First Niagara Financial (FNFG) 10-Q 2010 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

þ QUARTERLY REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the quarterly period ended March 31, 2010

OR

o TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934

For the transition period from                    to                    

Commission file number 000-23975

FIRST NIAGARA FINANCIAL GROUP, INC.

(exact name of registrant as specified in its charter)

Delaware	42-1556195
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
726 Exchange Street, Suite 618, Buffalo, NY	14210
(Address of principal executive offices)	(Zip Code)

(716) 819-5500
(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YESþ NOo

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). YESo NOo

Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer or a non-accelerated filer (as defined in Rule 12b-2 of the Exchange Act).

Large accelerated filerþ Accelerated filero Non-accelerated filero Smaller reporting companyo

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YESo NOþ

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court. YESo NOo

As of April 28, 2010, there were issued and outstanding 209,023,537 shares of the Registrant’s Common Stock, $0.01 par value.

FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2010
TABLE OF CONTENTS

Item Number	Page Number
PART I — FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition at March 31, 2010 (unaudited) and December 31, 2009		3
Consolidated Statements of Income for the three months ended March 31, 2010 and 2009 (unaudited)		4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2010 and 2009 (unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2010 and 2009 (unaudited)		6
Consolidated Statements of Cash Flows for the three months ended March 31, 2010 and 2009 (unaudited)		7
Notes to Consolidated Financial Statements (unaudited)		8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		24
3. Quantitative and Qualitative Disclosures about Market Risk		36
4. Controls and Procedures		37
PART II — OTHER INFORMATION
1. Legal Proceedings		37
1A. Risk Factors		38
2. Unregistered Sales of Equity Securities and Use of Proceeds		38
3. Defaults Upon Senior Securities		38
4. Submission of Matters to a Vote of Security Holders		38
5. Other Information		38
6. Exhibits		38
Signatures		39
Exhibit 31.1
Exhibit 31.2
Exhibit 32

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Condition(unaudited)
(in thousands, except share amounts)

	March 31,			December 31,
	2010			2009
Assets
Cash and cash equivalents	$	186,832		$	232,268
Restricted cash		—			4,000
Investment securities:
Available for sale, at fair value (amortized cost of $4,805,771 and $4,393,199 in 2010 and 2009)		4,876,925			4,421,678
Held to maturity, at amortized cost (fair value of $1,063,131 and $1,106,650 in 2010 and 2009)		1,038,566			1,093,552
Loans held for sale		35,168			32,270
Loans and leases, net of allowance for credit losses of $89,488 and $88,303 in 2010 and 2009		7,283,550			7,208,883
Bank owned life insurance		133,629			132,414
Premises and equipment, net		163,573			156,213
Goodwill		878,602			879,107
Core deposit and other intangibles, net		52,745			56,277
Other assets		318,488			368,171
Total assets	$	14,968,078		$	14,584,833
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	9,794,461		$	9,729,524
Short-term borrowings		1,034,236			1,674,761
Long-term borrowings		1,447,392			627,519
Other liabilities		285,367			179,368
Total liabilities		12,561,456			12,211,172
Stockholders’ equity:
Common stock, $0.01 par value, 250,000,000 shares authorized; 194,810,261 shares issued		1,948			1,948
Additional paid-in capital		2,126,938			2,128,196
Retained earnings		353,997			352,948
Accumulated other comprehensive income		28,443			2,514
Common stock held by ESOP; 2,802,168 and 2,874,196 shares in 2010 and 2009		(21,930	)		(22,382	)
Treasury stock, at cost; 6,091,564 and 6,595,500 shares in 2010 and 2009		(82,774	)		(89,563	)
Total stockholders’ equity		2,406,622			2,373,661
Total liabilities and stockholders’ equity	$	14,968,078		$	14,584,833

See accompanying notes to consolidated financial statements.

3

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income(unaudited)
(in thousands, except per share amounts)

	Three months ended
	March 31,
	2010		2009
Interest income:
Loans and leases	$	96,580	$	87,059
Investment securities and other		47,923		18,760
Total interest income		144,503		105,819
Interest expense:
Deposits		14,383		20,913
Borrowings		15,951		12,276
Total interest expense		30,334		33,189
Net interest income		114,169		72,630
Provision for credit losses		13,131		8,750
Net interest income after provision for credit losses		101,038		63,880
Noninterest income:
Banking services		16,007		9,970
Insurance and benefits consulting		12,163		12,548
Wealth management services		3,248		2,218
Lending and leasing		3,276		1,984
Bank owned life insurance		1,224		1,309
Other		1,030		431
Total noninterest income		36,948		28,460
Noninterest expense:
Salaries and employee benefits		48,237		33,237
Occupancy and equipment		9,907		6,466
Technology and communications		8,649		5,053
Marketing and advertising		1,532		2,532
Professional services		2,510		1,209
Amortization of intangibles		3,247		1,891
Federal deposit insurance premiums		3,463		1,499
Merger and acquisition integration expenses		6,232		1,762
Other		9,405		9,498
Total noninterest expense		93,182		63,147
Income before income taxes		44,804		29,193
Income taxes		15,905		10,451
Net income		28,899		18,742
Preferred stock dividend and discount accretion		—		2,668
Net income available to common stockholders	$	28,899	$	16,074
Earnings per share:
Basic	$	0.16	$	0.14
Diluted	$	0.16	$	0.14
Weighted average common shares outstanding:
Basic		185,121		115,055
Diluted		185,585		115,433
Dividends per common share	$	0.14	$	0.14

See accompanying notes to consolidated financial statements.

4

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income(unaudited)
(in thousands)

	Three months ended
	March 31,
	2010		2009
Net income	$	28,899	$	18,742
Other comprehensive income, net of income taxes:
Net unrealized gains on securities available for sale arising during the period		25,764		13,567
Net unrealized gains (losses) on interest rate swaps designated as cash flow hedges arising during the period		9		(25	)
Amortization of net loss related to pension and post-retirement plans		156		190
Total other comprehensive income		25,929		13,732
Total comprehensive income	$	54,828	$	32,474

See accompanying notes to consolidated financial statements.

5

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements Changes in Stockholders’ Equity(unaudited)
(in thousands, except per share amounts)

											Accumulated		Common
					Additional						other		stock
	Preferred		Common		paid-in			Retained			comprehensive		held by			Treasury
	stock		stock		capital			earnings			income		ESOP			stock			Total
Balances at January 1, 2010	$	—	$	1,948	$	2,128,196		$	352,948		$	2,514	$	(22,382	)	$	(89,563	)	$	2,373,661
Net income		—		—		—			28,899			—		—			—			28,899
Total other comprehensive income, net		—		—		—			—			25,929		—			—			25,929
ESOP shares committed to be released (72,028 shares)		—		—		386			—			—		452			—			838
Stock-based compensation expense		—		—		1,299			—			—		—			—			1,299
Excess tax benefit from stock-based compensation		—		—		906			—			—		—			—			906
Exercise of stock options and restricted stock activity (503,936 shares)		—		—		(3,849	)		(1,867	)		—		—			6,789			1,073
Common stock dividend of $0.14 per share		—		—		—			(25,983	)		—		—			—			(25,983	)
Balances at March 31, 2010	$	—	$	1,948	$	2,126,938		$	353,997		$	28,443	$	(21,930	)	$	(82,774	)	$	2,406,622

											Accumulated			Common
					Additional						other			stock
	Preferred		Common		paid-in			Retained			comprehensive			held by			Treasury
	stock		stock		capital			earnings			(loss) income			ESOP			stock			Total
Balances at January 1, 2009	$	176,719	$	1,254	$	1,326,159		$	369,671		$	(29,429	)	$	(23,843	)	$	(93,268	)	$	1,727,263
Net income		—		—		—			18,742			—			—			—			18,742
Total other comprehensive income, net		—		—		—			—			13,732			—			—			13,732
ESOP shares committed to be released (57,683 shares)		—		—		212			—			—			379			—			591
Stock-based compensation expense		—		—		1,259			—			—			—			—			1,259
Excess tax expense from stock-based compensation		—		—		(119	)		—			—			—			—			(119	)
Exercise of stock options and restricted stock activity (125,661 shares)		—		—		(2,318	)		(280	)		—			—			1,840			(758	)
Accretion of preferred stock discount		368		—		—			(368	)		—			—			—			—
Cumulative preferred stock dividend		153		—		—			(2,300	)		—			—			—			(2,147	)
Common stock dividend of $0.14 per share		—		—		—			(16,172	)		—			—			—			(16,172	)
Balances at March 31, 2009	$	177,240	$	1,254	$	1,325,193		$	369,293		$	(15,697	)	$	(23,464	)	$	(91,428	)	$	1,742,391

See accompanying notes to consolidated financial statements.

6

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows(unaudited)
(in thousands)

	Three months ended March 31,
	2010			2009
Cash flows from operating activities:
Net income	$	28,899		$	18,742
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of fees and discounts, net		12,292			2,490
Provision for credit losses		13,131			8,750
Depreciation of premises and equipment		4,276			3,145
Amortization of intangibles		3,247			1,891
Originations of loans held for sale		(85,254	)		(92,851	)
Proceeds from sales of loans held for sale		87,393			90,833
ESOP and stock-based compensation expense		2,137			1,850
Deferred income tax expense (benefit)		1,635			(672	)
Income from bank owned life insurance		(1,224	)		(1,309	)
Other, net		(13,452	)		12,522
Net cash provided by operating activities		53,080			45,391
Cash flows from investing activities:
Proceeds from maturities of securities available for sale		66,126			40,307
Proceeds from sale of securities available for sale		16,881			995
Principal payments received on securities available for sale		174,267			90,064
Purchases of securities available for sale		(560,239	)		(313,436	)
Principal payments received on securities held to maturity		51,531			—
Net (increase) decrease in loans and leases		(92,265	)		6,659
Other, net		10,542			8,307
Net cash used in investing activities		(333,157	)		(167,104	)
Cash flows from financing activities:
Net increase in deposits		64,903			284,341
Repayments of short-term borrowings, net		(680,846	)		(90,426	)
Proceeds from long-term borrowings		872,720			—
Repayments of long-term borrowings		(2,206	)		(2,407	)
Proceeds from exercise of stock options		1,144			—
Excess tax benefit (expense) from stock-based compensation		906			(119	)
Dividends paid on cumulative preferred stock		—			(2,147	)
Dividends paid on common stock		(25,980	)		(16,172	)
Net cash provided by financing activities		230,641			173,070
Net (decrease) increase in cash and cash equivalents		(49,436	)		51,357
Cash and cash equivalents at beginning of period		236,268			114,551
Cash and cash equivalents at end of period	$	186,832		$	165,908
Cash paid during the period for:
Income taxes	$	6,539		$	633
Interest expense		29,064			33,639
Securities available for sale purchased not settled		115,215			23,526
Capital lease obligation		—			11,928

See accompanying notes to consolidated financial statements.

