55 North Main Street
P.O. Box 311
Niles, Ohio 44446-0311
Ph. (330) 652-2539 ~ Fax: (330) 652-0911
March 18, 2005
Dear Fellow Shareholder:
On behalf of the Board of Directors and management of First Niles Financial, Inc., we cordially invite you to attend the annual meeting of the First Niles Financial, Inc. shareholders. The meeting will be held at 2:00 p.m. local time, on Wednesday, April 20, 2005 at our office located at 55 North Main Street, Niles, Ohio. The annual meeting will include management's report to you on the Company's 2004 financial and operating performance.
An important aspect of the annual meeting process is the annual shareholder vote on corporate business items. I urge you to exercise your rights as a shareholder to vote and participate in this process.
Whether or not you plan to attend the annual meeting, please read the enclosed proxy statement and then complete, sign and date the enclosed proxy card and return it in the accompanying postage paid return envelope as promptly as possible. This will save the Company additional expense in soliciting proxies and will ensure that your shares are represented at the meeting.
Your Board of Directors and management are committed to the success of First Niles Financial, Inc. and the enhancement of your investment. As Chairman of the Board, President and Chief Executive Officer, I want to express my appreciation for your confidence and support.
| Very truly yours, /s/ William L. Stephens WILLIAM L. STEPHENS Chairman of the Board, President and CEO |
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55 North Main Street
Niles, Ohio 44446
(330) 652-2539
To be held on April 20, 2005
Notice is hereby given that the annual meeting of shareholders of First Niles Financial, Inc. will be held at the company's office located at 55 North Main Street, Niles, Ohio, on April 20, 2005, at 2:00 p.m. local time. At the annual meeting, shareholders will be asked to consider and vote on the following proposal:
Proposal I. Election of one director for a term of three years.
Shareholders also will transact such other matters as may properly come before the annual meeting, or any adjournments or postponements thereof. We are not aware of any other business to come before the meeting.
The record date for the annual meeting is February 28, 2005. Only shareholders of record at the close of business on that date are entitled to notice of and to vote at the annual meeting or any adjournment or postponement thereof. Your Board of Directors recommends that you vote "FOR" the election of management's director nominee.
A proxy card and proxy statement for the annual meeting are enclosed. Whether or not you plan to attend the annual meeting, please take the time to vote by signing, dating and mailing the enclosed proxy card which is solicited on behalf of the Board of Directors. The proxy will not be used if you attend and vote at the annual meeting in person. Regardless of the number of shares you own, your vote is very important. Please act today.
Thank you for your continued interest and support.
| BY ORDER OF THE BOARD OF DIRECTORS /s/ William L. Stephens WILLIAM L. STEPHENS Chairman of the Board, President and CEO |
Niles, Ohio
March 18, 2005
Important: The prompt return of proxies will save us the expense of further requests for proxies to ensure a quorum at the annual meeting. A pre-addressed envelope is enclosed for your convenience. No postage is required if mailed within the United States.
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55 North Main Street
Niles, Ohio 44446
(330) 652-2539
To be held on April 20, 2005
The First Niles Financial, Inc. Board of Directors is using this proxy statement to solicit proxies from the holders of common stock of First Niles Financial, Inc. for use at the Company's annual meeting of shareholders. This proxy statement and the enclosed form of proxy are first being mailed to our shareholders on or about March 18, 2005. References in this proxy statement to "we," "us," "our," "First Niles," and the "Company" refer to First Niles Financial, Inc.
Certain of the information provided herein relates to Home Federal Savings and Loan Association of Niles, a wholly-owned subsidiary of First Niles. Home Federal Savings and Loan Association of Niles is referred to in this proxy statement as "Home Federal."
Time and Place of the Annual Meeting
Our annual meeting will be held as follows:
| Date: | April 20, 2005 | |
| Time: | 2:00 p.m., local time | |
| Place: | Home Federal Savings and Loan Association of Niles 55 North Main Street Niles, Ohio 44446 |
Matters to be Considered at the Annual Meeting
At the annual meeting, shareholders of First Niles are being asked to consider and vote upon the following proposal:
Proposal I. Election of one director, for a term of three years.
The shareholders also will transact any other business that may properly come before the annual meeting. As of the date of this proxy statement, we are not aware of any other business to be presented for consideration at the annual meeting other than the matters described in this proxy statement.
A quorum must be present at the meeting for any business to be conducted. The presence at the meeting, in person or by proxy, of the holders of one-third of the shares of common stock outstanding on the record date will constitute a quorum. Proxies received but marked as abstentions or broker non-votes will be included in the calculation of the number of shares considered to be present at the meeting.
NEXT PAGEYour Voting Rights
We have fixed the close of business on February 28, 2005 as the record date for the annual meeting. Only shareholders of record of First Niles common stock at the close of business on that date are entitled to notice of and to vote at the annual meeting. You are entitled to one vote for each share of First Niles common stock you own. On February 28, 2005, there were 1,384,553 shares of First Niles common stock outstanding and entitled to vote at the annual meeting.
