First Niagara Financial (FNFG) 10-Q 2009 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended March 31, 2009

OR

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

For the transition period from                    to                    

Commission file number 000-23975

FIRST NIAGARA FINANCIAL GROUP, INC.

(exact name of registrant as specified in its charter)

Delaware	42-1556195
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
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. YESþ NOo

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

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

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

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

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

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

As of May 5, 2009, there were issued and outstanding 149,755,712 shares of the Registrant’s Common Stock, $0.01 par value.

FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2009
TABLE OF CONTENTS

Item Number	Page Number
PART I — FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition as of March 31, 2009 (unaudited) and December 31, 2008		3
Consolidated Statements of Income for the three months ended March 31, 2009 and 2008 (unaudited)		4
Consolidated Statements of Comprehensive Income for the three months ended March 31, 2009 and 2008 (unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2009 and 2008 (unaudited)		6
Consolidated Statements of Cash Flows for the three months ended March 31, 2009 and 2008 (unaudited)		7
Notes to Consolidated Financial Statements (unaudited)		8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		17
3. Quantitative and Qualitative Disclosures about Market Risk		25
4. Controls and Procedures		26
PART II — OTHER INFORMATION
1. Legal Proceedings		26
1A. Risk Factors		26
2. Unregistered Sales of Equity Securities and Use of Proceeds		26
3. Defaults Upon Senior Securities		26
4. Submission of Matters to a Vote of Security Holders		26
5. Other Information		26
6. Exhibits		27
Signatures		28
EX-31.1
EX-31.2
EX-32

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

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

	March 31,			December 31,
	2009			2008
	(unaudited)
Assets
Cash and cash equivalents	$	161,908			110,552
Restricted cash		4,000			3,999
Securities available for sale		1,800,933			1,573,101
Loans held for sale		3,573			1,698
Loans and leases, net of allowance for credit losses of $79,613 and $77,793 in 2009 and 2008		6,366,222			6,384,284
Bank owned life insurance		128,460			127,151
Premises and equipment, net		107,780			95,978
Goodwill		748,971			748,971
Core deposit and other intangibles, net		33,837			35,578
Other assets		232,293			250,060
Total assets	$	9,587,977			9,331,372
Liabilities and Stockholders’ Equity
Liabilities:
Deposits	$	6,228,096			5,943,613
Short-term borrowings		666,836			717,464
Long-term borrowings		780,049			822,763
Other liabilities		170,605			120,269
Total liabilities		7,845,586			7,604,109
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; Series A, cumulative perpetual preferred stock, $1,000 liquidation value, 184,011 shares issued and outstanding in 2009 and 2008		177,240			176,719
Common stock, $0.01 par value, 250,000,000 shares authorized; 125,419,261 shares issued in 2009 and 2008		1,254			1,254
Additional paid-in capital		1,325,193			1,326,159
Retained earnings		369,293			369,671
Accumulated other comprehensive loss		(15,697	)		(29,429	)
Common stock held by ESOP; 3,036,682 and 3,094,365 shares in 2009 and 2008		(23,464	)		(23,843	)
Treasury stock, at cost; 6,731,893 and 6,857,554 shares in 2009 and 2008		(91,428	)		(93,268	)
Total stockholders’ equity		1,742,391			1,727,263
Total liabilities and stockholders’ equity	$	9,587,977			9,331,372

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
	March 31,
	2009		2008
Interest income:
Loans and leases	$	87,059		95,052
Securities available for sale and other investments		18,760		14,935
Total interest income		105,819		109,987
Interest expense:
Deposits		20,913		37,108
Borrowings		12,276		12,817
Total interest expense		33,189		49,925
Net interest income		72,630		60,062
Provision for credit losses		8,750		3,100
Net interest income after provision for credit losses		63,880		56,962
Noninterest income:
Banking services		9,970		9,310
Insurance and benefits consulting		12,548		12,762
Wealth management services		2,218		2,217
Lending and leasing		1,984		2,255
Bank owned life insurance		1,309		1,177
Other		431		1,546
Total noninterest income		28,460		29,267
Noninterest expense:
Salaries and employee benefits		33,237		33,419
Occupancy and equipment		6,466		7,160
Technology and communications		5,053		5,007
Marketing and advertising		2,532		2,502
Professional services		2,964		1,072
Amortization of core deposit and other intangibles		1,891		2,251
Federal deposit insurance premiums		1,499		245
Litigation settlement, net		2,845		—
Other		6,660		5,851
Total noninterest expense		63,147		57,507
Income before income taxes		29,193		28,722
Income taxes		10,451		9,909
Net income		18,742		18,813
Preferred stock dividend		2,300		—
Accretion of preferred stock discount		368		—
Net income available to common stockholders	$	16,074		18,813
Earnings per share:
Basic	$	0.14		0.18
Diluted	$	0.14		0.18
Weighted average common shares outstanding:
Basic		115,055		103,230
Diluted		115,433		103,641
Dividends per common share	$	0.14		0.14

