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1998 ANNUAL REPORT
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                                     [LOGO]








                           FIRST NILES FINANCIAL, INC.
                                   NILES, OHIO


<PAGE>





TABLE OF CONTENTS






                                                                        Page No.
                                                                        --------

President's Message......................................................     1
Selected Consolidated Financial Information..............................     2
Management's Discussion and Analysis of Financial
  Condition and Results of Operation.....................................     4
Consolidated Financial Statements.........................................   17
Shareholder Information...................................................   45
Corporate Information.....................................................   46












<PAGE>




                    [FIRST NILES FINANCIAL, INC. LETTERHEAD]








                                                         March 17, 1999


To Our Shareholders:

         It is my distinct pleasure to present to you our first Annual Report to
Shareholders  of First Niles  Financial,  Inc. The past year has been one of the
most,  if not the most,  significant  year in the 102 year  history  of the Home
Federal  Savings  and Loan  Association  of Niles,  our  wholly-owned  operating
subsidiary.

         Home  Federal  converted  from  mutual to stock  form of  ownership  in
October 1998. First Niles, upon completion of Home Federal's conversion to stock
form, simultaneously acquired all of the common stock of Home Federal and issued
First Niles common stock to the public,  raising over $16.9 million. At December
31, 1998, total shareholders' equity equaled approximately $29.9 million.

         Your Board and management are committed to building  shareholder value.
We will continue to be an  organization  which is committed to our customers and
to the community we serve.  We are dedicated to making your  investment in First
Niles a rewarding one.

         I would also like to take this time to thank all of our loyal customers
and new constituents,  our shareholders, for their past support and faith in our
future.

                                       Sincerely,



                                       WILLIAM L.  STEPHENS
                                       CHAIRMAN OF THE BOARD, PRESIDENT AND CEO







<PAGE>


<TABLE>
<CAPTION>

                   SELECTED CONSOLIDATED FINANCIAL INFORMATION



                                                                      December 31,
                                                       ---------------------------------------
                                                        1998            1997            1996
                                                       -------        --------         -------
Selected Financial Condition Data:                             (In Thousands)
----------------------------------
<S>                                                    <C>             <C>             <C>
Total assets.......................................... $86,724         $72,497         $71,213
Loans receivable, net.................................  36,132          36,744          33,183
Mortgage-backed and related securities................  12,432          12,359          12,900
Investment securities.................................  20,068          17,741          22,098
Deposits..............................................  54,837          57,854          57,673
Total borrowings......................................     300             400             500
Shareholders' equity..................................  29,923          13,163          12,163



                                                                Years Ended December 31,
                                                       ---------------------------------------
                                                         1998            1997            1996
                                                       -------         -------         -------
                                                               (In Thousands)
Selected Operations Data:
-------------------------

Total interest income................................. $ 5,221         $ 5,002         $ 4,780
Total interest expense................................   2,435           2,476           2,402
                                                       -------         -------         -------
   Net interest income................................   2,786           2,526           2,378
Provision (recovery) for loan losses..................    (103)            700              40
                                                       -------         -------         -------
  Net interest income after provision for loan losses.   2,889           1,826           2,338
Fees and service charges..............................      19              18              17
Gain on sales of investment securities................     461               4              --
Other non-interest income.............................       7               5               6
                                                       -------         -------         -------
Total non-interest income.............................     487              27              23
Total non-interest expense............................   2,290           1,380           1,751
                                                       -------         -------         -------
  Income before taxes and extraordinary item..........   1,086             473             610
Income tax provision..................................     276              87             184
                                                       -------         -------         -------
  Net income.......................................... $   810         $   386         $   426
                                                       =======         =======         =======

Earnings per share....................................      NM              NA              NA
Dividends per share...................................      --              NA              NA
</TABLE>

---------------------------------------------------
NM - Not meaningful.
NA - Not applicable.



                                        2

<PAGE>



<TABLE>
<CAPTION>
                                                                         Years Ended December 31,
                                                                  ---------------------------------------
                                                                   1998            1997            1996
                                                                  -------         -------         -------
<S>                                                                 <C>             <C>             <C>
Selected Financial Ratios and Other Data:
-----------------------------------------
PERFORMANCE RATIOS:
  Return on assets (ratio of net income to
    average total assets)........................................   1.06%           0.54%           0.60%
  Return on equity (ratio of net income to
    average equity)..............................................   4.99            3.05            3.58
  Interest rate spread:
    Average during year..........................................   2.68            2.78            2.63
    End of year..................................................   2.54            2.82            2.85
  Net interest margin (net interest income divided
     by average interest-earning assets).........................   3.68            3.56            3.39
  Ratio of operating expense to average total assets.............   2.94            1.86            2.42
  Ratio of average interest-earning assets to average
    interest-bearing liabilities.................................   1.31            1.22            1.22

QUALITY RATIOS:
  Non-performing assets to total assets at end of year...........   1.10            2.29            1.37
  Non-performing loans to loans receivable, net,
    end of year..................................................   2.64            4.52            2.94
  Allowance for loan losses to non-performing loans,
    end of year..................................................  82.09           51.38           30.90
  Allowance for loan losses to loans receivable, net,
    end of year..................................................   2.17            2.32            0.91

CAPITAL RATIOS:
  Equity to total assets at end of year..........................  34.50           18.16           17.08
  Average equity to average assets...............................  21.30           17.72           16.78

OTHER DATA:
  Book value per common share outstanding........................ $17.06            NA              NA
  Dividends declared per share...................................     --            NA              NA
  Dividend payout ratio(1).......................................     --            NA              NA
  Number of full-service offices.................................  1                 1              1

</TABLE>

(1)  Dividends  per share  divided by earnings per common share and common share
     equivalent.


                                        3

<PAGE>



                MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL
                       CONDITION AND RESULTS OF OPERATIONS

GENERAL

         The most significant  event of the last fiscal year was the October 26,
1998 conversion of Home Federal  Savings and Loan  Association of Niles from the
mutual to stock form of ownership.  On that date,  First Niles  Financial,  Inc.
issued  1,754,411  shares of common  stock at $10.00  per share,  raising  $15.5
million,  net of shares  acquired by the newly formed  Employee Stock  Ownership
Plan (the "ESOP") and net of the costs of the  Conversion.  Concurrent  with the
issuance of the shares,  Home Federal converted from the mutual to stock form of
organization,  and First Niles acquired 100% of the stock of Home Federal. First
Niles  has  no  significant  operations  outside  those  of  Home  Federal.  All
references  to First Niles prior to October 26,  1998,  except  where  otherwise
indicated, are to Home Federal.  References in this Annual Report to "we", "us",
and "our" refer to First Niles and/or Home Federal as the context requires.

         Home  Federal  was  established  in  Niles,  Ohio  in  1897.  We  are a
community-oriented  financial institution serving primarily the Niles, Ohio area
through  our one office  located  in Niles.  We provide  financial  services  to
individuals,  families and small businesses.  Our principal business consists of
attracting  retail  deposits from the general  public and investing  those funds
primarily in permanent and construction loans secured by first mortgages on one-
to four-family  residences.  We also originate  permanent and construction loans
secured by first mortgages on commercial and multi-family real estate. To a much
lesser extent, we originate consumer and commercial business loans.  Competition
from other financial  institutions has, however,  limited the volume of loans we
have been able to originate and place in our portfolio.  As a result, our excess
funds are invested in short-term,  lower-yielding investment and mortgage-backed
and related securities.

         Proceeds  received from our public offering were initially  invested in
interest-bearing deposits. We intend to invest these proceeds in the origination
of  loans  and the  purchase  of  investment  and  mortgage-backed  and  related
securities,  subject  to market  conditions.  However,  the  level of  financial
competition in our market area is strong and dominated by commercial banks, with
financial institutions of varying sizes and characteristics.  In addition,  Home
Federal  operates a single  office in the city of Niles,  which is  projected to
experience a continuing  decrease in population  and no  meaningful  increase in
households  over the next  several  years.  Niles and  Trumbull  County have per
capita income and median household income  significantly lower than Ohio and the
United States and in December  1998,  Trumbull  County also had an  unemployment
rate higher  than Ohio and the United  States.  These  economic  conditions  and
strong  competition  have  resulted in reduced loan demand which,  in turn,  has
resulted in a high  concentration of investment  securities and  mortgage-backed
and  related   securities   in  our  portfolio   compared  to  typical   savings
institutions.  In the event current  economic and market  conditions  persist or
worsen,  and loan demand  remains weak, we can not give any  assurances  that we
will be able to maintain or increase our mortgage  loan  portfolio,  which could
adversely affect our operations and financial results.


                                        4

<PAGE>



FINANCIAL CONDITION

         Assets totaled $86.7 million at December 31, 1998, an increase of $14.2
million,  or 19.6%,  from assets of $72.5  million at December 31, 1997.  Assets
increased  as a result  of the  $15.5  million  received  from the sale of First
Niles' common stock to the public in October 1998.  These funds were invested in
cash equivalents  which increased $12.2 million,  or 251%, with the balance used
to fund a $2.4 million,  or 8.0%,  increase in  mortgage-backed  and  investment
securities.

         The loan  portfolio  decreased  $612,000,  or 1.7%, to $36.1 million at
December 31, 1998,  compared to the prior year. This decline occurred because of
the prevailing low interest rate environment and strong competition for loans in
the area, which resulted in loan customers refinancing existing loans elsewhere.
During the year total real estate loans decreased by $1.7 million. Specifically,
loans secured by one to four-family and multi-family  properties  decreased by a
total of $3.0 million during the year ended December 31, 1998,  partially offset
by a $1.3 million  increase in loans secured by  commercial  real estate and for
construction and development.

         Deposits totaled $54.8 million at December 31, 1998,  compared to $57.8
million at December 31, 1997,  representing  a $3.0 million or 5.2%  decrease in
deposits.  During the year ended  December  31,  1998,  certificates  of deposit
decreased $1.4 million.  Passbook,  statement  savings accounts and money market
deposit  accounts  decreased by a collective  $1.9  million,  while NOW accounts
increased  $251,000  during the year ended  December 31,  1998.  The decrease in
deposits  experienced  in  every  account  category,  except  NOW  accounts,  is
primarily  attributable to deposit funds that were used by customers to purchase
stock in our public offering.

         Accounts payable and other liabilities increased by $438,000, or 54.9%,
to $1.2  million at December 31, 1998 from  $798,000 at December 31, 1997.  This
increase  was  primarily  due  to  a  $384,000  accrual  to  executive  deferred
compensation plans, which were terminated as of August 31, 1998.

         Net  proceeds  of $15.5  million  from the  sale of our  common  stock,
combined with net income of $810,000  accounted for substantially all of the net
increase in shareholders' equity.

RESULTS OF OPERATIONS

         GENERAL.  Our results of  operations  depend  primarily on net interest
income,  which is determined by (i) the difference  between rates of interest we
earn  on  interest-earning  assets,  consisting  primarily  of  mortgage  loans,
collateralized mortgage obligations and other investments,  and the rates we pay
on   interest-bearing   liabilities,   consisting   primarily  of  deposits  and
borrowings,  and (ii) the relative  amounts of our  interest-earning  assets and
interest-bearing  liabilities.  The level of non-interest  income,  such as fees
received from customer  deposit  account  service  charges and gains on sales of
investments,  and the level of  non-interest  expense,  such as federal  deposit
insurance  premiums,  salaries and benefits,  office  occupancy  costs, and data
processing costs, also affect our results of operations. Finally, our results of
operations  may  also  be  affected   significantly   by  general  economic  and
competitive   conditions,   particularly   changes  in  market  interest  rates,
government  policies  and actions of  regulatory  authorities,  all of which are
beyond our control.

                                        5

<PAGE>



         NET  INCOME.  We  recorded  net income of  $810,000  for the year ended
December 31, 1998, an increase of $424,000 or 110% from the year ended  December
31, 1997. The increase in net income was primarily due to a $260,000 increase in
net interest income, a $803,000 reduction in the provision for loan losses and a
$461,000  gain on sales of  investment  securities.  These gains were  partially
offset by a $910,000 increase in non-interest expense and a $189,000 increase in
federal income tax expense.

         Our  return on assets was 1.06% for the year ended  1998,  compared  to
 .54% for the year ended 1997.  Return on equity was 4.99% for 1998,  compared to
3.05% for 1997.  Average  equity to average assets was 21.30% for the year ended
1998,  compared to 17.72% for the year ended 1997. We did not declare or pay any
dividends during 1998.

         NET INTEREST INCOME. Net interest income increased $260,000,  or 10.3%,
from last  year to $2.8  million  for the year  ended  December  31,  1998.  The
increase  in net  interest  income was  generated  primarily  by a $4.9  million
increase  in average  interest-earning  assets  resulting  from the  proceeds we
received  in our public  offering  in October  1998.  In  addition,  the average
outstanding  balance in our loan  portfolio  increased  $1.4 million,  while the
overall  average  balance  of  the  investment  and  mortgage-backed  securities
portfolio remained relatively constant.

         Total interest expense  decreased  $41,000,  or 1.7%, from last year to
$2.4 million for the year ended  December 31,  1998.  An overall  decline in the
rate paid on deposits at Home Federal was the primary reason for the decrease in
interest expense. The rate paid on our certificate of deposit accounts exhibited
the largest  decline,  declining  to 5.32% for the year ended  December 31, 1998
from 5.45% for the same period in 1997. The balance of average  interest-bearing
liabilities remained relatively constant during 1998 and 1997.

