First Niagara Financial (FNFG) 10-Q 2008 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

_______________________

FORM 10-Q

_______________________

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

For the quarterly period ended September 30, 2008

OR

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

For the transition period from __________ to __________

Commission file number 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.)
6950 South Transit Road, P.O. Box 514, Lockport, NY	14095-0514
(Address of principal executive offices)	(Zip Code)
(716) 625-7500
(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.

YES x NO ¨

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 filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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

YES ¨ NO x

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.

YES ¨ NO ¨

The Registrant had 118,542,664 shares of Common Stock, $0.01 par value, outstanding as of November 4, 2008.

FIRST NIAGARA FINANCIAL GROUP, INC.

FORM 10-Q

For the Quarterly Period Ended September 30, 2008

TABLE OF CONTENTS

Item Number		Page Number
	PART I - FINANCIAL INFORMATION
1.	Financial Statements
	Consolidated Statements of Condition as of September 30, 2008 (unaudited) and December 31, 2007	3
	Consolidated Statements of Income for the three and nine months ended September 30, 2008 and 2007 (unaudited)	4
	Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2008 and 2007 (unaudited)	5
	Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2008 and 2007 (unaudited)	6
	Consolidated Statements of Cash Flows for the nine months ended September 30, 2008 and 2007 (unaudited)	7
	Notes to Consolidated Financial Statements (unaudited)	8
2.	Management’s Discussion and Analysis of Financial Condition and Results of Operations	16
3.	Quantitative and Qualitative Disclosures about Market Risk	28
4.	Controls and Procedures	28
	PART II - OTHER INFORMATION
1.	Legal Proceedings	29
1A.	Risk Factors	29
2.	Unregistered Sales of Equity Securities and Use of Proceeds	30
3.	Defaults Upon Senior Securities	30
4.	Submission of Matters to a Vote of Security Holders	30
5.	Other Information	30
6.	Exhibits	30
	Signatures	31

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Condition 

(in thousands, except share and per share amounts)

	September 30,			December 31,
	2008			2007
	(unaudited)
Assets
Cash and cash equivalents	$	144,254			114,991
Restricted cash		3,992			—
Securities available for sale		1,250,074			1,217,164
Loans held for sale		2,106			3,278
Loans and leases, net of allowance for credit losses of $77,664 and $70,247 in 2008 and 2007		6,341,708			5,651,427
Bank owned life insurance		126,177			108,875
Premises and equipment, net		94,231			88,687
Goodwill		766,302			706,924
Core deposit and other intangibles		37,612			43,147
Other assets		241,927			161,735
Total assets	$	9,008,383			8,096,228
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	5,816,720			5,548,984
Short-term borrowings		771,683			500,258
Long-term borrowings		832,094			594,723
Other liabilities		146,864			99,084
Total liabilities		7,567,361			6,743,049
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 250,000,000 shares authorized; 125,419,261 and 120,044,736 shares issued in 2008 and 2007		1,254			1,200
Additional paid-in capital		1,322,762			1,244,766
Retained earnings		364,491			344,656
Accumulated other comprehensive loss		(13,529	)		(2,604	)
Common stock held by ESOP; 3,134,547 and 3,323,662 shares in 2008 and 2007		(24,131	)		(25,350	)
Treasury stock, at cost; 15,427,226 and 15,274,479 shares in 2008 and 2007		(209,825	)		(209,489	)
Total stockholders’ equity		1,441,022			1,353,179
Total liabilities and stockholders’ equity	$	9,008,383			8,096,228

See accompanying notes to consolidated financial statements.

3

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Income(unaudited) 

(in thousands, except per share amounts)

	Three months ended				Nine months ended
	September 30,				September 30,
	2008		2007		2008		2007
Interest income:
Loans and leases	$	94,459		95,556		283,253		282,320
Securities available for sale and other investments		15,492		11,355		48,087		33,332
Total interest income		109,951		106,911		331,340		315,652
Interest expense:
Deposits		25,959		40,458		94,722		119,080
Borrowings		13,792		10,748		39,747		27,601
Total interest expense		39,751		51,206		134,469		146,681
Net interest income		70,200		55,705		196,871		168,971
Provision for credit losses		6,500		2,100		14,500		6,000
Net interest income after provision for credit losses		63,700		53,605		182,371		162,971
Noninterest income:
Banking services		10,390		10,071		29,655		29,177
Insurance and benefits consulting		12,302		13,345		38,193		40,083
Wealth management services		2,686		2,412		7,763		7,247
Lending and leasing		2,224		2,191		6,704		6,276
Bank owned life insurance		1,294		1,144		3,726		3,760
Other		293		567		2,051		1,443
Total noninterest income		29,189		29,730		88,092		87,986
Noninterest expense:
Salaries and employee benefits		33,914		30,159		101,177		95,428
Occupancy and equipment		5,744		5,544		18,716		23,010
Technology and communications		4,971		4,770		14,910		14,514
Marketing and advertising		2,639		2,121		7,603		5,730
Professional services		1,061		1,243		3,058		3,210
Amortization of core deposit and other intangibles		2,146		2,570		6,606		7,900
Other		6,279		5,541		18,785		17,087
Total noninterest expense		56,754		51,948		170,855		166,879
Income before income taxes		36,135		31,387		99,608		84,078
Income taxes		12,395		10,284		33,976		27,830
Net income	$	23,740		21,103		65,632		56,248
Earnings per share:
Basic	$	0.22		0.21		0.62		0.55
Diluted	$	0.22		0.21		0.62		0.54
Weighted average common shares outstanding:
Basic		106,075		101,472		105,067		103,366
Diluted		106,795		102,059		105,671		104,033
Dividends per common share	$	0.14		0.14		0.42		0.40

See accompanying notes to consolidated financial statements.

4

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Comprehensive Income(unaudited) 

(in thousands)

	Three months ended September 30,					Nine months ended September 30,
	2008			2007		2008			2007
Net income	$	23,740			21,103		65,632			56,248
Other comprehensive (loss) income, net of income taxes:
Securities available for sale:
Net unrealized (losses) gains arising during the period		(5,122	)		5,394		(11,109	)		4,111
Net unrealized gains on interest rate swaps		152			—		152			—
Other adjustments		8			19		32			30
Total other comprehensive (loss) income		(4,962	)		5,413		(10,925	)		4,141
Total comprehensive income	$	18,778			26,516		54,707			60,389

See accompanying notes to consolidated financial statements.

5

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Changes in Stockholders’ Equity (unaudited) 

(in thousands, except per share amounts)

									Accumulated			Common
			Additional						other			stock
	Common		paid-in			Retained			comprehensive			held by			Treasury
	stock		capital			earnings			loss			ESOP			Stock			Total
Balances at January 1, 2008	$	1,200		1,244,766			344,656			(2,604	)		(25,350	)		(209,489	)		1,353,179
Adoption of SFAS No. 158		—		—			(117	)		—			—			—			(117	)
Balances at January 1, 2008, as adjusted		1,200		1,244,766			344,539			(2,604	)		(25,350	)		(209,489	)		1,353,062
Net income		—		—			65,632			—			—			—			65,632
Common stock issued for the acquisition of Great Lakes Bancorp, Inc.		54		73,728			—			—			—			—			73,782
Total other comprehensive loss, net		—		—			—			(10,925	)		—			—			(10,925	)
Purchase of treasury stock		—		—			—			—			—			(6,795	)		(6,795	)
ESOP shares committed to be released		—		985			—			—			1,219			—			2,204
Stock-based compensation expense		—		4,507			—			—			—			—			4,507
Net tax benefits related to stock-based compensation		—		603			—			—			—			—			603
Exercise of stock options and restricted stock activity		—		(1,827	)		(1,750	)		—			—			6,459			2,882
Common stock dividend of $0.42 per share		—		—			(43,930	)		—			—			—			(43,930	)
Balances at September 30, 2008	$	1,254		1,322,762			364,491			(13,529	)		(24,131	)		(209,825	)		1,441,022

									Accumulated			Common
			Additional						other			stock
	Common		paid-in			Retained			comprehensive			held by			Treasury
	stock		capital			earnings			loss			ESOP			stock			Total
Balances at January 1, 2007	$	1,200		1,237,816			322,745			(19,877	)		(26,816	)		(127,871	)		1,387,197
Net income		—		—			56,248			—			—			—			56,248
Total other comprehensive income, net		—		—			—			4,141			—			—			4,141
Purchase of treasury stock		—		—			—			—			—			(85,695	)		(85,695	)
ESOP shares committed to be released		—		769			—			—			1,115			—			1,884
Stock-based compensation expense		—		5,141			—			—			—			—			5,141
Net tax benefits related to stock-based compensation		—		1,599			—			—			—			—			1,599
Exercise of stock options and restricted stock activity		—		(3,110	)		(4,569	)		—			—			11,086			3,407
Common stock dividend of $0.40 per share		—		—			(41,609	)		—			—			—			(41,609	)
Balances at September 30, 2007	$	1,200		1,242,215			332,815			(15,736	)		(25,701	)		(202,480	)		1,332,313

See accompanying notes to consolidated financial statements.