If you are the beneficial owner of shares held in "street name" by a broker, bank or other nominee, your nominee, as the record holder of the shares, is required to vote the shares in accordance with your instructions. If you do not give instructions to your nominee, your nominee will nevertheless be entitled to vote the shares with respect to "discretionary" items, but will not be permitted to vote your shares with respect to "non-discretionary" items. In the case of non-discretionary items, the shares will be treated as "broker non-votes." Under The Nasdaq Stock Market rules, the election of directors is considered a "discretionary" item and, therefore, your broker may vote your shares without instructions from you.
We maintain an Employee Stock Ownership Plan ("ESOP") which owns approximately 13.3% of First Niles common stock. Employees of First Niles and Home Federal participate in the ESOP. Each ESOP participant instructs the trustee of the plan how to vote the shares of First Niles common stock allocated to his or her account under the ESOP. If an ESOP participant properly executes the voting instruction card distributed by the ESOP trustee, the ESOP trustee will vote such participant's shares in accordance with the shareholder's instructions. Where properly executed voting instruction cards are returned to the ESOP trustee with no specific instruction as how to vote at the annual meeting, the trustee will vote the shares "FOR" the election of management's director nominee. In the event the ESOP participant fails to give timely voting instructions to the trustee with respect to the voting of the common stock that is allocated to his or her ESOP account, the ESOP trustee shall vote such shares "FOR" management's director nominee. The ESOP trustee will vote the shares of First Niles common stock held in the ESOP but not allocated to any participant's account in the same proportion as directed by the ESOP participants who directed the trustee as to the manner of voting their allocated shares in the ESOP.
Vote Required to Approve the Proposal
First Niles' directors are elected by a plurality of the votes cast, in person or by proxy, at the annual meeting by holders of First Niles common stock. This means that the director nominees with the most affirmative votes will be elected to fill the available seats. If you vote "Withheld" with respect to the election of a director nominee, your shares will not be voted with respect to the person indicated, although they will be counted for purposes of determining whether there is a quorum. Broker non-votes will have no effect on the outcome of the vote.
The First Niles Board of Directors unanimously recommends that you vote "FOR" the election of management's director nominee.
How to Vote
You may vote in person at the annual meeting or by proxy. To ensure your representation at the annual meeting, we recommend you vote by proxy even if you plan to attend the annual meeting. If you plan to attend the annual meeting and wish to vote in person, we will give you a ballot at the annual meeting. However, if your shares are held in the name of your broker, bank or other nominee, you will need to obtain a proxy form from the institution that holds your shares indicating that you were the beneficial owner of First Niles common stock on February 28, 2005, the record date for voting at the annual meeting. See "-How to Revoke Your Proxy and Change Your Vote" below.
Shares of First Niles common stock represented by properly executed proxies will be voted by the individuals named in such proxy in accordance with the shareholder's instructions. Where properly executed proxies are returned to First Niles with no specific instruction as how to vote at the annual meeting, the persons named in the proxy will vote the shares "FOR" the election of management's director nominee. Voting instructions are included on your proxy card. If your shares are registered in the name of a broker, bank or other nominee, you should follow the instructions set forth on the voting instruction form provided to you.
The persons named in the proxy will have the discretion to vote on any other business properly presented for consideration at the annual meeting in accordance with their best judgment. We are not aware of any other matters to be presented at the shareholders' annual meeting other than those described in the Notice of Annual Meeting of Shareholders accompanying this document.
You may receive more than one proxy card depending on how your shares are held. For example, you may hold some of your shares individually, some jointly with your spouse and some in trust for your children -- in which case you will receive three separate proxy cards to vote.
How to Revoke Your Proxy and Change Your Vote
If you are a registered shareholder, you may revoke your proxy and change your vote at any time before the polls close at the meeting by:
| (i) | signing and submitting a new proxy with a later date, | |
| (ii) | notifying the Corporate Secretary of First Niles in writing before the annual meeting that you have revoked your proxy, or | |
| (iii) | voting in person at the annual meeting. |
If you have instructed a broker, bank or other nominee to vote your shares, you should follow the directions received from your nominee to change those instructions.
Proxy Solicitation Costs
We will pay our own costs of soliciting proxies. In addition to this mailing, our directors, officers and employees may also solicit proxies personally, electronically or by telephone. We will also reimburse brokers and other nominees for their expenses in sending these materials to you and obtaining your voting instructions.
The following table presents information regarding the beneficial ownership of First Niles common stock as of February 28, 2005, by:
| (i) | those persons or entities (or group of affiliated persons or entities) known by management to beneficially own more than five percent of the outstanding common stock of First Niles; | |
| (ii) | each director and director nominee of First Niles; | |
| (iii) | each executive officer of First Niles named in the Summary Compensation Table appearing under "Executive Compensation" below; and |
| (iv) | all of the executive officers and directors of First Niles as a group. |
The persons named in this table have sole voting power for all shares of common stock shown as beneficially owned by them, subject to community property laws where applicable and except as indicated in the footnotes to this table. The address of each of the beneficial owners, except where otherwise indicated, is the same address as First Niles. An asterisk (*) in the table indicates that an individual beneficially owns less than one percent of the outstanding common stock of First Niles.