         See the tables below captioned  "Average  Balances,  Interest Rates and
Yields" and  "Rate/Volume  Analysis of Net  Interest  Income" for more  detailed
information regarding our net interest income.

                                        6

<PAGE>



AVERAGE BALANCES, INTEREST RATES AND YIELDS

         The following table presents for the periods indicated the total dollar
amount of interest income from average interest-earning assets and the resultant
yields, as well as the interest expense on average interest-bearing liabilities,
expressed both in dollars and rates.  No tax equivalent  adjustments  were made.
All average balances are computed using monthly average balances.

<TABLE>
<CAPTION>
                                                                                    Year Ended December 31,
                                                      ---------------------------------------------------------------------------

                                                                       1998                                      1997
                                                      --------------------------------------    ---------------------------------

                                                        Average       Interest                    Average      Interest
                                                      Outstanding     Earned/        Yield/     Outstanding     Earned/    Yield/
                                                        Balance         Paid          Rate        Balance        Paid       Rate
                                                      --------------------------------------    ---------------------------------
                                                                                       (Dollars in Thousands)
<S>                                                     <C>            <C>             <C>        <C>           <C>         <C>
INTEREST-EARNING ASSETS:
 Loans receivable(1).................................   $37,317        $3,074          8.24%      $35,946       $2,959      8.23%
 Mortgage-backed and related securities..............    12,467           767          6.15        11,677          665      5.70
 Investment securities...............................    17,908           941          5.25        19,210        1,150      5.99
 FHLB stock..........................................       306            22          7.19           283           20      7.07
 Interest-bearing deposits...........................     7,761           417          5.37         3,791          208      5.49
                                                        -------       -------                     -------      -------
  TOTAL INTEREST-EARNING ASSETS(1)...................   $75,759         5,221          6.89       $70,907        5,002      7.05
                                                        =======       -------                     =======      -------

INTEREST-BEARING LIABILITIES:
 Savings deposits....................................   $25,858           787          3.04       $26,340          806      3.06%
 Demand and NOW deposits.............................     3,069            93          3.03         2,885           88      3.05
 Certificate accounts................................    28,545         1,520          5.32        28,231        1,539      5.45
 Borrowings..........................................       385            35          9.09           488           43      8.81
                                                        -------       -------                     -------      -------
  TOTAL INTEREST-BEARING LIABILITIES.................   $57,857         2,435          4.21       $57,944        2,476      4.27
                                                        =======       -------                     =======      -------

NET INTEREST INCOME..................................                  $2,786                                   $2,526
                                                                       ======                                   ======

NET INTEREST RATE SPREAD.............................                                  2.68%                                2.78%
                                                                                       ====                                 ====
NET EARNING ASSETS...................................   $17,902                                   $12,963
                                                        =======                                   =======
NET YIELD ON AVERAGE INTEREST-EARNING ASSETS.........                                  3.68%                                3.56%
                                                                                       ====                                 ====
AVERAGE INTEREST-EARNING ASSETS TO AVERAGE INTEREST-
BEARING LIABILITIES..................................                   1.31x                                    1.22x
                                                                        ====                                     ====
</TABLE>
-----------------
(1)  Calculated net of deferred loan fees,  loan discounts and loans in process.
     Includes non-accrual loans.

                                        7

<PAGE>



RATE/VOLUME ANALYSIS OF NET INTEREST INCOME

         The  following  schedule  presents  the  dollar  amount of  changes  in
interest income and interest  expense for major  components of  interest-earning
assets and interest-bearing  liabilities.  It distinguishes  between the changes
related to outstanding  balances and that due to the changes in interest  rates.
For each category of interest-earning  assets and interest-bearing  liabilities,
information is provided on changes  attributable to (i) changes in volume (i.e.,
changes  in  volume  multiplied  by old rate) and (ii)  changes  in rate  (i.e.,
changes in rate multiplied by old volume).  For purposes of this table,  changes
attributable  to both rate and volume,  which  cannot be  segregated,  have been
allocated  proportionately  to the  change  due to volume  and the change due to
rate.

<TABLE>
<CAPTION>
                                                      Years Ended December 31,
                                                            1998 VS. 1997
                                                 --------------------------------------
                                                 Increase/(decrease)
                                                        Due to                 Total
                                                 ---------------------        Increase
                                                 Volume          Rate        (Decrease)
                                                 ------         ------       ----------
                                                          (Dollars in Thousands)

<S>                                              <C>            <C>            <C>
Interest-earning assets:
  Loans receivable .....................         $ 113          $   2          $ 115
  Mortgage-backed and related securities            46             56            102
  Investment securities ................           (75)          (134)          (209)
  Interest-bearing deposits and other ..           215             (4)           211
                                                 -----          -----          -----
    Total interest-earning assets ......         $ 299          $ (80)           219
                                                 =====          =====          -----

Interest-bearing liabilities:
  Savings deposits .....................         $ (15)         $  (4)           (19)
  Demand and NOW deposits ..............             6             (1)             5
  Borrowings ...........................            (9)             1             (8)
  Certificate accounts .................            17            (36)           (19)
                                                 -----          -----          -----
    Total interest-bearing  liabilities          $  (1)         $ (40)           (41)
                                                 =====          =====          -----

Net interest income.....................                                       $ 260
                                                                               =====
</TABLE>

         PROVISION  FOR LOAN  LOSSES.  The net  provision  for loan  losses  was
($103,000)  for the year ended  December  31, 1998  compared to $700,000 for the
year ended December 31, 1997. The significant  decrease in the net provision for
loan losses of $803,000 from year to year was primarily due to an improvement in
the  general  credit  quality  of the  overall  loan  portfolio.  Our  level  of
nonperforming  loans,  consisting of nonaccruing loans and loans delinquent more
than 90 days,  decreased  by $707,000 to $955,000 at December 31, 1998 from $1.7
million at December 31, 1997. Our nonperforming  loans totaled 2.6% of net loans
receivable  at December 31, 1998,  compared to 4.5% of net loans  receivable  at
December 31, 1997.  Our  allowance  for loan losses was $784,000 at December 31,
1998,  representing  82.1%  of  non-performing  loans  and  2.2%  of  net  loans
receivable.  At December 31, 1997 the  allowance  for loan losses was  $853,000,
representing 51.4% of non-performing loans and 2.3% of net loans receivable.  We
did not have any real estate owned or other  non-performing  assets on our books
at December 31, 1998 and 1997.

                                        8

<PAGE>




         It is our policy to provide  valuation  allowances for estimated losses
on loans  based  upon  past  loss  experience,  current  trends  in the level of
delinquent and specific problem loans, loan  concentrations to single borrowers,
adverse  situations  that may  affect  the  borrower's  ability  to  repay,  the
estimated  value of any  underlying  collateral,  and  current  and  anticipated
economic  conditions in our market area.  Accordingly,  the  calculation  of the
adequacy of the allowance for loan losses is not based  directly on the level of
non-performing assets.

         We will  continue  to monitor  our  allowance  for loan losses and make
future  additions  to the  allowance  through the  provision  for loan losses as
economic conditions dictate.  Although we maintain our allowance for loan losses
at a level which we consider to be adequate to provide for losses,  there can be
no  assurance  that  future  losses  will not exceed  estimated  amounts or that
additional provisions for loan losses will not be required in future periods. In
addition, our determination as to the amount of the allowance for loan losses is
subject to review by the Office of Thrift  Supervision  and the Federal  Deposit
Insurance Corporation, as part of their examination process, which may result in
the establishment of an additional allowance.

         NON-INTEREST INCOME. Non-interest income increased $460,000 to $487,000
for the year ended  December 31, 1998  compared to $27,000 the prior year.  This
$460,000  increase  was the result of the sale of 9,728  shares of  Freddie  Mac
common stock during 1998.

         NON-INTEREST  EXPENSE.  Non-interest  expense  increased  $910,000,  or
65.9%, for the year ended December 31, 1998 compared to the same period in 1997.
Compensation and benefits, our largest non-interest expense, increased $858,000,
or 103%, in 1998 as compared to 1997.  This increase was primarily  attributable
to bonuses totaling $435,000 paid to Home Federal employees in April 1998, and a
$288,000  lump-sum  contribution  to executive  deferred  compensation  plans in
exchange for the  suspension of further annual  contributions  to the executives
under such  plans.  Compensation  and  benefits  also  increased  as a result of
contributions  to the ESOP formed in connection with our conversion to the stock
form of  organization  and  simultaneous  public  offering of First Niles common
stock.

          FEDERAL  INCOME TAXES.  The provision for federal income taxes totaled
$276,000 for the year ended December 31, 1998, an increase of $189,000,  or 217%
from the $87,000  provision for 1997.  The increase in the provision for federal
income taxes was due to significantly higher pre-tax income.  Pre-tax income was
$613,000  higher in 1998 than in 1997. The effective tax rate increased to 25.4%
in the  current  one-year  period  compared to 18.4% in the same period one year
prior.

ASSET AND LIABILITY MANAGEMENT; MARKET RISK ANALYSIS

         As stated  above,  we derive  our income  primarily  from the excess of
interest  collected  over interest paid. The rates of interest we earn on assets
and pay on liabilities  generally are established  contractually for a period of
time.  Market  interest  rates  change  over time.  Accordingly,  our results of
operations,  like those of many financial institutions,  are impacted by changes
in  interest  rates  and  the  interest  rate  sensitivity  of  our  assets  and
liabilities.  The risk associated with changes in interest rates and our ability
to adapt to these changes is known as interest  rate risk and is Home  Federal's
most significant market risk.


                                        9

<PAGE>



         Our  operations  are also affected by our level of income and expenses.
Non-interest  income  includes  service  charges  and  fees  and gain on sale of
investments.  Non-interest expenses primarily include compensation and benefits,
occupancy and equipment expenses, deposit insurance premiums and data processing
expenses.  Our results of operations are also significantly  affected by general
economic and  competitive  conditions,  particularly  changes in market interest
rates, government legislation and regulation and monetary and fiscal policy.

         In an attempt to manage our  exposure to changes in interest  rates and
comply with  applicable  regulations,  we monitor Home  Federal's  interest rate
risk. In monitoring  interest rate risk we continually analyze and manage assets
and liabilities based on their payment streams and interest rates, the timing of
their maturities, and their sensitivity to actual or potential changes in market
interest rates.

         An asset or liability is interest rate sensitive within a specific time
period if it will  mature or  reprice  within  that time  period.  If our assets
mature or reprice more rapidly or to a greater extent than our liabilities, then
the market value of our portfolio  equity and our net interest income would tend
to increase  during periods of rising interest rates and decrease during periods
of falling  interest  rates.  Conversely,  if our assets  mature or reprice more
slowly or to a lesser extent than our liabilities,  then the market value of our
portfolio  equity and our net  interest  income  would tend to  decrease  during
periods of rising interest rates and increase during periods of falling interest
rates.  Our policy has been to address the  interest  rate risk  inherent in the
historical savings institution business of originating long-term loans funded by
short-term  deposits by  maintaining  sufficient  liquid assets for material and
prolonged changes in interest rates. We believe that our liquidity  position and
capital levels, which are well in excess of regulatory  requirements,  assist us
in reasonably limiting the effects of our interest rate risk exposure.

         Our Board of  Directors  is  responsible  for  reviewing  our asset and
liability  position.  The Board meets quarterly to review interest rate risk and
trends,  liquidity and capital ratios and related  regulatory  requirements.  In
addition,  the Board reviews simulations of the effect of interest rates on Home
Federal's  capital,  net interest  income and net income under various  interest
rate scenarios.  Management of Home Federal is responsible for  implementing the
policies and  decisions of the Board of Directors  with respect to our asset and
liability goals and strategies.

         To  manage   the   interest   rate  risk,   we  attempt  to   originate
adjustable-rate  loans;  however,  due to the low interest rate environment over
the past several years, customer demand for fixed-rate loans has been strong. At
December 31, 1998, adjustable-rate mortgage loans totaled $19.0 million or 49.9%
of our total gross loan portfolio.  We also maintain a large portfolio of liquid
assets which includes investment securities. Maintaining liquid assets, however,
tends to reduce  potential net income because  liquid assets  usually  provide a
lower yield than other interest-earning  assets. Despite these strategies we are
still more  vulnerable  to  increases  in interest  rates than to  decreases  in
interest rates given current market interest rate levels,  as illustrated in the
table on the following page.

         In order to encourage  institutions to reduce their interest rate risk,
the Office of Thrift  Supervision  adopted a rule incorporating an interest rate
risk component into the risk-based  capital rules.  This procedure for measuring
interest rate risk was developed by the Office of Thrift  Supervision to replace

                                       10

<PAGE>


the "gap" analysis,  which is the difference between interest-earning assets and
interest-bearing  liabilities  that  mature or reprice  within a  specific  time
period.  Net  portfolio  value is the present  value of expected cash flows from
assets, liabilities and off-balance sheet contracts. The calculation is intended
to  illustrate  the  change  in net  portfolio  value  that will  occur  upon an
immediate  change in interest  rates of at least 200 basis points with no effect
given to any steps that  management  might  take to  counter  the effect of that
interest rate movement.

         The  following  table  sets  forth  the  change in Home  Federal's  net
portfolio value at December 31, 1998, based on internal assumptions,  that would
occur upon an immediate  change in interest  rates,  with no effect given to any
steps that management might take to counteract that change.