6

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

Consolidated Statements of Cash Flows (unaudited) 

(in thousands)

	Nine months ended September 30,
	2008			2007
Cash flows from operating activities:
Net income	$	65,632			56,248
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of fees and discounts, net		5,048			3,912
Provision for credit losses		14,500			6,000
Depreciation of premises and equipment		8,177			8,966
Impairment loss from real estate writedowns		890			5,493
Amortization of core deposit and other intangibles		6,606			7,900
Originations of loans held for sale		(75,358	)		(61,955	)
Proceeds from sales of loans held for sale		76,728			62,236
Gain on sale of loans		(199	)		(409	)
Gain on sale of securities		—			(214	)
ESOP and stock-based compensation expense		6,711			7,423
Deferred income tax expense (benefit)		648			(3,194	)
Income from bank owned life insurance		(3,726	)		(3,223	)
Net increase in other assets		(4,942	)		(844	)
Net increase in other liabilities		28,122			25,165
Net cash provided by operating activities		128,837			113,504
Cash flows from investing activities:
Proceeds from maturities of securities available for sale		248,536			177,675
Principal payments received on securities available for sale		154,884			115,613
Purchases of securities available for sale		(236,041	)		(323,436	)
Loan originations in excess of principal payments		(159,792	)		(184,742	)
Acquisitions, net of cash and cash equivalents		(84,719	)		(10,778	)
Other, net		(23,342	)		(17,770	)
Net cash used in investing activities		(100,474	)		(243,438	)
Cash flows from financing activities:
Net decrease in deposits		(325,699	)		(4,283	)
Proceeds from short-term borrowings, net		120,777			26,146
Proceeds from long-term borrowings		265,000			196,100
Repayments of long-term borrowings		(12,285	)		(20,745	)
Proceeds from exercise of stock options		3,229			3,591
Excess tax benefit from stock-based compensation		603			1,599
Purchase of treasury stock		(6,795	)		(85,695	)
Dividends paid on common stock		(43,930	)		(41,609	)
Net cash provided by financing activities		900			75,104
Net increase (decrease) in cash and cash equivalents		29,263			(54,830	)
Cash and cash equivalents at beginning of period		114,991			187,652
Cash and cash equivalents at end of period	$	144,254			132,822
Cash paid during the period for:
Income taxes	$	35,131			28,109
Interest expense		134,708			145,018
Acquisition of noncash assets and liabilities:
Assets acquired		902,388			11,341
Liabilities assumed		743,888			563
Loans transferred to other real estate owned		3,784			342
Loans securitized	$	—			164,284

See accompanying notes to consolidated financial statements.

7

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

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. 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 provided by the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. Results for the nine months ended September 30, 2008 do not necessarily reflect the results that may be expected for the year ending December 31, 2008. Certain reclassification adjustments were made to the prior period financial statements to conform to the current presentation. The Company and the Bank are referred to collectively as “we” or “our.”

Note 1. Acquisition

Greater Buffalo Savings Bank

On February 15, 2008, we acquired all of the outstanding common shares of Great Lakes Bancorp, Inc. (“Great Lakes”), the parent company of Greater Buffalo Savings Bank. Under the terms of the merger agreement, Great Lakes stockholders received 5.4 million shares of First Niagara Financial Group, Inc. stock as well as cash consideration totaling $75.8 million in the aggregate. Capitalized costs related to the acquisition, primarily investment banking and professional fees, totaled approximately $1.1 million.

The results of Great Lakes’ operations are included in our 2008 Consolidated Statement of Income from the date of acquisition. The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Securities available for sale	$	211,752
Loans, net		546,927
Goodwill		59,154
Core deposits and other intangibles		879
Other assets		75,873
Total assets acquired		894,585
Deposits		593,252
Borrowings		137,718
Other liabilities		12,918
Total liabilities assumed		743,888
Net assets acquired	$	150,697

The core deposits and other intangible assets are being accreted, or amortized, over the estimated useful life of the acquired asset or liability as an adjustment to yield. The goodwill, which is not amortized, was assigned to our banking segment and is not deductible for tax purposes.

In December 2007, Greater Buffalo Savings Bank entered into a definitive agreement to sell two branch locations with deposits totaling $19.7 million and premises and equipment with a fair value of $3.0 million. This transaction closed on March 15, 2008. These deposit liabilities and premises and equipment have been excluded from the assets acquired and liabilities assumed shown above.

In accordance with Statement of Financial Accounting Standards (“SFAS”) No. 141, “Business Combinations,” the assets acquired and liabilities assumed from Great Lakes were recorded at fair value on the date of acquisition.

The fair value of available for sale securities acquired from Great Lakes was obtained from a third party, which considers observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other factors.

The estimation of the fair value for loans acquired from Great Lakes employed a pooling methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were estimated using an estimated rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans in existence at the acquisition date.

8

The fair value for savings and transaction deposit accounts acquired from Great Lakes was assumed to approximate the carrying value as of the acquisition date due to the variable-rate nature of these products. Certificates of deposit accounts were valued comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The portfolio was segregated into monthly pools. For each pool, the projected cash flows from maturing certificates were then calculated based on contractual rates and prevailing market rates. The valuation adjustment for each pool is equal to the present value of the difference of these two cash flows, discounted at the assumed market rate for a certificate with a corresponding maturity.

The fair value of borrowings assumed from Great Lakes was provided by third parties or estimated using the present value of projected cash flows from maturing borrowings, discounted utilizing current market rates of identical borrowings as of the acquisition date. One borrowing acquired from Great Lakes, due to its structure, was valued based on the most recent similarly structured borrowing of another financial institution.

Note 2. Loans and Leases 

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

	September 30, 2008			December 31, 2007
Commercial:
Real estate	$	2,157,421			1,902,334
Construction		332,180			292,675
Business		914,452			730,029
Total commercial loans		3,404,053			2,925,038
Residential real estate (1)		2,038,351			1,955,690
Home equity		607,800			503,779
Other consumer		152,640			127,169
Specialized lending (2)		184,739			183,747
Total loans and leases		6,387,583			5,695,423
Net deferred costs and unearned discounts		33,895			29,529
Allowance for credit losses		(77,664	)		(70,247	)
Total loans and leases, net	$	6,343,814			5,654,705

(1) Includes $2.1 million and $3.3 million of loans held for sale at September 30, 2008 and December 31, 2007, respectively.

(2) Includes commercial leases and financed insurance premiums.

The following table presents the analysis of the allowance for credit losses for the periods indicated:

	Nine months ended September 30,
	2008			2007
Balance at beginning of period	$	70,247			71,913
Charge-offs		(11,671	)		(8,279	)
Recoveries		1,698			1,418
Provision for credit losses		14,500			6,000
Acquired at acquisition date		2,890			—
Balance transferred(1)		—			(82	)
Balance at end of period	$	77,664			70,970

(1) Amount of credit loss reserves associated with mortgage loans securitized during the third quarter of 2007.

9

Note 3. Deposits 

The following is a summary of deposit balances for the dates indicated:

	September 30, 2008		December 31, 2007
Savings	$	778,794		786,759
Interest-bearing checking		521,206		468,165
Money market deposit accounts		1,915,122		1,607,137
Noninterest-bearing		693,424		631,801
Certificates		1,908,174		2,055,122
Total deposits	$	5,816,720		5,548,984

Note 4. Mortgage Servicing Rights

The following table summarizes changes in our Mortgage Serving Rights (“MSRs”) for the periods indicated:

	Nine months ended September 30,
	2008			2007
Balance at beginning of period	$	4,312			2,491
Addition of mortgage servicing rights		410			2,072
Amortization		(450	)		(219	)
Balance at end of period	$	4,272			4,344

We assess our MSRs on a quarterly basis for impairment based on their current fair value. If any impairment results after current market assumptions are applied, we will reduce the carrying value of our MSRs through a valuation allowance. We have not recorded any valuation allowance for the periods presented above. We amortize MSRs in proportion to the estimated net servicing revenues to be recognized over their expected lives. The balance of MSRs is included in other assets in the Consolidated Statements of Condition.