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
	March 31,
	2009			2008
Net income	$	18,742			18,813
Other comprehensive income, net of income taxes:
Securities available for sale:
Net unrealized gains arising during the period		13,567			5,876
Net unrealized losses on interest rate swaps		(25	)		—
Pension and post-retirement adjustments		190			17
Total other comprehensive income		13,732			5,893
Total comprehensive income	$	32,474			24,706

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

											Accumulated			Common
					Additional						other			stock
	Preferred		Common		paid-in			Retained			comprehensive			held by			Treasury
	stock		stock		capital			earnings			income			ESOP			stock			Total
Balances at January 1, 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		—		—		—			18,813			—			—			—			18,813
Common stock issued for the acquisition of Great Lakes Bancorp, Inc.		—		54		73,727			—			—			—			—			73,781
Total other comprehensive income, net		—		—		—			—			5,893			—			—			5,893
Purchase of treasury stock		—		—		—			—			—			—			(6,795	)		(6,795	)
ESOP shares committed to be released		—		—		222			—			—			406			—			628
Stock-based compensation expense		—		—		1,524			—			—			—			—			1,524
Excess tax benefit from stock-based compensation		—		—		96			—			—			—			—			96
Exercise of stock options and restricted stock activity		—		—		(1,950	)		(756	)		—			—			2,486			(220	)
Common stock dividend of $0.14 per share		—		—		—			(14,150	)		—			—			—			(14,150	)
Balances at March 31, 2008	$	—		1,254		1,318,385			348,446			3,289			(24,944	)		(213,798	)		1,432,632

See accompanying notes to consolidated financial statements.

6

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARY

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

	Three months ended March 31,
	2009			2008
Cash flows from operating activities:
Net income	$	18,742			18,813
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization of fees and discounts, net		2,490			1,578
Provision for credit losses		8,750			3,100
Depreciation of premises and equipment		3,145			2,661
Asset writedowns		700			890
Amortization of core deposit and other intangibles		1,891			2,251
Originations of loans held for sale		(92,851	)		(14,584	)
Proceeds from sales of loans held for sale		90,833			16,706
Loss (gain) on sale of loans		143			(172	)
ESOP and stock-based compensation expense		1,850			2,135
Deferred income tax (benefit) expense		(672	)		118
Income from bank owned life insurance		(1,309	)		(1,177	)
Net decrease (increase) in other assets		1,140			(321	)
Net increase in other liabilities		10,539			2,644
Net cash provided by operating activities		45,391			34,642
Cash flows from investing activities:
Proceeds from maturities of securities available for sale		40,307			65,378
Proceeds from sale of securities available for sale		995			—
Principal payments received on securities available for sale		90,064			43,069
Purchases of securities available for sale		(313,436	)		(67,215	)
Net decrease (increase) in loans and leases		6,659			(79,152	)
Acquisitions, net of cash and cash equivalents		—			(84,983	)
Other, net		8,307			(2,809	)
Net cash used in investing activities		(167,104	)		(125,712	)
Cash flows from financing activities:
Net increase in deposits		284,341			95,027
Repayments of short-term borrowings, net		(90,426	)		(150,475	)
Proceeds from long-term borrowings		—			190,000
Repayments of long-term borrowings		(2,407	)		(5,893	)
Proceeds from exercise of stock options		—			51
Excess tax (expense) benefit from stock-based compensation		(119	)		96
Purchase of treasury stock		—			(6,795	)
Dividends paid on cumulative preferred stock		(2,147	)		—
Dividends paid on common stock		(16,172	)		(14,150	)
Net cash provided by financing activities		173,070			107,861
Net increase in cash and cash equivalents		51,357			16,791
Cash and cash equivalents at beginning of period		114,551			114,991
Cash and cash equivalents at end of period	$	165,908			131,782
Cash paid during the period for:
Income taxes	$	633			5,226
Interest expense		33,639			48,756
Acquisition of noncash assets and liabilities:
Assets acquired		—			902,537
Liabilities assumed		—			743,766
Loans transferred to other real estate owned	$	240			776
Securities available for sale purchased not settled		23,526			17,405
Capital lease obligation		11,928			—