                                December 31, 1998
          -------------------------------------------------------------------
                                                    Net Portfolio Value as % of
                     Net Portfolio Value          Portfolio Value of Total Asset
          --------------------------------------  ------------------------------
Change
in Rate   $ Amount      $ Change        % Change     NPV Ratio      BP Change
-------   --------      --------        --------     ---------      ---------
                          (Dollars in Thousands)

+300      $20,455       $(3,336)         (14.0)%       27.08%          (238)
+200       21,861        (1,930)          (8.1)        28.18           (128)
+100       22,956          (835)          (3.5)        28.94            (52)
  --       23,791            --             --         29.46             --
-100       24,563           772            3.2         29.92             46
-200       25,209         1,418            6.0         30.28             82
-300       25,666         1,875            7.9         30.51            105

         In the above  table,  the first  column on the left  presents the basis
point  increments of yield curve shifts.  The second column presents the overall
dollar amount of net portfolio  value at each basis point  increment.  The third
and fourth columns  present Home Federal's  actual position in dollar change and
percentage  change in net  portfolio  value at each basis point  increment.  The
remaining  columns  present  Home  Federal's  percentage  change and basis point
change in its net portfolio  value as a percentage  of portfolio  value of total
assets.

         Computations  of  prospective  effects of  hypothetical  interest  rate
changes  are based on  numerous  assumptions,  including  interest  rates,  loan
prepayments,  deposit decay rates, and the market values of certain assets under
the various  interest rate scenarios and should not be relied upon as indicative
of actual results.  Certain  shortcomings are inherent in the method of analysis
presented in the computation of net portfolio value. Although certain assets and
liabilities  may have similar  maturities or periods  within which they reprice,
they may react  differently to changes in market  interest  rates.  The interest
rates on certain  types of assets and  liabilities  may  fluctuate in advance of
changes in market  interest  rates,  while interest rates on other types may lag
behind  changes in market  rates.  In the event of a change in  interest  rates,
prepayments and early withdrawal levels could deviate  significantly  from those
assumed in making the calculations set forth above.


                                       11

<PAGE>



LIQUIDITY AND COMMITMENTS

         Home Federal's  primary  sources of funds are deposits,  repayments and
prepayments of loans and securities and interest income.  Although  maturity and
scheduled  amortization  of loans  and  securities  are  relatively  predictable
sources of funds,  deposit flows and  prepayments  on loans and  securities  are
influenced  significantly  by general  interest rates,  economic  conditions and
competition. Historically, we have been able to generate sufficient cash through
our deposits and have only utilized borrowings to a limited degree.

         Liquidity  management  is an  ongoing  and  long-term  function  of our
asset/liability  management  strategy.  Excess funds  generally  are invested in
interest-bearing  overnight  deposits  at other  financial  institutions  and in
short-term  investment  securities.  If we require  funds  beyond our ability to
generate deposits,  additional  sources of funds are available.  Our most liquid
assets  are cash and cash  equivalents.  At  December  31,  1998,  cash and cash
equivalents totaled $17.1 million compared to $4.9 million at December 31, 1997.
We monitor and review  liquidity  regularly  and maintain a $2.0 million line of
credit with a commercial bank which can be accessed immediately.

         At  December  31,  1998,   the  total  loan   origination   commitments
outstanding  amounted to $2.1 million.  At the same date, the unadvanced portion
of construction  loans was $1.1 million.  Certificates  of deposit  scheduled to
mature  in one  year  or less at  December  31,  1998,  totaled  $22.7  million.
Investment and  mortgage-related  securities  scheduled to mature in one year or
less at December 31, 1998 totaled $1.3 million.  Based on historical experience,
we believe that a significant  portion of maturing deposits will remain with us.
We believe,  based on our current  balance  sheet  structure  and our ability to
acquire funds from the Federal Home Loan Bank of Cincinnati  and other  sources,
that our liquidity is adequate.

CAPITAL

         Consistent  with our goals to operate a sound and profitable  financial
organization,  we actively seek to maintain a "well capitalized"  institution in
accordance with regulatory standards. Total equity was $29.9 million at December
31,  1998,  or 34.5% of total assets on that date.  As of December 31, 1998,  we
exceeded  all  capital  requirements  of the Office of Thrift  Supervision.  Our
regulatory  capital  ratios  at  December  31,  1998  were  as  follows:  Tier I
(leverage)  capital,   27.0%;  Tier  I  risk-based  capital,  51.4%;  and  Total
risk-based capital,  55.3%. The regulatory capital requirements to be considered
well capitalized are 5.0%, 6.0%, and 10.0%, respectively.

YEAR 2000 ISSUES

         The  approaching  millennium is causing  organizations  of all types to
review their computer  systems for the ability to properly  accommodate the year
2000.  When  computer  systems  were first  developed,  two digits  were used to
designate the year in date calculations and "19" was assumed for the century. As
a result,  there is  significant  concern about the integrity of date  sensitive
calculations  when the calendar  rolls over to January 1, 2000.  An older system
could interpret  01/01/00 as January 1, 1900 potentially  causing major problems
calculating  interest,  payment,  delinquency  or  maturity  dates.  An internal
committee comprised of two officers and an outside director,  has been formed to
address the potential risk that the year 2000 poses for Home Federal.


                                       12

<PAGE>



         Financial  institution  regulators  recently have increased their focus
upon year  2000  compliance  issues  and have  issued  guidance  concerning  the
responsibilities  of senior  management  and  directors.  The Federal  Financial
Institutions  Examination Council has issued several  interagency  statements on
Year 2000 Project  Management  Awareness.  These  statements  require  financial
institutions to, among other things, examine the year 2000 issue with respect to
their  customers,  suppliers and borrowers.  These  statements also require each
federally insured financial institution to survey its exposure, measure its risk
and  prepare a plan to address  the year 2000 issue.  In  addition,  the federal
banking regulators have issued safety and soundness guidelines to be followed by
insured depository  institutions to assure resolution of any year 2000 problems.
The  federal  banking   agencies  have  asserted  that  year  2000  testing  and
certification is a key safety and soundness issue in conjunction with regulatory
exams and that an institution's  failure to address  appropriately the year 2000
issue  could  result in  supervisory  action,  including  the  reduction  of the
institution's  supervisory  ratings,  the denial of applications for approval of
mergers or acquisitions, or the imposition of civil money penalties.

         Accurate data  processing is essential to our  operations and a lack of
accurate processing by our vendors or us could have a significant adverse impact
on our financial  condition and results of  operations.  We have been assured by
our data  processing  service bureau that their computer  services will function
properly on and after January 1, 2000. A  contingency  plan,  however,  has been
developed by Home Federal in the unlikely event that our data processing service
does not  function  properly on or after  January 1, 2000.  This plan focuses on
conducting  operations in a manual mode, including the recording of transactions
on ledger cards.

         We have also  received  year 2000  updates  from most of our  material,
non-information system providers, including but not limited to security cameras,
credit card and ATM card processors, the vault alarm, check printers,  telephone
systems,  participation  loan servicers,  and  institutions we invest through or
with.  Based on these updates,  we do not anticipate any  significant  year 2000
issues. We expect software  upgrades and new personal  computers to be installed
by our data processing  servicer during March 1999. Our anticipated  expenditure
on this equipment is approximately $17,000.

         In  addition  to expenses  related to our own  systems,  we could incur
losses if loan payments are delayed due to year 2000  problems  affecting any of
our significant borrowers or impairing the payroll systems of large employers in
our market  area.  We have been  communicating  with our vendors to assess their
progress in evaluating their systems and  implementing  any corrective  measures
required by them to be prepared  for the year 2000.  We have also sent year 2000
readiness  request letters to certain  borrowers.  These borrowers were selected
based  on the  aggregate  amounts  owed  to Home  Federal,  the  type  of  loans
outstanding, and the perceived year 2000 risk based on our knowledge of the loan
customers  and  their  operations.  To date,  we have not been  advised  by such
parties  that they do not have plans in place to address  and correct the issues
associated with the year 2000 problem;  however, no assurance can be given as to
the  adequacy  of these  plans  or to the  timeliness  of their  implementation.
Currently,  due to the types of borrowers  doing  business with Home Federal and
the nature of our loans with these  borrowers,  we do not consider the year 2000
issue as part of our underwriting criteria.


                                       13

<PAGE>



RECENT ACCOUNTING PRONOUNCEMENTS

         FASB  STATEMENT ON REPORTING  COMPREHENSIVE  INCOME.  In June 1997, the
Financial  Accounting  Standards  Board ("FASB")  issued  Statement of Financial
Accounting  Standards ("SFAS") No. 130. SFAS No. 130 will require First Niles to
classify  items of other  comprehensive  income by their nature in the financial
statements and display the  accumulated  balance of other  comprehensive  income
separately from retained  earnings and additional  paid-in capital in the equity
section of the  statement of equity.  SFAS No. 130 is effective for fiscal years
beginning  after December 15, 1997. The adoption of this standard did not have a
material impact on First Niles' consolidated financial statements.

         FASB STATEMENT ON EARNINGS PER SHARE.  In March 1997,  FASB issued SFAS
No.  128.  SFAS No. 128  establishes  standards  for  computing  and  presenting
earnings per share and applies to entities  with  publicly  held common stock or
potential  common stock.  This statement  simplifies the standards for computing
earnings per share  previously  found in  Accounting  Principles  Board  ("APB")
Opinion  No.  15,  Earnings  per Share  ("EPS"),  and makes them  comparable  to
international EPS standards.  It replaces the presentation of primary EPS with a
presentation  of basic EPS.  It also  requires  dual  presentation  of basic and
diluted EPS on the face of the income  statement  for all entities  with complex
capital  structures  and  requires a  reconciliation  of the  numerator  and the
denominator of the basic EPS computation to the numerator and denominator of the
diluted EPS computation. Basic EPS excludes dilution and is computed by dividing
income available to common shareholders by the weighted-average number of common
shares  outstanding for the period.  Diluted EPS reflects the potential dilution
that could occur if  securities  or other  contracts  to issue common stock were
exercised or  converted  into common stock or resulted in the issuance of common
stock that then shared in the  earnings  of the entity.  Diluted EPS is computed
similarly  to fully  diluted  EPS  pursuant  to APB Opinion No. 15. SFAS No. 128
supersedes Opinion 15 and AICPA Accounting  Interpretation  1-102 of Opinion 15.
This statement is effective for financial  statements  issued for periods ending
after  December  15,  1997,  including  interim  periods.  The  adoption of this
standard did not have a material impact on First Niles'  consolidated  financial
statements.

         FASB STATEMENT ON DISCLOSURE OF INFORMATION ABOUT CAPITAL STRUCTURE. In
February  1997,  the FASB  issued SFAS No. 129.  SFAS No. 129  incorporates  the
disclosure  requirements  of APB Opinion No. 15,  Earnings per Share,  and makes
them applicable to all public and nonpublic entities that have issued securities
addressed  by  the  Statement.   APB  Opinion  No.  15  requires  disclosure  of
descriptive  information about securities that is not necessarily related to the
computation  of  earnings  per share.  This  statement  continues  the  previous
requirements to disclose certain information about an entity's capital structure
found in APB Opinions No. 10, Omnibus  Opinion-  1966, and No. 15,  Earnings per
Share,  and FASB  Statement  No. 47,  Disclosure of Long-Term  Obligations,  for
entities that were subject to the requirements of those standards.  SFAS No. 129
eliminates  the  exemption  of  nonpublic   entities  from  certain   disclosure
requirements  of Opinion 15 as provided by FASB Statement No. 21,  Suspension of
the  Reporting  of  Earnings  per Share and  Segment  Information  by  Nonpublic
Enterprises.  It supersedes specific disclosure  requirements of Opinions No. 10
and No. 15 and FASB Statement No. 47 and consolidates them in this Statement for
ease of retrieval and for greater visibility to nonpublic entities. FASB No. 129
is effective  for financial  statements  for periods  ending after  December 15,
1997.  The  adoption of this  standard  did not have a material  impact on First
Niles' consolidated financial statements.


                                       14

<PAGE>



         FASB  STATEMENT ON  DISCLOSURES  ABOUT  SEGMENTS OF AN  ENTERPRISE  AND
RELATED  INFORMATION.  In June 1997,  the FASB issued SFAS No. 131. SFAS No. 131
establishes  standards for the way public  enterprises are to report information
about  operating  segments in annual  financial  statements  and requires  those
enterprises to report selected  information about operating  segments in interim
financial  reports.  SFAS No. 131 is  effective  for  financial  statements  for
periods beginning after December 15, 1997. The adoption of this standard did not
have a material impact on First Niles' consolidated financial statements.

         FASB  STATEMENT  ON  EMPLOYERS'  DISCLOSURES  ABOUT  PENSIONS AND OTHER
POST-RETIREMENT  BENEFITS.  In February 1998, the FASB issued SFAS No. 132. SFAS
NO. 132 revises employers'  disclosures about pension and other  post-retirement
benefit  plans.  SFAS No. 132 does not change the  measurement or recognition of
those plans and is effective for fiscal years beginning after December 15, 1997.
The  adoption of this  standard  did not have a material  impact on First Niles'
consolidated financial statements.