Note 5. Interest Rate Swap 

To hedge the interest rate risk on certain variable-rate long-term borrowings, we entered into two interest rate swaps in September 2008, each with a notional amount of $25.0 million and a maturity date of September 2011. We used these swaps to convert a total of $50.0 million of London Inter-Bank Offered Rate (LIBOR) based variable-rate long-term borrowings to fixed rate borrowings. We accounted for these swaps as cash flow hedges in accordance with SFAS No. 133, “Accounting for Derivatives Instruments and Hedging Activities.” At September 30, 2008, the unrealized gain on the swaps, net of deferred taxes, was $152 thousand and is included in total comprehensive income in the Consolidated Statements of Comprehensive Income.

Note 6. Stock-Based Compensation

We offer several stock-based incentive compensation plans to directors and certain employees, including a stock option plan, a restricted stock plan, and a long-term performance-based equity compensation plan. We account for these plans under SFAS No. 123(R), “Share-Based Payment,”which requires us to record compensation costs related to awards under the plans at the time such awards are granted.

The total expense recognized for our stock-based compensation plans was $4.5 million and $5.1 million during the nine months ended September 30, 2008 and 2007, respectively. The amounts recognized include expenses relating to pre-existing stock awards, new grants awarded during the current period, and expenses relating to equity awards accelerated in connection with employee retirements. These amounts are included as part of salaries and employee benefits expense in the Consolidated Statements of Income.

10

Note 7. Earnings Per Share

The following table is a computation of our basic and diluted earnings per share for the periods indicated:

	Three months ended						Nine months ended
	September 30,						September 30,
	2008			2007			2008			2007
Net income available to common shareholders	$	23,740			21,103			65,632			56,248
Weighted average common shares outstanding:
Total shares issued		125,419			120,045			124,536			120,045
Unallocated ESOP shares		(3,196	)		(3,468	)		(3,260	)		(3,506	)
Unvested restricted stock awards		(542	)		(557	)		(558	)		(560	)
Treasury shares		(15,606	)		(14,548	)		(15,651	)		(12,613	)
Total basic weighted average common shares outstanding		106,075			101,472			105,067			103,366
Incremental shares from assumed exercise of stock options		460			468			365			539
Incremental shares from assumed vesting of restricted stock awards		260			119			239			128
Total diluted weighted average common shares outstanding		106,795			102,059			105,671			104,033
Basic earnings per share	$	0.22			0.21			0.62			0.55
Diluted earnings per share	$	0.22			0.21			0.62			0.54
Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations		631			909			793			874

Note 8. Fair Value Measurements

As of January 1, 2008, we adopted SFAS No. 157, “Fair Value Measurements,” which defines fair value, establishes a framework for measuring fair value in GAAP, and enhances disclosures about fair value measurements for financial assets and financial liabilities. In accordance with Financial Accounting Standards Board (“FASB”) Staff Position No. 157-2, “Effective Date of FASB Statement No. 157,” we have delayed the application of SFAS No. 157 for nonfinancial assets, such as goodwill and real property held for sale, and nonfinancial liabilities until January 1, 2009.

The fair value hierarchy established by SFAS No. 157 is based on observable and unobservable inputs participants use to price an asset or liability. SFAS No. 157 has prioritized these inputs into the following fair value hierarchy:

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 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. These valuation methodologies were applied to all of the Company’s financial assets and liabilities carried at fair value effective January 1, 2008.

11

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available for Sale. The fair value of our available for sale securities portfolio was estimated using Level 2 inputs. We obtain fair value measurements from a third party. The fair value measurements consider observable data that may include dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other factors. At September 30, 2008, the carrying value and estimated fair value, using Level 2 inputs, of our securities available for sale was $1.2 billion.

During the quarter ended September 30, 2008, we determined that the collateralized debt obligations included in our securities available for sale portfolio should be transferred from Level 2 to Level 3 of the fair value hierarchy due to the lack of observable market data. At September 30, 2008, the carrying value and estimated fair value, using Level 3 inputs, of our collateralized debt obligations was $1.2 million.

Interest Rate Swaps. 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 material 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.

We obtain fair value measurements of our interest rate swaps from a third party. The fair value measurements are determined using the 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 collateral postings, thresholds, mutual puts, and guarantees are also considered in the fair value measurement. At September 30, 2008, the carrying value and estimated fair value, using Level 2 inputs, of our interest rate swaps was $252 thousand.

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

Impaired Loans. Certain impaired loans are reported at the fair value of the underlying collateral if repayment is expected solely from collateral. Collateral values are estimated using Level 2 inputs based on appraisals of similar properties obtained from a third party. During the quarter, we recorded a $2.8 million increase to our specific reserve as a result of adjusting the carrying value and estimated fair value of certain impaired loans to $4.2 million.

Note 9. 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 years of credited service are not considered when computing an employee’s benefits under the Plan.

We account for our pension and postretirement plans in accordance with SFAS No. 158, “Employers' Accounting for Defined Benefit Pension and Other Postretirement Plans,” which requires us to recognize in our financial statements an asset for a plan’s overfunded status or a liability for a plan’s underfunded status. We report changes in the funded status of our pension and postretirement plan as a component of other comprehensive income, net of applicable taxes, in the year in which changes occur.

In 2008, we adopted the measurement provision of SFAS No. 158 which requires our plans’ assets and obligations that determine its future funded status to be measured as of the end of our fiscal year. As a result of our change in measurement date, we recorded an adjustment to our January 1, 2008 retained earnings of $117 thousand.

12

Periodic pension and postretirement cost (benefit), 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					Nine months ended
	September 30,					September 30,
Pension plans:		2008		2007			2008		2007
Interest cost	$	950		928			2,851		2,785
Expected return on plan assets		(934	)	(1,242	)		(2,804	)	(3,727	)
Amortization of unrecognized loss		—		37			—		112
Net pension cost (benefit)	$	16		(277	)		47		(830	)

	Three months ended					Nine months ended
	September 30,					September 30,
Other postretirement plans:		2008		2007			2008		2007
Interest cost	$	141		116			424		347
Amortization of unrecognized loss		4		4			10		12
Amortization of unrecognized prior service liability		(16	)	(16	)		(48	)	(48	)
Net postretirement cost	$	129		104			386		311

Note 10. Segment Information

We have two business segments: banking and financial services. The banking segment includes our retail and commercial banking operations, as well as our investment management and advisory operations, which were previously included in our financial services segment. The selected financial information below for the three and nine months ended September 30, 2007 reflects this realignment. The 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:

For the three months ended:	Banking		Financial Services		Consolidated Total
September 30, 2008
Net interest income	$	70,200		—		70,200
Provision for credit losses		6,500		—		6,500
Net interest income after provision for credit losses		63,700		—		63,700
Noninterest income		16,848		12,341		29,189
Amortization of core deposit and other intangibles		1,273		873		2,146
Other noninterest expense		44,166		10,442		54,608
Income before income taxes		35,109		1,026		36,135
Income tax expense		12,043		352		12,395
Net income	$	23,066		674		23,740
September 30, 2007
Net interest income	$	55,705		—		55,705
Provision for credit losses		2,100		—		2,100
Net interest income after provision for credit losses		53,605		—		53,605
Noninterest income		16,364		13,366		29,730
Amortization of core deposit and other intangibles		1,554		1,016		2,570
Other noninterest expense		39,615		9,763		49,378
Income before income taxes		28,800		2,587		31,387
Income tax expense		9,221		1,063		10,284
Net income	$	19,579		1,524		21,103

13

For the nine months ended:	Banking		Financial Services		Consolidated Total
September 30, 2008
Net interest income	$	196,870		1		196,871
Provision for credit losses		14,500		—		14,500
Net interest income after provision for credit losses		182,370		1		182,371
Noninterest income		49,792		38,300		88,092
Amortization of core deposit and other intangibles		3,858		2,748		6,606
Other noninterest expense		132,642		31,607		164,249
Income before income taxes		95,662		3,946		99,608
Income tax expense		32,630		1,346		33,976
Net income	$	63,032		2,600		65,632
September 30, 2007
Net interest income	$	168,960		11		168,971
Provision for credit losses		6,000		—		6,000
Net interest income after provision for credit losses		162,960		11		162,971
Noninterest income		47,847		40,139		87,986
Amortization of core deposit and other intangibles		4,721		3,179		7,900
Other noninterest expense		129,027		29,952		158,979
Income before income taxes		77,059		7,019		84,078
Income tax expense		25,146		2,684		27,830
Net income	$	51,913		4,335		56,248

Note 11. Income Taxes

We are subject to routine audits of our tax returns by the Internal Revenue Service and the New York State Department of Taxation and Finance. With few exceptions, we are no longer subject to examinations by such tax authorities for years before 2004. The Internal Revenue Service commenced an examination of our federal income tax returns for 2005 and 2006 during the fourth quarter of 2007 that was completed during the second quarter of 2008. We did not have a material change to our financial position due to the settlement of this examination. The New York State Department of Taxation and Finance commenced an examination of our state income tax returns for 2004, 2005, and 2006 during the second quarter of 2008 that is anticipated to be completed by the end of the year. We do not anticipate a material change to our financial position due to the settlement of this examination.

