk-based  capital ratio of at least 10%) and considered healthy
pay the  lowest  premium  while  institutions  that  are  less  than  adequately
capitalized (i.e., core or Tier 1 risk-based capital ratios of less than 4% or a
risk-based  capital  ratio  of less  than  8%)  and  considered  of  substantial
supervisory concern pay the highest premium.  Risk classification of all insured
institutions  is made by the FDIC  semi-annually.  At December  31, 1999 we were
classified as a well-capitalized institution.

     Effective January 1, 1997, the premium schedule for Bank Insurance Fund and
Savings  Association  Insurance  Fund insured  institutions  ranged from 0 to 27
basis points. However,  Savings Association Insurance Fund-insured  institutions
and Bank  Insurance  Fund-insured  institutions  are required to pay a Financing
Corporation assessment, in order to fund the interest on bonds issued to resolve
thrift  failures in the 1980s.  In 1998,  this amount was equal to about 6 basis
points for each $100 in domestic deposits for Savings Association Insurance Fund
members while Bank Insurance Fund-insured  institutions paid an assessment equal
to about  1.50 basis  points for each $100 in  domestic  deposits.  The  savings
institutions  assessment  is expected  to be reduced to about 2 basis  points no
later than January 1, 2000, when Bank Insurance Fund- insured institutions fully
participate in the  assessment.  These  assessments,  which may be revised based
upon the level of Bank  Insurance  Fund and Savings  Association  Insurance Fund
deposits, will continue until the bonds mature in the year 2017.

     REGULATORY CAPITAL REQUIREMENTS. All federally insured savings institutions
are  required  to  maintain  minimum  capital  standards,  including  a tangible
capital,   a  leverage  ratio  (or  core  capital)  and  a  risk-based   capital
requirement.  The capital  regulations require tangible capital of at least 1.5%
of adjusted total assets, as defined by regulation.  At December 31, 1999 we had
tangible capital of $22.2 million,  or 28.2% of adjusted total assets,  which is
approximately  $20.6 million above the minimum  requirement  of 1.5% of adjusted
total assets in effect on that date.

                                       24

<PAGE>




     The capital  standards also require core capital equal to at least 3% to 4%
of adjusted total assets, depending on an institution's supervisory rating. Core
capital generally consists of tangible capital. At December 31, 1999 we had core
capital equal to $22.2  million,  or 28.2% of adjusted  total  assets,  which is
$19.1 million above the minimum leverage ratio requirement of 4% as in effect on
that date.

     The Office of Thrift Supervision  risk-based  requirement  requires savings
associations to have total capital of at least 8% of risk-weighted assets. Total
capital consists of core capital,  as defined above, and supplementary  capital.
Supplementary  capital  consists  of  certain  permanent  and  maturing  capital
instruments  that do not qualify as core capital and general  valuation loan and
lease  loss  allowances  up to a  maximum  of  1.25%  of  risk-weighted  assets.
Supplementary capital may be used to satisfy the risk-based  requirement only to
the extent of core capital.

     In determining the amount of risk-weighted  assets,  all assets,  including
certain  off-balance sheet items,  will be multiplied by a risk weight,  ranging
from 0% to 100%,  based on the risk inherent in the type of asset.  For example,
the Office of Thrift Supervision has assigned a risk weight of 50% for prudently
underwritten  permanent one- to  four-family  first lien mortgage loans not more
than 90 days delinquent and having a loan-to-value ratio of not more than 80% at
origination unless insured to such ratio by an insurer approved by Fannie Mae or
Freddie Mac.

     On December 31, 1999 we had total risk-based capital of approximately $23.2
million,  including $22.2 million in core capital and $1.0 million in qualifying
supplementary  capital,  and  risk-weighted  assets of $40.5  million,  or total
capital of 57.1% of  risk-weighted  assets.  This amount was $20.0 million above
the 8% requirement in effect on that date.

     The  Office  of  Thrift   Supervision   is  authorized  to  impose  capital
requirements  in excess  of these  standards  on  individual  associations  on a
case-by-case basis. The Office of Thrift Supervision and the FDIC are authorized
and,  under certain  circumstances  required,  to take certain  actions  against
savings associations that fail to meet their capital requirements. These actions
may include submission of a capital  restoration plan and various limitations on
an institution's growth and operations,  depending upon an institution's capital
category.  In  certain  cases the FDIC or the Office of Thrift  Supervision  may
appoint a conservator or receiver for the institution.