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 of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2008 Annual Report on 10-K. Results for the three months ended March 31, 2009 do not necessarily reflect the results that may be expected for the year ending December 31, 2009. 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. Investment Securities

The amortized cost, gross unrealized gains and losses, and approximate fair value of our securities available for sale at March 31, 2009 and December 31, 2008 are summarized as follows:

	Amortized		Unrealized		Unrealized			Fair
At March 31, 2009:	cost		gains		losses			value
Debt securities:
States and political subdivisions	$	306,848		4,571		(132	)		311,287
U.S. Government agencies and government sponsored enterprises		27,467		47		(7	)		27,507
Corporate		3,533		—		(1,765	)		1,768
Total debt securities		337,848		4,618		(1,904	)		340,562
Mortgage-backed securities:
Federal National Mortgage Association		139,069		3,906		(31	)		142,944
Federal Home Loan Mortgage Corporation		172,055		7,498		(9	)		179,544
Government National Mortgage Association		11,465		94		(152	)		11,407
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation		568,851		9,682		(601	)		577,932
Federal National Mortgage Association		227,443		4,783		(960	)		231,266
Government National Mortgage Association		85,478		226		(464	)		85,240
Non-Agency issued		248,566		185		(24,044	)		224,707
Total collateralized mortgage obligations		1,130,338		14,876		(26,069	)		1,119,145
Total mortgage-backed securities		1,452,927		26,374		(26,261	)		1,453,040
Asset-backed securities		3,441		—		(149	)		3,292
Other		5,307		13		(1,281	)		4,039
Total securities available for sale	$	1,799,523		31,005		(29,595	)		1,800,933

	Amortized		Unrealized		Unrealized			Fair
At December 31, 2008:	cost		gains		losses			value
Debt securities:
States and political subdivisions	$	295,639		4,160		(52	)		299,747
U.S. Government agencies and government sponsored enterprises		29,968		50		(20	)		29,998
Corporate		5,028		1		(1,589	)		3,440
Total debt securities		330,635		4,211		(1,661	)		333,185
Mortgage-backed securities:
Federal National Mortgage Association		146,646		2,916		(300	)		149,262
Federal Home Loan Mortgage Corporation		182,929		5,921		(12	)		188,838
Government National Mortgage Association		11,711		64		(399	)		11,376
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation		446,086		4,074		(69	)		450,091
Federal National Mortgage Association		179,657		1,398		(1,194	)		179,861
Government National Mortgage Association		24,257		87		(404	)		23,940
Non-Agency issued		263,432		106		(34,523	)		229,015
Total collateralized mortgage obligations		913,432		5,665		(36,190	)		882,907
Total mortgage-backed securities		1,254,718		14,566		(36,901	)		1,232,383
Asset-backed securities		3,499		—		(122	)		3,377
Other		5,307		8		(1,159	)		4,156
Total securities available for sale	$	1,594,159		18,785		(39,843	)		1,573,101

8

The table below details certain information regarding our securities available for sale that were in an unrealized loss position at March 31, 2009 and December 31, 2008 by the length of time those securities were in a continuous loss position:

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At March 31, 2009:	value		losses		value		losses		value		losses
Debt securities:
States and political subdivisions	$	56,664		121		434		11		57,098		132
U.S. Government agencies and government sponsored enterprises		10,463		7		—		—		10,463		7
Corporate		1,265		969		253		796		1,518		1,765
Total debt securities		68,392		1,097		687		807		69,079		1,904
Mortgage-backed securities:
Federal National Mortgage Association		437		2		1,850		29		2,287		31
Federal Home Loan Mortgage Corporation		123		1		440		8		563		9
Government National Mortgage Association		—		—		8,664		152		8,664		152
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation		112,360		601		—		—		112,360		601
Federal National Mortgage Association		16,906		960		—		—		16,906		960
Government National Mortgage Association		52,633		464		—		—		52,633		464
Non-Agency issued		57,950		6,728		156,969		17,316		214,919		24,044
Total collateralized mortgage obligations		239,849		8,753		156,969		17,316		396,818		26,069
Total mortgage-backed securities		240,409		8,756		167,923		17,505		408,332		26,261
Asset-backed securities		—		—		3,292		149		3,292		149
Other		—		—		3,170		1,281		3,170		1,281
Total securities available for sale in an unrealized loss position	$	308,801		9,853		175,072		19,742		483,873		29,595