Note 12. Recently Issued Accounting Pronouncements

In December 2007, the FASB released SFAS No. 141(R), “Business Combinations.” This standard revises and enhances the guidance set forth in SFAS No. 141 by establishing a definition for the “acquirer,” providing additional guidance on the recognition of acquired contingencies and noncontrolling interests, and broadening the scope of the standard to include all transactions involving a transfer in control, irrespective of the consideration involved in the transfer. SFAS No. 141(R) is effective for business combinations for which the acquisition date occurs in a fiscal year beginning on or after December 15, 2008. Although the standard will not have any impact on our current Consolidated Financial Statements, application of the new guidance could be significant to the Company in the context of future merger and acquisition activity.

In December 2007, the FASB released SFAS No. 160, “Noncontrolling Interests in Consolidated Financial Statements—an amendment of ARB No. 51.” This statement amends ARB 51 to establish accounting and reporting standards for the noncontrolling interest in a subsidiary and for the deconsolidation of a subsidiary. It clarifies that a noncontrolling interest in a subsidiary is an ownership interest in the consolidated entity that should be reported as equity in the consolidated financial statements. SFAS No. 160 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the implementation of this guidance to have a material impact on our Consolidated Financial Statements.

In March 2008, the FASB released SFAS No. 161, “Disclosures about Derivative Instruments and Hedging Activities-an amendment of FASB Statement No. 133.” This statement amends SFAS No. 133 by requiring enhanced disclosures to provide users with a better understanding of our objectives and strategies for using derivatives; how we account for derivatives and related hedge items; and how derivatives affect our financial position, financial performance, and cash flows. SFAS No. 161 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after November 15, 2008. We do not expect the implementation of this guidance to have a material impact on our Consolidated Financial Statements.

14

In May 2008, the FASB released SFAS No. 162, “The Hierarchy of Generally Accepted Accounting Principles.” This statement identifies the sources of accounting principles and the framework for selecting the accounting principles used in the preparation of financial statements of nongovernmental entities that are presented in conformity with generally accepted accounting principles in the United States. SFAS No. 162 is effective 60 days after the SEC’s approval of the Public Company Accounting Oversight Board amendments to AU Section 411, “The Meaning of Present Fairly in Conformity with Generally Accepted Accounting Principles.” We do not expect the implementation of this guidance to have a material impact on our Consolidated Financial Statements.

In June 2008, the FASB released Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This position requires unvested share-based payment awards that contain nonforfeitable rights to dividends or dividend equivalents to be treated as participating securities and included in the computation of earnings per share pursuant to the two-class method described in SFAS No. 128, “Earnings Per Share.” FSP EITF 03-6-1 is effective for fiscal years, and interim periods within those fiscal years, beginning on or after December 15, 2008. We do not expect the implementation of this guidance to have a material impact on our Consolidated Financial Statements.

In October 2008, the FASB released FSP 157-3, “Determining the Fair Value of a Financial Asset When the Market for That Asset is Not Active” to clarify the application of SFAS No. 157, “Fair Value Measurements,” in a market that is not active and to provide an example that illustrates key considerations in determining the fair value of a financial asset when the market for that asset is not active. Effective immediately for our interim financial statements as of September 30, 2008, the implementation of FSP 157-3 did not have a material impact on our Consolidated Financial Statements.

Note 13. Subsequent Events

On October 1, 2008, we issued 8.5 million shares of common stock from treasury in a syndicated stock offering at a price of $13.50 per share. Net proceeds totaled approximately $108.8 million after deducting underwriting discounts and commissions and offering expenses of $6.2 million.

On October 27, 2008, we received approval to participate in the U.S. Treasury’s Capital Purchase Program (“CPP”) under the Troubled Assets Relief Program (“TARP”). We have been approved for the maximum subscription amount of 3% of our risk-weighted assets as of June 30, 2008, which amounted to $185.6 million, in the form of nonvoting preferred stock. The preferred stock would pay a 5% cumulative dividend per year for five years, then 9% thereafter and is callable after three years. The U.S. Treasury would also receive warrants to purchase our common stock with an aggregate market price equal to 15% of the preferred stock they receive. Participation in the CPP would restrict us from increasing the dividend we pay on our common stock and from repurchasing shares of our common stock for three years without consent from the U.S. Treasury, in addition to limiting compensation paid to our executives. Pursuant to our review and approval of the terms and conditions of the CPP, we would receive the proceeds during the fourth quarter. We plan to use the proceeds to execute our growth strategy, which may include the acquisition of other financial services companies.

15

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 subsidiary 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 the annual report on Form 10-K for the year ended December 31, 2007 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

First Niagara Financial Group, Inc. is a Delaware corporation and financial holding company serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, which is a federally chartered savings bank subject to Office of Thrift Supervision regulation. We are a full-service, community focused bank in Upstate New York, with $9.0 billion in assets, $5.8 billion in deposits, and 114 full-service branch locations.

RECENT MARKET DEVELOPMENTS

In the past year, declining housing values have resulted in deteriorating economic conditions across the U.S., resulting in significant writedowns in the values of mortgage-backed securities and derivative securities by financial institutions, government sponsored entities, and major commercial and investment banks. This has led to decreased confidence in financial markets among borrowers, lenders, and depositors as well as extreme volatility in the capital and credit markets and the failure of some entities in the financial sector.

In an effort to restore confidence, liquidity, and stability to financial markets, the Emergency Economic Stabilization Act of 2008 (“EESA”) was signed into law on October 3, 2008. The EESA is expected to provide relief through the infusion of capital and the purchase of troubled assets from financial institutions. In addition, the EESA temporarily increased the limit on FDIC coverage to $250,000 through December 31, 2009.

Pursuant to the EESA, the U.S. Treasury created the Troubled Assets Relief Program (“TARP”). Under this program, the U.S Treasury will make available $250 billion of capital to financial institutions in the form of preferred stock. The U.S. Treasury will also receive warrants to purchase common stock with an aggregate market price equal to 15% of their preferred stock investment.

Additionally, on October 14, 2008, the Secretary of the Treasury invoked the systemic risk exception of the FDIC Improvement Act of 1991, enabling the FDIC to provide a 100% guarantee for newly-issued senior unsecured debt and noninterest bearing transaction deposit accounts at FDIC insured institutions under the Temporary Liquidity Guarantee Program. There is no cost to participating institutions for the first 30 days of the program and thereafter fees will be imposed at the rate of 75 basis points per year for newly issued senior unsecured debt and 10 basis points per year for noninterest bearing transaction deposit accounts.

As a result of the relative economic stability of our Upstate New York markets over the last few years, our market area has not experienced the turmoil created by these recent developments. Therefore, we have not noticed a significant impact on our daily operations; however, we cannot provide any assurance that in the future we will not be adversely affected by these events.

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 consumer and commercial deposit products. Additionally, we offer insurance and employee benefits consulting services through a wholly-owned subsidiary of the Bank. 

16

Our profitability is primarily dependent on the difference, or net spread, between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings. The rate we earn on our assets and the rate we pay on our liabilities is a function of the general level of interest rates and competition within our markets. This net 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.

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 concentrated in Upstate New York; therefore, our financial results are affected by economic conditions in this geographic area. At this point, Upstate New York has not been significantly impacted by the deteriorating economic conditions affecting other regions of the country. However, if we are unable to sustain our competitive posture or if economic conditions in our markets do deteriorate, both our ability to expand our business, as well as the quality of our loan portfolio, could materially impact our financial results.