         FASB  STATEMENT ON ACCOUNTING FOR  DERIVATIVE  INSTRUMENTS  AND HEDGING
ACTIVITIES. In June 1998, the FASB issued SFAS No. 133. SFAS NO. 133 establishes
accounting and reporting standards for derivative instruments, including certain
derivative instruments embedded in other contracts  (collectively referred to as
derivatives),  and for hedging activities. SFAS No. 133 requires that any entity
recognize all  derivatives  as either asset or  liabilities  in the statement of
financial  position and measure those instruments at fair value and is effective
for all fiscal  quarters of fiscal years  beginning  after June 15, 1999.  First
Niles intends to adopt SFAS No. 133 on its effective  date. The adoption of this
standard is not expected to have a material impact on First Niles'  consolidated
financial statements.

IMPACT OF INFLATION AND CHANGING PRICES

         The financial  statements and related data  presented  herein have been
prepared in accordance  with  generally  accepted  accounting  principles  which
require the measurement of financial  position and operating results in terms of
historical dollars without  considering changes in the relative purchasing power
of money over time due to  inflation.  The primary  impact of  inflation  on our
operations is reflected in increased  operating  costs.  Unlike most  industrial
companies,   virtually  all  of  the  assets  and  liabilities  of  a  financial
institution are monetary in nature. As a result, interest rates, generally, have
a more  significant  impact on a financial  institution's  performance than does
inflation.  Interest rates do not  necessarily  move in the same direction or to
the same extent as the prices of goods and services.

DISCLOSURE REGARDING FORWARD-LOOKING STATEMENTS

         First Niles and Home Federal may from time to time make written or oral
"forward-looking  statements." These forward-looking statements may be contained
in this Annual Report to  Shareholders,  in our filings with the  Securities and
Exchange Commission, including our Annual Report on Form 10-KSB and the exhibits
thereto,  and in  other  communications  by us,  which  are  made in good  faith
pursuant to the "safe harbor" provisions of the Private Securities Litigation


                                       15

<PAGE>


Reform Act of 1995.  The words "may",  "could",  "should",  "would",  "believe",
"anticipate", "estimate", "expect", "intend", "plan" and similar expressions are
intended to identify forward-looking statements.

         Forward-looking  statements  include  statements  with  respect  to our
beliefs, plans, objectives,  goals, expectations,  anticipations,  estimates and
intentions,  that are  subject  to  significant  risks  and  uncertainties.  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.

         The  foregoing  list  of  important   factors  is  not  exclusive.   We
incorporate   by  reference   those  risk  factors   included  in  First  Niles'
Registration  Statement  on Form  SB-2  (Reg.  No.  333-58883)  filed  with  the
Securities and Exchange  Commission  under the Securities Act of 1933. We do not
undertake to update any forward-looking statement, whether written or oral, that
may be made from time to time by or on behalf of First Niles or Home Federal.


                                       16

<PAGE>



ANNESS GERLACH & WILLIAMS                            1275 BOARDMAN-CANFIELD ROAD
CERTIFIED PUBLIC ACCOUNTANTS                                       P.O. Box 3827
(A PROFESSIONAL CORPORATION)                              YOUNGSTOWN, OHIO 44513
                                                                  (330) 758-5716
                                                              FAX (330) 758-0703


               REPORT OF INDEPENDENT CERTIFIED PUBLIC ACCOUNTANTS



Board of Directors
First Niles Financial, Inc.
Niles, Ohio


         We have audited the consolidated  statements of financial  condition of
First Niles Financial,  Inc. (formerly Home Federal Savings and Loan Association
of  Niles)  as of  December  31,  1998 and 1997,  and the  related  consolidated
statements of income, comprehensive income, stockholders' equity, and cash flows
for each of the years in the period ended  December 31,  1998.  These  financial
statements   are  the   responsibility   of  the   Company's   management.   Our
responsibility  is to express an opinion on these financial  statements based on
our audits.

         We conducted our audits in accordance with generally  accepted auditing
standards.  Those standards require that we plan and perform the audit to obtain
reasonable assurance about whether the financial statements are free of material
misstatement.  An audit includes examining, on a test basis, evidence supporting
the amounts and disclosures in the financial statements.  An audit also includes
assessing the  accounting  principles  used and  significant  estimates  made by
management,  as well as evaluating the overall financial statement presentation.
We believe that our audits provide a reasonable basis for our opinion.

         In our opinion,  the  financial  statements  referred to above  present
fairly, in all material respects,  the consolidated  financial position of First
Niles  Financial,  Inc. as of December 31, 1998 and 1997,  and the  consolidated
results of its operations and its cash flows for each of the years in the period
ended  December 31, 1998,  in  conformity  with  generally  accepted  accounting
principles.



                                             /s/ Anness Gerlach & Williams


Youngstown, Ohio
January 20, 1999




                                       17



<PAGE>


<TABLE>
<CAPTION>

                 CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                        (In thousands, except share data)

                                                                                     DECEMBER 31
                                                                                 --------------------
                                                                                   1998        1997
                                                                                 --------    --------
<S>                                                                              <C>         <C>
         ASSETS

Cash and cash equivalents:
  Noninterest bearing                                                            $    995    $    819
  Interest bearing                                                                 16,129       4,057
                                                                                 --------    --------
         Total cash and cash equivalents                                           17,124       4,876

Securities available for sale - at market                                          19,751      17,447
Securities to be held to maturity - at cost                                        12,432      12,359
Loans receivable                                                                   36,132      36,744
Accrued interest receivable                                                           282           1
Federal Home Loan Bank stock, at cost                                                 317         294
Real estate investment-limited partnership, at equity                                 383         426
Prepaid expenses and other assets                                                      47          36
Prepaid federal income taxes                                                           --          20
Premises and equipment, at cost less accumulated depreciation                         256         294
                                                                                 --------    --------
              TOTAL ASSETS                                                       $ 86,724    $ 72,497
                                                                                 ========    ========
         LIABILITIES

Deposits                                                                         $ 54,837    $ 57,854
Accrued interest payable                                                              110         127
Accounts payable and other liabilities                                              1,236         798
Note payable                                                                          300         400
Federal income tax payable                                                             46          --
Deferred federal income tax liability                                                 272         155
                                                                                 --------    --------
              TOTAL LIABILITIES                                                    56,801      59,334

         STOCKHOLDERS' EQUITY

Stockholders' equity:
  Preferred stock, $.01 par value, authorized 500,000 shares; none outstanding         --          --
  Common stock, $.01 par value, authorized 6,000,000 shares;
    1,754,411 shares issued and outstanding                                            18          --
  Additional paid-in capital                                                       16,897          --
  Retained earnings, substantially restricted                                      12,709      11,899
  Accumulated other comprehensive income:
    Net unrealized gains on securities available for sale, net of related tax
      effects of $817 in 1998 and $651 in 1997                                      1,586       1,264
  Common stock purchased by the Employee Stock Ownership Plan                      (1,287)         --
                                                                                 --------    --------

              TOTAL STOCKHOLDERS' EQUITY                                           29,923      13,163
                                                                                 --------    --------

         TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY                              $ 86,724    $ 72,497
                                                                                 ========    ========

THE  ACCOMPANYING NOTES ARE AN INTEGRAL PART
 OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

</TABLE>


                                       18



<PAGE>



                        CONSOLIDATED STATEMENTS OF INCOME

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                                 (In thousands)

                                              YEAR ENDED DECEMBER 31
                                              ----------------------
                                                 1998          1997
                                              --------       -------

Interest income:
  Loans receivable:
    First mortgage loans                       $ 2,967       $ 2,851
    Consumer and other loans                       107           108
  Mortgage-backed and related securities           767           665
  Investments                                      963         1,170
  Interest-bearing deposits                        417           208
                                               -------       -------
         TOTAL INTEREST INCOME                   5,221         5,002

Interest expense:
  Deposits                                       2,400         2,433
  Borrowings                                        35            43
                                               -------       -------
         TOTAL INTEREST EXPENSE                  2,435         2,476
                                               -------       -------

         NET INTEREST INCOME                     2,786         2,526

Provision for (recoveries of) loan losses         (103)          700
                                               -------       -------

         NET INTEREST INCOME AFTER
         PROVISION FOR LOAN LOSSES               2,889         1,826

Noninterest income:
  Gain on sale of  securities                      461            --
  Service fees and other                            26            27
                                               -------       -------
         TOTAL NONINTEREST INCOME                  487            27

Noninterest expense:
  Equity in loss of limited partnership             43            38
  General and administrative:
    Compensation and benefits                    1,689           831
    Occupancy and equipment                         89            81
    Federal deposit insurance premiums              35            30
    Other operating expense                        434           400
                                               -------       -------
         TOTAL NONINTEREST EXPENSE               2,290         1,380
                                               -------       -------

         INCOME BEFORE INCOME TAXES              1,086           473

Federal income taxes                               276            87
                                               -------       -------

         NET INCOME                            $   810       $   386
                                               =======       =======

         EARNINGS PER SHARE                        N/A           N/A
                                               =======       =======


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
 OF THESE CONSOLIDATED FINANCIAL STATEMENTS.


                                       19



<PAGE>



                 CONSOLIDATED STATEMENTS OF COMPREHENSIVE INCOME

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                                 (In thousands)


                                                          Year Ended December 31
                                                          ----------------------
                                                              1998      1997
                                                            -------   -------

Net income                                                  $   810   $   386
Other comprehensive income:
   Unrealized gains on securities:
      Unrealized gains arising for year                         948       930
      Related income tax                                       (322)     (316)
                                                            -------   -------
                                                                626       614
    Reclassification adjustment:
      Gain included in net income, net of $157 income tax      (304)       --
                                                            -------   -------
Other comprehensive income                                      322       614
                                                            -------   -------

              COMPREHENSIVE INCOME                          $ 1,132   $ 1,000
                                                            =======   =======



THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
OF THESE CONSOLIDATED FINANCIAL STATEMENTS.






























                                       20



<PAGE>


<TABLE>
<CAPTION>

                 CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997

                        (In thousands, except share data)

                                                                                              Net  Common Stock
                                           Common Stock                                Unrealized  Purchased by
                                      ----------------------                             Gains On      Employee
                                           Number               Additional             Securities         Stock
                                        of Shares                  Paid-in    Retained  Available     Ownership
                                      Outstanding     Amount       Capital    Earnings   for Sale          Plan      Total
                                      -----------     ------    ----------    --------   --------   -----------      -----
<S>                                     <C>         <C>         <C>         <C>         <C>          <C>          <C>
Balance at January 1, 1997                     --   $      --   $      --   $  11,513   $     650    $      --    $  12,163

Net income for the year                        --          --          --         386          --           --          386
Change in unrealized gains in
  securities available for sale                --          --          --          --         614           --          614
                                        ---------   ---------   ---------   ---------   ---------    ---------    ---------

Balance at December 31, 1997                   --          --          --      11,899       1,264           --       13,163

Reorganization to common
  stock form and issuance of
  1,754,411 shares                      1,754,411          18      16,884          --          --       (1,404)      15,498
Net income for the year                        --          --          --         810          --           --          810
Change in unrealized gains in
  securities available for sale                --          --          --          --         626           --          626
Less reclassification adjustment
   for gain realized                           --          --          --          --        (304)          --         (304)
Amortization of ESOP expense                   --          --          --          --          --          117          117
Difference between average fair value
  and cost per share of ESOP shares
  committed to be released                     --          --          13          --          --           --           13
                                        ---------   ---------   ---------   ---------   ---------    ---------    ---------

Balance at December 31, 1998            1,754,411   $      18   $  16,897   $  12,709   $   1,586    $  (1,287)   $  29,923
                                        =========   =========   =========   =========   =========    =========    =========


THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
 OF THESE CONSOLIDATED FINANCIAL STATEMENTS.
</TABLE>









                                       21



<PAGE>


<TABLE>
<CAPTION>

                     CONSOLIDATED STATEMENTS OF CASH FLOWS

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                                 (In thousands)

                                                                         YEAR ENDED DECEMBER 31
                                                                        ------------------------
                                                                          1998            1997
                                                                        --------        --------

CASH FLOWS FROM OPERATING ACTIVITIES
<S>                                                                     <C>             <C>     
  Net income                                                            $    810        $    386
  Adjustments to reconcile net income to net cash provided by
     (used in) operating activities:
       Deferred income taxes                                                 (49)           (268)
       Depreciation                                                           49              50
       Amortization of discounts and premiums on investments and
         mortgage-backed and related securities                              (22)            (32)
       Gain on sale of securities                                           (461)             (4)
       ESOP shares committed to be released                                  130              --
       Equity in loss of limited partnership                                  43              38
       Provision for (recoveries of) loan losses                            (103)            700
       Income reinvested from  asset mutual funds                             --            (510)
       Federal Home Loan Bank stock dividends                                (23)            (20)
       Net (increase) decrease in accrued interest receivable and
         prepaid expenses and other assets                                  (272)             22
       Net increase in accrued interest, accounts payable and
         other liabilities                                                   467             154
                                                                        --------        --------
         NET CASH PROVIDED BY OPERATING ACTIVITIES                           569             516

CASH FLOWS FROM INVESTING ACTIVITIES
  Proceeds from sale of securities available for sale                        471           4,821
  Purchase of securities available for sale                               (1,827)             --
  Proceeds from maturities of held to maturity securities                     --           1,000
  Proceeds from principal payments on mortgage-backed
    and related securities                                                 9,490           8,445
  Purchase of mortgage-backed and related securities                      (9,540)         (7,872)
  Net increase in interest-bearing deposits with banks                   (12,072)         (2,480)
  Net (increase) decrease in loans                                           715          (4,260)
  Additions to premises and equipment                                        (11)            (88)
                                                                        --------        --------
         NET CASH USED IN INVESTING ACTIVITIES                           (12,774)           (434)

CASH FLOWS FROM FINANCING ACTIVITIES
  Issuance of common stock - net                                          15,498              --
  Net decrease in savings accounts                                        (1,609)           (653)
  Net increase (decrease) in certificates of deposit                      (1,408)            834
  Repayment of note payable                                                 (100)           (100)
                                                                        --------        --------
         NET CASH PROVIDED BY FINANCING ACTIVITIES                        12,381              81
                                                                        --------        --------

         NET INCREASE IN CASH                                                176             163
CASH AT BEGINNING OF YEAR                                                    819             656
                                                                        --------        --------

         CASH AT END OF YEAR                                            $    995        $    819
                                                                        ========        ========

Cash paid during the period for:
  Interest on deposits                                                  $  2,416        $  2,419

  Income taxes                                                          $    259        $    351
</TABLE>

THE ACCOMPANYING NOTES ARE AN INTEGRAL PART
 OF THESE CONSOLIDATED FINANCIAL STATEMENTS.