7

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(unaudited)
(in thousands, except as noted and per share amounts)

The accompanying consolidated financial statements of First Niagara Financial Group, Inc. (“the Company”) and its wholly owned subsidiary First Niagara Bank (“the Bank”) have been prepared using U.S. generally accepted accounting principles (“GAAP”) for interim financial information. On April 9, 2010, the Company became a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System, and First Niagara Bank was renamed First Niagara Bank, N.A. as it became a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency.

These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2009 Annual Report on Form 10-K. Results for the three months ended March 31, 2010 do not necessarily reflect the results that may be expected for the year ending December 31, 2010. We reviewed subsequent events and determined that no further disclosures were required. Reclassifications are made whenever necessary to conform prior period’s presentation to the current period’s presentation. The Company and the Bank are referred to collectively as “we” or “our.”

Note 1. Acquisition

Harleysville National Corporation

On April 9, 2010, the Company acquired all of the outstanding common shares of Harleysville National Corporation (“Harleysville”), the parent company of Harleysville National Bank and Trust Company, which had 83 branch locations across nine Eastern Pennsylvania counties. Under the terms of the merger agreement, Harleysville stockholders received 20.3 million shares of First Niagara Financial Group Common stock. As of April 9, 2010, Harleysville had assets with a carrying value of $5.2 billion, including loans outstanding with a carrying value of $2.9 billion, as well as deposits with a carrying value of $3.9 billion. We incurred $6.2 million in merger and acquisition integration expenses related to the merger during the quarter ended March 31, 2010. The results of Harleysville’s operations will be included in our Consolidated Statement of Income from the date of acquisition. As a result of the proximity of the closing of the merger with Harleysville to the date these consolidated financial statements are available to be issued, we are still evaluating the estimated fair values of the assets acquired and the liabilities assumed. Accordingly, the amount of any goodwill to be recognized in connection with this transaction is also yet to be determined.

8

Note 2. Investment Securities

The amortized cost, gross unrealized gains and losses, and approximate fair value of our investment securities at March 31, 2010 and December 31, 2009 are summarized as follows:

	Amortized		Unrealized		Unrealized			Fair
At March 31, 2010:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	388,619	$	4,751	$	(45	)	$	393,325
U.S. government agencies and government sponsored enterprises		306,154		711		(123	)		306,742
Corporate		3,152		64		(1,133	)		2,083
Total debt securities		697,925		5,526		(1,301	)		702,150
Residential mortgage-backed securities:
Government National Mortgage Association		30,218		232		(182	)		30,268
Federal National Mortgage Association		93,869		4,039		—			97,908
Federal Home Loan Mortgage Corporation		56,457		3,162		—			59,619
Collateralized mortgage obligations:
Government National Mortgage Association		2,595,541		39,284		(4,251	)		2,630,574
Federal National Mortgage Association		650,231		16,659		(942	)		665,948
Federal Home Loan Mortgage Corporation		516,628		13,629		(651	)		529,606
Non-agency issued		158,649		1,520		(5,515	)		154,654
Total collateralized mortgage obligations		3,921,049		71,092		(11,359	)		3,980,782
Total mortgage-backed securities		4,101,593		78,525		(11,541	)		4,168,577
Asset-backed securities		3,098		—		(78	)		3,020
Other		3,155		23		—			3,178
Total securities available for sale	$	4,805,771	$	84,074	$	(12,920	)	$	4,876,925
Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	443,059	$	10,980	$	—		$	454,039
Federal National Mortgage Association		301,289		6,410		(67	)		307,632
Federal Home Loan Mortgage Corporation		294,218		7,242		—			301,460
Total securities held to maturity	$	1,038,566	$	24,632	$	(67	)	$	1,063,131

9

	Amortized		Unrealized		Unrealized			Fair
At December 31, 2009:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	416,847	$	6,037	$	(40	)	$	422,844
U.S. government agencies and government sponsored enterprises		340,806		190		(1,164	)		339,832
Corporate		3,395		40		(1,222	)		2,213
Total debt securities		761,048		6,267		(2,426	)		764,889
Residential mortgage-backed securities:
Government National Mortgage Association		30,906		170		(243	)		30,833
Federal National Mortgage Association		101,578		3,471		(10	)		105,039
Federal Home Loan Mortgage Corporation		59,527		3,229		(10	)		62,746
Collateralized mortgage obligations:
Government National Mortgage Association		1,977,458		15,319		(15,896	)		1,976,881
Federal National Mortgage Association		692,614	��	14,290		(1,647	)		705,257
Federal Home Loan Mortgage Corporation		590,172		12,604		(753	)		602,023
Non-agency issued		173,080		1,344		(7,145	)		167,279
Total collateralized mortgage obligations		3,433,324		43,557		(25,441	)		3,451,440
Total mortgage-backed securities		3,625,335		50,427		(25,704	)		3,650,058
Asset-backed securities		3,165		—		(98	)		3,067
Other		3,651		13		—			3,664
Total securities available for sale	$	4,393,199	$	56,707	$	(28,228	)	$	4,421,678
Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	467,473	$	4,792	$	(455	)	$	471,810
Federal National Mortgage Association		319,190		4,195		(107	)		323,278
Federal Home Loan Mortgage Corporation		306,889		4,673		—			311,562
Total securities held to maturity	$	1,093,552	$	13,660	$	(562	)	$	1,106,650

10

The table below details certain information regarding our investment securities that were in an unrealized loss position at March 31, 2010 and December 31, 2009 by the length of time those securities were in a continuous loss position:

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At March 31, 2010:	value		losses		value		losses		value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	8,833	$	34	$	1,034	$	11	$	9,867	$	45
U.S. government agencies and government sponsored enterprises		125,768		123		—		—		125,768		123
Corporate		—		—		500		1,133		500		1,133
Total debt securities		134,601		157		1,534		1,144		136,135		1,301
Residential mortgage-backed securities:
Government National Mortgage Association		19,623		7		8,106		175		27,729		182
Collateralized mortgage obligations:
Government National Mortgage Association		316,094		4,251		—		—		316,094		4,251
Federal National Mortgage Association		43,673		942		—		—		43,673		942
Federal Home Loan Mortgage Corporation		38,093		651		—		—		38,093		651
Non-agency issued		30,752		414		68,182		5,101		98,934		5,515
Total collateralized mortgage obligations		428,612		6,258		68,182		5,101		496,794		11,359
Total mortgage-backed securities		448,235		6,265		76,288		5,276		524,523		11,541
Asset-backed securities		—		—		3,020		78		3,020		78
Total securities available for sale in an unrealized loss position	$	582,836	$	6,422	$	80,842	$	6,498	$	663,678	$	12,920
Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Federal National Mortgage Association	$	35,762	$	67	$	—	$	—	$	35,762	$	67

11

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At December 31, 2009:	value		losses		value		losses		value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	11,268	$	26	$	1,260	$	14	$	12,528	$	40
U.S. government agencies and government sponsored enterprises		261,543		1,164		—		—		261,543		1,164
Corporate		70		2		410		1,220		480		1,222
Total debt securities		272,881		1,192		1,670		1,234		274,551		2,426
Residential mortgage-backed securities:
Government National Mortgage Association		19,987		86		8,269		157		28,256		243
Federal National Mortgage Association		116		1		551		9		667		10
Federal Home Loan Mortgage Corporation		87		1		412		9		499		10
Collateralized mortgage obligations:
Government National Mortgage Association		875,059		15,896		—		—		875,059		15,896
Federal National Mortgage Association		47,705		1,647		—		—		47,705		1,647
Federal Home Loan Mortgage Corporation		69,198		753		—		—		69,198		753
Non-agency issued		46,294		772		73,607		6,373		119,901		7,145
Total collateralized mortgage obligations		1,038,256		19,068		73,607		6,373		1,111,863		25,441
Total mortgage-backed securities		1,058,446		19,156		82,839		6,548		1,141,285		25,704
Asset-backed securities		—		—		3,067		98		3,067		98
Total securities available for sale in an unrealized loss position	$	1,331,327	$	20,348	$	87,576	$	7,880	$	1,418,903	$	28,228
Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	51,389	$	455	$	—	$	—	$	51,389	$	455
Federal National Mortgage Association		38,216		107		—		—		38,216		107
Total securities held to maturity in an unrealized loss position	$	89,605	$	562	$	—	$	—	$	89,605	$	562

Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations

The Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”) guarantees the contractual cash flows of our mortgage-backed securities. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. FNMA and FHLMC are government sponsored enterprises that are under the conservatorship of the U.S. government.

At March 31, 2010, of the 40 U.S. government sponsored enterprise mortgage-backed securities and collateralized mortgage obligations (“CMOs”) in an unrealized loss position, two were in a continuous unrealized loss position for 12 months or more. At December 31, 2009, of the 76 U.S. government sponsored enterprise mortgage-backed securities and CMOs in an unrealized loss position, 10 were in a continuous unrealized loss position for 12 months or more. The unrealized losses at March 31, 2010 and December 31, 2009 were primarily due to changes in interest rates. We consider these securities temporarily impaired due to the guarantee provided as to the full payment of principal and interest. We also do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.

Non-Agency Collateralized Mortgage Obligations

Our non-agency CMO portfolio consists primarily of investment grade securities at March 31, 2010, as 96% of this portfolio is rated investment grade, and 89% is rated A- or higher. All of our non-agency CMOs carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. These securities were purchased based on the underlying loan characteristics such as loan-to-value ratio, credit scores, property type, location, and the level of credit enhancement. Current characteristics of each security such as credit rating, delinquency and foreclosure levels, credit enhancement, projected collateral losses, and the level of credit loss and coverage are reviewed regularly by management. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. When the level of credit loss coverage for an individual security significantly deteriorates, we expand our analysis of the security to include detailed cash flow projections based upon loan level credit characteristics and prepayment assumptions. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings.

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At March 31, 2010, of the 36 non-agency CMOs in an unrealized loss position, 20 were in a continuous unrealized loss position for 12 months or more. At December 31, 2009, of the 38 non-agency CMOs in an unrealized loss position, 20 were in a continuous unrealized loss position for 12 months or more. We have assessed these securities in an unrealized loss position at March 31, 2010 and December 31, 2009 and determined that the decline in fair value is temporary. We believe the decline in fair value was caused by the significant widening in liquidity spreads across sectors related to the continued illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. In making this determination we considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized costs, the securities’ credit ratings, the delinquency or default rates of the underlying collateral and levels of credit enhancement. We also do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity. It is possible that the underlying loan collateral of these securities will perform worse than expectations, which may lead to adverse changes in cash flows on these securities and potential future other than temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future would include, but are not limited to, deterioration of credit metrics, such as significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity in the non-agency CMO market.