Beneficial ownership is determined in accordance with the rules of the Securities and Exchange Commission ("SEC"). In computing the number of shares beneficially owned by a person and the percentage ownership of that person, shares of common stock subject to outstanding options held by that person that are currently exercisable or exercisable within 60 days after February 28, 2005 are deemed outstanding. Such shares, however, are not deemed outstanding for the purpose of computing the percentage ownership of any other person.
| Beneficial Owner | Shares Beneficially Owned(1) | Percent of Class | |
| First Niles Financial, Inc. Employee Stock Ownership Plan | 184,662(2) | 13.3% | |
| William S. Eddy, Director | 1,000 | * | |
| Leonard T. Gantler, Director | 49,625(3) | 3.6% | |
| P. James Kramer, Director | 4,781(4) | * | |
| Lawrence Safarek, Treasurer and Vice President | 86,995 | 6.1% | |
| William L. Stephens, Chairman of the Board, President and CEO | 107,388(5) | 7.7% | |
| Ralph A. Zuzolo, Sr., Director | 69,491(6) | 5.0% | |
| Directors and executive officers of the Company as a group (6 persons) | 319,280(7) | 22.4% |
| (1) | Included in the shares beneficially owned by the named individuals are options to purchase shares of First Niles common stock that are currently exercisable or exercisable within 60 days as follows: Mr. Safarek - 31,148 shares and Mr. Stephens - 11,148 shares. |
| (2) | Represents shares held by the ESOP, 110,750 shares of which have been allocated to accounts of participants. Pursuant to the terms of the ESOP, each ESOP participant has the right to direct the voting of shares of common stock allocated to his or her account. First Bankers Trust Company, N.A., Quincy, Illinois, as the trustee of the ESOP, may be deemed to beneficially own the shares held by the ESOP that have not been allocated to the accounts of participants. |
| (3) | Includes 13,550 shares of common stock held solely by Mr. Gantler's spouse. |
| (4) | All of Mr. Kramer's shares of common stock held jointly with his spouse. |
| (5) | Includes 53,940 shares of common stock held jointly with Mr. Stephens' spouse. |
| (6) | Includes 17,405 shares of common stock owned solely by Mr. Zuzulo's spouse and 14,800 shares of common stock owned by a corporation of which Mr. Zuzolo and his wife are shareholders. Mr. Zuzolo disclaims beneficial ownership of the 14,800 of shares of common stock owned by the corporation except to the extent of his and his spouse's pecuniary interest therein. |
| (7) | Includes shares held directly, as well as shares held jointly with family members, shares held in retirement accounts, held in a fiduciary capacity, held by certain of the group members' families, or held by trusts of which the group member is a trustee or substantial beneficiary, with respect to which shares the group member may be deemed to have sole or shared voting and/or investment powers. This amount also includes 42,296 shares of common stock issuable upon exercise of the directors' and executive officers' stock options. |
Section 16(a) Beneficial Ownership Reporting Compliance
Section 16(a) of the Securities Exchange Act of 1934 requires the Company's directors and executive officers, and persons who own more than 10% of First Niles Financial's common stock (or any other equity securities, of which there are none), to report their initial ownership of the Company's common stock and any subsequent changes in that ownership to the SEC. Specific due dates for these reports have been established by the SEC and the Company is required to disclose in this proxy statement any late filings or failures to file.
To our knowledge, based solely on a review of the copies of such reports furnished to us and written representations that no other reports were required during the fiscal year ended December 31, 2004, all Section 16(a) filing requirements applicable to its executive officers, directors and greater than 10% beneficial owners were complied with except for director Ralph A. Zuzolo, Sr. Mr. Zuzulo inadvertently failed to file a timely Form 5 reporting previously unreported small acquisitions of 133 shares in each of his and his wife's individual retirement accounts that qualified for deferred reporting during 2002. Mr. Zuzulo also failed to file a timely Form 4 reporting the purchase of 292 shares in each of his and his wife's individual retirement accounts. Each of these transactions has been reported by Mr. Zuzulo on his Form 5 filed for the year ended December 31, 2004.
Our Board of Directors currently consists of five members. Approximately one-third of the directors are elected annually to serve for a three-year period or until their respective successors are elected and qualified. The director nominee has consented to being named in this proxy statement and has agreed to serve if elected. At this time, we are not aware of any reason why this nominee might be unable to serve if elected. If the director nominee is unable to serve before the election, your proxy authorizes us to vote for a replacement nominee if our Board of Directors names one.