                                       22



<PAGE>



                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

         On July 6, 1998,  the Board of Directors  of Home  Federal  Savings and
Loan Association of Niles (the "Association")  adopted a Plan of Conversion (the
"Plan")  whereby the  Association  would convert to the stock form of ownership,
followed by the  issuance  of all of the  Association's  outstanding  stock to a
newly formed  holding  company,  First Niles  Financial,  Inc. (the  "Company").
Pursuant to the Plan,  the  Company  offered  common  shares for sale to certain
depositors of the Association  and members of the community.  The conversion was
completed on October 26, 1998, and resulted in the issuance of 1,754,411  common
shares of the Company which,  after  consideration of offering expenses totaling
approximately $643,000, and share purchases by the Employee Stock Ownership Plan
("ESOP") totaling $1,404,000,  resulted in net equity proceeds of $15.5 million.
Condensed  financial  statements  of the Company are presented in Note M. Future
references are made either to the Company or the Association as applicable.

         The Company is a savings and loan holding company whose  activities are
primarily  limited  to holding  the stock of the  Association.  The  Association
conducts a general banking business in Niles,  Ohio which consists of attracting
deposits from the general public and applying those funds to the  origination of
loans for residential,  consumer and nonresidential  purposes. The Association's
profitability  is significantly  dependent on its net interest income,  which is
the difference  between interest income generated from  interest-earning  assets
(i.e. loans and  investments) and the interest expense paid on  interest-bearing
liabilities (i.e.  customer deposits and borrowed funds). Net interest income is
affected by the relative amount of interest-earning  assets and interest-bearing
liabilities and the interest  received or paid on these  balances.  The level of
interest  rates  paid  or  received  by the  Association  can  be  significantly
influenced by a number of environmental  factors,  such as governmental monetary
policy, that are outside of management's control.

         The  consolidated  financial  information  presented  herein  has  been
prepared in accordance with generally accepted  accounting  principles  ("GAAP")
and general  accounting  practices within the financial  services  industry.  In
preparing  consolidated financial statements in accordance with GAAP, management
is required to make estimates and assumptions  that affect the reported  amounts
of  assets  and  liabilities  and  the  disclosure  of  contingent   assets  and
liabilities  at the date of the financial  statements  and revenues and expenses
during the reporting period. Actual results could differ from such estimates.

         The following is a summary of  significant  accounting  policies  which
have been consistently applied in the preparation of the accompanying  financial
statements.

Principles of Consolidation:

         The  consolidated  financial  statements  include  the  accounts of the
Company and the  Association at December 31, 1998 and for the period October 26,
1998  through  December 31, 1998.  Prior to October 26, 1998,  the  consolidated
financial statements are those of the Association.



                                       23



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Investment Securities and Mortgage-Backed and Related Securities:

         The Company accounts for investment  securities and mortgage-backed and
related  securities  in  accordance  with  Statement  of  Financial   Accounting
Standards  ("SFAS") No. 115,  "Accounting  for Certain  Investments  in Debt and
Equity  Securities."  SFAS No. 115 requires that  investments  be categorized as
held-to-maturity,  trading  or  available  for sale.  Securities  classified  as
held-to-  maturity are carried at cost only if the  Association has the positive
intent and ability to hold these securities to maturity.  Trading securities and
securities  designated  as  available  for sale are  carried  at fair value with
resulting   unrealized  gains  or  losses  recorded  to  operations  or  equity,
respectively.  At December  31, 1998 and 1997,  the  Company's  equity  accounts
reflected net unrealized  gains of $1,586,000 and $1,264,000,  respectively,  on
securities  designated as available for sale.  Realized gains or losses on sales
of securities are recognized using the specific identification method.

Loans Receivable:

         Loans held in portfolio are stated at the principal amount outstanding,
adjusted  for the  allowance  for loan losses and unearned  income.  Interest is
accrued  as  earned,  unless  the  collectibility  of  the  loan  is  in  doubt.
Uncollectible  interest on loans that are contractually past due is charged off,
or an allowance is established based on management's  periodic  evaluation.  The
allowance is  established  by a charge to interest  income equal to all interest
previously  accrued,  and income is  subsequently  recognized only to the extent
that cash payments are received until, in management's  judgment, the borrower's
ability to make periodic interest and principal payments has returned to normal,
in  which  case  the  loan  is  returned  to  accrual  status.  If the  ultimate
collectibility  of the loan is in  doubt,  in whole  or in  part,  all  payments
received on nonaccrual loans are applied to reduce principal until such doubt is
eliminated.

         Loans held for sale are  identified at  origination  and carried at the
lower  of cost or  market,  determined  in the  aggregate.  In  computing  cost,
deferred loan  origination  fees are deducted from the principal  balance of the
related loan. At December 31, 1998 and 1997,  there were no loans  identified as
held for sale.

Loan Origination Fees and Costs:

         The  Association  accounts  for  loan  origination  fees  and  costs in
accordance  with  SFAS No.  91,  "Accounting  for  Nonrefundable  Fees and Costs
Associated  with  Originating  or  Acquiring  Loans and Initial  Direct Costs of
Leases."  Pursuant to the provisions of SFAS No. 91, all loan  origination  fees
received net of direct origination costs, are deferred and amortized to interest
income over the  contractual  lives of the loans using the  level-yield  method,
giving effect to actual loan  prepayments.  Additionally,  SFAS No. 91 generally
limits the definition of loan origination costs to the direct costs attributable
to originating a loan.




                                       24



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Allowance for Losses on Loans:

         It is the  Association's  policy to provide  valuation  allowances  for
estimated losses on loans based on past loss  experience,  current trends in the
level of delinquent and specific problem loans,  loan  concentrations  to single
borrowers,  adverse  situations that may affect the borrower's ability to repay,
the estimated  value of any underlying  collateral  and current and  anticipated
economic  conditions in the primary  market area.  When the collection of a loan
becomes doubtful,  or otherwise  troubled,  the Association  records a loan loss
provision  equal  to the  difference  between  the fair  value  of the  property
securing the loan and the loan's carrying  value.  Major loans and major lending
areas are  reviewed  periodically  to determine  potential  problems at an early
date.  The  allowance  for loan losses is  increased  by charges to earnings and
decreased by charge-offs (net of recoveries).

         The Association accounts for impaired loans in accordance with SFAS No.
114,  "Accounting  by Creditors for Impairment of a Loan." SFAS No. 114 requires
that impaired loans be measured based upon the present value of expected  future
cash  flows  discounted  at  the  loan's  effective  interest  rate  or,  as  an
alternative,  at the  loan's  observable  market  price  or  fair  value  of the
collateral.

         A loan is defined under SFAS No. 114 as impaired when, based on current
information and events, it is probable that a creditor will be unable to collect
all amounts due according to the  contractual  terms of the loan  agreement.  In
applying  the  provisions  of  SFAS  No.  114,  the  Association  considers  its
investment in one- to  four-family  residential  loans and consumer  installment
loans to be homogeneous and therefore excluded from separate  identification for
evaluation  of  impairment.  With  respect to the  Association's  investment  in
commercial  real estate loans,  and its evaluation of impairment  thereof,  such
loans are  collateral  dependent  and,  as a result,  are carried as a practical
expedient at the lower of cost or fair value.

         Loans which are more than  ninety days  delinquent  are  considered  to
constitute  more  than a  minimum  delay  in  repayment  and are  evaluated  for
impairment under SFAS No. 114 at that time.

         The  Association  identified  one loan at  December  31,  1998,  with a
carrying  value of $648,000 and three loans at December 31, 1997 with a carrying
value of $1,062,000,  which were considered impaired due to delinquent payments.
Accrual of interest on these loans has been suspended.









                                       25



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Premises and Equipment:

         Premises and  equipment  are recorded at cost and include  expenditures
which extend the useful lives of existing assets. Maintenance, repairs and minor
renewals are expensed as incurred.  For  financial  reporting,  depreciation  is
provided on the straight-line and accelerated  methods over the estimated useful
lives of the  assets,  estimated  to be forty to fifty years for  buildings  and
three to ten years for furniture and equipment.

Federal Income Taxes:

         The Association  accounts for federal income taxes pursuant to SFAS No.
109,  "Accounting  for  Income  Taxes."  SFAS  No.  109  established   financial
accounting  and reporting  standards for the effects of income taxes that result
from the  Association's  activities  within the current and previous  years.  In
accordance  with SFAS No. 109, a deferred tax liability or deferred tax asset is
computed  by  applying  the  current  statutory  tax  rates  to net  taxable  or
deductible temporary  differences between the tax basis of an asset or liability
and its  reported  amount in the  financial  statements  that will result in net
taxable  or  deductible  amounts  in future  periods.  Deferred  tax  assets are
recorded  only  to the  extent  that  the  amount  of net  deductible  temporary
differences or  carryforward  attributes may be utilized  against current period
earnings,  carried back against prior years'  earnings,  offset against  taxable
temporary  differences reversing in future periods, or utilized to the extent of
management's  estimate  of future  taxable  income.  A  valuation  allowance  is
provided for deferred tax assets to the extent that the value of net  deductible
temporary differences and carryforward attributes exceeds management's estimates
of taxes payable on future taxable income. Deferred tax liabilities are provided
on the total amount of net temporary differences taxable in the future.

         Deferral of income taxes results  primarily from deferred  compensation
accruals,  Federal Home Loan Bank stock dividends,  and book/tax  differences in
the allowance for loan losses.

Cash and Cash Equivalents:

         For purposes of reporting cash flows, cash includes noninterest bearing
cash which includes cash on hand and amounts due from correspondent banks.

Earnings Per Share:

         Basic  earnings per share is computed  based upon the  weighted-average
shares outstanding during the year less weighted-average shares in the ESOP that
are unallocated and not committed to be released.

         Earnings  per share is not  presented  for 1998 and 1997 as the Company
completed its conversion to stock form in October 1998.



                                       26



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE A - SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)

Comprehensive Income:

         The Company adopted SFAS No. 130, "Reporting Comprehensive Income," for
reporting periods as of January 1, 1997. The Statement establishes standards for
reporting and presentation of comprehensive  income and its components in a full
set of general-purpose financial statements. It requires that all items that are
required  to  be  recognized  under   accounting   standards  as  components  of
comprehensive income be reported in a financial statement that is presented with
the same  prominence as other financial  statements.  SFAS No. 130 requires that
companies (i) classify terms of other comprehensive  income by their nature in a
financial   statement  and  (ii)  display  the  accumulated   balance  of  other
comprehensive  income separately from retained  earnings and additional  paid-in
capital in the equity section of the statement of financial condition. Financial
statements for earlier periods have been reclassified for comparative purposes.

Recent Accounting Standards:

         In June 1998, the FASB issued SFAS No. 133,  "Accounting for Derivative
Instruments and Hedging Activities." This Statement  establishes  accounting and
reporting  standards for derivative  instruments,  including certain  derivative
instruments   embedded  in  other  contracts,   (collectively   referred  to  as
derivatives) and for hedging  activities.  It requires that any entity recognize
all  derivatives  as either assets or  liabilities in the statement of financial
position and measure those instruments at fair value. If certain  conditions are
met, a derivative may be specifically  designated as (a) a hedge of the exposure
to  changes  in  the  fair  value  of a  recognized  asset  or  liability  or an
unrecognized firm commitment, (b) a hedge of the exposure of variable cash flows
of a forecasted transaction,  or (c) a hedge of the foreign currency exposure of
a net investment in a foreign  operation,  an unrecognized  firm commitment,  an
available-for-sale  security,  or  a  foreign-currency-  denominated  forecasted
transaction.

         This  Statement  is effective  for all fiscal  quarters of fiscal years
beginning after June 15, 1999.  Initial  application of this Statement should be
as of the  beginning  of an  entity's  fiscal  quarter;  on that  date,  hedging
relationships must be designated anew and documented  pursuant to the provisions
of the  Statement.  This  Statement  should  not  be  applied  retroactively  to
financial statements of prior periods. Management does not believe that adoption
of this  statement  will  have a  material  impact  on the  Company's  financial
condition and results of operations.