Municipal, Corporate Debt and Other Securities

Our municipal bond portfolio consists primarily of investment grade securities rated A or better at March 31, 2010. Only two percent of this portfolio had either no investment rating or a rating below investment grade. We have assessed the securities in our municipal bond and corporate debt available for sale portfolio that were in an unrealized loss position at March 31, 2010 and December 31, 2009. We have determined that such declines in fair value below amortized cost were temporary. We believe the decline in fair value of the remaining securities below amortized cost was caused by changes in interest rates and the significant widening in liquidity spreads across sectors related to the continued illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. In making this determination, we also considered the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer and guarantor, where applicable, and the delinquency or default rates of the underlying collateral. In addition, we do not have the intent to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity. At March 31, 2010, of the 33 municipal, corporate debt, and other securities in a continuous, unrealized loss position, 17 were in a continuous, unrealized loss position for 12 months or more. At December 31, 2009, of the 41 municipal, corporate debt, and other securities in a continuous, unrealized loss position, 24 were in a continuous, unrealized loss position for 12 months or more.

Scheduled contractual maturities of our investment securities at March 31, 2010 are as follows:

	Amortized		Fair
	cost		value
Debt securities:
Within one year	$	260,246	$	261,611
After one year through five years		411,259		414,795
After five years through ten years		23,758		24,138
After ten years		2,662		1,606
Total debt securities		697,925		702,150
Asset-backed securities		3,098		3,020
Mortgage-backed securities		5,140,159		5,231,708
Other		3,155		3,178
	$	5,844,337	$	5,940,056

While the contractual maturities of our mortgage-backed securities and asset-backed securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of the mortgage-backed and asset-backed securities that we own.

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Note 3. Loans and Leases

The following is a summary of our loans and leases at the dates indicated:

	March 31,			December 31,
	2010			2009
Commercial:
Real estate	$	2,785,830		$	2,713,542
Construction		347,752			348,040
Business(1)		1,543,253			1,481,845
Specialized lending(2)		202,485			207,749
Total commercial		4,879,320			4,751,176
Residential real estate(3)		1,618,007			1,674,961
Home equity		702,735			691,069
Other consumer		182,790			186,341
Total loans and leases		7,382,852			7,303,547
Net deferred costs and unearned discounts		25,354			25,909
Allowance for credit losses		(89,488	)		(88,303	)
Total loans and leases, net	$	7,318,718		$	7,241,153

(1)	Includes $4.9 million of loans held for sale at March 31, 2010.
(2)	Includes commercial leases and financed insurance premiums.
(3)	Includes $30.3 million and $32.3 million of loans held for sale at March 31, 2010 and December 31, 2009, respectively.

The following table presents the activity in the allowance for credit losses for the periods indicated:

	Three months ended March 31,
	2010			2009
Balance at beginning of period	$	88,303		$	77,793
Charge-offs		(12,674	)		(7,305	)
Recoveries		728			375
Provision for credit losses		13,131			8,750
Balance at end of period	$	89,488		$	79,613

The table below details additional information on our loans as of March 31:

	2010		2009
Nonaccrual loans	$	77,920	$	51,918
Year to date interest income that would have been recorded if loans had been performing in accordance with original terms		1,394		104
Balance of impaired loans		74,762		47,319
Allowance relating to impaired loans included in allowance for credit losses		8,146		1,732
Recorded investment of impaired loans for which there is no related allowance for credit losses		8,305		33,963
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring		37,478		17,463

We had no loans past due 90 days or more for which we were still accruing interest at March 31, 2010 and December 31, 2009.

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Note 4. Senior Notes

On March 19, 2010, we issued $300.0 million of 6.75% Senior Notes due March 19, 2020 (the “6.75% Senior Notes”), a portion of the proceeds of which will be used to repay $150.0 million in 12.00% senior notes we issued and National City Bank, a subsidiary of The PNC Financial Services Group, Inc., purchased in September 2009. This repayment occurred in the second quarter of 2010. The 6.75% Senior Notes are redeemable, in whole or in part, at any time and are included in long-term borrowings in our Consolidated Statements of Condition.

Note 5. Derivative Financial Instruments

We are a party to derivative financial instruments in the normal course of business to meet the financing needs of our customers and to manage our own exposure to fluctuations in interest rates. These financial instruments have been limited to interest rate swap agreements which are entered into with counterparties that meet established credit standards and often contain master netting and bilateral collateral provisions protecting the party at risk.

We designate interest rate swap agreements used to manage interest rate risk as either fair value hedges or cash flow hedges. To hedge the exposure against changes in fair value of certain loans, we have entered into interest rate swap agreements that have been designated as fair value hedges. To hedge the interest rate risk on certain variable rate long-term borrowings, we entered into interest rate swaps designated as cash flow hedges. We entered into these swaps designated as cash flow hedges in order to hedge the variability in the cash outflows of London Inter-Bank Offered Rate (LIBOR) based borrowings attributable to changes in LIBOR.

We also act as an interest rate swap counterparty for certain commercial borrowers. In order to mitigate our exposure to these interest rate swaps, we enter into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps we have with the commercial borrowers. These interest rate swap agreements are entered into simultaneously, mitigating our exposure to interest rate risk. We believe that the credit risk inherent in these contracts is minimal based on our credit standards and the presence of the netting and collateral provisions within the interest rate swap agreements.

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The following table presents information regarding our derivative financial instruments, at the dates indicated:

	Asset Derivatives				Liability Derivatives
	Notional				Notional
	amount		Fair value(1)		amount		Fair value(2)
March 31, 2010
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	57,668	$	2,351
Derivatives not designated as hedging instruments:
Interest rate swap agreements		206,967		10,936		206,967		11,006
Total derivatives	$	206,967	$	10,936	$	264,635	$	13,357
December 31, 2009
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	57,687	$	2,218
Derivatives not designated as hedging instruments:
Interest rate swap agreements		206,247		9,629		206,247		9,831
Total derivatives	$	206,247	$	9,629	$	263,934	$	12,049

(1)	Included in other assets in our Consolidated Statements of Condition.
(2)	Included in other liabilities in our Consolidated Statements of Condition.

The following tables present information about amounts recognized for our derivative financial instruments for the periods indicated:

	(Loss) gain(1)
	Three months ended
	March 31,
	2010			2009
Derivatives in fair value hedging relationships:
Interest rate swap agreements	$	(148	)	$	—
Derivatives not designated as hedging instruments:
Interest rate swap agreements		132			370
	$	(16	)	$	370

⁽¹⁾ Included in noninterest income, other in our Consolidated Statements of Income

	Gain (loss)			Loss reclassified from
	recognized in other			accumulated other
	comprehensive			comprehensive
	income, net of tax			income into income (1)
Three months ended March 31, 2010
Derivatives in cash flow hedging relationships:
Interest rate swap agreements	$	9		$	(393	)
Three months ended March 31, 2009
Derivatives in cash flow hedging relationships:
Interest rate swap agreements	$	(25	)	$	(29	)

⁽¹⁾ Included in interest expense, borrowings in our Consolidated Statements of Income.

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Note 6. Earnings Per Share

The following table is a computation of our basic and diluted earnings per share using the two-class method for the periods indicated:

	Three months ended
	March 31,
	2010			2009
Net income available to common stockholders	$	28,899		$	16,074
Less income allocable to unvested restricted stock awards		73			63
Net income allocable to common stockholders	$	28,826		$	16,011
Weighted average common shares outstanding:
Total shares issued		194,810			125,419
Unallocated ESOP shares		(2,861	)		(3,094	)
Unvested restricted stock awards		(475	)		(461	)
Treasury shares		(6,353	)		(6,809	)
Total basic weighted average common shares outstanding		185,121			115,055
Incremental shares from assumed exercise of stock options		307			150
Incremental shares from assumed vesting of restricted stock awards		157			228
Total diluted weighted average common shares outstanding		185,585			115,433
Basic earnings per common share	$	0.16		$	0.14
Diluted earnings per common share	$	0.16		$	0.14
Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations		1,259			2,992

Note 7. Pension and Other Postretirement Plans

We maintain a legacy employer sponsored defined benefit pension plan (the “Plan”) for which participation and benefit accruals have been frozen since 2002. Additionally, any pension plans acquired in connection with previous whole-bank acquisitions, and subsequently merged into the Plan, were frozen prior to or shortly after completion of the transactions. Accordingly, no employees are permitted to commence participation in the Plan and future salary increases and future years of credited service are not considered when computing an employee’s benefits under the Plan.

Periodic pension and postretirement cost, which is recorded as part of salaries and employee benefits expense in the Consolidated Statements of Income, is comprised of the following for the periods indicated:

	Three months ended
	March 31,
	2010			2009
Pension plans:
Service cost	$	25		$	48
Interest cost		1,016			1,007
Expected return on plan assets		(790	)		(739	)
Amortization of unrecognized loss		266			315
Net pension cost	$	517		$	631
Other postretirement plans:
Interest cost		112			127
Amortization of unrecognized loss		—			6
Amortization of unrecognized prior service liability		(16	)		(16	)
Net postretirement cost	$	96		$	117

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Note 8. Fair Value of Financial Instruments

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current accounting guidance establishes a fair value hierarchy based on the transparency of inputs participants use to price an asset or liability. The fair value hierarchy prioritizes these inputs into the following three levels:

Level 1 Inputs— Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

Level 2 Inputs— Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs— Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own assumptions about the assumptions that market participants would use to price the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

Our valuation methodologies may produce a fair value calculation that may not be indicative of net realizable value or reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at each measurement date.

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available for Sale

The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available (Level 1). When quoted prices of identical securities are not available, the fair value estimate is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. We obtain fair value measurements from a third party.

Due to the lack of observable market data, we have classified our collateralized debt obligations (“CDOs”) in Level 3 of the fair value hierarchy. We determined the fair value of these securities using a projected cash flow model that considers prepayment speeds, discount rates, defaults, subordination protection, and contractual payments.

Interest Rate Swaps

We obtain fair value measurements of our interest rate swaps from a third party. The fair value measurements are determined using a market standard methodology of netting discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). Variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Credit valuation adjustments are incorporated to appropriately reflect our nonperformance risk as well as the counterparty’s nonperformance risk. The impact of netting and any applicable credit enhancements, such as bilateral collateral postings, thresholds, mutual puts, and guarantees are also considered in the fair value measurement.

The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However, Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default. We have determined that the impact of these credit valuation adjustments is not significant to the overall valuation of our interest rate swaps. Therefore, we have classified the entire fair value of our interest rate swaps in Level 2 of the fair value hierarchy.