We face significant competition both in attracting deposits and providing loans in the Upstate New York market. We compete with numerous banking and financial services companies, many of whom (whether regional or national) have substantially greater resources and lending capacity, and may offer certain services that we do not or cannot provide. In this marketplace, 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 have identified 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 subjective and complex judgments. Accordingly, our accounting policies relating to our allowance for credit losses, the accounting treatment and valuation of our investment securities portfolio, the analysis of the carrying value of goodwill, and income taxes are considered critical, as our judgments could have a material effect on our financial results. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2007 Form 10-K. A brief description of our current accounting policies involving significant management valuation judgments follows:

Allowance for Credit Losses

The allowance for credit losses represents our best estimate of expected potential losses related to our loan and lease portfolio. In establishing our provision for credit losses, we consider the estimated net realizable value of the underlying collateral, as well as several other factors including: (i) current economic conditions and the related impact on specific borrowers and industry groups, (ii) historical default experiences, and (iii) expected loss in the event of default.

While we use available information to estimate losses on loans, additional credit loss provisions may be necessary based on numerous factors, including changes in macro-economic conditions. To the best of our knowledge, the allowance for credit losses includes all losses that we believe are both probable and reasonable to estimate at the balance sheet date. However, there can be no assurance that the allowance for credit losses will be adequate to cover all losses that may in fact be incurred from our present loan and lease portfolio. Changes in the financial condition of individual borrowers, national and local economic conditions, historical loss experience, and the condition of the collateral at the time of sale may all affect the level of our allowance for credit losses.

We continually reassess the allowance and charge-off uncollectible loans against the reserve when circumstances do not warrant continuance of the loan as a viable asset. Recoveries of assets previously written off, if any, are credited to the allowance for credit losses account.

17

Investment Securities

All of our investment securities are classified as available for sale and recorded at fair value on our Statements of Condition. Unrealized gains or losses, net of the deferred tax effect, are reported in other comprehensive income as a separate component of stockholders’ equity. Fair values are based on prices obtained from a third party which considers such observable data as dealer quotes, market spreads, cash flows, market consensus prepayment speeds, credit information, and the bond’s terms and conditions, among other factors. We conduct a quarterly review and evaluation of the securities portfolio to determine if any declines in fair value are other than temporary. Any valuation decline that is determined to be other than temporary would require us to write down the security to fair value through a charge to current period operations.

Goodwill

We assess goodwill for impairment in accordance with applicable accounting guidance. This assessment is performed on an annual basis or when certain triggering events are deemed to have occurred and involves evaluating the estimated earnings from the related assets and liabilities of our business units based upon the present value of future cash flows. If the estimated fair value of a business segment to which we have allocated goodwill is less than the financial statement carrying value, we would record a charge against earnings to reduce the carrying value of the goodwill. 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 2007 Form 10-K.

Income Taxes

We account for income taxes using the asset and liability approach. Under this approach, deferred tax assets and liabilities are established for the temporary differences between the financial reporting basis and the tax basis of our assets and liabilities. Deferred tax assets and liabilities are measured using enacted tax rates expected to be in effect when such amounts are realized or settled. We must assess the likelihood that a portion or all of the deferred tax assets will not be realized. In doing so, judgments and estimates must be made regarding the projection of future taxable income. If necessary, a valuation allowance is established to reduce the deferred tax assets to the amount that is more likely than not to be realized.

In computing the income tax provision, estimates and assumptions must be made regarding the deductibility of certain expenses. It is possible that these estimates and assumptions may be disallowed as part of an examination by the various taxing authorities that we are subject to, resulting in additional income tax expense in future periods. In addition, we maintain a reserve related to uncertain tax positions. These uncertain tax positions are evaluated each reporting period to determine the level of reserve that is appropriate.

18

RESULTS FOR THE NINE MONTHS ENDED SEPTEMBER 30, 2008

Overview

Net income for the nine months ended September 30, 2008 increased $9.4 million, or 8 cents per diluted share, to $65.6 million, or 62 cents per diluted share, from $56.2 million, or 54 cents per diluted share, for the nine months ended September 30, 2007. Net income for the third quarter of 2008 was $23.7 million, or 22 cents per diluted share, compared with $21.1 million, or 21 cents per diluted share, for the third quarter of 2007.

Results for the third quarter of 2008 as compared to the second quarter of 2008 reflect a number of positive trends highlighted by an 18 basis point increase in our net interest margin to 3.68%, the highest level in over two years. This increase was driven by our pricing discipline, our asset/liability management efforts and an easing in competitive deposit rates. Other highlights are as follows:

· Net interest income increased by $3.6 million, or 5%, primarily due to a reduction in our funding costs.

· Yields on our interest bearing liabilities have declined 29 basis points, their lowest level in three years. This decline resulted from the maturation of higher rate certificates of deposit accounts, easing in competitive market deposit pricing, and a reduction in our borrowing costs.

· Commercial loan growth continued, despite difficult market conditions, with only modest credit quality weakening, as evidenced by only slight increases in our ratio of annualized net charge-offs to average loans outstanding and ratio of total nonaccruing loans to total loans.

Analysis of Financial Condition at September 30, 2008

Total assets increased $912.2 million from $8.10 billion at December 31, 2007 to $9.01 billion at September 30, 2008, primarily due to the Great Lakes acquisition during the first quarter of 2008. In addition, we noted the following positive balance trends during 2008:

· Higher-yielding commercial loans have grown to 53% of our loan portfolio, compared to 51% at December 31, 2007 and 50% one year ago.

· Our securities available for sale portfolio of $1.3 billion reflected the higher yielding securities added to the portfolio in the fourth quarter of 2007, which resulted in an average yield of 5.00% for the first nine months of 2008 as compared to an average yield of 4.40% for the same period in 2007.

· Deposit mix shift from certificates of deposit accounts into lower yielding money market deposit accounts and other core deposit products resulted in our core deposit accounts increasing to 67% of total deposits, compared to 63% at December 31, 2007 and 60% one year ago.

· Increase in lower cost wholesale borrowings resulted in average borrowings increasing to 20% of interest bearing liabilities for the nine month period ended September 30, 2008 as compared to 14% for the nine months ended September 30, 2007.

Lending Activities

Our loan portfolio is concentrated in commercial real estate and business loans, as well as residential mortgages. Our strategy continues to emphasize commercial loan originations which provide a higher yield than residential and consumer loans, in addition to providing opportunities to cross sell profitable merchant and cash management services. We also actively market home equity loans given their customer relationship building benefits. The following table presents the composition of our loan and lease portfolios as of the dates indicated (amounts in thousands):

	September 30, 2008						December 31, 2007
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	2,157,421			33.8	%	$	1,902,334			33.5	%
Construction		332,180			5.2			292,675			5.1
Business		914,452			14.3			730,029			12.8
Total commercial loans		3,404,053			53.3			2,925,038			51.4
Residential real estate		2,038,351			31.9			1,955,690			34.3
Home equity		607,800			9.5			503,779			8.9
Other consumer		152,640			2.4			127,169			2.2
Specialized lending		184,739			2.9			183,747			3.2
Total loans and leases		6,387,583			100.0	%		5,695,423			100.0	%
Net deferred costs and unearned discounts		33,895						29,529
Allowance for credit losses		(77,664	)					(70,247	)
Total loans and leases, net	$	6,343,814					$	5,654,705

19

Excluding the balances obtained from Great Lakes, total loans and leases increased $148.8 million from December 31, 2007, reflecting an increase in higher-yielding commercial loan balances of $288.7 million, or 12% annualized. Contributing to this growth was a $178.8 million, or 12% annualized, increase in commercial real estate loans and a $98.3 million, or 16% annualized, increase in business loans. These increases were driven by a growth in originations and historically low unscheduled loan payoffs as a result of decreased competition from larger banks and nonbank entities currently facing liquidity and capital issues. Somewhat offsetting these increases was a 20% annualized decrease in our other consumer loans portfolio, as we continue to deemphasize certain types of consumer loans, including indirect auto loans, and a 10% annualized decrease in residential real estate loans as consumer demand continues to be for long-term fixed rate products which we generally do not maintain in our portfolio.

Allowance for Credit Losses and Nonperforming Assets

Credit quality describes how our loans perform relative to their repayment terms. In general, when loan payments are timely and defaults are low, credit quality is high. As part of the lending process, subjective judgments about a borrower's ability to repay and the value of any underlying collateral are made prior to approving a loan.

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.

The following table presents the analysis of the allowance for credit losses for the periods indicated (amounts in thousands).