	Less than 12 months				12 months or longer				Total
	Fair		Unrealized		Fair		Unrealized		Fair		Unrealized
At December 31, 2008:	value		losses		value		losses		value		losses
Debt securities:
States and political subdivisions	$	6,116		48		379		4		6,495		52
U.S. Government agencies and government sponsored enterprises		1,971		20		—		—		1,971		20
Corporate		1,689		1,589		—		—		1,689		1,589
Total debt securities		9,776		1,657		379		4		10,155		1,661
Mortgage-backed securities:
Federal National Mortgage Association		31,438		258		2,282		42		33,720		300
Federal Home Loan Mortgage Corporation		111		1		976		11		1,087		12
Government National Mortgage Association		9,550		395		121		4		9,671		399
Collateralized mortgage obligations:
Federal Home Loan Mortgage Corporation		23,318		29		3,863		40		27,181		69
Federal National Mortgage Association		44,695		1,192		702		2		45,397		1,194
Government National Mortgage Association		13,193		404		—		—		13,193		404
Non-Agency issued		201,193		33,433		24,954		1,090		226,147		34,523
Total collateralized mortgage obligations		282,399		35,058		29,519		1,132		311,918		36,190
Total mortgage-backed securities		323,498		35,712		32,898		1,189		356,396		36,901
Asset-backed securities		3,149		79		228		43		3,377		122
Other		351		3		3,297		1,156		3,648		1,159
Total securities available for sale in an unrealized loss position	$	336,774		37,451		36,802		2,392		373,576		39,843

Agency Mortgage-Backed Securities and Collateralized Mortgage Obligations

The Federal National Mortgage Association (“FNMA”), Federal Home Loan Mortgage Corporation (“FHLMC”) or Government National Mortgage Association (“GNMA”) guarantees the contractual cash flows of our mortgage-backed securities. FNMA and FHLMC are government sponsored enterprises that were placed under the conservatorship of the U.S. government on September 7, 2008. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. At March 31, 2009, of the 43 U.S. government sponsored enterprise mortgage-backed securities in an unrealized loss position, 20 were in a continuous unrealized loss position for 12 months or more. The unrealized losses at March 31, 2009 were primarily due to the continued illiquidity and uncertainty in the markets. We do not consider these securities other than temporarily impaired due to the guarantee provided as to the full payment of principal and interest and our intent and ability to hold these securities for a sufficient period of time to allow for a recovery in their fair value.

9

Non-Agency Collateralized Mortgage Obligations

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement, and none are collateralized with sub-prime loans. These securities were purchased based on the underlying loan characteristics such as loan to value ratio, credit scores, property type, location, and the level of credit enhancement. Current characteristics of each security such as delinquency and foreclosure levels, credit enhancement, projected losses, the level of credit loss, and coverage are reviewed regularly by management. If the level of credit loss coverage is sufficient, it indicates that we will receive all of the originally scheduled cash flows. When the level of credit loss coverage for an individual security significantly deteriorates, we expand our analysis of the security to include detailed cash flow projections based upon loan level credit characteristics and prepayment assumptions. We review the resulting cash flows to determine whether we will receive all of the originally scheduled cash flows. The resulting projected credit losses are compared to the current level of credit enhancement to determine whether the security is expected to experience losses during any future period. At March 31, 2009, of the 47 non-agency collateralized mortgage obligations in an unrealized loss position, 36 were in a continuous unrealized loss position for 12 months or more. We have assessed these securities in an unrealized loss position at March 31, 2009 and determined that the decline in fair value was temporary. We believe the decline in fair value was caused by the significant widening in liquidity spreads across sectors related to the continued illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. In making this determination we considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized cost, the financial condition of the issuer, the delinquency or default rates of underlying collateral. In addition to the analysis of cash flow projections and level of credit support noted above, we also consider our intent and ability to hold these securities for a sufficient period of time to allow for a recovery in their fair value. It is possible that the underlying loan collateral of these securities will perform worse than expectations, which may lead to adverse changes in cash flows on these securities and potential future other than temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future would include, but are not limited to, deterioration of credit metrics, significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity.