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The following table summarized our assets and liabilities measured at fair value on a recurring basis at the dates indicated:

	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
March 31, 2010
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	393,325	$	—	$	393,325	$	—
U.S. government agencies and government sponsored enterprises		306,742		—		306,742		—
Corporate		2,083		—		1,477		606
Total debt securities		702,150		—		701,544		606
Residential mortgage-backed securities:
Government National Mortgage Association		30,268		—		30,268		—
Federal National Mortgage Association		97,908		—		97,908		—
Federal Home Loan Mortgage Corporation		59,619		—		59,619		—
Collateralized mortgage obligations:
Government National Mortgage Association		2,630,574		—		2,630,574		—
Federal National Mortgage Association		665,948		—		665,948		—
Federal Home Loan Mortgage Corporation		529,606		—		529,606		—
Non-agency issued		154,654		—		154,654		—
Total collateralized mortgage obligations		3,980,782		—		3,980,782		—
Total mortgage-backed securities		4,168,577		—		4,168,577		—
Asset-backed securities		3,020		—		3,020		—
Other		3,178		—		3,178		—
Total securities available for sale		4,876,925		—		4,876,319		606
Interest rate swaps		10,936		—		10,936		—
Total assets	$	4,887,861	$	—	$	4,887,255	$	606
Liabilities:
Interest rate swaps	$	13,357	$	—	$	13,357	$	—

There were no significant transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the quarter ended March 31, 2010.

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	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
December 31, 2009
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	422,844	$	—	$	422,844	$	—
U.S. government agencies and government sponsored enterprises		339,832		—		339,832		—
Corporate		2,213		—		1,733		480
Total debt securities		764,889		—		764,409		480
Residential mortgage-backed securities:
Government National Mortgage Association		30,833		—		30,833		—
Federal National Mortgage Association		105,039		—		105,039		—
Federal Home Loan Mortgage Corporation		62,746		—		62,746		—
Collateralized mortgage obligations:
Government National Mortgage Association		1,976,881		—		1,976,881		—
Federal National Mortgage Association		705,257		—		705,257		—
Federal Home Loan Mortgage Corporation		602,023		—		602,023		—
Non-agency issued		167,279		—		167,279		—
Total collateralized mortgage obligations		3,451,440		—		3,451,440		—
Total mortgage-backed securities		3,650,058		—		3,650,058		—
Asset-backed securities		3,067		—		3,067		—
Other		3,664		—		3,664		—
Total securities available for sale		4,421,678		—		4,421,198		480
Interest rate swaps		9,629		—		9,629		—
Total assets	$	4,431,307	$	—	$	4,430,827	$	480
Liabilities:
Interest rate swaps	$	12,049	$	—	$	12,049	$	—

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis during the three months ended March 31, 2010 and 2009 were as follows:

	Corporate Debt
	Securities
Balance at January 1, 2010	$	480
Total gains:
Included in earnings		—
Included in other comprehensive income		126
Purchases, issuances, and settlements, net		—
Transfers in and/or out of Level 3		—
Balance at March 31, 2010	$	606
Total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	—

	Corporate Debt
	Securities
Balance at January 1, 2009	$	564
Total losses:
Included in earnings		—
Included in other comprehensive income		(171	)
Purchases, issuances, and settlements, net		—
Transfers in and/or out of Level 3		—
Balance at March 31, 2009	$	393
Total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	—

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Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans

We periodically record nonrecurring adjustments to the carrying value of collateral dependent impaired loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan. In cases where the carrying value of the loan exceeds the fair value of the collateral, an impairment charge is recognized. Real estate collateral is typically valued using independent appraisals or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurement adjustments have been classified as Level 2. During the quarter ended March 31, 2010, we recorded a $3.0 million increase to our specific reserve as a result of adjusting the carrying value and estimated fair value of certain impaired loans to $18.5 million. During the quarter ended March 31, 2009, we recorded a $5.9 million increase to our specific reserve as a result of adjusting the carrying value and estimated fair value of certain impaired loans to $13.8 million.

Mortgage Servicing Rights

The fair value of our mortgage servicing rights (“MSRs”) was estimated using Level 3 inputs. MSRs do not trade in an active, open market with readily observable prices. As such, we determine the fair value of our MSRs using a projected cash flow model that considers loan type, loan rate and maturity, discount rate assumptions, estimated fee income and cost to service, and estimated prepayment speeds. During the quarter ended March 31, 2010, we recorded a $118 thousand reduction in the valuation allowance for our MSRs due to the recovery to carrying value in the estimated fair value of certain strata of our MSRs. During the quarter ended March 31, 2009, we recorded a $700 thousand provision for impairment on our MSRs because the carrying value of certain strata of our MSRs exceeded their estimated fair value due to an increase in prepayment speeds.

The carrying value and estimated fair value of our financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows (in thousands):

	March 31, 2010				December 31, 2009
			Estimated fair				Estimated fair
	Carrying value		value		Carrying value		value
Financial assets:
Cash and cash equivalents	$	186,832	$	186,832	$	236,268	$	236,268
Investment securities available for sale		4,876,925		4,876,925		4,421,678		4,421,678
Investment securities held to maturity		1,038,566		1,063,131		1,093,552		1,106,650
Loans and leases, net(1)		7,318,718		7,540,382		7,241,153		7,444,034
FHLB stock		55,650		55,650		79,014		79,014
Mortgage servicing rights		7,135		7,613		6,596		6,699
Interest rate swap agreements		10,936		10,936		9,629		9,629
Accrued interest receivable		52,095		52,095		50,455		50,455
Financial liabilities:
Deposits	$	9,794,461	$	9,816,723	$	9,729,524	$	9,763,604
Borrowings		2,481,628		2,474,230		2,302,280		2,309,330
Interest rate swap agreements		13,357		13,357		12,049		12,049
Accrued interest payable		6,814		6,814		5,498		5,498

⁽¹⁾ Included in loans and leases, net are loans held for sale with a carrying value of $35.2 million and a fair value of $36.0 million at March 31, 2010 and a carrying value of $32.3 million and a fair value of $35.8 million at December 31, 2009.

Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax ramifications related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these estimates.

Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. The method of estimating the fair value of the financial instruments disclosed in the table above does not necessarily incorporate the exit price concept used to record financial instruments at fair value in our Consolidated Statements of Condition.

Cash and Cash Equivalents

The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less.

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Loans and Leases

Our variable-rate loans reprice as the associated rate index changes. Therefore, the carrying value of these loans approximates fair value. We calculated the fair value of our fixed-rate loans and leases by discounting scheduled cash flows through the estimated maturity using credit adjusted period end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions.

Investment Securities

The fair value estimates of our investment securities are based on quoted market prices of identical securities, where available. When quoted prices of identical securities are not available, the fair value estimate is based on quoted market prices of similar securities, adjusted for differences between the securities. Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. We obtain fair value measurements from a third party.

FHLB Stock

The carrying value of our FHLB stock approximates fair value.

Accrued Interest Receivable

The carrying value of accrued interest receivable approximates fair value.

Deposits

The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors’ payments held in escrow, is equal to the amount payable on demand. The fair value of our certificates of deposit is based on the discounted value of contractual cash flows, using the period end rates offered for deposits of similar remaining maturities.

Borrowings

The fair value of our borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.

Accrued Interest Payable

The carrying value of accrued interest payable approximates fair value.

Commitments

The fair value of our commitments to extend credit, standby letters of credit, and financial guarantees are not included in the above table as the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.

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Note 9. Segment Information

We have two business segments: banking and financial services. Our banking segment includes all of our retail and commercial banking operations. Our financial services segment includes our insurance and employee benefits consulting operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation.

Selected financial information for our segments follows for the periods indicated:

			Financial		Consolidated
For the three months ended:	Banking		services		total
March 31, 2010
Net interest income	$	114,169	$	—	$	114,169
Provision for credit losses		13,131		—		13,131
Net interest income after provision for credit losses		101,038		—		101,038
Noninterest income		24,585		12,363		36,948
Amortization of intangibles		2,565		682		3,247
Other noninterest expense		79,955		9,980		89,935
Income before income taxes		43,103		1,701		44,804
Income tax expense		15,225		680		15,905
Net income	$	27,878	$	1,021	$	28,899
March 31, 2009
Net interest income	$	72,630	$	—	$	72,630
Provision for credit losses		8,750		—		8,750
Net interest income after provision for credit losses		63,880		—		63,880
Noninterest income		15,894		12,566		28,460
Amortization of intangibles		1,087		804		1,891
Other noninterest expense		51,161		10,095		61,256
Income before income taxes		27,526		1,667		29,193
Income tax expense		9,784		667		10,451
Net income	$	17,742	$	1,000	$	18,742

Note 10. Recently Issued Accounting Pronouncements

In June 2009, the Financial Accounting Standards Board (the “FASB”) released new guidance to improve the information that we provide in our financial statements about a transfer of financial assets; the effects of a transfer on our financial position, financial performance, and cash flows; and our continuing involvement, if any, in transferred financial assets. Additionally, this guidance eliminates the concept of a qualifying special-purpose entity. As this new guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009, we were required to apply this guidance prospectively to transfers of financial assets beginning January 1, 2010. This new guidance did not impact our Consolidated Financial Statements.

In June 2009, the FASB released new guidance which addresses the effects on certain provisions of current accounting guidance relating to the consolidation of variable interest entities, as a result of the elimination of the qualifying special-purpose entity concept. It addresses concerns about the application of certain key provisions of current accounting guidance, including those in which the accounting and disclosures do not always provide timely and useful information about a company’s involvement in a variable interest entity. This guidance requires us to perform an analysis to determine whether any of our variable interests give us a controlling financial interest in a variable interest entity. In addition, this guidance requires ongoing assessments of whether we are the primary beneficiary of a variable interest entity. As this guidance is effective for fiscal years, and interim periods within those fiscal years, beginning after November 15, 2009, we were required to evaluate all variable interest entities to determine whether or not they should be consolidated in our first quarter 2010 results. This new guidance did not impact our Consolidated Financial Statements.

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ITEM 2. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future performance and perceived opportunities in the market. Our actual results may differ significantly from the results, performance, and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, credit quality and government regulation, and other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2009 under Item 1A. “Risk Factors.” First Niagara Financial Group, Inc. does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.

OVERVIEW

At March 31, 2010, First Niagara Financial Group, Inc. was a Delaware corporation and savings and loan holding company serving both retail and commercial customers through our bank subsidiary, First Niagara Bank (the “Bank”), which was a federally chartered savings association subject to Office of Thrift Supervision regulation.

On April 9, 2010, we became a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System, and First Niagara Bank became a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency and was renamed First Niagara Bank, N.A. In connection with this conversion, First Niagara Commercial Bank was merged into First Niagara Bank, N.A. Also on April 9, 2010, we acquired all of the outstanding common shares of Harleysville National Corporation (“Harleysville”), the parent company of Harleysville National Bank and Trust Company, and thereby acquired all of Harleysville National Bank’s 83 branch locations in Eastern Pennsylvania. Under the terms of the merger agreement, Harleysville stockholders received 20.3 million shares of First Niagara Financial Group, Inc. common stock.