                                       27



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE  B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES

         The amortized cost and estimated  fair values of investment  securities
are summarized as follows:

<TABLE>
<CAPTION>
                                                       December 31
                                    --------------------------------------------------
                                              1998                        1997
                                    -----------------------    -----------------------
                                                 Estimated                   Estimated
                                    Amortized         Fair     Amortized          Fair
                                         Cost        Value          Cost         Value
                                    ---------    ---------     ---------     ---------
                                                       (In thousands)
<S>                                  <C>           <C>           <C>           <C>
Available for sale securities:
  FHLMC Common Stock                 $    39       $ 2,577       $    48       $ 2,085
  Asset Management Funds:
    Income Trust                       5,668         5,624         5,668         5,602
    ARMS                               4,006         3,872         4,006         3,928
    GNMA Trust                         5,795         5,837         5,795         5,817
  Corporate Bonds:
    Due within one year                1,271         1,271            --            --
    Due after one to ten years           555           555            --            --
  Other                                   15            15            15            15
                                     -------       -------       -------       -------

              TOTALS                 $17,349       $19,751       $15,532       $17,447
                                     =======       =======       =======       =======
</TABLE>

         The amortized cost, gross unrelated gains,  gross unrealized losses and
estimated  fair  values  for  mortgage-backed  and  related  securities  held to
maturity are summarized as follows:

<TABLE>
<CAPTION>

                                                                    December 31, 1998
                                                 ---------------------------------------------------
                                                                   Gross        Gross      Estimated
                                                 Amortized    Unrealized   Unrealized           Fair
                                                      Cost         Gains       Losses          Value
                                                 ---------    ----------   ----------      ---------
                                                                       (In thousands)
<S>                                               <C>            <C>           <C>           <C>
Held to maturity securities:
  Mortgage-backed and related securities:
    Government National Mortgage Association
       participation certificates                  $    27       $    --       $     1       $    26
    Federal National Mortgage Association
      collateralized mortgage obligations            6,292             9            22         6,279
    Federal Home Loan Mortgage Corporation:
       Participation certificates                       60             1             7            54
      Collateralized mortgage obligations            6,053            21            19         6,055
                                                   -------       -------       -------       -------

              TOTALS                               $12,432       $    31       $    49       $12,414
                                                   =======       =======       =======       =======
</TABLE>



                                       28



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE B - INVESTMENTS AND MORTGAGE-BACKED SECURITIES (CONTINUED)


<TABLE>
<CAPTION>
                                                                    December 31, 1997
                                                 ---------------------------------------------------
                                                                   Gross        Gross      Estimated
                                                 Amortized    Unrealized   Unrealized           Fair
                                                      Cost         Gains       Losses          Value
                                                 ---------    ----------   ----------      ---------
                                                                       (In thousands)
<S>                                                <C>            <C>           <C>           <C>
Held to maturity securities:
  Mortgage-backed  and related securities:
     Government National Mortgage Association
        participation certificates                 $    48       $    --       $    --       $    48
     Federal National Mortgage Association
        collateralized mortgage obligations          8,482             6            12         8,476
     Federal Home Loan Mortgage Corporation:
        Participation certificates                      92            --             2            90
        Collateralized mortgage obligations          3,737             9            25         3,721
                                                   -------       -------       -------       -------

                   TOTALS                          $12,359       $    15       $    39       $12,335
                                                   =======       =======       =======       =======
</TABLE>


NOTE C - LOANS RECEIVABLE

         The composition of the loan portfolio is as follows:

                                                     December 31
                                             -------------------------
                                                1998            1997
                                             ---------        --------
                                                    (In thousands)

Real estate mortgage (primarily one- to
  four-family residential)                    $ 26,772        $ 29,777
Construction and development                     5,104           4,231
Commercial real estate                           5,042           4,603
Consumer and other                               1,128           1,181
Loans on deposits                                   82              84
Loans in progress                               (1,212)         (2,278)
                                              --------        --------
                                                36,916          37,598
Less allowance for loan losses                     784             854
                                              --------        --------

          TOTALS                              $ 36,132        $ 36,744
                                              ========        ========








                                       29



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE C - LOANS RECEIVABLE (CONTINUED)

         In the ordinary  course of business,  the Association has granted loans
to some of the officers,  directors and their related  interests.  Related party
loans are made on  substantially  the same terms,  including  interest rates and
collateral,  as those  prevailing  at the time of comparable  transactions  with
unrelated  persons and do not involve  more than normal risk of  collectibility.
The aggregate  dollar amount of these loans was  approximately  $1.2 million and
$1.1 million at December 31, 1998 and 1997, respectively.  During the year ended
December 31, 1998, loans of $159,000 were made to officers,  directors and their
related  interests  while  principal  repayments of  approximately  $39,000 were
received from related parties.

         The  Association's   lending  efforts  have  historically   focused  on
one-to-four-family  residential real estate loans and construction  loans, which
comprise  approximately  $26.8  million,  or 73%, of the total loan portfolio at
December 31, 1998, and $29.8 million,  or 79% of the total portfolio at December
31, 1997.  Historically,  such loans have been conservatively  underwritten with
cash  down  payments   sufficient  to  provide  the  Association  with  adequate
collateral coverage in the event of default.  Nevertheless,  the Association, as
with any lending institution,  is subject to the risk that real estate values or
economic  conditions could deteriorate in its primary lending areas within Ohio,
thereby impairing collateral values.  However,  management is of the belief that
real estate values and economic conditions in the Association's  primary lending
areas are presently stable.


         The activity in the allowance for loan losses is summarized as follows:

                                                    December 31
                                                 -----------------
                                                1998         1997
                                               ------       ------
                                                  (In thousands)

Balance at beginning of  year                  $ 854        $ 301
Provision charged to operations (credit)        (103)         700
Less loans charged off                           (21)        (147)
Recovery                                          54           --
                                               -----        -----

         BALANCE AT END OF YEAR                $ 784        $ 854
                                               =====        =====












                                       30



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE D - REAL ESTATE INVESTMENT - LIMITED PARTNERSHIP

         In 1996, the Association  acquired an interest in a limited partnership
formed to construct and operate  multi-family  housing units. Due to the ability
to exercise  significant control over operations,  the Association  accounts for
the investment in the limited  partnership  using the equity  method.  Under the
terms of the limited partnership agreement,  the Association has a total capital
contribution  of $500,000 and is  allocated  tax losses and  affordable  housing
federal income tax credits based upon that investment.

         The Association funded its partnership capital contribution through the
proceeds of a $500,000  term note payable to a bank in five annual  installments
of $100,000  beginning  November 15, 1997. The interest is payable  semiannually
beginning May 15, 1997 and ending  November 15, 2001, at a fixed rate of 8.875%.
The note  payable is  collateralized  by ten  membership  shares of the  limited
partnership.

         Condensed   financial   information  for  the  entire   partnership  is
summarized as of and for the years ended December 31, 1998 and 1997 as follows:

                                   1998         1997
                                  ------       ------
                                     (In thousands)

Balance Sheet:
  Investment in real estate       $4,945       $5,154
  Total assets                     5,086        5,274
  Mortgage payable                 2,874        2,891
  Partners' equity                 1,927        2,149

Operations:
  Rental income                      512          502
  Net loss                           222          235

















                                       31



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE E - PREMISES AND EQUIPMENT

         Premises and equipment are summarized as follows:

                                                 December 31
                                             --------------------
                                             1998            1997
                                             ----            ----
                                                 (In thousands)

Land                                         $ 32            $ 32
Buildings                                     359             359
Furniture, equipment and vehicles             381             370
                                             ----            ----
                                              772             761
Less accumulated depreciation                 516             467
                                             ----            ----

          TOTALS                             $256            $294
                                             ====            ====


NOTE F - DEPOSITS

    A comparative summary of deposits is as follows:

<TABLE>
<CAPTION>
                                                                                     December 31
                                                                 ---------------------------------------------------
                                        Weighted Average                 1998                         1997
                                               Rate              ---------------------        ----------------------
                                       At December 31, 1998      Amount        Percent        Amount         Percent
                                                                 ------        -------        ------         -------
                                                                                   (In thousands)
<S>                                          <C>                 <C>           <C>            <C>                 <C>
Savings:
  Statement savings accounts                 2.50%               $   194             -%       $   303             1%
  Passbook savings accounts                  2.50%                20,563            37%        21,980            38%
  Christmas club                             0.00%                     6             -%             6             -%
  Negotiable order of
    withdrawal accounts                      2.50%                 3,081             6%         2,830             5%
  Money market
    deposit accounts                         2.55%                 3,811             7%         4,145             7%
                                                                 -------       -------        -------       -------
          Total savings                                           27,655            50%        29,264            51%

Certificates of deposit:
  Less than 1 year,
    3.05% to 4.70%                           4.40%                 6,448            12%         8,784            15%
  One to two years,
    4.40% to 5.91%                           5.17%                11,887            22%        12,877            22%
  Over two years,
    4.70% to 6.00%                           5.66%                 2,453             4%         2,767             5%
  Jumbo - over $100,000                      5.41%                 3,284             6%         1,049             2%
  IRA accounts, six months to
    three years, 4.35% to 6.00%              5.34%                 3,110             6%         3,113             5%
                                                                 -------       -------        -------       -------
         Total certificates of deposit                            27,182            50%        28,590            49%
                                                                 -------       -------        -------       -------

                 TOTAL DEPOSITS                                  $54,837           100%       $57,854           100%
                                                                 =======       =======        =======       =======
</TABLE>

                                       32



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE F - DEPOSITS (CONTINUED)

Deposits in excess of $100,000 are not federally insured.

Scheduled maturities of certificates of deposit are as follows:

                                     December 31
                              ---------------------------
                                1998               1997
                              -------            --------
                                    (In thousands)

Within one year               $22,649            $24,276
One to two years                3,841              2,941
Two to three years                692              1,373
                              -------            -------

          TOTALS              $27,182            $28,590
                              =======            =======

Interest expense on deposits is summarized as follows:

                                                    Year Ended December 31
                                                   ------------------------
                                                    1998              1997
                                                   ------            ------
                                                        (In thousands)

Passbook savings accounts                          $  658            $  663
Statement savings                                       8                10
Negotiable order of withdrawal accounts                92                88
Money market deposit accounts                         121               133
Certificates of deposit                             1,521             1,539
                                                   ------            ------

          TOTALS                                   $2,400            $2,433
                                                   ======            ======


NOTE G - FEDERAL INCOME TAXES

Income tax expense is summarized as follows:

                             Year Ended December 31
                            ------------------------
                             1998              1997
                            ------            ------
                                (In thousands)

Federal:
  Current                   $ 325             $ 355
  Deferred                    (49)             (268)
                            -----             -----

          TOTALS            $ 276             $  87
                            =====             =====



                                       33



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE G - FEDERAL INCOME TAXES (CONTINUED)

         The  provision  for federal  income taxes on earnings  differ from that
computed at the statutory rate of 34% is as follows:

                                                     Year Ended December 31
                                                    -------------------------
                                                     1998               1997
                                                    ------             ------
                                                           (In thousands)

Federal taxes computed at statutory rate            $ 369              $ 161
Decrease resulting from:
  Limited partnership tax credits                     (89)               (70)
  Dividends received deduction                         (4)                (4)
                                                    -----              -----

          FEDERAL INCOME TAX PROVISION              $ 276              $  87
                                                    =====              =====

Effective federal income tax rate                    25.4%              18.4%
                                                    =====              =====

         The  composition  of the  Company's  net deferred  tax  liability is as
follows:

                                                                 December 31
                                                              -----------------
                                                               1998       1997
                                                              ------     ------
                                                                (In thousands)
Taxes (payable) refundable on temporary differences
  at the expected statutory rate:
     Deferred tax liabilities:
        Federal Home Loan Bank stock dividends                $ (72)     $ (64)
        Unrealized gains on securities available for sale      (817)      (651)
                                                              -----      -----
               TOTAL DEFERRED TAX LIABILITIES                  (889)      (715)

     Deferred tax assets:
        Deferred compensation                                   351        220
        Allowance for loan losses                               266        340
                                                              -----      -----
               TOTAL DEFERRED TAX ASSETS                        617        560
                                                              -----      -----

          NET DEFERRED FEDERAL INCOME TAX LIABILITY           $(272)     $(155)
                                                              =====      =====

         Prior to 1996, the Association was allowed a special bad debt deduction
based on a percentage of earnings,  generally limited to 8% of otherwise taxable
income,  or the amount of qualifying and  nonqualifying  loans  outstanding  and
subject to certain  limitations  based on  aggregate  loans and savings  account
balances at the end of the calendar  year. The  Association  was subject to such
limitations  during  the year ended  December  31,  1995,  and,  therefore,  was
precluded from utilizing the percentage of earnings bad debt  deduction.  If the
amounts that  qualified as deductions  for federal income tax purposes are later
used for purposes other than for




                                       34



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE G - FEDERAL INCOME TAXES (CONTINUED)

bad debt losses, including distributions in liquidation, such distributions will
be subject to federal  income  taxes at the then  current  corporate  income tax
rate.  Retained  earnings at December  31,  1998,  includes  approximately  $2.5
million for which federal income taxes have not been provided. The amount of the
unrecognized  deferred tax liability  relating to the  cumulative  percentage of
earnings bad debt deduction totaled approximately $863,000 at December 31, 1998.
See Note L for additional  information  regarding the  Association's  future bad
debt deductions.