The table below sets forth information regarding our Board of Directors, including their age, position with First Niles and term of office. Except as disclosed in this proxy statement, there are no arrangements or understandings between any nominee and any other person pursuant to which such nominee was selected. The Board of Directors recommends you vote "FOR" the director nominee.
| Name | Age | Position(s) Held | Director Since(1) | Term of Office Expires |
| Nominees | ||||
| William S. Eddy | 49 | Director | 2002 | 2008 |
| Directors Remaining in Office | ||||
| William L. Stephens | 73 | Chairman of the Board, President and Chief Executive Officer | 1969 | 2006 |
| Leonard T. Gantler | 53 | Director | 2003 | 2006 |
| P. James Kramer | 49 | Director | 1994 | 2007 |
| Ralph A. Zuzolo, Sr. | 62 | Director | 1979 | 2007 |
(1) Includes service as a director of Home Federal.
The principal occupation of each director of First Niles and of the nominee for director is set forth below. All directors and nominees have held their present position for at least five years unless otherwise indicated.
William S. Eddy. Dr. Eddy has a doctorate degree in Osteopathic Medicine and since 1988 has served as the president of the Clinic of Osteopathic Medicine, Inc., located in Niles, Ohio. Dr. Eddy was appointed to the First Niles and Home Federal Boards of Directors effective January 28, 2002.
William L. Stephens. Mr. Stephens serves as Chairman of the Board, President and Chief Executive Officer of Home Federal and First Niles. He has served in such capacities for Home Federal since 1969 and for First Niles since its inception in October 1998.
Leonard T. Gantler. Mr. Gantler has been the principal and sole shareholder of Leonard T. Gantler Co., Inc., a public accounting firm in Warren, Ohio, since 1978.
P. James Kramer. Since 1984, Mr. Kramer has served as President of William Kramer & Son, a heating and air conditioning company, located in Niles, Ohio.
Ralph A. Zuzolo, Sr. Mr. Zuzolo is an attorney and a principal in the law firm of Zuzolo, Zuzolo & Zuzolo, located in Niles, Ohio. Mr. Zuzolo has been with his law firm since 1968. Mr. Zuzolo is also the Chief Executive Officer of American Title Services, Inc., a real estate title agency located in Niles, Ohio.
BOARD MEETINGS, BOARD COMMITTEES AND
CORPORATE GOVERNANCE MATTERS
The Board of Directors of First Niles generally meets twice per month. Meetings of the Board of Directors of Home Federal, the Company's wholly-owned operating subsidiary, are also generally held twice per month. The First Niles Board of Directors conducted 24 regular meetings and one special meeting during fiscal 2004. The Home Federal Board of Directors conducted 24 regular meetings and two special meetings during fiscal 2004. Each director attended at least 75% of the (i) First Niles Board meetings and any committees on which he served and (ii) Home Federal Board meetings and any committees on which he served. In addition, all of our Board members are expected to attend the Company's annual meeting of shareholders, although the Company does not have any written policy as to Board members' attendance at the annual meeting of shareholders. Last year's annual meeting of shareholders was attended by the entire Board of Directors.
The Board of Directors has determined that Messrs. Leonard T. Gantler, P. James Kramer and William S. Eddy, constituting a majority of the Board members, are "independent directors" as that term is defined in the National Association of Securities' Dealers ("NASD") listing standards. Shareholders may communicate directly with the Board of Directors by sending written communications to the Company, addressed to the Chairman of the Board.
The First Niles Board of Directors' principal standing committees are the Executive, Investment, Compensation, Audit and Nominating Committees. The Executive and Investment Committees did not meet during fiscal 2004. The Board of Directors has adopted a written charter for the compensation, audit and nominating committees, as well as a written code of business conduct and ethics that applies to all of our directors, officers and employees. You may obtain a copy of these documents free of charge by writing to our Corporate Secretary at First Niles Financial, Inc., 55 North Main Street, Niles Ohio 44446, or by calling (330) 652-2539.
In addition, our code of business conduct and ethics has been filed with the SEC as Exhibit 14 to the Company's Annual Report on Form 10-KSB for the year ended December 31, 2003. Our Audit Committee
and Nominating Committee charters were attached to our proxy statement as Appendices A and B, respectively, for the annual meeting of shareholders held on April 20, 2004 and filed electronically with the SEC.