At March 31, 2010, we had $15.0 billion in assets, $9.8 billion in deposits, and 172 full-service branch locations. As a result of the merger with Harleysville on April 9, 2010, we have approximately $20 billion in assets, $14 billion in deposits and 255 branches across Upstate New York and Pennsylvania.

BUSINESS AND INDUSTRY

We operate as a community oriented bank that provides customers with a full range of products and services delivered through our customer focused business units. These products include commercial and residential real estate loans, commercial business loans and leases, home equity and other consumer loans, wealth management products, as well as various retail consumer and commercial deposit products. Additionally, we offer insurance and employee benefits consulting services through a wholly-owned subsidiary of the Bank.

Our profitability is primarily dependent on the difference, or net interest spread, between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates and competition within our markets. This net interest spread is also highly sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as policies of the federal government and its regulatory agencies. We manage our interest rate risk as described in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities, by adjusting depository institutions reserve requirements, and by varying the target federal funds and discount rates. The actions of the Federal Reserve in these areas influence the growth of our loans, investments, and deposits, and also affect interest rates that we earn on interest-earning assets and that we pay on interest-bearing liabilities.

MARKET AREAS AND COMPETITION

Our business operations are currently concentrated in Upstate New York, Western Pennsylvania, and beginning April 9, 2010, Eastern Pennsylvania; therefore, our financial results are affected by economic conditions in these geographic areas. If economic conditions in our markets deteriorate further or if we are unable to sustain our competitive posture, our ability to expand our business and the quality of our loan portfolio could materially impact our financial results.

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Our primary lending and deposit gathering areas are generally concentrated in the same counties as our branches. We face significant competition in both making loans and attracting deposits in our markets as the Upstate New York and Western and Eastern Pennsylvania regions have a high concentration of financial institutions, some of which are significantly larger than we are and have greater financial resources. Our competition for loans comes principally from commercial banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies. In these marketplaces, opportunities to grow and expand are primarily a function of how we are able to differentiate our product offerings and customer experience from our competitors.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and that require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the adequacy of our allowance for credit losses, the valuation and other than temporary impairment analysis of our investment securities, the accounting treatment and valuation of our acquired loans, and the analysis of the carrying value of goodwill for impairment are deemed to be critical, as our judgments could have a material effect on our results of operations. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2009 Annual Report on Form 10-K. A brief description of our current accounting policies involving significant management judgment follows:

Allowance for Credit Losses

We establish our allowance for credit losses through a provision for credit losses based on our evaluation of the credit quality of our loan portfolio. This evaluation, which includes a review of all loans on which full collectibility may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical loan loss experience, and other factors that warrant recognition in determining our credit loss allowance. We continue to monitor and modify the level of our allowance for credit losses in order to ensure it is adequate to cover losses inherent in our loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses.

Our evaluation of our allowance for credit losses is based on a continuing review of our loan portfolio. The methodology that we use for determining the amount of the allowance for credit losses consists of several elements. We formally review all individual commercial real estate and business credits and/or total loan concentrations to one borrower greater than $500 thousand and less than $1 million no less frequently than every 36 months and those over $1 million no less frequently than every 18 months. We review nonaccruing, impaired, and delinquent commercial loans individually every quarter and we consider the value of any underlying collateral or future cash flows when determining estimates of losses on those loans and the need, if any, for a specific allowance. All loans over $300 thousand classified as “special mention” and all loans over $200 thousand classified as “substandard” or “doubtful” are reviewed quarterly in accordance with our Allowance for Loan and Lease Loss Policy. In addition, a substantial portion of our commercial loan portfolio is reviewed and rated during the year by our internal loan review unit. For all nonclassified loans, we estimate losses and allocate allowance by common categories (commercial real estate, multi-family, residential, home equity, consumer, etc.) based primarily on our historical loss experience, industry trends, trends in the local real estate market, and the current business and economic environment in our market areas.

Investment Securities

Fair value of our investment securities is based upon quoted market prices of identical securities, where available. If such quoted prices are not available, fair value is based upon valuation models that use cash flow, security structure, and other observable information. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes of similar securities. Broker quotes may be adjusted to ensure that investment securities are recorded at fair value. These adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time.

We conduct a quarterly review and evaluation of our investment securities portfolio to determine if any declines in fair value below amortized cost are other than temporary. In making this determination we consider some or all of the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in fair value in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, credit enhancement, projected losses, level of credit loss, and projected cash flows. Any valuation decline below amortized cost that we determine to be other than temporary would require us to write down the credit component of such unrealized loss through a charge to current period earnings. If we intend to sell a security with a fair value below amortized cost or if it is more likely than not that we will be required to sell such a security, we would record an other than temporary impairment charge through current period earnings for the full decline in fair value below amortized cost.

Acquired Loans

Loans that we acquire in connection with acquisitions subsequent to January 1, 2009 are recorded at fair value with no carryover of the related allowance for credit losses. Fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

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The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition, is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require us to evaluate the need for an allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which we will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan. In addition, charge-offs on such loans would be first applied to the nonaccretable discount portion of the fair value adjustment.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we expect to fully collect the new carrying value (i.e., fair value) of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount.

Goodwill

We test goodwill for impairment annually, as of November 1, using a two-step process that begins with an estimation of the fair value of a reporting unit. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions, and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value.

A more detailed description of our methodology for testing goodwill for impairment and the related assumptions made can be found within the “Critical Accounting Policies and Estimates” section in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations” of our 2009 Annual Report on Form 10-K.

RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2010

Overview

Net income for the three months ended March 31, 2010 increased to $28.9 million, compared to $18.7 million for the three months ended March 31, 2009. Our diluted earnings per common share for the first three months of 2010 increased to $0.16, compared to $0.14 for the first three months of 2009. The diluted earnings per share comparison to the prior year reflects the impact of an incremental 69 million shares that were issued in two 2009 equity offerings to bolster our capital position and provide funds for our strategic growth initiatives. Our return on average assets for the quarter ended March 31, 2010 remained unchanged at 0.81% compared to the quarter ended March 31, 2009. Our return on average common equity for the quarter ended March 31, 2010 increased to 4.88% from 4.18% for the quarter ended March 31, 2009.

Results for the first quarter of 2010 as compared to the first quarter of 2009 were most significantly impacted by a $41.5 million, or 57%, increase in our net interest income. This increase resulted from a 57% increase in our average interest-earning assets, a 56% increase in our average interest-bearing liabilities, and a 14 basis point increase in our net interest spread. Additionally, banking services income increased to $16.0 million for the current quarter, compared to $10.0 million in the first quarter of 2009. Substantially all of this increase is due to our expansion into Western Pennsylvania as a result of the National City Bank (“NatCity”) branch acquisition.

These items were partially offset by a $15.0 million increase in salaries and benefits expense during the current quarter as compared to the same period in the prior year, primarily due to our September 2009 NatCity branch acquisition and the increase in our supporting infrastructure in anticipation of our April 2010 merger with Harleysville.

Analysis of Financial Condition at March 31, 2010

Total assets increased $383 million from $14.6 billion at December 31, 2009 to $15.0 billion at March 31, 2010. In addition, we noted the following balance trends during 2010:

• Commercial loans increased in both Upstate New York and Western Pennsylvania by a total of $128 million, or 11% annualized, since December 31, 2009.

• Core deposits increased $345 million, or 21% annualized, across retail, commercial, and municipal customers.

• Higher cost certificate of deposit account balances decreased $280 million, or 38% annualized, as we continued to execute our strategy of letting higher priced certificate of deposits run off and focused on building our lower cost relationship based deposit customers.

• Investment securities increased by $400 million, with new investments made primarily in collateralized mortgage obligations guaranteed by the Government National Mortgage Association.

• Total borrowings increased $179 million as we replaced a portion of our short-term borrowings with long-term borrowings, including $300 million of 6.75% senior notes.

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Lending Activities

Our primary lending activity is the origination of commercial real estate and business loans, as well as residential mortgages to customers located within our primary market areas. Our loan portfolio is concentrated in commercial real estate and business loans, which provide opportunities to cross sell profitable merchant and cash management services. Consistent with our long-term customer relationship focus, we generally retain the servicing rights on residential mortgage loans that we sell resulting in monthly service fee income to us. We also originate and retain in our lending portfolio various types of home equity and consumer loan products given their customer relationship building benefits.

We mitigate our risk with regard to commercial real estate and multi-family loans by emphasizing geographic distribution within our market areas and diversification of these property types. In addition, our policy for commercial lending generally requires a maximum loan-to-value (“LTV”) ratio of 75% on purchases of existing commercial real estate and 80% on purchases of existing multi-family real estate. For construction loans, the maximum LTV ratio varies depending on the project, however, it generally does not exceed 90% for any project.

Our LTV requirements for residential real estate loans vary depending on the loan program. For loans with LTVs in excess of 85%, we require the borrower to obtain private mortgage insurance. We generally originate loans that meet accepted secondary market underwriting standards.

The following table presents the composition of our loan and lease portfolios at the dates indicated (amounts in thousands):

	March 31, 2010						December 31, 2009
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	2,785,830			37.7	%	$	2,713,542			37.2	%
Construction		347,752			4.7			348,040			4.8
Business(1)		1,543,253			20.9			1,481,845			20.3
Specialized lending		202,485			2.8			207,749			2.8
Total commercial loans		4,879,320			66.1			4,751,176			65.1
Residential real estate(2)		1,618,007			21.9			1,674,961			22.9
Home equity		702,735			9.5			691,069			9.5
Other consumer		182,790			2.5			186,341			2.5
Total loans and leases		7,382,852			100.0	%		7,303,547			100.0	%
Net deferred costs and unearned discounts		25,354						25,909
Allowance for credit losses		(89,488	)					(88,303	)
Total loans and leases, net	$	7,318,718					$	7,241,153

(1)	Includes $4.9 million of loans held for sale at March 31, 2010.
(2)	Includes $30.3 million and $32.3 million of loans held for sale at March 31, 2010 and December 31, 2009, respectively.

