Investors in First Niles Seek 2 Seats on Board

NILES, Ohio – Two investors who own more than 9% of the 1.12 million shares outstanding in First Niles Financial Corp. seek to replace two of the five-man board of directors April 27 at its annual meeting.

Lance Osborne and Steve Passov have engaged a proxy solicitation firm to gather the votes of shareholders, they informed four shareholders last Saturday morning. They are running, they say, because of the poor performance of Home Federal Home Savings & Loan Association of Niles, 55 N. Main St., the sole subsidiary of First Niles.

Home Federal should be reporting net income of $800,000 a year on assets of nearly $100 million, they said, not the $212,000 reported for 2015. The $212,000 does not even cover the quarterly three-cents per common share dividends the board of First Niles declares, Osborne told the four shareholders.

Since 2009, total dividends paid on common and preferred stock have totaled $2,422,711, Osborne said, while net income has been $1.212 million, a deficit of $1,266,596.

Over the last decade, the value of First Niles common stock has fallen to $8.15 per share as of Monday. Ten years ago, they said, the board rejected a takeover offer of $18.50 per share.

Home Federal, with assets of $98.5 million at Dec. 31, was founded in 1897 and has one office.

The investors, Osborne, age 36, and Passov, age 49, are real estate developers in northeastern Ohio.

Osborne is founder and president of Osborne Capital Group, Mentor, which he describes as “a real estate investment and management company specializing in property development, acquisitions, distressed debt workouts, asset recapitalizations and advisory services.” Since it was founded in 2003, Osborne Capital has completed more than $50 million in real estate transactions and developed or redeveloped more than 400,000 square feet of retail, office and residential projects, he says.

Passov, who heads Passov Real Estate Group, Beachwood, founded his firm in November 2013, he says, after 25 years in the industry. It “boasts eight of the most relevant, competent agents in the market,” he says, who represent more than 100 “of the coolest projects throughout Ohio.” These projects total more than 100 million square feet of bank offices, restaurants and retailers, both large national and regional chains.

In their indictment of the senior management of First Niles, Osborne and Passov first noted that earnings do not cover the dividends paid, that the loans Home Federal carries on its books, roughly $20 million, should be three times that figure, and the investments of $60 million, should be a third that amount.

The assets of Home Federal return 0.22% compared to its peer group’s 0.89%, Osborne said. And high- performing community banks have an even higher return on assets than 0.89%. Return on equity should be 8.0%

One reason is the peers sell the mortgages they originate on the secondary market, Fannie Mae and Freddie Mac, and they collect the service fees.

Holding the mortgages Home Federal originates in its portfolio compels it to charge the highest of interest in the Youngstown-Warren-Boardman metropolitan statistical area, 4%, compared to at least 1% lower, often 1.25% to 1.5% above other lenders, Osborne said.

Should they be elected to the First Niles board, Osborne and Passov said they would seek to restructure the loan portfolio to 20% investments and 65% loans, as do most of Home Federal’s peers. They would also seek to establish a correspondent relationship with Fannie Mae and Freddie Mac so Home Federal could sell the residential mortgages it originates on the secondary market.

They would also have Home Federal become more engaged in the commercial real estate market, their area of expertise.

“There’s no one with [commercial] real estate on the [First Niles] board,” Passov said. “We have that experience. … We want to focus on commercial real estate.”

The Community Reinvestment Act rating Home Federal last received was a “needs to improve,” Osborne told the shareholders last Saturday, something management is loath to admit or discuss as evidenced by First Niles “didn’t even footnote that in their annual [2015] report.”

“That’s material,” Passov said.

“It’s never been in writing by management,” Osborne picked up. “That means the regulators are unhappy.”

The board, according to the First Niles website, consists of P. James Kramer, chairman; Lawrence Safarek, president and CEO; Dr. William Eddy; Dan Csontos, treasurer and vice president; and Robert J. Shaker. Kramer was first elected in 1994, Safarek in 2007, Eddy in 2002,and Csontos and Shaker in 2006.

Efforts to interview Safarek were directed to the bank’s attorney, who emailed The Business Journal Monday afternoon that questions to the CEO should be put in writing. The Business Journal did so but received no response.

Despite repeated efforts to hold discussions with the board about how Home Federal could reverse its course, Osborne and Passov said, they have met but the board only listened politely to their concerns and remedies. The efforts to engage in a discussion were conducted after board meetings were concluded, Osborne and Passov told the shareholders.

“They have a lack of open-mindedness,” Passov said. “That’s what really shocks us.”

“They’re entrenched,” Osborne added. “They’re completely entrenched.”

Should they gain control of the board and institute reforms, Osborne and Passov said, they would increase profitability by updating the technology, hiring a full-time IT professional, and set a goal of raising the dividend to eight cents a share as profits increase.

Home Federal lacks an ATM and doesn’t offer remote capture, they noted.

Osborne and Passov continue to try to meet with shareholders and said they have collected 30% of the proxies. Thirty percent of First Niles common shares are owned by the bank and another 30% of the shares are held in street names or brokerage accounts, they said.

“We’re accumulating shares and will continue to accumulate shares,” Osborne said.

Pictured: Home Federal Home Savings & Loan Association of Niles, which operates a sole office at 55 N. Main St., is the sole subsidiary of First Niles Financial Corp.

Copyright 2022 The Business Journal, Youngstown, Ohio.