Compensation Committee. The Compensation Committee is currently comprised of Directors Eddy, Gantler and Kramer. The Compensation Committee administers our stock option and incentive plan and our recognition and retention plan, and reviews overall compensation policies for First Niles. Since First Niles currently does not pay any salaries to its officers or employees, all compensation matters, except for stock-based compensation awards, are addressed by Home Federal's (our principal subsidiary) Board of Directors. During fiscal 2004, the Compensation Committee did not meet at the holding company level, however, Home Federal's compensation committee, which has an identical make-up, met two times. The Compensation Committee is responsible for:
| (i) | determining compensation to be paid to its officers and employees, which are based on the recommendation of President Stephens, except that compensation paid to executive officers is determined based on the recommendation of a majority of the independent directors. (President Stephens is not present during voting or deliberations concerning his compensation); | |
| (ii) | overseeing the administration of our employee benefit plans covering employees generally; and | |
| (iii) | reviewing our compensation policies. |
Audit Committee. The Audit Committee is currently comprised of Directors Eddy, Gantler and Kramer. The Board of Directors has determined that Mr. Gantler is an "audit committee financial expert" as defined in Item 401(e) of Regulation S-B of the Securities Exchange Act of 1934, and that all of the Audit Committee members meet the independence and financial literary requirements in the NASD's listing standards. The Audit Committee met four times during fiscal year 2004. The Audit Committee, among other things:
| (i) | oversees the entire audit function for First Niles, both internal and independent; | |
| (ii) | hires, terminates and/or reappoints the independent auditors; | |
| (iii) | ensures the existence of effective accounting and internal control systems; | |
| (iv) | approves non-audit and audit services to be performed by the independent auditors; | |
| (v) | reviews and approves all related party transactions for potential conflict of interest situations; and | |
| (vi) | reviews and assesses the adequacy of the Audit Committee charter on an annual basis. |
Nominating Committee. The Nominating Committee is currently comprised of Directors Eddy, Gantler and Kramer. The Nominating Committee met one time during fiscal year 2004. The Nominating Committee is responsible for recommending director candidates to serve on the Board of Directors. The Board of Directors also will consider director candidates proposed by shareholders who comply with the procedures set forth in the Company's bylaws. Final approval of director nominees is determined by the full Board, based on the recommendation of the Nominating Committee. The Nominating Committee has the following responsibilities:
| (i) | recommend to the Board the appropriate size of the Board and assist in identifying, interviewing and recruiting candidates for the Board; |
| (ii) | recommend candidates (including incumbents) for election and appointment to the Board of Directors, subject to the provisions set forth in the Company's certificate of incorporation and bylaws relating to the nomination or appointment of directors, based on the following criteria: business experience, education, integrity and reputation, independence, conflicts of interest, diversity, age, number of other directorships and commitments (including charitable obligations), tenure on the Board, attendance at Board and committee meetings, stock ownership, specialized knowledge (such as an understanding of banking, accounting, marketing, finance, regulation and public policy) and a commitment to the Company's communities and shared values, as well as overall experience in the context of the needs of the Board as a whole; | |
| (iii) | review nominations submitted by shareholders, which have been addressed to the Corporate Secretary, and which comply with the requirements of the Company's certificate of incorporation and bylaws. Nominations from shareholders will be considered and evaluated using the same criteria as all other nominations; | |
| (iv) | annually recommend to the Board committee assignments and committee chairs on all committees of the Board, and recommend committee members to fill vacancies on committees as necessary; and | |
| (v) | perform any other duties or responsibilities expressly delegated to the Committee by the Board. |
Nominations, other than those made by the Nominating Committee, must be made pursuant to timely notice in writing to the Corporate Secretary as set forth in Article I, Section 6 of the Company's bylaws. In general, to be timely, a shareholder's notice must be received by the Company not less than 60 days nor more than 90 days prior to the date of the scheduled annual meeting; however, if less than 70 days' notice of the date of the scheduled annual meeting is given by the Company, the shareholder has until the close of business on the tenth day following the day on which notice of the date of the scheduled annual meeting was made. The shareholder's notice must include the information set forth in Article I, Section 6(c) of the Company's bylaws, which includes the following:
| (i) | as to each person whom a shareholder proposes to nominate for election as a director: | |
| ||
| (ii) | as to the shareholder giving the notice: | |
|
The foregoing description is a summary of the Company's nominating process. Any shareholder wishing to propose a director candidate to the Company should review and must comply in full with the procedures set forth in the Company's certificate of incorporation and bylaws, and Delaware law.
REPORT OF THE AUDIT COMMITTEE OF THE BOARD OF DIRECTORS
The following Report of the Audit Committee of the Board of Directors shall not be deemed to be soliciting material or to be incorporated by reference by any general statement incorporating by reference this proxy statement into any filing under the Securities Act of 1933 or the Securities Exchange Act of 1934, except to the extent the Company specifically incorporates this Report therein, and shall not otherwise be deemed filed under such Acts.
The Audit Committee of First Niles consists of Directors Eddy, Gantler and Kramer. The Audit Committee operates under a written charter that specifies its duties and responsibilities.
Management is responsible for the Company's internal controls, financial reporting process and compliance with laws and regulations. The independent accountants are responsible for performing an independent audit of the Company's consolidated financial statement in accordance with generally accepted auditing standards and issuing a report thereon. The Audit Committee's responsibility is to monitor and oversee these processes.
As required by its charter, the Audit Committee received and reviewed the report of Anness, Gerlach & Williams regarding the results of their audit, as well as the written disclosures and the letter from Anness, Gerlach & Williams required by Independence Standards Board Standard No. 1 (Independence Discussion with Audit Committees). The Audit Committee reviewed and discussed the audited financial statements with the management of First Niles. A representative of Anness, Gerlach & Williams also discussed with the Audit Committee the independence of Anness, Gerlach & Williams from First Niles, as well as the matters required to be discussed by Statement of Auditing Standards No. 61 (Communication with Audit Committees).