NOTE H - EMPLOYEE RETIREMENT AND DEFERRED COMPENSATION PLANS

          In  conjunction  with its  reorganization  to stock form in 1998,  the
Company implemented an Employee Stock Ownership Plan ("ESOP"). The ESOP provides
retirement  benefits for substantially all employees who have completed one year
of service and have attained the age of 21. The Company accounts for the ESOP in
accordance with Statement of Position ("SOP") 93-6,  "Employers'  Accounting for
Employee Stock  Ownership  Plans." SOP 93-6 requires the measure of compensation
expense  recorded by employers to equal the fair value of ESOP shares  allocated
to participants  during a fiscal year.  Expense  recognized  related to the ESOP
totaled $130,000 for 1998.

          The  Association  has a  noncontributory  defined benefit pension plan
covering all eligible employees.  Benefits are based on years of service and the
highest consecutive five-year average earnings preceding normal retirement date.
Plan assets consist of fully-insured  retirement income life insurance  policies
and cash deposit  accounts.  At plan years ended  August 31, 1998 and 1997,  the
plan asset values were $1,049,000 and $954,000, respectively, which approximates
the  actuarially   computed  value  of  vested  and  nonvested   benefits.   The
Association's  policy is to fund pension  costs  accrued.  Pension costs totaled
approximately  $33,000  for the years  ended  December  31,  1998 and  1997.  In
November,  1998,  the Board of Directors  voted to terminate this plan effective
January  31, 1999 with all  participants  becoming  100% vested in the  benefits
accrued.   The  termination  will  not  result  in  further   liability  to  the
Association.

          The Directors of the Association had approved a non-qualified deferred
compensation  plan for certain  officers which  provided for monthly  retirement
benefits  of  specified  amounts for each  executive.  The  agreements  had been
subject to annual  renewal,  however,  the Directors  elected to terminate  this
agreement  at the  conclusion  of the  plan  year  ended  August  31,  1998.  In
conjunction with the termination,  the officers were provided with an additional
twenty-four  months  of  vesting,  the cost of which has been  included  in 1998
operations. Accrued deferred compensation amounts are payable in a lump sum upon
the executive's death, disability,  voluntary resignation, or termination by the
Association  without  cause.  Deferred  compensation  expense was  $384,000  and
$144,000 for the years ended December 31, 1998 and 1997, respectively.






                                       35



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE I - COMMITMENTS AND CONTINGENCIES

          The Association is a party to financial  instruments  with off-balance
sheet risk in the normal course of business to meet the  financing  needs of its
customers including  commitments to extend credit. Such commitments  involve, to
varying  degrees,  elements  of credit and  interest-rate  risk in excess of the
amount  recognized  in the  statement  of  financial  position.  The contract or
notional  amounts of the  commitments  reflect  the extent of the  Association's
involvement in such financial instruments.

          The   Association's   exposure   to  credit   loss  in  the  event  of
nonperformance by the other party to the financial instrument for commitments to
extend  credit  is  represented  by the  contractual  notional  amount  of those
instruments. The Association uses the same credit policies in making commitments
and conditional obligations as those utilized for on-balance-sheet instruments.

          At December 31, 1998, the Association  had outstanding  commitments of
approximately $2.1 million to originate fixed and variable rate residential real
estate  loans.  The  average  interest  rate of loan  commitments  was  7.28% at
December  31,  1998.  In  the  opinion  of  management,   the  outstanding  loan
commitments  equaled or exceeded  prevalent market interest rates and such loans
were  underwritten  in accordance  with normal  underwriting  policies,  and all
commitments  will be funded via cash flow from  operations  and existing  excess
liquidity.

          From  time to  time,  and in the  ordinary  course  of  business,  the
Association  becomes a party to matters  of  litigation.  In the  opinion of the
Association's  counsel,  there  are  no  claims,  asserted  or  unasserted,  the
resolution  of  which  would  have  a  material  affect  on  the   Association's
consolidated financial statements.


NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS

         The following  table shows  carrying  values and the related  estimated
fair values of financial  instruments at December 31, 1998 and 1997. Items which
are not financial instruments are not included.


<TABLE>
<CAPTION>

                                                                 December 31
                                          -----------------------------------------------------
                                                    1998                          1997
                                          -----------------------       -----------------------

                                                        Estimated          Fair       Estimated
                                          Carrying           Fair       Carrying           Fair
                                           Amounts          Value        Amounts          Value
                                          --------      ---------       --------      ---------
                                                                (In thousands)
<S>                                       <C>            <C>            <C>            <C>
Cash and equivalents                      $ 17,124       $ 17,124       $  4,876       $  4,876
Securities:
  Available for sale                        19,751         19,751         17,447         17,447
  Held to maturity                          12,432         12,414         12,359         12,335
  Federal Home Loan Bank stock                 317            317            294            294
Loans                                       36,132         36,479         36,744         36,957
Accrued interest receivable                    282            282              1              1
Deposits:
  Checking, savings and money market       (27,655)       (27,655)       (29,264)       (29,264)
  Certificates of deposit                  (27,182)       (27,254)       (28,590)       (28,984)
Accrued interest payable                      (110)          (110)          (127)          (127)
Note payable                                  (300)          (300)          (400)          (400)
</TABLE>

                                       36



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE J - FAIR VALUES OF FINANCIAL INSTRUMENTS (CONTINUED)

           For purposes of the above  disclosures of estimated  fair value,  the
following  assumptions  were  used:  the  estimated  fair  value  for  cash  and
equivalents,  accrued  interest and note payable was  considered to  approximate
cost;  the estimated fair value for securities was based on quoted market values
for the individual securities or for equivalent  securities;  the estimated fair
value for loans was based on estimates of the rate the Association  would charge
for similar  loans at December  31, 1998 and 1997,  respectively,  applied  over
estimated  payment  periods;  the  estimated  fair value for demand and  savings
deposits  was  based on their  carrying  value;  the  estimated  fair  value for
certificates of deposit was based on estimates of the rate the Company would pay
on such obligations at December 31, 1998 and 1997, respectively, applied for the
time period until maturity;  and the estimated fair value of commitments was not
material. It was not practicable to estimate the fair value of a 17% partnership
interest in a non-traded real estate  investment;  that investment is carried at
equity of $383,000 and $426,000 at December 31, 1998 and 1997, respectively.

           While  these  estimates  of fair  values  are  based on  management's
judgment of appropriate factors,  there is no assurance that, if the Company had
disposed of such items at December 31, 1998 or 1997,  the estimated  fair values
would  necessarily  have been  achieved at that date,  since  market  values may
differ depending on various circumstances. The estimated fair values at December
31, 1998 and 1997,  should not  necessarily be considered to apply at subsequent
dates.

           In addition, other assets and liabilities of the Company that are not
defined as financial  instruments  were not  included in the above  disclosures,
such as property and equipment.  Also,  non-financial  instruments typically not
recognized in financial  statements (but which may have value) were not included
in the above  disclosures.  These  include,  among other  items,  the  estimated
earning  power of core  deposit  accounts,  the value of a trained  work  force,
customer goodwill, and similar items.


NOTE K - REGULATORY CAPITAL

           The  Association  is subject to the regulatory  capital  requirements
promulgated by the Office of Thrift Supervision  (OTS).  Failure to meet minimum
capital  requirements can initiate certain mandatory -- and possibly  additional
discretionary -- actions by regulators that, if undertaken,  could have a direct
material  effect  on  the  Association's  financial  statements.  Under  capital
adequacy  guidelines and the regulatory  framework for prompt corrective action,
the Association must meet specific capital guidelines that involve  quantitative
measures of the Association's assets, liabilities, and certain off-balance-sheet
items as calculated under regulatory  accounting  practices.  The  Association's
capital amounts and classification are also subject to qualitative  judgments by
the regulators about components, risk weightings, and other factors.






                                       37



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE K - REGULATORY CAPITAL (CONTINUED)

           The OTS has adopted  risk-based capital ratio guidelines to which the
Association  is  subject.  The  guidelines  establish  a  systematic  analytical
framework  that  makes  regulatory   capital   requirements  more  sensitive  to
differences in risk profiles  among banking  organizations.  Risk-based  capital
ratios are  determined by  allocating  assets and  specified  off-balance  sheet
commitments  to four  risk-weighting  categories,  with higher levels of capital
being required for the categories perceived as representing greater risk.

           These  guidelines  divide the capital into two tiers.  The first tier
("Tier 1") includes common equity,  certain  non-cumulative  perpetual preferred
stock (excluding  auction rate issues) and minority interests in equity accounts
of consolidated subsidiaries,  less goodwill and certain other intangible assets
(except  mortgage  servicing  rights and  purchased  credit card  relationships,
subject to certain  limitations).  Supplementary  ("Tier II") capital  includes,
among other items,  cumulative  perpetual and long-term  limited-life  preferred
stock,  mandatory  convertible  securities,  certain hybrid capital instruments,
term  subordinated  debt and the allowance  for loan losses,  subject to certain
limitations,  less required  deductions.  Savings  associations  are required to
maintain  a total  risk-based  capital  ratio of 8%,  of which 4% must be Tier 1
capital.  The OTS may, however,  set higher capital requirements when particular
circumstances  warrant.   Savings  associations   experiencing  or  anticipating
significant  growth are expected to maintain capital ratios,  including tangible
OTS capital positions, well above the minimum levels.

           In addition,  the OTS  established  guidelines  prescribing a minimum
Tier 1 leverage  ratio (Tier 1 capital to adjusted  total assets as specified in
the guidelines). These guidelines provide for a minimum Tier 1 leverage ratio of
3% for savings associations that meet certain specified criteria, including that
they have the highest regulatory rating and are not experiencing or anticipating
significant  growth.  All other banks are required to maintain a Tier 1 leverage
ratio of 3% plus an additional cushion of at least 100 to 200 basis points.

           As of  December  31,  1998 and  1997,  management  believes  that the
Association met all capital  adequacy  requirements to which the Association was
subject.
















                                       38




<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE K - REGULATORY CAPITAL (CONTINUED)

<TABLE>
<CAPTION>

                                                                           As of December 31, 1998
                                               ------------------------------------------------------------------------------------
                                                                                                                  To be "well-
                                                                                                               capitalized" under
                                                                                  For capital                  prompt corrective
                                                      Actual                   adequacy purposes               action provisions
                                               ------------------           ----------------------           ----------------------
                                                Amount      Ratio              Amount     Ratio                  Amount     Ratio
                                                ------      -----              ------     -----                  ------     -----
                                                                            (Dollars in thousands)
<S>                                            <C>          <C>              <C>          <C>                 <C>           <C>
Total capital
  (to risk-weighted assets)                    $22,758      55.3%            >=$3,291     >=8.0%              >=$ 4,114     >=10.0%

Tier 1 capital
  (to risk-weighted assets)                    $21,159      51.4%                   *        *                >=$ 2,468     >= 6.0%

Core (Tier 1) capital
  (to adjusted total assets)                   $21,159      27.0%            >=$2,354     >=3.0%              >=$ 3,923     >= 5.0%

Tangible capital
  (to adjusted total assets)                   $21,159      27.0%            >=$1,177     >=1.5%                      *         *

*  Ratio not required under regulations.



                                                                           As of December 31, 1997
                                               ------------------------------------------------------------------------------------
                                                                                                                  To be "well-
                                                                                                               capitalized" under
                                                                                  For capital                  prompt corrective
                                                      Actual                   adequacy purposes               action provisions
                                               ------------------           ----------------------           ----------------------
                                                Amount      Ratio              Amount     Ratio                  Amount     Ratio
                                                ------      -----              ------     -----                  ------     -----
                                                                            (Dollars in thousands)
Total capital
  (to risk-weighted assets)                    $12,392      31.4%            >=$3,158     >=8.0%               >=$3,948     >=10.0%

Tier 1 capital
  (to risk-weighted assets)                    $11,899      30.1%                   *        *                 >=$2,369     >= 6.0%

Core (Tier 1) capital
  (to adjusted total assets)                   $11,899      16.7%            >=$2,137     >=3.0%               >=$3,561     >= 5.0%

Tangible capital
  (to adjusted total assets)                   $11,899      16.7%            >=$1,068     >=1.5%                      *         *

*  Ratio not required under regulations.

</TABLE>



                                       39



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE K - REGULATORY CAPITAL (CONTINUED)

           The  following  is  a  reconciliation  of  the  Association's  equity
reported in the  consolidated  financial  statements  under  generally  accepted
accounting   principles  to  regulatory   capital,   as  determined  under  OTS,
requirements.

<TABLE>
<CAPTION>

                                                                                Core
                                                             Tangible        (Tier 1)     Risk-based
                                                              Capital        Capital         Capital
                                                              -------        -------         -------
                                                                         (In thousands)
<S>                                                          <C>            <C>            <C>
December 31, 1998:
   Total equity of the Association                           $ 22,745       $ 22,745       $ 22,745
   General allowance for loan losses                               --             --            518
   Limitation on gross unrealized gain on available
     for sale securities                                           --             --           (505)
   Net unrealized gain on available for sale securities        (1,586)        (1,586)            --
                                                             --------       --------       --------

   Regulatory Capital                                        $ 21,159       $ 21,159       $ 22,758
                                                             ========       ========       ========

December 31, 1997:
   Total equity  of the Association                          $ 13,163       $ 13,163       $ 13,163
   General allowance for loan losses                               --             --            493
   Net unrealized gain on available for sale securities        (1,264)        (1,264)        (1,264)
                                                             --------       --------       --------

 Regulatory Capital                                          $ 11,899       $ 11,899       $ 12,392
                                                             ========       ========       ========
</TABLE>

           The Company may not  declare or pay cash  dividends  on its shares of
common  stock if the  effect  thereof  would  cause  stockholders'  equity to be
reduced below applicable regulatory capital maintenance  requirements or if such
declaration  and payment would otherwise  violate  regulatory  requirements.  At
December 31, 1998, approximately $9.3 million of the Company's retained earnings
was available to pay dividends to stockholders or to be used for other corporate
purposes.