Municipal and Corporate Debt Securities and Other

We have assessed the remaining securities in our available for sale portfolio that were in an unrealized loss position at March 31, 2009 and December 31, 2008 and determined that the decline in fair value was temporary. We believe the decline in fair value was caused by the significant widening in liquidity spreads across sectors related to the continued illiquidity and uncertainty in the markets and not the credit quality of the individual issuer or underlying assets. In making this determination, we also 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, the delinquency or default rates of the underlying collateral, and our ability and intent to hold these securities for a sufficient period of time to allow for a recovery in their fair value. At March 31, 2009, of the 79 municipal and corporate debt and other securities in a continuous unrealized loss position, 14 were in a continuous unrealized loss position for 12 months or more.

Note 2. Loans and Leases

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

	March 31,			December 31,
	2009			2008
Commercial:
Real estate	$	2,262,505			2,211,402
Construction		331,247			340,564
Business		969,836			940,304
Specialized lending(1)		174,711			178,916
Total commercial loans		3,738,299			3,671,186
Residential real estate(2)		1,914,691			1,990,784
Home equity		629,916			624,495
Other consumer		134,689			143,989
Total loans and leases		6,417,595			6,430,454
Net deferred costs and unearned discounts		31,813			33,321
Allowance for credit losses		(79,613	)		(77,793	)
Total loans and leases, net	$	6,369,795			6,385,982

(1)	Includes commercial leases and financed insurance premiums.
(2)	Includes $3.6 million and $1.7 million of loans held for sale at March 31, 2009 and December 31, 2008, respectively.

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

	Three months ended March 31,
	2009			2008
Balance at beginning of period	$	77,793			70,247
Charge-offs		(7,305	)		(2,710	)
Recoveries		375			756
Provision for credit losses		8,750			3,100
Acquired at acquisition date		—			2,890
Balance at end of period	$	79,613			74,283

Note 3. Mortgage Servicing Rights

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

	Three months ended March 31,
	2009			2008
Balance at beginning of period	$	4,295			4,312
Additions		1,252			74
Amortization		(367	)		(130	)
Balance at end of period	$	5,180			4,256
Valuation allowance		(700	)		—
Mortgage servicing rights, net	$	4,480			4,256

We amortize MSRs in proportion to the estimated net servicing revenues to be recognized over their expected lives. We assess the fair value of our MSRs based on current market assumptions. If the fair value is less than the carrying value of our MSRs, we will reduce the carrying value through a valuation allowance. Due to a decrease in mortgage loan rates, we recorded a $700 thousand valuation allowance during the quarter ended March 31, 2009. The balance of MSRs is included in other assets in the Consolidated Statements of Condition.

Note 4. Deposits

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

	March 31,		December 31,
	2009		2008
Savings	$	786,535		788,767
Interest-bearing checking		503,863		485,220
Money market deposit accounts		2,216,321		1,940,136
Noninterest-bearing		705,965		718,593
Certificates		2,015,412		2,010,897
Total deposits	$	6,228,096		5,943,613

Included in total deposits are municipal deposits totaling $859.0 million and $684.4 million at March 31, 2009 and December 31, 2008, respectively. Included in certificates of deposit at March 31, 2009 and December 31, 2008 are $278.4 million and $196.3 million, respectively, of deposits in the Certificate of Deposit Account Registry Service (“CDARS”) administered by the Promontory Financial Network.

Note 5. Interest Rate Swaps

To hedge the interest rate risk on certain variable-rate long-term borrowings, we entered into two interest rate swaps during 2008, each with a notional amount of $25.0 million and a maturity date of September 2011. We designated these swaps as cash flow hedges. We entered into these swaps in order to hedge the variability in the cash outflows of London Inter-Bank Offered Rate (LIBOR) based borrowings attributable to changes in interest rates. The swaps had a negative carrying value and estimated fair value of $2.3 million at March 31, 2009 and December 31, 2008, which is included in other liabilities in our Consolidated Statements of Condition. The increase in the unrealized loss on the swaps, net of deferred taxes, for the quarter ended March 31, 2009 was $25 thousand and is included in total comprehensive income in our Consolidated Statements of Comprehensive Income.

We also act as an interest rate swap counterparty for certain commercial customers. In order to mitigate our exposure to holding long term fixed rate commercial loans, we enter into corresponding and offsetting hedge positions with third parties. The total notional amount relating to these interest rate swaps amounted to $126.6 million and $113.3 million at March 31, 2009 and December 31, 2008, respectively. The net increase in the fair value of these swaps amounted to $370 thousand during the three months ended March 31, 2009 and is included in other noninterest income in our Consolidated Statements of Income.