In fulfilling its oversight responsibility of reviewing the services performed by First Niles' independent auditors, the Audit Committee carefully reviews the policies and procedures for the engagement of the independent auditors. The Audit Committee met with the independent auditors to discuss the results of their examinations, the evaluation of the Company's internal controls, and the overall quality of the Company's financial reporting. The Audit Committee also reviewed and discussed with the independent auditors the fees paid to the independent auditors; these fees are described under "Relationship With Independent Auditors" below.
The Company's Chief Executive Officer and Principal Financial Officer also reviewed with the Audit Committee the certifications that each such officer will file with the SEC pursuant to the requirements of Sections 302 and 906 of the Sarbanes-Oxley Act of 2002 ("Sarbanes"). Management also reviewed with the Audit Committee the policies and procedures it has adopted to ensure the accuracy of such certifications.
Based on the Audit Committee's review and discussions noted above, it recommended to the Board of Directors that the audited financial statements be included in the Company's Annual Report on Form 10-KSB for the year ended December 31, 2004, for filing with the SEC.
Submitted by the undersigned members of the Audit Committee:
William S. Eddy
Leonard T. Gantler
P. James Kramer
RELATIONSHIP WITH INDEPENDENT AUDITORS
General
On February 9, 2005, First Niles Financial, Inc. filed a Current Report on Form 8-K announcing that Anness, Gerlach & Williams would not be standing for re-election as its independent public accountants for the year ended December 31, 2005. The Audit Committee is currently seeking and evaluating proposals from several accounting firms. A representative of Anness, Gerlach & Williams is expected to attend the meeting to respond to appropriate questions and will have an opportunity to make a statement if he or she so desires.
In the report the Company stated that the audit reports of Anness, Gerlach & Williams on the First Niles' financial statements for the last two fiscal years ended December 31, 2004 did not contain a qualified, adverse or disclaimed opinion and that during the two fiscal years ended December 31, 2004 and through February 7, 2005, there were no disagreements with Anness, Gerlach & Williams on any matter of accounting principles or practices, financial statement disclosure, or auditing scope or procedures, which if not resolved to Anness, Gerlach & Williams' satisfaction, would have caused them to make reference to the subject matter of such disagreement in connection with issuing their reports.
Independent Auditing Firm Fees
Anness, Gerlach & Williams was the Company's principal auditor for fiscal 2003 and 2004. The aggregate fees billed to the Company by Anness, Gerlach & Williams and its affiliates for the fiscal years ended December 31, 2003 and 2004 were as follows:
| Year Ended December 31, | ||||
| 2003 | 2004 | |||
| Audit Fees (1) | $54,000 | $42,900 | ||
| Audit Related Fees | --- | --- | ||
| Tax Fees (2) | 6,400 | 4,300 | ||
| All Other Fees (3) | 1,700 | 800 | ||
| | ||||
| (1) | Primarily for performing the annual audit of First Niles' consolidated financial statements and reviewing First Niles' quarterly financial statements. | |
| (2) | Primarily for tax compliance, tax advice, tax return preparation services and correspondence with the IRS. The fees reported for 2003 include tax consulting related services in connection with director retirement. | |
| (3) | Primarily for assistance in the calculation of Home Federal's liquidation account balance. |
Pre-Approval of Audit and Non-Audit Services
Our Audit Committee pre-approves all audit and permissible non-audit services provided by our independent auditors. These services may include audit services, audit-related services, tax services and other services. Prior to engaging our independent auditors to render an audit or permissible non-audit service, the Audit Committee specifically approves the engagement to render that service. Accordingly, we do not engage our independent auditors to render audit or permissible non-audit services pursuant to pre-approval policies or procedures or otherwise, unless the engagement to provide such services has been approved by the Audit Committee in advance. The engagement of Anness, Gerlach & Williams to render 100 percent of the services described in the categories above was approved by the Audit Committee in advance of the rendering of those services.
COMPENSATION OF DIRECTORS
The members of the Boards of Directors of First Niles and Home Federal are identical. Directors of First Niles are not compensated for service on the Company's Board of Directors. Directors of Home Federal, however, are compensated for service on the Home Federal Board of Directors. During fiscal 2004, each director (employee and non-employee) of Home Federal was paid a fee of $500 for each meeting of the Board of Directors attended, with up to five excused absences paid per year.
Ralph A. Zuzolo, Sr., a director of First Niles and Home Federal, is a partner in the law firm of Zuzolo, Zuzolo & Zuzolo, which firm acts as counsel to Home Federal from time to time. The legal fees received by the law firm from professional services rendered to Home Federal during the year ended December 31, 2004 did not exceed five percent of the firm's or the Company's gross revenues.