     The Office of Thrift Supervision is also generally authorized to reclassify
an  institution  into a lower  capital  category  and  impose  the  restrictions
applicable to such category if the  institution  is engaged in unsafe or unsound
practices or is in an unsafe or unsound condition.

     The  imposition by the Office of Thrift  Supervision  or the FDIC of any of
these  measures on Home  Federal may have a  substantial  adverse  effect on its
operations and profitability.

     LIMITATIONS ON DIVIDENDS AND OTHER CAPITAL DISTRIBUTIONS.  Office of Thrift
Supervision regulations impose various restrictions on savings associations with
respect  to their  ability  to make  distributions  of  capital,  which  include
dividends,  stock  redemptions  or  repurchases,   cash-out  mergers  and  other
transactions  charged  to the  capital  account.  Office of  Thrift  Supervision
regulations  also prohibit a savings  association  from  declaring or paying any
dividends or from repurchasing any of its stock if, as a result,  the regulatory
capital of the  association  would be reduced  below the amount  required  to be

                                       25

<PAGE>



maintained for the liquidation account established in connection with its mutual
to stock conversion.

     Office of Thrift Supervision  recently revised  regulations  provide that a
savings association may make a capital distribution without notice to the Office
of Thrift Supervision,  unless it is a subsidiary of a holding company, provided
that it has a regulatory rating in the two top examination categories, is not of
supervisory concern, and would remain well-capitalized, as defined in the Office
of Thrift  Supervision  prompt  corrective  action  regulations,  following  the
proposed  distribution,  and the distribution does not exceed its net income for
the calendar year-to-date plus retained net income for the previous two calendar
years (less any dividends  previously  paid).  Savings  associations  that would
remain adequately  capitalized  following the proposed distribution and meet the
other noted  requirements  must notify the Office of Thrift  Supervision 30 days
prior to  declaring  a capital  distribution.  All other  institutions  or those
seeking to exceed the noted amounts must file an  application  before making the
distribution.

     QUALIFIED THRIFT LENDER TEST. All savings institutions are required to meet
a  qualified  thrift  lender  test  to  avoid  certain   restrictions  on  their
operations. This test requires a savings institution to have at least 65% of its
portfolio assets, as defined by regulation, in qualified thrift investments on a
monthly  average  for nine out of every 12  months  on a  rolling  basis.  As an
alternative,  the savings  institution  may  maintain 60% of its assets in those
assets  specified in Section  7701(a)(19)  of the Internal  Revenue Code.  Under
either test, these assets primarily consist of residential housing related loans
and  investments.  At December  31, 1999 we met the test and have always met the
test since it became effective.

     Any savings institution that fails to meet the qualified thrift lender test
must convert to a national bank,  unless it  requalifies  as a qualified  thrift
lender and remains a qualified  thrift  lender.  If an  institution  has not yet
requalified or converted to a national bank, its new  investments and activities
are limited to those  permissible for both a savings  institution and a national
bank, and it is limited to national bank branching  rights in its home state. In
addition,  the institution is immediately  ineligible to receive any new Federal
Home Loan Bank  borrowings.  If the institution has not requalified or converted
to a national  bank  within  three  years  after the  failure,  it must sell all
investments  and stop all  activities  not  permissible  for a national bank. In
addition,  it must  repay  promptly  any  outstanding  Federal  Home  Loan  Bank
borrowings,  which may result in prepayment  penalties.  If any institution that
fails the qualified thrift lender test is controlled by a holding company,  then
within one year after the failure,  the holding  company must register as a bank
holding  company  and  become  subject  to  all  restrictions  on  bank  holding
companies. See "- Holding Company Regulation."

     COMMUNITY  REINVESTMENT  ACT. Under the Community  Reinvestment  Act, every
FDIC insured institution has a continuing and affirmative  obligation consistent
with safe and sound  banking  practices  to help  meet the  credit  needs of its
entire community, including low and moderate income neighborhoods. The Community
Reinvestment Act requires the Office of Thrift  Supervision,  in connection with
the examination of Home Federal,  to assess the institution's  record of meeting
the credit  needs of its  community  and to take this record into account in its
evaluation of certain  applications,  such as a merger or the establishment of a
branch, by Home Federal.  An unsatisfactory  rating may be used as the basis for
the  denial of an  application  by the  Office of  Thrift  Supervision.  We were

                                       26

<PAGE>



examined for compliance under the Community  Reinvestment Act in August 1999 and
received a rating of "satisfactory."