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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 Statement of Financial Accounting Standards (“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 amounted to $1.3 million and $1.5 million for the three months ended March 31, 2009 and 2008, 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 retirements. These amounts are included as part of salaries and employee benefits expense in the Consolidated Statements of Income.

Note 7. Earnings Per Share

As of January 1, 2009, we adopted Financial Accounting Standards Board (“FASB”) Staff Position (“FSP”) EITF 03-6-1, “Determining Whether Instruments Granted in Share-Based Payment Transactions are Participating Securities.” This position requires that our unvested restricted awards that contain nonforfeitable rights to dividends to be treated as participating securities in the computation of earnings per share (“EPS”) pursuant to the two-class method as described in Statement of Financial Accounting Standards (“SFAS”) No. 128, “Earnings Per Share.” The two-class method is an earnings allocation that determines EPS for each class of common stock and participating security. The following table is a computation of our basic and diluted earnings per share under the two-class method for the periods indicated:

	Three months ended
	March 31,
	2009			2008
Numerator for basic and diluted net income per common stock share and unvested restricted stock award:
Net income available to common stockholders	$	16,074			18,813
Less dividends:
Common stockholders		16,109			14,065
Unvested restricted stock awards		63			85
Total undistributed earnings	$	(98	)		4,663
Common stockholders undistributed earnings — basic		(98	)		4,637
Unvested restricted stock awards undistributed earnings — basic		—			26
Total undistributed earnings	$	(98	)		4,663
Numerator for basic net income per common stock share	$	16,011			18,702
Numerator for basic net income per unvested restricted stock award	$	63			111
Denominator for basic and diluted net income per common stock share:
Weighted average common shares outstanding:
Total shares issued		125,419			122,762
Unallocated ESOP shares		(3,094	)		(3,323	)
Unvested restricted stock awards		(461	)		(575	)
Treasury shares		(6,809	)		(15,634	)
Total basic weighted average common shares outstanding		115,055			103,230
Incremental shares from assumed exercise of stock options		150			221
Incremental shares from assumed vesting of restricted stock awards		228			190
Total diluted weighted average common shares outstanding		115,433			103,641
Denominator for basic and diluted net income per unvested restricted stock award:
Weighted average unvested restricted stock awards outstanding		461			575
Basic earnings per share:
Common stock share	$	0.14			0.18
Unvested restricted stock award	$	0.14			0.19
Diluted earnings per share:
Common stock share	$	0.14			0.18
Unvested restricted stock award	$	0.14			0.19
Anti-dilutive warrants, stock options, and restricted stock awards excluded from the diluted weighted average common share calculations		2,992			2,563

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Note 8. Fair Value Measurements

The fair value hierarchy established by SFAS No. 157, “Fair Value Measurements,” 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. Fair value is based upon quoted market prices of identical assets or liabilities, where available. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes of similar assets or liabilities. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. If quoted prices are not available, fair value is based upon valuation models that use cash flow, security structure, and other observable information.

Our valuation methodologies may produce a fair value calculation that may not be reflective of future fair values. While we believe our valuation methodologies are appropriate and consistent with other market participants, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at March 31, 2009.

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 primarily estimated using Level 2 inputs. At March 31, 2009, the carrying value and estimated fair value, using Level 2 inputs, of our securities available for sale was $1.8 billion.

Due to the lack of observable market data, we classify our collateralized debt obligations (“CDOs”), a component of corporate debt securities, in Level 3 of the fair value hierarchy. We determined the fair value of these securities using a projected cash flow model that considers prepayment speeds, discount rates, defaults, subordination protection, and contractual payments. During the quarter ended March 31, 2009, we recorded unrealized losses of $171 thousand to adjust the carrying value and estimated fair value of the CDOs to $393 thousand at March 31, 2009.

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. At March 31, 2009, our swaps had a negative carrying value and estimated fair value, using Level 2 inputs, of $2.1 million.

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 $5.9 million increase to our specific reserve as a result of adjusting the carrying value and estimated fair value of certain impaired loans to $13.8 million.

Mortgage Servicing Rights

The fair value of our MSRs was estimated using Level 3 inputs. MSRs do not trade in an active, open market with readily observable prices. As such, we determine the fair value of our MSRs using a projected cash flow model that considers loan type, loan rate and maturity, discount rate assumptions, estimated fee income and cost to service, and estimated prepayment speeds. During the quarter, we recorded a $700 thousand valuation allowance as a result of adjusting the carrying value and estimated fair value of our MSRs to $4.5 million.