NOTE L - LEGISLATIVE MATTERS

           The  deposit  accounts  of  the  Association  and  of  other  savings
associations are insured by the Federal Deposit Insurance  Corporation  ("FDIC")
through the Savings  Association  Insurance Fund  ("SAIF").  The reserves of the
SAIF were below the level required by law, because a significant  portion of the
assessments  paid  into  the  fund  are  used to pay the  cost of  prior  thrift
failures.  The deposit  accounts of commercial  banks are insured by the FDIC in
the Bank Insurance  Fund ("BIF"),  except to the extent such banks have acquired
SAIF  deposits.  The  reserves of the BIF met the level  required by law in May,
1995.  As a result  of the  respective  reserve  levels  of the  funds,  deposit
insurance  assessments paid by healthy savings associations  exceeded those paid
by healthy  commercial banks by approximately $.19 per $100 in deposits in 1995.
In 1996, no BIF assessments  were required for healthy  commercial  banks except
for a $2,000 minimum fee.



                                       40



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE L - LEGISLATIVE MATTERS (CONTINUED)

           During 1996,  legislation was enacted to recapitalize  the SAIF which
provided for a special  assessment  of $.657 per $100 of SAIF  deposits  held at
March 31, 1995. The Association had $58.0 million in deposits at March 31, 1995,
resulting  in an  assessment  of  $378,000,  or  $249,000  after-tax,  which was
recorded during 1996.

           A component of the  recapitalization  plan provides for the merger of
the SAIF and BIF on January  1, 2000,  assuming  the  elimination  of the thrift
charter or of the separate federal  regulation of thrifts prior to the merger of
the deposit  insurance funds.  This legislation would require the Association to
be  regulated as a bank under  federal  laws which would  subject it to the more
restrictive  activity  limits  imposed  on  national  banks.  In the  opinion of
management,  such  restrictions  would not materially  affect the  Association's
operations.

           Under separate legislation related to the recapitalization  plan, the
Association  is required to recapture as taxable income any additions to its bad
debt reserve which were added after 1987 and is unable to utilize the percentage
of  earnings  method  to  compute  its  reserve  in  the  future.  However,  the
Association has not made any additions to its bad debt reserve post-1987.


NOTE M - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.

           The following condensed financial  statements summarize the financial
position of First Niles Financial, Inc. as of December 31, 1998, and the results
of its  operations  and its cash flows for the  period  October  26,  1998 (date
operations commenced) through December 31, 1998.

                           First Niles Financial, Inc.
                        STATEMENT OF FINANCIAL CONDITION
                                December 31, 1998
                                 (In thousands)

ASSETS

Cash and cash equivalents:
  Noninterest bearing                             $    15
  Interest bearing                                  5,404
                                                  -------
                                                    5,419

Securities available for sale                       1,826
Investment in Home Federal Savings and
  Loan Association of Niles                        22,745
Accrued interest and prepaid expense                   20
                                                  -------


          TOTALS ASSETS                           $30,010
                                                  =======





                                       41



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE M - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
 (CONTINUED)


LIABILITIES AND STOCKHOLDERS' EQUITY

Accounts payable to Home Federal Savings and
   Loan Association of Niles                                       $     82
Accrued tax                                                               5
                                                                   --------
          TOTAL LIABILITIES                                              87
Stockholders' equity:
  Common Stock                                                           18
  Additional Paid-in Capital                                         16,897
  Retained Earnings                                                  12,709
  Net unrealized gains on securities available for sale               1,586
  Common stock purchased by the Employee Stock
    Ownership Plan                                                   (1,287)
                                                                   --------
            TOTAL STOCKHOLDERS' EQUITY                               29,923
                                                                   --------

            TOTAL LIABILITIES AND STOCKHOLDERS' EQUITY             $ 30,010
                                                                   ========


                           First Niles Financial, Inc.
                          CONDENSED STATEMENT OF INCOME
                         For the period October 26, 1998
                            through December 31, 1998
                                 (In thousands)

Revenue:
  Equity in earnings of subsidiary                      $272
  Interest income                                         61
                                                        ----
          TOTAL REVENUE                                  333

General and administrative expenses                       60
                                                        ----

          INCOME BEFORE INCOME TAXES                     273

Income taxes                                              --
                                                        ----
          NET INCOME                                    $273
                                                        ====








                                       42



<PAGE>



             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE M - CONDENSED FINANCIAL STATEMENTS OF FIRST NILES FINANCIAL, INC.
 (CONTINUED)


                           First Niles Financial, Inc.
                        CONDENSED STATEMENT OF CASH FLOWS
                         For the period October 26, 1998
                            through December 31, 1998
                                 (In thousands)

Cash flows provided by operating activities:
  Net income for the period                                            $    273
  Adjustments to reconcile net income to net cash
    provided by operating activities:
      Undistributed income of consolidated subsidiary                      (272)
      Amortization of premium on securities available for sale                1
      Increase in accrued interest and prepaid expenses                     (20)
      Increase in accounts payable and accrued tax                           87
                                                                       --------
           NET CASH PROVIDED BY OPERATING ACTIVITIES                         69

Cash flows used in investing activities:
  Investment in subsidiary                                               (8,451)
  Purchase of securities designated as available for sale                (1,827)
  Interest bearing cash account                                          (5,404)
                                                                       --------
           NET CASH USED IN INVESTING ACTIVITIES                        (15,682)

 Cash flows provided by financing activities:
   Net  proceeds from issuance of common stock                           15,498
   Proceeds from subsidiary for Employee Stock
   Ownership Plan shares                                                    130
                                                                        -------
           NET CASH PROVIDED BY  FINANCING ACTIVITIES                    15,628

           NET INCREASE IN CASH                                              15

Cash and cash equivalents at beginning of period                             --
                                                                       --------

           CASH AND CASH EQUIVALENTS AT END OF PERIOD                  $     15
                                                                       ========










                                       43



<PAGE>


             NOTES TO CONSOLIDATED FINANCIAL STATEMENTS (CONTINUED)

                   FIRST NILES FINANCIAL, INC. AND SUBSIDIARY

                 For the years ended December 31, 1998 and 1997


NOTE N - CORPORATE REORGANIZATION AND CONVERSION TO STOCK FORM

           On July 6, 1998, the Association's  Board of Directors adopted a Plan
of  Conversion  whereby  the  Association  would  convert  to the stock  form of
ownership,  followed  by the  issuance of all of the  Association's  outstanding
common stock to a newly formed holding company, First Niles Financial, Inc.

           On October 26, 1998, the Association  completed its conversion to the
stock form of ownership, and issued all of the Association's  outstanding common
shares to the Company.

           In connection with the conversion,  the Company sold 1,754,411 shares
at a price of $10.00 per share which,  after  consideration of offering expenses
totaling  approximately  $643,000,  and shares  purchased  by the ESOP  totaling
$1,404,000, resulted in net equity proceeds of approximately $15.5 million.

           At  the  date  of  the  conversion,  the  Association  established  a
liquidation  account in an amount  equal to retained  earnings  reflected in the
statement of financial condition used in the conversion  offering circular.  The
liquidation  account  will be  maintained  for the benefit of  eligible  savings
account  holders  who  maintained  deposit  accounts  in the  Association  after
conversion.  In the event of a complete  liquidation  (and only in such  event),
each eligible  savings  account holder will be entitled to receive a liquidation
distribution  from the  liquidation  account in the  amount of the then  current
adjusted balance of deposit accounts held,  before any liquidation  distribution
may be made with respect to common stock. Except for the repurchase of stock and
payment of  dividends  by the  Association,  the  existence  of the  liquidation
account will not restrict the use or application of such retained earnings.  The
Association  may not declare,  pay a cash dividend on, or repurchase  any of its
common stock, if the effect thereof would cause retained  earnings to be reduced
below either the amount required for the  liquidation  account or the regulatory
capital requirements for SAIF insured institutions.



















                                       44


<PAGE>


                           FIRST NILES FINANCIAL, INC.
                             SHAREHOLDER INFORMATION
--------------------------------------------------------------------------------

ANNUAL MEETING

The  annual  meeting  of  shareholders  will be held at 2:00  P.M.  local  time,
WEDNESDAY,  APRIL 21,  1999,  at the main office of First  Niles,  located at 55
North Main Street, Niles, Ohio.

COMMON STOCK AND DIVIDENDS

First Niles Financial,  Inc.'s common stock trades on The Nasdaq SmallCap Market
under the symbol "FNFI".  At December 31, 1998,  there were 1,754,411  shares of
common stock issued and outstanding and 572 shareholders of record.

The table below presents the quarterly range of high and low bid prices of First
Niles'  common stock since  becoming a public  company on October 26, 1998.  The
price  information set forth in the table below was provided by the Nasdaq Stock
Market. Such information  reflects  interdealer prices,  without retail mark-up,
mark-down or commission and therefore may not represent actual transactions.


                                                               1998
                                                       ---------------------
                                                         HIGH         LOW

Fourth Quarter  (since October 26, 1998).............   $12.00       $9.00

Dividend payment  decisions are made with  consideration of a variety of factors
including earnings,  financial condition,  market  considerations and regulatory
restrictions.  At December 31, 1998,  First Niles had not paid any  dividends to
date. On February 22, 1999,  First Niles  Financial,  Inc.  declared a $.07 cash
dividend  payable on March 26, 1999 to shareholders of record on March 12, 1999.
Restrictions  on  dividend  payments  are  described  in Note K of the  Notes to
Consolidated Financial Statements included in this Annual Report.


SHAREHOLDER AND GENERAL INQUIRIES               TRANSFER AGENT

Lawrence Safarek, Vice President               Fifth Third Bank
First Niles Financial, Inc.                    Corporate Trust Services
55 North Main Street                           Mail Drop 10AT66
Niles, Ohio 44446                              38 Fountain Square Plaza
(330) 652-2539                                 Cincinnati, Ohio 45263
                                               (800) 837-2755 (toll free)
                                               (513) 579-5320 (local)

ANNUAL AND OTHER REPORTS

You may obtain First Niles' Annual  Report on Form 10-KSB and other  information
by writing or calling:  First Niles Financial,  Inc. Investor  Relations,  Attn:
Lawrence  Safarek,  Vice President and Treasurer,  55 North Main Street,  Niles,
Ohio 44446: (330) 652-2539.

                                       45

<PAGE>


<TABLE>
<CAPTION>
                                          FIRST NILES FINANCIAL, INC.
                                             CORPORATE INFORMATION
--------------------------------------------------------------------------------------------------------------



COMPANY AND BANK ADDRESS

55 North Main Street                                             Telephone:        (330) 652-2539
Niles, Ohio  44446                                               Fax:              (330) 652-0911

<S>                                                              <C>
BOARD OF DIRECTORS                                               EXECUTIVE OFFICERS

WILLIAM L. STEPHENS                                              WILLIAM L. STEPHENS
  CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE                          CHAIRMAN, PRESIDENT AND CHIEF EXECUTIVE
  OFFICER OF FIRST NILES FINANCIAL, INC. AND                       OFFICER OF FIRST NILES FINANCIAL, INC. AND
  HOME FEDERAL SAVINGS AND LOAN                                    HOME FEDERAL SAVINGS AND LOAN
  ASSOCIATION OF NILES                                             ASSOCIATION OF NILES

GEORGE J. SWIFT                                                  GEORGE J. SWIFT
  VICE PRESIDENT AND SECRETARY OF FIRST NILES                      VICE PRESIDENT AND SECRETARY OF FIRST NILES
  FINANCIAL, INC. AND HOME FEDERAL SAVINGS                         FINANCIAL, INC. AND HOME FEDERAL SAVINGS
  AND LOAN ASSOCIATION OF NILES                                    AND LOAN ASSOCIATION OF NILES

P. JAMES KRAMER                                                  LAWRENCE SAFAREK
  PRESIDENT, WILLIAM KRAMER & SON                                  VICE PRESIDENT AND TREASURER OF FIRST NILES
                                                                   FINANCIAL, INC. AND HOME FEDERAL SAVINGS
HORACE L. MCLEAN                                                   AND LOAN ASSOCIATION OF NILES
  PRESIDENT, MCLEAN ENGINEERING, INC.

RALPH A. ZUZOLO, SR.
  PARTNER, LAW FIRM OF ZUZOLO, ZUZOLO
  & ZUZOLO


INDEPENDENT AUDITORS                                             SPECIAL COUNSEL

ANNESS, GERLACH & WILLIAMS,                                      SILVER, FREEDMAN & TAFF, L.L.P.
  a Professional Corporation                                     1100 New York Avenue, N.W.
Certified Public Accountants                                     Seventh Floor, East Tower
1275 Boardman-Canfield Road                                      Washington, D.C.  20005
Youngstown, Ohio 44513

</TABLE>


                                       46