     HOLDING  COMPANY  REGULATION.  First  Niles is a unitary  savings  and loan
holding  company  subject  to  regulatory  oversight  by the  Office  of  Thrift
Supervision.  First  Niles is required to  register  and file  reports  with the
Office of Thrift Supervision and is subject to regulation and examination by the
Office of Thrift Supervision.  In addition, the Office of Thrift Supervision has
enforcement   authority  over  First  Niles  and  its  non-savings   association
subsidiaries.

     As a unitary savings and loan holding company, First Niles generally is not
subject to activity  restrictions.  If First Niles  acquires  control of another
savings association as a separate subsidiary, it would become a multiple savings
and loan  holding  company,  and the  activities  of First  Niles and any of its
subsidiaries (other than Home Federal or any other Savings Association Insurance
Fund- insured savings  association) would generally become subject to additional
restrictions.

     If we fail the qualified  thrift  lender test,  within one year First Niles
must  register  as,  and  will  become  subject  to,  the  significant  activity
restrictions applicable to bank holding companies.

     FEDERAL SECURITIES LAW. The stock of First Niles is registered with the SEC
under  the  Securities  Exchange  Act of 1934.  First  Niles is  subject  to the
information,   proxy  solicitation,   insider  trading  restrictions  and  other
requirements of the SEC under the Securities Exchange Act of 1934.

     First Niles stock held by persons who are affiliates,  generally  including
the executive officers,  directors and 10% stockholders,  of First Niles may not
be resold without  registration or unless sold in accordance with certain resale
restrictions.   If  First  Niles  meets  specified  current  public  information
requirements,  each  affiliate  of the  company  is able  to sell in the  public
market,  without  registration,  a limited  number of shares in any  three-month
period.

     FEDERAL  HOME LOAN BANK  SYSTEM.  We are a member of the Federal  Home Loan
Bank of  Cincinnati,  which is one of 12 regional  Federal  Home Loan Banks that
administers  the home financing  credit function of savings  institutions.  Each
Federal  Home Loan Bank  serves as a reserve  or  central  bank for its  members
within  its  assigned  region.  It makes  loans to members  in  accordance  with
policies and  procedures,  established  by the board of directors of the Federal
Home Loan  Bank,  which are  subject to the  oversight  of the  Federal  Housing
Finance  Board.  All advances from the Federal Home Loan Bank are required to be
fully  secured by  sufficient  collateral as determined by the Federal Home Loan
Bank. In addition,  all long-term  advances  must be used for  residential  home
financing.

     As a member,  we are required to purchase and maintain a minimum  amount of
stock in the Federal Home Loan Bank of Cincinnati.  At December 31, 1999, we had
$340,000 in Federal  Home Loan Bank  stock,  which was in  compliance  with this
requirement.  We receive  dividends on our Federal  Home Loan Bank stock.  These
dividends averaged 7.06% for 1999.

                                       27

<PAGE>




FEDERAL AND STATE TAXATION

     FEDERAL TAXATION. In August 1996, legislation was enacted that repealed the
percentage of taxable income method used by many thrifts to calculate  their bad
debt reserve for federal  income tax purposes.  As a result,  small thrifts must
recapture  that  portion of the reserve  that exceeds the amount that could have
been taken under the experience  method for tax years  beginning  after December
31, 1987. Due to certain  limitations as to allowable  additions to the bad debt
reserve,  Home Federal has not made  additions to its  allowance  since 1987 and
will not be subject to federal income tax recapture.

     In addition to the regular  income  tax,  corporations,  including  savings
institutions, generally are subject to a minimum tax. An alternative minimum tax
is imposed at a minimum tax rate of 20% on alternative  minimum  taxable income,
which  is the  sum of a  corporation's  regular  taxable  income  (with  certain
adjustments)  and tax  preference  items,  less  any  available  exemption.  The
alternative  minimum tax is imposed to the extent it exceeds  the  corporation's
regular  income  tax and net  operating  losses  can  offset no more than 90% of
alternative minimum taxable income.

     A portion of our  reserves  for losses on loans which are  presented on the
statement of financial condition as retained earnings,  may not, without adverse
tax  consequences,  be  utilized  for the  payment  of cash  dividends  or other
distributions   to  a  shareholder,   including   distributions  on  redemption,
dissolution or  liquidation,  or for any other purpose except to absorb bad debt
losses.  As of December  31, 1999,  the portion of our reserves  subject to this
treatment for tax purposes totaled approximately $2.54 million.

     We file federal income tax returns on a fiscal year basis using the accrual
method of  accounting.  First  Niles  does not  anticipate  filing  consolidated
federal income tax returns with Home Federal.