Goodwill

We test the carrying value of our goodwill, which amounted to $749.0 million at March 31, 2009, for impairment at least annually or more frequently if events or changes in circumstances indicate that the asset might be impaired. Impairment testing requires that the fair value of each of our reporting units be compared to the carrying amount of its net assets, including goodwill. Our reporting units consist of our banking unit and financial services unit. Determining the fair value of a reporting unit requires us to use a high degree of subjective judgment.

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We measure the fair value of our banking unit annually, using Level 3 inputs, utilizing the market comparable approach as the primary indicator of fair value and the income approach to corroborate these values. We measure the fair value of our financial services unit annually, using Level 3 inputs, as of November 1st utilizing the average of the income approach, the market approach for similar companies, and the market approach for comparable acquisitions. We select comparable companies and transactions from a peer group that most closely resemble companies and transactions with similar operations, asset size, market capitalization, market characteristics, and geographic locations. We utilize certain assumptions, such as control premiums, price to earnings multiples, and dividend yields that were the median or mean of these comparable companies and transactions. In addition, we reconcile our market capitalization to the estimated consolidated fair value of the reporting units utilizing the median control premium of comparable transactions. We perform a review of the period subsequent to the measurement date to determine if there were any significant adverse changes in operations or events that would alter our determination as of the measurement date.

As a result of the decline in the price of our common stock during the first quarter of 2009, a triggering event under SFAS No. 142, “Goodwill and Other Intangible Assets,” had occurred as of March 31, 2009. The decline in our common stock is generally consistent with the overall financial services sector. In particular, this sector has been hard hit by the overall economic turmoil and general market dislocation. We completed our March 31, 2009 goodwill analysis and determined that there was no impairment of goodwill in either our banking or financial services reporting units.

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.

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

	Three months ended
	March 31,
	2009			2008
Pension plans:
Service cost	$	48			—
Interest cost		1,007			951
Expected return on plan assets		(739	)		(935	)
Amortization of unrecognized loss		315			—
Net pension cost		631			16
Other postretirement plans:
Interest cost		127			142
Amortization of unrecognized loss		6			3
Amortization of unrecognized prior service liability		(16	)		(16	)
Net postretirement cost	$	117			129

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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 advisory operations. Our financial services segment includes our insurance and employee benefits consulting operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation.

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

			Financial		Consolidated
For the three months ended:	Banking		services		total
March 31, 2009
Net interest income	$	72,630		—		72,630
Provision for credit losses		8,750		—		8,750
Net interest income after provision for credit losses		63,880		—		63,880
Noninterest income		15,894		12,566		28,460
Amortization of core deposit and other intangibles		1,087		804		1,891
Other noninterest expense		51,161		10,095		61,256
Income before income taxes		27,526		1,667		29,193
Income tax expense		9,784		667		10,451
Net income	$	17,742		1,000		18,742
March 31, 2008
Net interest income	$	60,061		1		60,062
Provision for credit losses		3,100		—		3,100
Net interest income after provision for credit losses		56,961		1		56,962
Noninterest income		16,466		12,801		29,267
Amortization of core deposit and other intangibles		1,307		944		2,251
Other noninterest expense		44,641		10,615		55,256
Income before income taxes		27,479		1,243		28,722
Income tax expense		9,480		429		9,909
Net income	$	17,999		814		18,813

Note 11. 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. The adoption of SFAS No. 141 will significantly impact how acquisitions are accounted for, including our acquisition of 57 National City branches discussed further in Note 12, and as such, we recorded $1.7 million of acquisition related professional services expenses during the quarter ended March 31, 2009.

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. The implementation of this guidance did not 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. The implementation of this guidance did not have a material impact on our Consolidated Financial Statements and the related disclosures are included in Note 5.

In June 2008, the FASB released 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. The implementation of this guidance did not have a material impact on our Consolidated Financial Statements.

In April 2009, the FASB released FSP FAS 157-4, “Determining Fair Value When the Volume and Level of Activity for the Asset or Liability Have Significantly Decreased and Identifying Transactions That Are Not Orderly.” This position provides additional guidance for estimating fair value in accordance with SFAS No. 157, “Fair Value Measurements,” when the volume and level of activity for the asset or liability have significantly decreased as well as identifying circumstances that indicate a transaction is not orderly. FSP FAS 157-4 is effective for fiscal years, and interim periods within those fiscal years, ending after June 15, 2009. The implementation of this guidance is not expected to have a material impact on our Consolidated Financial Statements.