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The table below is selected information concerning the composition of our loan and lease portfolios, including loans held for sale, by originating branch location at the dates indicated (in thousands):

	Upstate New		Western		Total loans
	York		Pennsylvania(1)		and leases
March 31, 2010:
Commercial:
Real estate	$	2,448,642	$	337,188	$	2,785,830
Construction		344,737		3,015		347,752
Business		1,086,034		457,219		1,543,253
Specialized lending		200,727		1,758		202,485
Total commercial		4,080,140		799,180		4,879,320
Residential real estate		1,594,607		23,400		1,618,007
Home equity		676,750		25,985		702,735
Other consumer		124,592		58,198		182,790
Total loans and leases	$	6,476,089	$	906,763	$	7,382,852
December 31, 2009:
Commercial:
Real estate	$	2,414,478	$	299,064	$	2,713,542
Construction		348,040		—		348,040
Business		1,013,995		467,850		1,481,845
Specialized lending		207,749		—		207,749
Total commercial		3,984,262		766,914		4,751,176
Residential real estate		1,655,627		19,334		1,674,961
Home equity		674,047		17,022		691,069
Other consumer		120,293		66,048		186,341
Total loans and leases	$	6,434,229	$	869,318	$	7,303,547

⁽¹⁾ Commercial loans in Western Pennsylvania include $35 million of performing commercial real estate loans at March 31, 2010 and December 31, 2009 and $25 million of performing business loans at March 31, 2010 and December 31, 2009 which were purchased from Harleysville in December 2009.

Our commercial loan portfolio increased $128 million, or 11% annualized, during the first three months of 2010 as a result of our continued strategic focus on the portfolio and decreased competition as larger banks and nonbank entities continued to face liquidity and capital issues. This increase was concentrated in both commercial real estate loans and business loans. Commercial loan originations, including line advances, increased to $645 million in Upstate New York during the quarter ended March 31, 2010, from $526 million during the same period in 2009. Commercial loan originations totaled $326 million in Western Pennsylvania for the quarter ended March 31, 2010.

While we originated $107 million in new residential loans, our residential real estate loan portfolio decreased by $57 million as ongoing consumer preference is for long-term fixed rate products which we generally do not maintain in our portfolio. In addition, we experienced an 8% decrease in our other consumer loans portfolio, as we continue to deemphasize certain types of consumer loans, including indirect auto loans.

Allowance for Credit Losses and Nonperforming Assets

Credit risk is the risk associated with the potential inability of some of our borrowers to repay their loans according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.

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The following table presents the activity in our allowance for credit losses for the periods indicated (amounts in thousands):

	Three months ended March 31,
	2010			2009
Balance at beginning of period	$	88,303		$	77,793
Charge-offs		(12,674	)		(7,305	)
Recoveries		728			375
Net charge-offs		(11,946	)		(6,930	)
Provision for credit losses		13,131			8,750
Balance at end of period	$	89,488		$	79,613
Ratio of annualized net charge-offs to average loans outstanding during the period		0.66	%		0.44	%
Ratio of annualized provision for credit losses to average loans outstanding during the period		0.73	%		0.55	%

The primary indicators of credit quality are the level of our nonaccruing loans as well as the net charge-off ratio which measures net charge-offs as a percentage of average total loans outstanding. We place loans on nonaccrual status when they become more than 90 days past due, or earlier if we do not expect the full collection of interest or principal. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is reversed from interest income.

The following table presents our nonaccruing loans and nonperforming assets at the dates indicated (amounts in thousands):

	March 31,			December 31,
	2010			2009
Nonaccruing loans:
Commercial real estate	$	44,149		$	37,129
Commercial business		10,793			4,759
Specialized lending		1,777			1,962
Shared national credits		5,440			11,403
Residential real estate		10,811			9,468
Home equity		3,558			2,330
Other consumer		1,392			1,510
Total nonaccruing loans		77,920			68,561
Real estate owned		6,774			7,057
Total nonperforming assets	$	84,694		$	75,618
Total nonaccruing loans as a percentage of total loans		1.05	%		0.94	%
Total nonperforming assets as a percentage of total assets		0.57	%		0.52	%
Allowance for credit losses to total loans		1.21	%		1.20	%
Allowance for credit losses to nonaccruing loans		115	%		129	%

The following table details our net charge-offs by loan category for the periods indicated (in thousands):

	Three months ended
	March 31,
	2010		2009
Commercial:
Real estate	$	4,275	$	4,552
Business		507		729
Specialized lending		683		1,059
Shared national credits		5,945		—
Total commercial		11,410		6,340
Residential real estate		56		13
Home equity		162		110
Other consumer		318		467
	$	11,946	$	6,930

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Despite the continued difficult economic climate and some deterioration in our portfolio, our credit quality continued to compare favorably to the industry and our peers. We believe the level of allowance is sufficient to cover the inherent risk of loss in our loan portfolios. Total nonaccruing loans as a percentage of total loans increased 11 basis points from the prior quarter to 1.05% of total loans as we have experienced continued modest deterioration in the credit quality of our commercial real estate and commercial business portfolios. The balance in nonaccruing shared national credits was attributable to one relationship for which we took a $6 million charge-off during the current quarter. This loan was subsequently sold in April 2010 for its $5 million March 31, 2010 carrying value.

The ratio of our allowance for credit losses to total loans was 1.21% at March 31, 2010, compared to 1.20% at December 31, 2009. As required by current accounting guidance, the acquired loans obtained in the NatCity branch acquisition were recorded at fair value with no carryover of the related allowance for credit losses that NatCity may have previously recorded for the loans. Including the remaining credit related discount on the loans obtained in the NatCity branch acquisition of $41 million at March 31, 2010 and $43 million at December 31, 2009, the ratio of our allowance for credit losses to total loans was 1.75% at March 31, 2010 and 1.78% at December 31, 2009. We believe this non-GAAP measure, which adds the credit related discount on the acquired NatCity loans to our allowance for credit losses, provides a meaningful analysis of our ability to withstand credit losses in our loan portfolio and provides for better comparison to our peers. Annualized net charge-offs to average loans outstanding for the current quarter increased to 0.66% from 0.44% for the same period in the prior year primarily due to a partial charge-off on the above mentioned shared national credit. This partial charge-off accounted for one half of our current quarter net charge-offs.

Investment Securities Portfolio

Our investment securities portfolio is comprised primarily of debt securities issued by U.S. government agencies and government sponsored enterprises; mortgage backed securities; collateralized mortgage obligations guaranteed by U.S. government agencies and government sponsored enterprises; and to a lesser extent, non-agency issued collateralized mortgage obligations; and obligations of states and political subdivisions. Portions of our portfolio are utilized to meet pledging requirements for deposits of state and local governments, securities sold under repurchase agreements, and FHLB advances.

The $455 million increase in our investment securities available for sale portfolio to $4.9 billion at March 31, 2010 from December 31, 2009 was primarily attributable to the continued investment of our multiple sources of liquidity. The majority of the funds were invested in mortgage-backed securities guaranteed by the Government National Mortgage Association. Our investment securities available for sale portfolio remains well positioned to provide a stable source of cash flow with a weighted average estimated remaining life of 3.1 years at March 31, 2010.

At March 31, 2010, the pre-tax net unrealized gains on our available for sale investment securities increased to $71 million from $28 million at December 31, 2009. The unrealized gain represents the difference between the estimated fair value and the amortized cost of our securities. Generally, the value of our investment securities fluctuates in response to changes in market interest rates, changes in credit spreads, or levels of liquidity in the market. The increase in the net unrealized gains was primarily due to market participants requiring a lower rate of return on mortgage-backed securities and collateralized mortgage obligations relative to Treasury securities at March 31, 2010 as compared to December 31, 2009, thereby causing the fair value of our existing mortgage-backed securities and collateralized mortgage obligations to increase.

We have assessed our securities that were in an unrealized loss position at March 31, 2010 and determined that any decline in fair value below amortized cost was temporary. In making this determination we considered some or all of the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, credit enhancement, projected losses, levels of credit loss, and projected cash flows. We also considered any intention to sell these securities and whether it is more likely than not that we will be required to sell these securities before the recovery of their amortized cost basis, which may be at maturity.

Deposits

The following table illustrates the composition of our deposits at the dates indicated (amounts in thousands):

	March 31, 2010					December 31, 2009					Increase
	Amount		Percent			Amount		Percent			(Decrease)
Core Deposits:
Savings	$	932,698		9.5	%	$	916,854		9.4	%	$	15,844
Interest-bearing checking		1,057,349		10.8			1,063,065		10.9			(5,716	)
Money market deposit accounts		3,825,794		39.1			3,535,736		36.4			290,058
Noninterest-bearing		1,301,730		13.3			1,256,537		12.9			45,193
Total core deposits		7,117,571		72.7			6,772,192		69.6			345,379
Certificates		2,676,890		27.3			2,957,332		30.4			(280,442	)
Total deposits	$	9,794,461		100.0	%	$	9,729,524		100.0	%	$	64,937

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The table below contains selected information on the composition of our deposits, by originating branch location at the dates indicated (in thousands):

	Upstate New		Western
	York		Pennsylvania		Total deposits
March 31, 2010:
Core deposits:
Savings	$	804,832	$	127,866	$	932,698
Interest-bearing checking		554,234		503,115		1,057,349
Money market deposit		2,896,162		929,632		3,825,794
Noninterest-bearing		836,551		465,179		1,301,730
Total core deposits		5,091,779		2,025,792		7,117,571
Certificates		1,290,426		1,386,464		2,676,890
Total deposits	$	6,382,205	$	3,412,256	$	9,794,461
December 31, 2009:
Core deposits:
Savings	$	796,845	$	120,009	$	916,854
Interest-bearing checking		537,767		525,298		1,063,065
Money market deposit		2,654,865		880,871		3,535,736
Noninterest-bearing		795,322		461,215		1,256,537
Total core deposits		4,784,799		1,987,393		6,772,192
Certificates		1,385,402		1,571,930		2,957,332
Total deposits	$	6,170,201	$	3,559,323	$	9,729,524

Our focus on growing low cost profitable relationships and a customer preference for short term products resulted in a $345 million, or 21% annualized, increase in our core deposits during the first quarter of 2010. Money market deposit accounts in our Upstate New York market increased by $241 million, or 37% annualized, as customers continue to migrate towards this product. The maturation of higher rate certificates resulted in a $186 million, or 48% annualized, decrease in certificates of deposit accounts in Western Pennsylvania during the current quarter.

We continued to focus our efforts on growing our municipal deposits, which increased from $987 million at December 31, 2009 and $859 million at March 31, 2009 to $1.2 billion at March 31, 2010. The 82% annualized increase from December 31, 2009, primarily in money market deposit accounts, is due to both seasonal inflow of tax collection payments and new account growth.

Borrowings

On March 19, 2010, we issued $300 million of 6.75% Senior Notes due March 19, 2020 (the “6.75% Senior Notes”), a portion of the proceeds of which will be used to repay $150 million in 12.00% senior notes we issued and National City Bank, a subsidiary of The PNC Financial Services Group, Inc., purchased in September 2009. This repayment occurred in the second quarter of 2010. The 6.75% Senior Notes are redeemable, in whole or in part, at any time.