EXECUTIVE COMPENSATION
Summary Compensation Table
The following table sets forth summary information concerning compensation awarded to, earned by or paid to First Niles' chief executive officer and any other executive officer, whose total salary and bonus exceeded $100,000, for services rendered in all capacities during the fiscal year ended December 31, 2004. Each of these officers received perquisites and other personal benefits in addition to salary and bonus during the periods stated. The aggregate amount of these perquisites and other personal benefits, however, did not exceed the lesser of $50,000 or ten percent of the total of their annual salary and bonus and, therefore, has been omitted as permitted by the rules of the SEC. We will use the term "named executive officers" from time to time in this proxy statement to refer to the officers listed in the table below.
| Annual Compensation | Long Term Compensation Awards | |||||
| Name and Principal Position | Year | Salary ($)(1) | Bonus ($) | Restricted Stock Awards ($) | Options (#) | All Other Compensation ($) |
| William L. Stephens President and CEO | 2004 | $155,440 | $5,935 | --- | --- | $27,819(2) |
| 2003 | 155,940 | 5,935 | --- | --- | 28,367 | |
| 2002 | 155,440 | --- | --- | --- | 23,068 | |
| Lawrence Safarek Vice President | 2004 | $100,800 | $4,200 | --- | --- | $19,686(2) |
| 2003 | 95,700 | 4,050 | --- | --- | 19,072 | |
| 2002 | 92,400 | 3,850 | --- | --- | 15,588 | |
| | ||||||
| (1) | Includes director fees for Mr. Stephens of $13,000 in 2004, $13,500 in 2003 and $13,000 in 2002 for service on the Home Federal Board of Directors. |
| (2) | Represents Home Federal's annual contributions to the ESOP on behalf of Messrs. Stephens and Safarek. The ESOP contributions made on behalf of Messrs. Stephens and Safarek had a market value of $78,079 and $55,254, respectively as of December 31, 2004. |
Aggregate Option Exercises in Last Fiscal Year and FY-End Option Values
The following table sets forth the number and value of unexercised stock options held by the named executive officers. The value of an unexercised, in-the-money option at fiscal year-end is the difference between its exercise or base price and the fair market value of the underlying stock on December 31, 2004. The fair market value of a share of First Niles common stock was $18.29 on December 31, 2004, based on the closing sales price of First Niles common stock as reported on the Nasdaq Stock Market on that date. The Company does not have any outstanding stock appreciation rights.
| Number of Unexercised Options at FY-End (#) | Value of Unexercised In-the-Money Options at FY-End ($) | ||||||||
| Name | Shares Acquired on Exercise (#) | Value Realized ($) | Exercisable (#) | Unexercisable (#) | Exercisable ($) | Unexercisable ($) | |||
| William L. Stephens | 23,940 | $137,894 | 11,148 | --- | $ 64,212 | --- | |||
| Lawrence Safarek | --- | --- | 31,148 | --- | 179,412 | --- | |||
Employment Agreement
On October 26, 1998, Home Federal entered into employment agreements with President Stephens and Vice President Safarek. Messrs. Stephens' and Safarek's employment agreements provide for an annual base salary in an amount not less than his then current salary and grants participation in an equitable manner in discretionary bonuses as well as employee benefits applicable to executive personnel. The initial term of each of their agreements was for three years. Each agreement provides for a one year extension in addition to the then-remaining term under the agreement, on each anniversary of the effective date of the agreement. All extensions are subject to a formal performance evaluation performed by disinterested members of the Board of Directors of Home Federal. As of the date of this proxy statement, Messrs. Stephens and Safarek each had approximately 2 ½ years remaining on their respective employment agreements.
Each of the agreements provide for termination upon the executive's death or disability, for cause or in certain events specified by Office of Thrift Supervision regulations. If the executive's employment is "involuntarily terminated," other than for the reasons set forth in the preceding sentence, he is entitled to (i) his then applicable salary for the then-remaining term of his agreement and (ii) health insurance benefits as maintained by us for the benefit of our senior executive employees. The term "involuntarily terminated" refers to the termination of employment of the executive without his express written consent, other than retirement. In addition, a material diminution of or interference with the executive's duties, responsibilities and benefits in his current officer position shall be deemed and shall constitute an involuntary termination of employment to the same extent as express notice of such involuntary termination. Any of the following actions would constitute such diminution or interference unless consented to in writing by the executive:
| (a) | a change in the principal workplace of the executive to a location outside of a 30 mile radius from our headquarters office as of the date of the agreement; | |
| (b) | a material demotion of the executive, a material reduction in the number or seniority of other personnel reporting to the executive, or a material reduction in the frequency with which, or in the nature of the matters with respect to which, such personnel are to report to the executive, other than as part of a company-wide reduction in staff; | |
| (c) | a material adverse change in the salary, perquisites, benefits, contingent benefits or vacation time which had previously been provided to the executive, other than as part of an overall |
| program applied uniformly and with equitable effect to all members of the senior management of First Niles or Home Federal; and | ||
| (d) | a material permanent increase in the required hours of work or the workload of the executive. |
The employment agreements are also terminable by the executive upon 90 days' notice to Home Federal. The agreements do not contain a change in control provision.