	Nine months ended September 30,
	2008			2007
Balance at beginning of period	$	70,247		$	71,913
Net charge-offs:
Charge-offs		(11,671	)		(8,279	)
Recoveries		1,698			1,418
Net charge-offs		(9,973	)		(6,861	)
Acquired at acquisition date		2,890			—
Provision for credit losses		14,500			6,000
Balance transferred(1)		—			(82	)
Balance at end of period	$	77,664		$	70,970
Ratio of annualized net charge-offs to average loans outstanding during the period		0.21	%		0.16	%
Ratio of annualized provision for credit losses to average loans outstanding during the period		0.31	%		0.14	%

(1) Amount of credit loss reserves associated with mortgage loans securitized during the third quarter of 2007.

The primary indicators of credit quality are the level of our nonperforming and classified loans as well as the net charge-off ratio which measures loan losses as a percentage of total loans outstanding. We place loans on nonaccrual status when they become more than 90 days past due, or earlier if there is uncertainty regarding the collectibility of interest or principal. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is reversed from income.

20

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

	September 30, 2008			December 31, 2007
Nonaccruing loans:
Commercial real estate	$	28,884		$	16,229
Commercial business		4,274			3,430
Residential real estate		5,167			3,741
Home equity		1,541			849
Other consumer		627			885
Specialized lending		4,205			2,920
Total nonaccruing loans		44,698			28,054
Real estate owned		2,782			237
Total nonperforming assets	$	47,480		$	28,291
Total nonaccruing loans as a percentage of total loans		0.70	%		0.49	%
Total nonperforming assets as a percentage of total assets		0.53	%		0.35	%
Allowance for credit losses to total loans		1.21	%		1.23	%
Allowance for credit losses to nonaccruing loans		174	%		250	%

Our credit quality trends continue to be consistent with expectations, in light of the softening economic climate combined with the maturation of our commercial loan portfolio. While our total nonperforming loans increased $10.3 million from the prior quarter, they still represent only 0.70% of our total loans, compared to 0.49% at December 31, 2007 and 0.53% at June 30, 2008. As a percentage, our allowance for credit losses to nonaccruing loans decreased to 174% at September 30, 2008 from 243% one year ago and 218% last quarter.

Total nonaccruing loans increased $16.6 million since December 31, 2007. Of this increase, $918 thousand was attributable to residential real estate and home equity loans obtained from Great Lakes, while the remaining increase was primarily attributable to certain commercial real estate and business loans. Net charge-offs to average loans outstanding increased slightly to 0.21% from 0.16% for the comparable nine months in 2007 and 0.19% from the prior quarter. We continue to have no exposure to subprime or Alt-A mortgages within our footprint. We believe the level of allowance is sufficient to cover losses in our loan portfolios. 

Investment Securities Portfolio

Our available for sale securities portfolio is comprised primarily of U.S. government agency securities, mortgage backed securities, collateralized mortgage obligations, and obligations of states and political subdivisions. Portions of our portfolio are utilized for pledging requirements for deposits of state and local subdivisions, securities sold under repurchase agreements, and FHLB advances.

At September 30, 2008, the balance of our securities portfolio was $1.25 billion, compared to $1.22 billion at December 31, 2007, with the increase attributable to the securities obtained in the Great Lakes acquisition offset by unrealized losses in our portfolio. Our investment portfolio remains well positioned to provide a stable source of cash flow with a weighted average estimated remaining life of 3.8 years at September 30, 2008.

During the quarter, net unrealized losses on available for sale investment securities, net of deferred tax effect increased $5.1 million to $11.1 million.  Generally, the value of our investment securities fluctuates inversely with changes in interest rates. The value of our securities may also be impacted by changes in credit or a temporary lack of liquidity in the market. The unrealized losses represent the difference between the estimated fair value and the amortized cost of our securities, net of the deferred tax effect.  As of September 30, 2008 our pre-tax net unrealized losses were $18.4 million with an amortized cost of $1.27 billion. The net loss position has primarily been caused by the significant upheaval in the mortgage and credit markets contributing to the lack of liquidity for certain asset classes. We have assessed the securities available for sale that were in an unrealized loss position and determined that the decline in fair value is temporary. 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 cost, the financial condition of the issuer (primarily U. S. government agencies or government sponsored enterprises), the delinquency or default rates of underlying collateral, and our ability and intent to hold these securities until their fair value recovers to their amortized cost. At this point we deem any unrealized losses to be temporary, as we have the ability and intent to hold our investment securities currently in an unrealized loss position to recovery. In addition, we do not hold any common or preferred stock of Federal National Mortgage Association (“FNMA”) or Federal Home Loan Mortgage Corporation (“FHLMC”).

21

Deposits

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

	September 30, 2008					December 31, 2007
	Amount		Percent			Amount		Percent
Core Deposits:
Savings	$	778,794		13.4	%	$	786,759		14.2	%
Interest-bearing checking		521,206		9.0			468,165		8.4
Money market deposit accounts		1,915,122		32.9			1,607,137		29.0
Noninterest-bearing		693,424		11.9			631,801		11.4
Total core deposits		3,908,546		67.2			3,493,862		63.0
Certificates		1,908,174		32.8			2,055,122		37.0
Total deposits	$	5,816,720		100.0	%	$	5,548,984		100.0	%

During the first nine months of 2008, our total deposit balances decreased $325.5 million, exclusive of $593.3 million in deposits acquired from Great Lakes. Certificate balances decreased $480.5 million, while money market deposit balances increased $289.9 million, indicative of the maturation of certificates of deposit accounts and our focus on growing profitable relationships. As a result, core deposits increased $154.9 million during the first nine months of 2008 and now comprise 67% of total deposits, up from 65% in the prior quarter and 60% in the same quarter in 2007.

Our municipal deposit balances increased $35.3 million to $626.0 million at September 30, 2008 from December 31, 2007, exclusive of $45.0 million in municipal deposits acquired from Great Lakes. However, balances declined $46.8 million from the second quarter of 2008 as municipalities fund planned expenditures before fall tax collections replenish balances.

Borrowings

Wholesale borrowings increased $371.1 million, or 30%, during the first nine months of 2008 to $1.60 billion, excluding those assumed as part of the acquisition of Great Lakes. We used borrowings to support our loan growth while these funding costs are at comparatively low levels. Since December 31, 2007, we have originated $265.0 million in new long-term borrowings at rates that range from 3.01% to 3.83%, with an average weighted life of 3.4 years. These borrowings, together with the renewal of maturing existing borrowings, have contributed to a 54 basis point reduction in our borrowing costs during the first three quarters of 2008 as compared to the same period in 2007, and a 24 basis point reduction from the prior quarter.

22

RESULTS OF OPERATIONS FOR THE THREE AND NINE MONTHS ENDED SEPTEMBER 30, 2008 AND 2007

Net Interest Income

The following table presents our condensed average balance sheet information as well as tax equivalent interest income and yields. We use a tax 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 income tax rates adjusted for the nondeductible portion of interest expense that we incurred to acquire 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 September 30,
	2008									2007
	Average			Interest						Average			Interest
	outstanding			earned/			Yield/			outstanding			earned/			Yield/
	balance			paid			rate			balance			paid			rate
Interest-earning assets:
Loans and leases(1)	$	6,422,241		$	94,721			5.88	%	$	5,785,517		$	95,143			6.54	%
Securities available for sale and other investments(2)		1,346,186			16,678			4.95			1,166,486			13,463			4.61
Total interest-earning assets		7,768,427			111,399			5.72			6,952,003			108,606			6.22
Noninterest-earning assets(3)(4)		1,223,472									1,092,672
Total assets	$	8,991,899								$	8,044,675
Interest-bearing liabilities:
Savings deposits	$	802,900			525			0.26	%	$	881,145		$	773			0.35	%
Checking deposits		498,065			344			0.27			482,838			454			0.37
Money market deposits		1,963,454			10,386			2.10			1,393,680			13,208			3.76
Certificates of deposit		1,985,925			14,704			2.95			2,286,634			26,023			4.51
Borrowed funds		1,444,923			13,792			3.78			889,375			10,748			4.78
Total interest-bearing liabilities		6,695,267			39,751			2.36			5,933,672			51,206			3.42
Noninterest-bearing deposits		726,852									657,366
Other noninterest-bearing liabilities		131,998									126,245
Total liabilities		7,554,117									6,717,283
Stockholders’ equity(3)		1,437,782									1,327,392
Total liabilities and stockholders’ equity	$	8,991,899								$	8,044,675
Net interest income				$	71,648								$	57,401
Net interest rate spread								3.36	%								2.80	%
Net earning assets	$	1,073,161								$	1,018,331
Net interest rate margin					3.68	%								3.30	%
Ratio of average interest-earning assets to average interest-bearing liabilities		116.03	%								117.16	%