     The federal income tax returns of Home Federal for the last three years are
open to possible  audit by the Internal  Revenue  Service.  No returns are being
audited by the Internal  Revenue  Service at the current time. In the opinion of
management,  any  examination  of  still  open  returns,  including  returns  of
predecessors  or  entities  merged  into Home  Federal,  would  not  result in a
deficiency which could have a material adverse effect on the financial condition
of Home Federal.

     OHIO  TAXATION.  We are subject to the Ohio  corporate  franchise tax. As a
financial  institution,  we compute  our  franchise  tax based on our net worth.
Under  this  method,  we  will  compute  our  Ohio  corporate  franchise  tax by
multiplying our net worth, as specifically adjusted pursuant to Ohio law, by the
applicable tax rate,  which is currently 1.4%.  First Niles will also be subject
to the Ohio  corporate  franchise tax. The tax imposed is the greater of the tax
on net worth, or the tax on net income.

     DELAWARE TAXATION.  As a Delaware holding company,  First Niles is exempted
from Delaware corporate income tax but is required to file an annual report with
and pay an annual fee to the State of  Delaware.  First Niles is also subject to
an annual franchise tax imposed by the State of Delaware.


                                       28

<PAGE>



COMPETITION

     We face strong  competition in originating  real estate and other loans and
in  attracting  deposits.  Competition  in  originating  real estate loans comes
primarily from other savings  institutions,  commercial banks, credit unions and
mortgage bankers.  Other savings  institutions,  commercial banks, credit unions
and finance companies provide vigorous competition in consumer lending.

     We attract all of our deposits  through Home Federal's one office in Niles,
Ohio.   Competition  for  those  deposits  is  principally  from  other  savings
institutions,  commercial banks and credit unions located in our market area, as
well as mutual  funds.  We compete  for these  deposits by offering a variety of
deposit accounts at competitive rates and superior service.

EXECUTIVE OFFICERS OF FIRST NILES

     WILLIAM L. STEPHENS. Mr. Stephens, age 68, serves as Chairman of the Board,
President and Chief  Executive  Officer of Home Federal and First Niles.  He has
served in such  capacities for Home Federal since 1969 and for First Niles since
its formation in October 1998.

     GEORGE J. SWIFT. Mr. Swift, age 77, is Vice President and Secretary of Home
Federal and First  Niles.  He has served in such  capacities  with Home  Federal
since 1969 and for First Niles since its formation in October 1998.

     LAWRENCE SAFAREK.  Mr. Safarek,  age 50, currently serves as Vice President
and Treasurer of Home Federal and First Niles.  He has served in such capacities
with Home Federal  since 1995 and for First Niles since its formation in October
1998.  Mr.  Safarek  has been  employed  with Home  Federal  in  numerous  other
capacities since 1971.

EMPLOYEES

     At  December  31,  1999,  we had a total  of 13  employees,  including  one
part-time  employee.  Our  employees  are  not  represented  by  any  collective
bargaining group. Management considers its employee relations to be good.

ITEM 2.  DESCRIPTION OF PROPERTY

     We conduct our  business  through  Home  Federal's  only office  located in
Niles,  Ohio,  which is owned  by Home  Federal.  We  believe  that our  current
facilities  are  adequate  to meet the  present  and  foreseeable  needs of Home
Federal and First Niles. The total net book value of Home Federal's premises and
equipment,  including land,  building and leasehold  improvements and furniture,
fixtures and equipment,  at December 31, 1999 was $245,000.  See Note E of Notes
to Consolidated Financial Statements.

     We maintain an on-line data base with a service bureau servicing  financial
institutions.  The net book value of the data processing and computer  equipment
utilized by Home Federal at December 31, 1999 was $41,000.

                                       29

<PAGE>




ITEM 3.  LEGAL PROCEEDINGS

     From time to time First Niles is  involved as  plaintiff  or  defendant  in
various legal actions arising in the normal course of business. Presently, First
Niles is not  involved  in any legal  proceedings  that are  expected  to have a
material adverse impact on its consolidated financial position.