CERTAIN TRANSACTIONS
Home Federal has followed a policy of granting loans to officers and directors. Loans to directors and executive officers are made in the ordinary course of business and on the same terms and conditions as those of comparable transactions with the general public prevailing at the time, in accordance with our underwriting guidelines, and do not involve more than the normal risk of collectibility or present other unfavorable features.
All loans made by Home Federal to its directors and executive officers are subject to the Office of Thrift Supervision regulations restricting loan and other transactions with affiliated persons of Home Federal. All loans to directors and executive officers were performing in accordance with their terms at December 31, 2004.
SHAREHOLDER PROPOSALS
In order to be eligible for inclusion in First Niles' proxy materials for next year's annual meeting of shareholders, any shareholder proposal must be received at First Niles' executive office at 55 North Main Street, Niles, Ohio 44446 on or before November 18, 2005. Shareholder proposals to be considered for presentation at next year's annual meeting, although not included in the proxy statement, must be received at our executive office on or before February 19, 2006; provided, however, that in the event that the date of next year's annual meeting is held before March 31, 2006 or after June 19, 2006, the shareholder proposal must be received on or before the close of business on the later of the 60th day prior to such annual meeting or the tenth day following the day on which notice of the date of the annual meeting was mailed or public announcement of the date of such meeting was made.
All shareholder proposals for inclusion in First Niles' proxy materials shall be subject to the requirements of the proxy rules adopted under the Securities Exchange Act of 1934, as amended, and, as with any shareholder proposal (regardless of whether it is included in First Niles' proxy materials), the Company's certificate of incorporation and bylaws and Delaware law.
OTHER MATTERS
The Board of Directors is not aware of any business to come before the annual meeting other than the matters described above in this proxy statement. However, if any other matters should properly come before the meeting, it is intended that holders of the proxies will act in accordance with their best judgment.
First Niles Financial, Inc.
 | Mark this box with an X if you have made changes to your name or address details above. |
| Annual Meeting of Shareholders Revocable Proxy Card |
April 20, 2005
The undersigned hereby appoints the members of the Board of Directors of First Niles Financial, Inc., and its survivor, with full power of substitution, and authorizes them to represent and vote, as designated below and in accordance with their judgment upon any other matters properly presented at the annual meeting, all the shares of First Niles Financial, Inc. common stock held of record by the undersigned at the close of business on February 28, 2005, at the annual meeting of shareholders, to be held on Wednesday, April 20, 2005, and at any and all adjournments or postponements thereof. The Board of Directors recommends a vote "FOR" management's director nominee.
This proxy, when properly executed, will be voted in the manner directed herein by the undersigned shareholder(s). If no direction is made, this proxy will be voted FOR management's director nominee.
Should a director nominee be unable to serve as a director, an event that First Niles Financial, Inc. does not currently anticipate, the persons named in this proxy reserve the right, in their discretion, to vote for a substitute nominee designated by the Board of Directors.
| A | Election of Director |
| For Withhold | ||
| 1. | The election of WILLIAM S. EDDY as a director of First Niles Financial, Inc. for a term of three years. | |
THIS PROXY WILL BE VOTED AS DIRECTED, BUT IF NO INSTRUCTIONS ARE SPECIFIED, THIS PROXY WILL BE VOTED FOR THE PROPOSAL STATED. IF ANY OTHER BUSINESS IS PRESENTED AT SUCH MEETING, THIS PROXY WILL BE VOTED BY THOSE NAMED IN THIS PROXY IN THEIR BEST JUDGMENT. AT THE PRESENT TIME, THE BOARD OF DIRECTORS KNOWS OF NO OTHER BUSINESS TO BE PRESENTED AT THE MEETING.
| B | Authorized Signatures - Sign Here - This section must be completed for your instructions to be executed. |
| Signature 1 - Please keep signature within the box |
| Signature 2 - Please keep signature within the box |
| Date (mm/dd/yyyy) |
| / / |
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| Revocable Proxy - First Niles Financial, Inc. |
THIS PROXY IS SOLICITED ON BEHALF OF THE BOARD OF DIRECTORS
This proxy may be revoked at any time before it is voted by delivering to the Secretary of Firs Niles Financial, Inc., on or before the taking of the vote at the annual meeting, a written notice of revocation bearing a later date than the proxy or a later dated proxy relating to the same shares of First Niles Financial, Inc. common stock, or by attending the annual meeting and voting in person. Attendance at the annual meeting will not in itself constitute the revocation of a proxy. If this proxy is properly revoked as described above, then the power of such attorneys and proxies shall be deemed terminated and of no further force and effect.
The person(s) signing this proxy acknowledge(s) receipt from First Niles Financial, Inc. prior to the execution of this Proxy, of a Notice of Annual Meeting scheduled to be held on April 20, 2005, a Proxy Statement dated on or about March 18, 2005 and First Niles Financial, Inc.'s Annual Report to Shareholders for the fiscal year ended December 31, 2004.
THE ENCLOSED POSTAGE PAID ENVELOPE.