Short-term borrowings decreased $641 million from December 31, 2009 to March 31, 2010, and long-term borrowings increased $820 million during that same period. In late 2009, we had entered into short-term borrowings that matured in the first quarter of 2010. As these borrowings matured, we replaced them with long-term financing, including the above mentioned 6.75% Senior Notes issuance.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2010 AND 2009

Net Interest Income

The following table presents our condensed average balance sheet information as well as taxable equivalent interest income and yields. We use a taxable equivalent basis in order to provide the most comparative yields among all types of interest-earning assets. That is, interest on tax-exempt securities and loans are presented as if the interest we earned was taxed at our statutory Federal and state income tax rates adjusted for the nondeductible portion of interest expense that we incurred to hold these assets. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances (amounts in thousands):

	Three months ended March 31,
	2010								2009
	Average			Interest					Average			Interest
	outstanding			earned/		Yield/			outstanding			earned/		Yield/
	balance			paid		rate			balance			paid		rate
Interest-earning assets:
Loans and leases(1)
Commercial:
Real estate	$	3,084,272		$	43,774		5.71	%	$	2,563,165		$	36,778		5.77	%
Business		1,502,544			15,934		4.30			956,523			10,439		4.43
Specialized lending		208,884			3,398		6.51			182,305			3,022		6.63
Total commercial loans		4,795,700			63,106		5.30			3,701,993			50,239		5.47
Residential		1,645,693			21,451		5.24			1,967,570			26,300		5.37
Home equity		704,450			8,494		4.89			636,325			8,076		5.14
Other consumer		187,272			3,917		8.48			144,349			2,697		7.58
Total loans		7,333,115			96,968		5.33			6,450,237			87,312		5.45
Securities and other investments(2)		5,540,217			49,259		3.56			1,774,559			19,917		4.49
Total interest-earning assets		12,873,332		$	146,227		4.57	%		8,224,796		$	107,229		5.24	%
Noninterest-earning assets(3)(4)		1,671,238								1,212,191
Total assets	$	14,544,570							$	9,436,987
Interest-bearing liabilities:
Savings deposits	$	917,397		$	308		0.14	%	$	774,262		$	452		0.24	%
Checking deposits		1,034,659			320		0.13			486,663			191		0.16
Money market deposits		3,689,294			6,279		0.69			2,083,102			6,969		1.36
Certificates of deposit		2,823,804			7,476		1.07			2,012,120			13,301		2.68
Borrowed funds		2,233,362			15,951		2.89			1,507,374			12,276		3.29
Total interest-bearing liabilities		10,698,516		$	30,334		1.15	%		6,863,521		$	33,189		1.96	%
Noninterest-bearing deposits		1,245,565								689,596
Other noninterest-bearing liabilities		198,857								147,734
Total liabilities		12,142,938								7,700,851
Stockholders’ equity(3)		2,401,632								1,736,136
Total liabilities and stockholders’ equity	$	14,544,570							$	9,436,987
Net interest income (taxable equivalent)				$	115,893							$	74,040
Net interest rate spread							3.42	%							3.28	%
Net earning assets	$	2,174,816							$	1,361,275
Net interest rate margin							3.61	%							3.61	%
Ratio of average interest-earning assests to average interest-bearing liabilities		120.33	%							119.83	%

(1)	Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans and loans held for sale.
(2)	Average outstanding balances are at amortized cost.
(3)	Average outstanding balances include unrealized gains/losses on securities available for sale.
(4)	Average outstanding balances include allowance for credit losses and bank owned life insurance, earnings from which are reflected in noninterest income.

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Our taxable equivalent net interest income increased $42 million to $116 million in the first quarter of 2010 as compared to the first quarter of 2009. This increase resulted from a $4.6 billion, or 57%, increase, in average interest-earning assets, a $3.8 billion, or 56%, increase in our interest-bearing liabilities, and a 14 basis point increase in our net interest rate spread. The increase in average interest-earning assets and liabilities was primarily due to the NatCity branch acquisition. Our taxable equivalent net interest margin remained unchanged at 3.61% for the first three months of 2010 as compared to the first three months of 2009, reflecting:

• Lower yields earned on earning assets due to the continued low interest rate environment.

• More favorable funding mix, resulting in an 81 basis point decrease in the interest rate paid on liabilities, due to a shift from certificates of deposit accounts to lower rate money market and other core deposit accounts.

• An increase in average borrowings at a rate 40 basis points lower than the same period in the prior year.

Provision for Credit Losses

Our provision for credit losses is based upon our assessment of the adequacy of our allowance for credit losses with consideration given to such interrelated factors as the composition of and risk in our loan portfolio, the level of our nonaccruing and delinquent loans, and related collateral or government guarantees, net charge-offs, and economic considerations. The provision charged to income amounted to $13 million, or 0.73% of average loans, for the three months ended March 31, 2010 compared to $9 million, or 0.55% of average loans, for the three months ended March 31, 2009.

Noninterest Income

Noninterest income increased $9 million, or 30%, to $37 million for the quarter ended March 31, 2010 compared to the same quarter in 2009. This increase was primarily due to a $6 million, or 61%, increase in revenues from fee based banking services and an increase in revenue from wealth management services, both of which were attributable to our Western Pennsylvania branches. Insurance and benefits consulting revenue, decreased only modestly despite the continued difficult economic conditions.

As a percent of total revenues, our noninterest income decreased to 24% for the quarter ended March 31, 2010 compared to 28% for the same quarter in 2009, reflective of the growth of our net interest income due to the assets acquired in the NatCity branch acquisition.

Noninterest Expense

For the quarter ended March 31, 2010, noninterest expenses increased $30 million to $93 million, compared to the same quarter in 2009, due to the increase in our supporting infrastructure for the September 2009 NatCity branch acquisition and April 2010 merger with Harleysville. Noninterest expenses for 2010 included $6 million in merger and acquisition integration expenses related to our April 2010 merger with Harleysville. These expenses are primarily comprised of $1 million in technology and communications, $1 million in marketing and advertising, and $3 million in professional services.

The addition of our Pennsylvania workforce in the third quarter of 2009 contributed $10 million of the increase in salaries and benefits for the first quarter of 2010 compared to the first quarter of 2009. The remaining increase is attributable to an increase in our workforce in anticipation of our merger with Harleysville, aspirational growth, routine merit increases, and an increase in performance-based incentive compensation. Both occupancy and equipment and technology and communications expenses increased due primarily to the additional NatCity branches and anticipated merger with Harleysville. Federal deposit insurance premiums increased $2 million during the first three months of 2010, as compared to the first three months of 2009, due to the increase in our deposit base as well as an industry wide increase in the assessment rate.

Our efficiency ratio for the current quarter decreased slightly to 61.7% as compared to 62.5% for the same quarter in 2009 reflecting our ability to successfully integrate the former NatCity branch locations. Excluding merger and acquisition integration expenses of $6 million and $2 million in the quarters ended March 31, 2010 and March 31, 2009, respectively, our efficiency ratio improved to 57.5% for the quarter ended March 31, 2010 as compared to 60.7% for the same quarter in 2009. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. This improvement was primarily due to a $3 million litigation settlement in the first quarter of 2009 coupled with our ability to grow organically and by acquisition in an efficient manner.

Income Taxes

Our effective tax rate for the three months ended March 31, 2010 decreased to 35.5% as compared to 35.8% for the same period in the prior year, primarily due to the apportionment of our income between Pennsylvania and New York in 2010 resulting from the NatCity branch acquisition, partially offset by a higher level of income before taxes. Our effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and certain tax-related items.

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CAPITAL RESOURCES

During the quarter ended March 31, 2010, our stockholders’ equity increased $33 million due primarily to our net income of $29 million and $26 million in net unrealized gains, net of taxes, on our securities available for sale arising during the quarter. These amounts were partially offset by common stock dividends paid during the quarter. For the three months ended March 31, 2010, we declared common stock dividends of $0.14 per share, or $26 million, representing a payout ratio of 88%. At this time, we do not anticipate increasing our per share dividend as it is important that we preserve our liquidity and maintain our strong capital position in the current economic environment.

At March 31, 2010, we held 6.1 million shares of our common stock as treasury shares with the authorization to repurchase 3.5 million additional shares as part of our capital management initiatives. During the first three months of 2010, we did not make any repurchases of our common stock. We issued 504 thousand shares from treasury stock in connection with the exercise of stock options and grants of restricted stock awards during the first quarter of 2010. While treasury stock purchases are an important component of our capital management strategy, we currently have no plans to make additional purchases.

On April 29, 2010, we filed with the Delaware Secretary of State a certificate of amendment to our certificate of incorporation increasing our authorized common shares from 250 million to 500 million. This increase was approved by our stockholders at our Annual Meeting on April 27, 2010.

Our capital ratios continue to exceed the regulatory guidelines for well-capitalized institutions. The following table shows the Bank’s ratios as of March 31, 2010. The regulatory guidelines are intended to reflect the varying degrees of risk associated with different on- and off-balance sheet items (amounts in thousands).

											To be well capitalized
						Minimum					under prompt corrective
	Actual					capital adequacy					action provisions
	Amount		Ratio			Amount		Ratio			Amount		Ratio
Tangible capital	$	1,047,747		7.55	%	$	208,226		1.50	%		N/A		N/A
Tier 1 (core) capital		1,047,747		7.55			555,269		4.00		$	694,087		5.00	%
Tier 1 risk based capital		1,047,747		13.08			320,360		4.00			480,540		6.00
Total risk based capital		1,137,235		14.20			640,720		8.00			800,900		10.00

We manage our capital position to ensure that our capital base is sufficient to support our current and future business needs, satisfy existing regulatory requirements, and meet appropriate standards of safety and soundness.

We also consider certain non-GAAP financial measures, on a consolidated basis, to be meaningful measures of capital quality. Tangible common equity to tangible assets represents common stockholders’ equity less goodwill of $879 million at March 31, 2010 and December 31, 2009 and core deposit and other intangibles of $53 million and $56 million at March 31, 2010 and December 31, 2009, respectively, divided by total assets less goodwill and core deposit and other intangibles. This ratio remained steady at 10.51% at March 31, 2010, compared to 10.54% at December 31, 2009. Tangible common equity to risk-weighted assets represents common stockholders’ equity less goodwill and core deposit and other intangibles divided by risk-weighted assets. This ratio improved slightly to 18.3% at March 31, 2010 from 17.8% at December 31, 2009.

LIQUIDITY

Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. We manage our liquidity to ensure that we have sufficient cash to:

• Support our operating and investing activities.

• Meet increases in demand for loans and other assets.

• Provide for decreases in deposits.

• Minimize excess balances in lower yielding asset accounts.

Cash, interest-bearing demand accounts at correspondent banks and brokerage houses, federal funds sold, and short-term money market investments are our most liquid assets. The levels of those assets are monitored daily and are dependent on operating, financing, lending, and investing activities during any given period. Excess short-term liquidity is usually invested in overnight federal funds sold. In the event that funds beyond those generated internally are required due to higher than expected loan demand, deposit outflows, or the amount of debt maturing, additional sources of funds are available through the use of FHLB advances, repurchase agreements, the sale of loans or investments, or the use of our lines of credit.