ITEM 4.  SUBMISSION OF MATTERS TO A VOTE OF SECURITY HOLDERS

     A special  meeting of  shareholders of First Niles was held on December 15,
1999 at our office in Niles,  Ohio. At that meeting the shareholders  were asked
to and voted upon (i)  approval of the  adoption  of the First Niles  Financial,
Inc. 1999 Stock Option and Incentive  Plan  ("Proposal  I") and (ii) approval of
the adoption of the First Niles  Financial,  Inc. 1999 Recognition and Retention
Plan ("Proposal II"). The voting on such matters was as follows:


                    Votes        Votes                              Broker
                     For        Against       Abstentions         Non-votes
                   --------------------------------------------------------
Proposal I         971,516      203,634         17,125               ---
Proposal II        945,462      229,247         17,425               ---


                                     PART II

ITEM 5.  MARKET FOR COMMON EQUITY AND RELATED STOCKHOLDER MATTERS

     Page 43 of the 1999 Annual Report to Stockholders attached to this document
as Exhibit 13 is incorporated herein by reference.

ITEM 6.  MANAGEMENT'S DISCUSSION AND ANALYSIS OR PLAN OF OPERATION

     Pages 4 to 13 of the 1999 Annual  Report to  Stockholders  attached to this
document as Exhibit 13 is incorporated herein by reference.


                                       30

<PAGE>



ITEM 7.  FINANCIAL STATEMENTS

     The following  information  appearing in First Niles' 1999 Annual Report to
Stockholders attached hereto as Exhibit 13 is incorporated herein by reference.

ANNUAL REPORT SECTION                                     PAGES IN ANNUAL REPORT

Report of Independent Auditors                                       15

Consolidated Balance Sheets as of December 31, 1999 and 1998         16

Consolidated Statements of Income for the Years                      17
  Ended December 31, 1999 and 1998

Consolidated Statements of Changes in Shareholders' Equity           18
 for the Years Ended December 31, 1999 and 1998

Consolidated Statements of Cash Flows for the Years                  19
  Ended December 31, 1999 and 1998

Notes to Consolidated Financial Statements                        20-42


     With the exception of the aforementioned  information,  First Niles' Annual
Report to Stockholders for the year ended December 31, 1999, is not deemed filed
as part of this Annual Report on Form 10-KSB.

ITEM 8.  CHANGES  IN  AND  DISAGREEMENTS  WITH  ACCOUNTANTS  ON  ACCOUNTING  AND
         FINANCIAL DISCLOSURE

     There has been no Current  Report on Form 8-K filed  within 24 months prior
to the  date of the most  recent  financial  statements  reporting  a change  of
accountants and/or reporting disagreements on any matter of accounting principle
or financial statement disclosure.


                                       31

<PAGE>



                                    PART III

ITEM 9.  DIRECTORS,   EXECUTIVE   OFFICERS,   PROMOTERS  AND  CONTROL   PERSONS;
         COMPLIANCE WITH SECTION 16(A) OF THE EXCHANGE ACT

DIRECTORS

     Information  concerning  Directors of First Niles is incorporated herein by
reference  from  the  definitive  proxy  statement  for the  Annual  Meeting  of
Stockholders  to be held in April 2000,  a copy of which will be filed not later
than 120 days after the close of the fiscal year.

EXECUTIVE OFFICERS

     Information concerning Executive Officers of First Niles is contained under
the caption  "Executive  Officers of First Niles" in Part I of this Form 10-KSB,
and is incorporated herein by this reference.

COMPLIANCE WITH SECTION 16(A)

     Section 16(a) of the Securities Exchange Act of 1934, as amended,  requires
First Niles' directors and executive officers, and persons who own more than 10%
of a  registered  class of its equity  securities,  to file with the SEC initial
reports of  ownership  and reports of changes in  ownership  of common stock and
other equity securities of First Niles. Officers, directors and greater than 10%
stockholders  are required by SEC  regulation to furnish First Niles with copies
of all Section 16(a) forms they file.

     To First Niles'  knowledge,  based solely on a review of the copies of such
reports  furnished  to the  company and  written  representations  that no other
reports were required,  all Section 16(a) filing requirements  applicable to its
officers,  directors and greater than 10 percent beneficial owners were complied
with during the fiscal year ended December 31, 1999.

ITEM 10. EXECUTIVE COMPENSATION

     Information  concerning  executive  compensation is incorporated  herein by
reference  from  the  definitive  proxy  statement  for the  Annual  Meeting  of
Stockholders  to be held in April 2000,  a copy of which will be filed not later
than 120 days after the close of the fiscal year.

ITEM 11. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

     Information  concerning security ownership of certain beneficial owners and
management  is  incorporated  herein  by  reference  from the  definitive  proxy
statement  for the Annual  Meeting of  Stockholders  to be held in April 2000, a
copy of which  will be filed  not  later  than 120 days  after  the close of the
fiscal year.