23

	Nine months ended September 30,
	2008									2007
	Average			Interest						Average			Interest
	outstanding			earned/			Yield/			outstanding			earned/			Yield/
	balance			paid			rate			balance			paid			rate
Interest-earning assets:
Loans and leases(1)	$	6,287,886		$	284,046			6.02	%	$	5,731,277		$	281,120			6.54	%
Securities available for sale and other investments(2)		1,379,217			52,226			5.05			1,148,053			38,651			4.49
Total interest-earning assets		7,667,103			336,272			5.85			6,879,330			319,771			6.20
Noninterest-earning assets(3)(4)		1,233,759									1,077,769
Total assets	$	8,900,862								$	7,957,099
Interest-bearing liabilities:
Savings deposits	$	796,868			1,717			0.29	%	$	915,116		$	3,203			0.47	%
Checking deposits		486,998			1,094			0.30			490,696			1,560			0.43
Money market deposits		1,883,580			34,256			2.43			1,356,608			37,127			3.66
Certificates of deposit		2,156,305			57,655			3.57			2,296,188			77,190			4.49
Borrowed funds		1,320,664			39,747			4.00			808,332			27,601			4.54
Total interest-bearing liabilities		6,644,415			134,469			2.70			5,866,940			146,681			3.34
Noninterest-bearing deposits		681,173									621,389
Other noninterest-bearing liabilities		152,063									117,270
Total liabilities		7,477,651									6,605,599
Stockholders’ equity(3)		1,423,211									1,351,500
Total liabilities and stockholders’ equity	$	8,900,862								$	7,957,099
Net interest income				$	201,803								$	173,090
Net interest rate spread								3.15	%								2.86	%
Net earning assets	$	1,022,688								$	1,012,390
Net interest rate margin					3.51	%								3.35	%
Ratio of average interest-earning assets to average interest-bearing liabilities		115.39	%								117.26	%

(1) Average outstanding balances are net of deferred costs and premiums and include nonaccruing 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.

Or taxable equivalent net interest rate margin improved 18 basis points from the second quarter of 2008 and 16 basis points for the first nine months of 2008 as compared to the first nine months of 2007. In addition, we experienced a 25% increase in net interest income during the quarter ending September 30, 2008 as compared to the third quarter of 2007, as well as a 17% increase in net interest income for the first three quarters of 2008 as compared to the same period in 2007, reflecting:

· A more favorable funding mix driven by decreases in higher yielding certificates of deposit, growth in lower priced core deposits, and use of lower cost wholesale borrowings as an alternative funding source.

· Multiple reductions in the federal funds interest rate resulting in funding costs at their lowest level in over two years.

· Increased yields on investment securities due to our fourth quarter 2007 portfolio restructuring.

· Shift in our balance sheet mix to higher yielding commercial loans.

· Growth in our noninterest bearing deposits, primarily business checking deposits.

Provision for Credit Losses

Our provision for credit losses is based on interrelated factors such as the composition of and risk in our loan portfolio, the level of nonaccruing and delinquent loans and the related collateral, as well as economic considerations. The provision charged to income was $6.5 million and $14.5 million for the three and nine months ended September 30, 2008, respectively, compared with $2.1 million and $6.0 million for the same periods in 2007, respectively. The $6.5 million provision recorded in the third quarter of 2008 represents a $1.6 million increase over the second quarter of 2008, with the increase primarily due to increased nonaccruing loans and the increased size of our higher risk commercial loan portfolio.

24

Noninterest Income

Noninterest income decreased slightly to $29.2 million for the quarter ended September 30, 2008 as compared to the third quarter of 2007. Insurance and benefits consulting revenues decreased $1.0 million primarily as a result of an industry-wide softening in insurance renewal rates. This decrease was somewhat offset by increases in transaction-based revenues from banking services and revenues from wealth management services due to increased sales activity as customers took advantage of higher rates offered on annuity products compared to rates on certificates of deposit accounts.

For the nine months ended September 30, 2008, noninterest income remained relatively unchanged at $88.1 million as compared to the same period in 2007. While insurance and benefits consulting revenues decreased by $1.9 due to industry-wide softening in insurance renewal rates, we experienced increases in revenues from transaction-based banking services, revenues from sales related wealth management services, and activity-driven lending and leasing revenues. The increase in other noninterest income was primarily the result of a gain from the disposition of one of our branches.

Although noninterest income as a percent of total revenues decreased to 29% for the quarter ended September 30, 2008 from 35% for the third quarter of 2007, the decrease resulted primarily from the increasing level of our net interest income. Noninterest income continues to be a significant source of stable revenue not subject to the volatility of interest rate changes.

Noninterest Expense

Noninterest expenses increased $4.8 million for the three months ended September 30, 2008 as compared to the third quarter of 2007. A $3.8 million increase in salaries and benefits during the current quarter is the result of personnel added from the Great Lakes acquisition, routine merit increases, and increases in performance-based incentive and equity compensation. Marketing and advertising expenses increased during the current quarter as compared to the same quarter in 2007, reflective of our statewide branding campaign, which we recently enhanced to address customers’ concerns regarding the financial services industry. Expenses related to troubled loans contributed to the increase in other noninterest expense. These increases were somewhat offset by scheduled decreases in intangible amortization.

For the nine months ended September 30, 2008, noninterest expenses increased $6.6 million as compared to the same period in 2007, excluding $2.2 million in integration costs associated with the first quarter 2008 Great Lakes acquisition and a $4.8 million real estate impairment loss recorded in the second quarter of 2007. Additional Great Lakes personnel, routine merit increases, and increases in performance-based incentive and equity compensation contributed to a $5.3 million increase in salaries and benefits. In addition, marketing and advertising expense increased $1.9 million due to our ongoing statewide branding campaign. Property tax payments made on behalf of borrowers of troubled loans helped contribute to a $1.5 million increase in other noninterest expense. Offsetting these increases was a $1.3 million decrease in intangible amortization related to previous bank and insurance agency acquisitions and a decrease in occupancy and equipment costs related to the fourth quarter 2007 sales of nine branches.

Our increased net interest income and disciplined management of expenses facilitated the improvement in our efficiency ratio for both the current quarter and the first three quarters of 2008. Excluding Great Lakes integration expenses and the 2007 real estate impairment loss, our efficiency ratio for the three months ended September 30, 2008 improved to 56.7%, the lowest level in seven quarters, as compared to 60.8% for the three months ended September 30, 2007. For the first three quarters of 2008, our efficiency ratio improved to 59.2% from 63.1% for the first three quarters of 2007 (excluding Great Lakes integration expenses and 2007 real estate impairment loss).

Income Taxes

Our effective tax rate for the nine months ended September 30, 2008 increased to 34.1% as compared to 33.1% for the same period in the prior year, primarily due to 2007 New York State legislation phasing out the exclusion of dividends paid by our real estate investment trust (“REIT”) to First Niagara Bank.

CAPITAL RESOURCES

During the first nine months of 2008, our stockholders’ equity increased $87.8 million. The increase was primarily the result of the first quarter acquisition of Great Lakes, which included the issuance of 5.4 million shares of common stock with an aggregate value of $73.8 million, our earnings (net of dividends declared) of $21.7 million, as well as an increase from ESOP and stock-based compensation plans of $10.2 million. Offsetting these were $11.1 million in unrealized losses in our securities portfolio and $6.8 million in treasury stock purchases.

25

For the nine months ended September 30, 2008, we declared common stock dividends of $0.42 per share, or $43.9 million. This represents a payout ratio of 68%, and a 5% increase over the prior year on a per share basis. At this time, we do not anticipate increasing our per share dividend as it is important that we preserve our liquidity and maintain our capital position in the current uncertain economic environment.

On October 1, 2008, in an effort to provide additional capital to execute our growth strategy, further enhance our capital position, and for general corporate purposes, we raised additional capital by issuing 8.5 million shares of common stock from treasury in a syndicated stock offering at a price of $13.50 per share. Net proceeds totaled approximately $108.8 million after deducting underwriting discounts and commissions and offering expenses of $6.2 million.