Our standing in the national markets, and our ability to obtain funding from them, are taken into consideration as part of our liquidity management strategies. Our credit rating is investment grade, and substantiates our financial stability and consistency of our earnings. Fitch Ratings has assigned us a long-term issuer default rating of BBB and a short-term issuer rating of F2, and in January 2010, Moody’s Investors Service and Standard & Poor’s Ratings Service assigned us first time long-term issuer credit ratings of Baa1 and BBB-, respectively. These ratings increase our ability to efficiently access the capital markets to meet our liquidity needs, as evidenced by our $300 million issuance of 6.75% Senior Notes in March of 2010.

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Factors or conditions that could affect our liquidity management objectives include changes in the mix of items on our balance sheet; our investment, loan, and deposit balances; our reputation; and our credit rating. A significant change in our financial performance or credit rating could reduce the availability, or increase the cost, of funding from the national markets. To date, we have not seen any negative impact in availability of funding as a result of the broader credit and liquidity issues being seen elsewhere.

We use a mix of liquidity sources, including deposit balances, cash generated by our investment and loan portfolios, short and long-term borrowings, as well as short-term federal funds, internally generated capital, and other credit facilities.

As of March 31, 2010, our total available cash, interest-bearing demand accounts, federal funds sold, and other money market investments was $187 million. In addition to cash flow from operations, deposits, and borrowings, funding is provided from the principal and interest payments received on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit balances and the pace of mortgage prepayments are greatly influenced by the level of interest rates, the economic environment, and local competitive conditions.

Our primary investing activities are the origination of loans, the purchase of investment securities, and the acquisition of banking and financial services companies. Our higher level of commercial loan growth in 2010 has been funded primarily by liquidity obtained in the NatCity acquisition.

We have a total borrowing capacity of up to $5.6 billion from various funding sources which include the Federal Home Loan Bank, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $2.1 billion was utilized as of March 31, 2010. In order to provide us with an alternative funding source and to repay the $150 million, 12% senior notes we had issued and NatCity purchased, in March of 2010 we issued $300 million of 6.75% Senior Notes due March 19, 2020.

In the ordinary course of business, we extend commitments to originate commercial and residential mortgages, commercial loans, and other consumer loans. Commitments to extend credit are agreements to lend to a customer as long as conditions established under the contract are not violated. Our commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the customer. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. In addition, we may extend commitments on fixed rate loans which expose us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. At March 31, 2010, we had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $2.2 billion.

Included in these commitments are lines of credit to both consumer and commercial customers. The borrower is able to draw on these lines as needed, therefore our funding requirements for these products are generally more difficult to predict. Our credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the total amount of these instruments. Unused commercial lines of credit amounted to $1.4 billion at March 31, 2010 and generally have an expiration period of less than one year. Home equity and other consumer unused lines of credit totaled $521 million at March 31, 2010 and have an expiration period of up to ten years.

In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Standby letters of credit amounted to $142 million at March 31, 2010 and generally have an expiration period of less than two years. Since a significant portion of our unused commercial lines of credit and the majority of our outstanding standby letters of credit expire without being funded, our obligation under the above commitment amounts may be substantially less than the amounts reported. It is anticipated that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations.

Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we were committed to sell $89 million in residential mortgages at March 31, 2010.

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Loan Maturity and Repricing Schedule

The following table sets forth certain information at March 31, 2010 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal (in thousands):

	Within one		One through
	year		five years		After five years		Total
Commercial:
Real estate	$	1,147,698	$	1,488,736	$	110,790	$	2,747,224
Construction		366,343		19,639		234		386,216
Business		1,235,435		275,654		58,559		1,569,648
Specialized lending		89,990		116,036		—		206,026
Total commercial		2,839,466		1,900,065		169,583		4,909,114
Residential real estate		424,549		761,082		422,359		1,607,990
Home equity		444,361		142,234		115,880		702,475
Other consumer		88,376		49,726		50,604		188,706
Total loans and leases	$	3,796,752	$	2,853,107	$	758,426	$	7,408,285

For the loans reported in the preceding table, the following sets forth at March 31, 2010, the dollar amount of all of our fixed-rate and adjustable-rate loans due after March 31, 2011 (in thousands):

	Fixed		Adjustable		Total
Commercial:
Real estate	$	746,296	$	853,230	$	1,599,526
Construction		19,873		—		19,873
Business		306,029		28,184		334,213
Specialized lending		116,036		—		116,036
Total commercial		1,188,234		881,414		2,069,648
Residential real estate		1,117,402		66,039		1,183,441
Home equity		258,114		—		258,114
Other consumer		100,330		—		100,330
Total loans and leases	$	2,664,080	$	947,453	$	3,611,533

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

Our primary market risk is interest rate risk, which is defined as the potential variability of our earnings that arises from changes and volatility in market interest rates. Changes in market interest rates, whether they are increases or decreases, and the pace at which the changes occur can trigger repricings and changes in the pace of payments, which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively.

Most of the yields on our earning assets, including floating-rate loans and investments, are related to market interest rates. So is our cost of funds, which includes the rates we pay on interest-bearing deposits and borrowings. Interest rate risk occurs when the interest income (yields) we earn on our assets changes at a pace that differs from the interest expense (rates) we pay on liabilities.

Our Asset and Liability Committee, which is comprised of members of executive management, monitors our sensitivity to interest rates and approves strategies to manage our exposure to interest rate risk. Our goal is to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates.

The primary tool we use to assess our exposure to interest rate risk is a computer modeling technique that simulates the effects of variations in interest rates on net interest income. These simulations, which we conduct at least quarterly, compare multiple hypothetical interest rate scenarios to a stable or current interest rate environment.

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The following table shows the estimated impact on net interest income for the next 12 months resulting from potential changes in interest rates. The calculated changes assume a gradual parallel shift across the yield curve over the next 12 months. The effects of changing the yield curve slope are not considered in the analysis, nor do we consider changes in the spread relationships between various indexes which impact our net interest income. These estimates require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on our net interest income. Actual results may differ significantly due to timing, magnitude, and frequency of interest rate changes and changes in market conditions (amounts in thousands):

	Calculated decrease at March 31, 2010
Changes in interest rates(1)	Net interest income			% Change
	(in thousands)
+200 basis points	$	(4,349	)		(0.92)	%
+100 basis points		(2,650	)		(0.56	)

⁽¹⁾ The Federal Reserve benchmark overnight federal funds rate was 0.25% at March 31, 2010, therefore, the calculation of the effect of a decrease in interest rates is not measurable.

ITEM 4. Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of March 31, 2010 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective as of March 31, 2010.

During the quarter ended March 31, 2010, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

In the ordinary course of business, we are involved in various threatened and pending legal proceedings. We believe that we are not a party to any pending legal, arbitration, or regulatory proceedings that would have a material adverse impact on our financial results or liquidity. Certain legal proceedings in which we are involved are described below:

The Company was named as a defendant in two class actions filed in the Court of Common Pleas, Montgomery County, Pennsylvania: Seibert v. Harleysville National Corp., et al.; and McAuvic v. Geraghty, et al. Both actions challenged the terms of the merger between the Company and Harleysville (the “Merger”). The Seibert and McAuvic complaints each charged that Harleysville and its directors breached their fiduciary duties to Harleysville stockholders by failing to negotiate a fair price for Harleysville stock. In addition, the plaintiffs claimed that the process leading to the Merger was unfair. The complaints alleged that the Company aided and abetted the breaches of fiduciary duty by Harleysville National and its directors. The complaints sought to enjoin the Merger and to recover money damages. A substantially similar case was filed in Montgomery County naming only Harleysville and its directors as defendants: Shoemaker v. Geraghty, et al. On April 14, 2010, plaintiffs filed stipulations dismissing all three of these cases, without prejudice.

On January 4, 2010, a complaint was filed in the United States District Court for the Eastern District of Pennsylvania in a case entitled Valerius, et al. v. Geraghty, et al. That complaint alleged that the Harleysville proxy issued in connection with the Merger was materially misleading. It named Harleysville and its directors as defendants and sought to enjoin the proposed Merger. On January 15, 2010, the Company was sued in the United States District Court for the Eastern District of Pennsylvania in a case entitled Shoemaker, et al. v. Geraghty, et al. The complaint named the Company and Harleysville and its directors as defendants and asserted that the Harleysville proxy issued in connection with the Merger was incomplete and materially misleading. On February 3, 2010, another complaint was filed in the United States District Court for the Eastern District of Pennsylvania in a case entitled Maffia v. Geraghty, et al. against Harleysville and its directors. The claims in Maffia were substantially the same as those alleged in Valerius.

On February 8, 2010, plaintiffs filed a stipulation of dismissal with prejudice in the Shoemaker action. On February 26, 2010, plaintiffs in the Valerius and Maffia actions filed stipulations dismissing those actions with prejudice.

In late July and early August 2009, four shareholder derivative actions were filed in the Court of Common Pleas, Philadelphia County, Pennsylvania, naming Harleysville and its directors as defendants: Valerius v. Geraghty, et al.; Silver v. Bergey, et al.; Davis v. Geraghty, et al.; and Forbes v. Geraghty, et al. Each of these actions charges Harleysville and its directors with breaching their fiduciary duties to Harleysville stockholders by failing to negotiate a fair price for Harleysville stock in connection with the Merger. In addition, the plaintiffs claim that the process leading to the Merger was unfair. As pleaded, the complaints seek to enjoin and/or rescind the Merger, an award of attorneys’ fees and costs, and various additional relief. Because the Merger was consummated on April 9, 2010, the plaintiffs’ requests to enjoin the Merger have been mooted. The Company intends to move to dismiss the complaints. The Company believes that the claims in the complaints are without merit.

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ITEM 1A. Risk Factors

There are no material changes to the risk factors as previously discussed in Item 1A, to Part I of our 2009 Annual Report on Form 10-K.

ITEM 2. Unregistered Sales of Equity Securities and Use of Proceeds

a) Not applicable.

b) Not applicable.

c) We did not repurchase any shares of our common stock during the first quarter of 2010.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Submission of Matters to a Vote of Security Holders

No matters were submitted to a vote of security holders during the quarter ended March 31, 2010.

ITEM 5. Other Information

(a)	Not applicable.
(b)	Not applicable.

ITEM 6. Exhibits

The following exhibits are filed herewith:

Exhibits
	31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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SIGNATURES

Pursuant to the requirements of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned thereunto duly authorized.

	FIRST NIAGARA FINANCIAL GROUP, INC.
Date: May 3, 2010	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer
Date: May 3, 2010	By:	/s/ Michael W. Harrington
		Michael W. Harrington
		Chief Financial Officer

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