                                       32

<PAGE>



ITEM 12. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

     Information  concerning certain  relationships and related  transactions is
incorporated  herein by reference  from the definitive  proxy  statement for the
Annual Meeting of Stockholders to be held in April 2000, a copy of which will be
filed not later than 120 days after the close of the fiscal year.

ITEM 13. EXHIBITS AND REPORTS ON FORM 8-K

     (a) EXHIBITS

     See Index to Exhibits

     (b) REPORTS ON FORM 8-K

     On November 15, 1999,  First Niles filed a Current  Report on Form 8-K with
the SEC containing a copy of a press release dated November 15, 1999  announcing
the  declaration  of a special cash  distribution  of $6.00 per share payable on
December 13, 1999 to shareholders of record on November 29, 1999.














                                       33

<PAGE>



                                   SIGNATURES

     Pursuant  to the  requirements  of  Section  13 or 15(d) of the  Securities
Exchange Act of 1934, the Registrant has duly caused this Report to be signed on
its behalf by the undersigned, thereunto duly authorized.

                                           FIRST NILES FINANCIAL, INC.



Date: March 27, 2000                     By: /s/ William L.  Stephens
      ---------------                        ---------------------------------
                                          William L. Stephens
                                          Chairman of the Board, President and
                                          Chief Executive Officer
                                           (DULY AUTHORIZED REPRESENTATIVE)

     Pursuant to the  requirements of the Securities  Exchange Act of 1934, this
Report has been signed below by the following  persons in the  capacities and on
the dates indicated.


 /s/ William L.  Stephens                          Date: March 27, 2000
---------------------------------------------            --------------
William L. Stephens, Chairman of the Board,
President and Chief Executive Officer
(PRINCIPAL EXECUTIVE OFFICER)

 /s/ George J.  Swift                              Date: March 27, 2000
---------------------------------------------            --------------
George J. Swift, Vice President and Secretary
(PRINCIPAL FINANCIAL AND OPERATING OFFICER)

 /s/ P.  James Kramer                              Date: March 27, 2000
---------------------------------------------            --------------
P. James Kramer, Director

 /s/ Horace L.  McLean                             Date: March 27, 2000
---------------------------------------------            --------------

Horace L. McLean, Director

 /s/ Ralph A.  Zuzolo                              Date: March 27, 2000
---------------------------------------------            --------------
Ralph A. Zuzolo, Sr., Director

 /s/ Thomas G.  Maley                              Date: March 27, 2000
---------------------------------------------            --------------
Thomas G. Maley, Controller
(PRINCIPAL ACCOUNTING OFFICER)



<PAGE>



                                INDEX TO EXHIBITS


 Exhibit
 Number                                      Document
 -------          --------------------------------------------------------------

   3              The Certificate of Incorporation and Bylaws, filed on July 10,
                  1998 as Exhibits 3.1 and 3.2,  respectively,  to  Registrant's
                  Registration Statement on Form SB-2 (File No. 333-58883),  are
                  incorporated by reference.

   4              Registrant's  Specimen  Stock  Certificate,  filed on July 10,
                  1998 as Exhibit 4 to  Registrant's  Registration  Statement on
                  Form SB-2 (File No. 333-58883), is incorporated by reference.

   10.1           Employment   Agreement  between  Registrants   operating  bank
                  subsidiary  and  William  L.  Stephens,  George  J.  Swift and
                  Lawrence  Safarek  filed as  Exhibits  10.1,  10.2 and 10.3 to
                  Registrant's  Report on Form  10-KSB for the fiscal year ended
                  December 31, 1998 (File No. 0-24849),  is incorporated  herein
                  by reference.

   10.2           Registrant's  1999 Stock Option and Incentive  Plan,  filed on
                  November  12,  1999  as  Appendix  A  to  Registrant's   Proxy
                  Statement on Schedule 14A (File No. 0-24849),  is incorporated
                  herein by reference.

   10.3           Registrant's  1999  Recognition  and  Retention  Plan filed on
                  November  12,  1999  as  Appendix  B  to  Registrant's   Proxy
                  Statement on Schedule 14A (File No. 0-24849),  is incorporated
                  herein by reference.

   13             Annual Report to Stockholders

   21             Subsidiaries  of  the  Registrant   filed  as  Exhibit  21  to
                  Registrant's  Report on Form  10-KSB for the fiscal year ended
                  December 31, 1998 (File No. 0-24849),  is incorporated  herein
                  by reference.

   23             Consent of Accountants

   27             Financial Data Schedule (electronic filing only)