At September 30, 2008, we held more than 15.4 million shares of our stock as treasury shares, of which 8.5 million were issued in our follow-on stock offering which closed on October 1, 2008. As part of our capital management initiatives, we may repurchase additional shares under our current share repurchase program. For the nine months ended September 30, 2008 we repurchased 625 thousand shares of our common stock, at a total purchase price of $6.8 million. As of September 30, 2008, we are authorized to repurchase an additional 3.5 million shares under current repurchase programs. During the first three quarters of 2008 we issued 535 thousand shares from treasury stock in connection with the exercise of stock options and vested restricted stock awards. While treasury stock purchases are an important component of our capital management strategy, we are not likely to make additional purchases until the economy and capital markets stabilize.

On October 27, 2008, we received approval to participate in the U.S. Treasury’s Capital Purchase Program (“CPP”) under the Troubled Assets Relief Program (“TARP”). We have been approved for the maximum subscription amount of 3% of our risk-weighted assets as of June 30, 2008, which amounted to $185.6 million, in the form of nonvoting preferred stock. The preferred stock would pay a 5% cumulative dividend per year for five years, then 9% thereafter and is callable after three years. The U.S. Treasury would also receive warrants to purchase our common stock with an aggregate market price equal to 15% of the preferred stock they receive. Participation in the CPP would restrict us from increasing the dividend we pay on our common stock and from repurchasing shares of our common stock for three years without consent from the U.S. Treasury, in addition to limiting compensation paid to our executives. Pursuant to our review and approval of the terms and conditions of the CPP, we would receive the proceeds during the fourth quarter and use the funds to execute our growth strategy, which may include the acquisition of other financial services companies.

Our capital ratios continue to exceed the regulatory guidelines for well-capitalized institutions. The following table shows the Bank’s ratios as of September 30, 2008. 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	$	616,729		7.58	%		121,981		1.50	%		N/A		N/A	%
Tier 1 (core) capital		616,729		7.58			325,282		4.00			406,602		5.00
Tier 1 risk based capital		616,729		10.05			245,349		4.00			368,024		6.00
Total risk based capital		693,413		11.30			490,698		8.00			613,373		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.

LIQUIDITY

Liquidity refers to our ability to obtain cash, or to convert assets into cash 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.

26

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 line of credit.

Our standing in the national markets, and our ability to obtain funding from them, factor into 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.

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 September 30, 2008, our total available cash, interest-bearing demand accounts, federal funds sold, and other money market investments was $144.3 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 acquisition of Great Lakes and our higher level of commercial loan growth in 2008 have been funded primarily by cash flow generated from our deposit growth, principal and interest received from maturing assets, as well as wholesale borrowings.

We have a total borrowing capacity of up to $1.9 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 $1.6 billion was utilized as of September 30, 2008.

In the ordinary course of business, we extend commitments to originate residential, commercial, and other loans to our customers. Commitments to extend credit are agreements to lend to a customer as long as conditions established under the contract are not violated. Commitments generally have fixed expiration dates or other termination clauses and may require the customer to pay a fee. 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. Collateral may be obtained based upon our assessment of the customer’s creditworthiness. In addition, we may extend credit 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. As of September 30, 2008, we had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $1.2 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 the funding requirements for these products are generally more difficult to predict. The risks involved in issuing these credit lines 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 $674.4 million at September 30, 2008 and generally have an expiration period of less than one year. Home equity and other consumer unused lines of credit totaled $291.0 million 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 commercial customers in the event the customer fails to perform under the terms of a contract between the customer and the third party. Standby letters of credit amounted to $98.2 million at September 30, 2008 and generally have an expiration period of less than two years. Since the majority of unused lines of credit and 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.

At the end of the current quarter, we were committed to sell residential mortgages amounting to $15.4 million, consistent with our approach to sell long-term fixed rate mortgages.

27

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 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 sensitivity 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 (ALCO), which is comprised of members of senior management, monitors our sensitivity to interest rates and enacts 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. In other words, we want changes in loan and deposit balances, rather than changes in market interest rates, to be the primary drivers of growth in net interest income.

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.

The following table shows the estimated impact on net interest income for the next twelve months resulting from potential changes in interest rates. The calculated changes assume a parallel shift across the yield curve relative to the current interest rate environment at September 30, 2008. The effects of changing the yield curve slope are not considered in the analysis. These estimates require making certain assumptions including the pace of payments from loan and mortgage-related investments, reinvestment rates, and deposit maturities. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on net interest income. Actual results may differ significantly due to the timing, magnitude, and frequency of interest rate changes and changes in market conditions.

	Calculated increase (decrease) at September 30, 2008
Changes in interest rates	Net interest income			% Change
	(in thousands)
+200 basis points	$	(6,336	)		(2.29	)%
+100 basis points		(3,518	)		(1.27	)
-100 basis points		1,073			0.39

ITEM 4. Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of September 30, 2008 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 September 30, 2008.

During the quarter ended September 30, 2008, 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.

28

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:

First Niagara Insurance Brokers, Inc. v. First Niagara Financial Group, Inc., U.S.D.C., W.D.N.Y., Civil No. 1:07-cv-0833 JTC. On October 10, 2007, First Niagara Insurance Brokers, Inc. (“FN-Canada”), an unrelated insurance broker licensed in Canada but not in the United States, filed an action in the federal court for the Southern District of New York alleging service mark infringement and several related New York State causes of action. FN-Canada claims that it owns a United States common law service mark in the term FIRST NIAGARA and that the Company is infringing this mark. FN-Canada seeks an injunction and damages of $532 million. We believe that the claim for damages is without merit. On December 18, 2007, at the Company’s request, the lawsuit was transferred from the Southern District of New York to the Western District of New York.

This lawsuit continues a dispute that has been ongoing since 2002. In 2002, FN-Canada commenced an Opposition proceeding before the U.S. Patent and Trademark Office Trademark Trial and Appeal Board (“TTAB”), seeking to oppose the Company’s application to register service marks incorporating the FIRST NIAGARA mark. In its most recent decision, the TTAB held that there was no likelihood of confusion between FN-Canada’s Canadian insurance services and the Company’s United States banking services, and dismissed FN-Canada’s Opposition claim in twelve of fifteen service mark classifications. The TTAB did hold that there was a likelihood of confusion between FN-Canada’s insurance services and the Company’s insurance services. FN-Canada appealed that decision to the U.S. Court of Appeals for the Federal Circuit but, in light of its new District Court lawsuit, moved to stay that appeal pending determination of the new lawsuit. The Company opposed the motion to stay the appeal and the Federal Circuit denied FN-Canada’s motion. On September 9, 2008, the U.S. Court of Appeals for the Federal Circuit affirmed the TTAB’s determination.

FN-Canada’s claimed damages of $532 million represent what it claims are the Company’s “net revenues” from all services provided under the FIRST NIAGARA marks, including banking services. Even if FN-Canada could prove that it owned common law United States service marks and that the Company infringed –which we believe is unlikely– an accounting of profits is available in a service mark infringement action only if plaintiff can show the Company acted with willful deception. The TTAB has held twice that the Company did not adopt its name in bad faith.

ITEM 1A. Risk Factors

Except for the additional risk factors described below, there are no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our 2007 Form 10-K.

The Soundness of Other Financial Services Institutions May Adversely Affect Our Credit Risk

We rely on other financial services institutions through trading, clearing, counterparty, and other relationships. We maintain limits and monitor concentration levels of our counterparties as specified in our internal policies. Our reliance on other financial services institutions exposes us to credit risk in the event of default by these institutions or counterparties. These losses could adversely affect our results of operations and financial condition.

Increases in FDIC Insurance Premiums May Cause Our Earnings to Decrease

The EESA temporarily increased the limit on FDIC coverage to $250,000 through December 31, 2009. In addition, the Temporary Liquidity Guarantee Program, which we anticipate participating in beyond the initial 30 days of the program, allows the FDIC to now provide coverage for newly-issued senior unsecured debt and noninterest bearing transaction deposit accounts. Each of these actions will cause the premiums assessed to us by the FDIC to increase. These actions will significantly increase our noninterest expense in 2009 and in future years as long as the increased premiums are in place.

29

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

a) Not applicable.

b) Not applicable.

c) The following table discloses information regarding the repurchases of our common stock made during the third quarter of 2008:

Month	Number of shares purchased		Average price per share paid		Total number of shares purchased as part of publicly announced repurchase plans		Maximum number of shares yet to be purchased under the plans
July		—		—		—		3,503,096
August		—		—		—		3,503,096
September		—		—		—		3,503,096
Total		—				—

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 September 30, 2008.

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

30

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: November 6, 2008	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer
Date: November 6, 2008	By:	/s/ Michael W. Harrington
		Michael W. Harrington
		Chief Financial Officer

31