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In April 2009, the FASB released FSP FAS 115-2 and FAS 124-2, “Recognition and Presentation of Other-Than-Temporary Impairments” which is intended to provide greater clarity to investors about the credit and noncredit component of an other than temporary impairment charge (“OTTI”) and to more effectively communicate when an OTTI event has occurred. This FSP applies to debt securities and requires that the total OTTI be presented in the statement of income with an offset for the amount of impairment that is recognized in other comprehensive income, which is the noncredit component. Noncredit component losses are to be recorded in other comprehensive income if an investor can assess that it does not have the intent to sell the security or it is more likely than not that it will not have to sell the security prior to its anticipated recovery. FSP FAS 115-2 and FAS 124-2 is effective for fiscal years, and interim periods within those fiscal years, ending after June 15, 2009. The implementation of this guidance is not expected to have a material impact on our Consolidated Financial Statements. However, we are in the process of finalizing our assessment of this new guidance.

Note 12. Subsequent Events

On April 6, 2009, we entered into a Purchase and Assumption Agreement (the “Purchase Agreement”) with National City Bank (“National City”) and The PNC Financial Services Group, Inc. (“PNC”) whereby we agreed to purchase certain assets and assume certain liabilities of 57 National City branches in the Pittsburgh, Erie, and Warren, Pennsylvania markets. The Board of Governors of the Federal Reserve System and the U.S. Department of Justice required National City to divest these and other branches in connection with the merger of PNC and National City’s former parent company, National City Corporation. The transaction is expected to close in the third quarter of 2009, upon which we will assume approximately $4.2 billion of deposit liabilities and acquire approximately $838.9 million of loans and $3.2 billion in cash, as well as the real and personal property associated with the branches.

Concurrent with our entry into the Purchase Agreement, we entered into a Securities Purchase Agreement with PNC and National City (the “Securities Purchase Agreement”) pursuant to which we have the right to require PNC to purchase the lesser of 6.8 million shares of our common stock and the number of shares of our common stock that would result in an aggregate purchase price of $75.0 million, in each case at a per share purchase price equal to the five-day weighted average price upon the closing of the transaction. In addition, we have the right to require National City to purchase our 12% Senior Notes due 2014 in an aggregate principal amount of up to $150.0 million less the purchase price paid by PNC for any common stock issued pursuant to the Securities Purchase Agreement. We have until September 30, 2009 to exercise our rights under the Securities Purchase Agreement.

On April 20, 2009 we issued 31.1 million shares of common stock in an underwritten stock offering at a price of $12.25 per share. Net proceeds of the offering totaled $360.7 million after deducting underwriting discounts and commissions and offering expenses of $19.6 million. We plan to use the proceeds to enhance our capital levels and to facilitate repayment of the $184.0 million in preferred stock issued to the U.S. Department of the Treasury under the Capital Purchase Program, as well as for general corporate purposes.

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

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which First Niagara Financial Group, Inc. and its 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, 2008 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 $9.6 billion in assets, $6.2 billion in deposits, and 113 full-service branch locations.

BUSINESS AND INDUSTRY

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

Our profitability is primarily dependent on the difference, or net 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. In addition, pursuant to the terms of the United States Department of the Treasury’s Capital Purchase Program, we may be subject to retroactive restrictions imposed by future federal statutes,which may adversely affect our ability to effectively manage our business.

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, which began to show signs of weakening during the latter half of 2008. If economic conditions in our markets continue to deteriorate or if we are unable to sustain our competitive posture, 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.

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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 2008 Form 10-K. A brief description of our current accounting policies involving significant management valuation judgments follows:

Allowance for Credit Losses

We establish our allowance for credit losses through charges to our provision for credit losses. We evaluate our allowance based on a continuing review of our loan portfolio. We review larger balance nonaccruing, impaired, and delinquent loans individually and we consider the value of any underlying collateral or estimated future cash flows in determining estimates of losses and inherent risks associated with those loans. We estimate losses in smaller balance, homogeneous loans based on our historical experience, industry trends and current trends in the real estate market and the current economic environment in our market areas. The adequacy of our allowance for credit losses is based on our evaluation of various conditions including the following: changes in the composition of and growth in our loan portfolio; industry and regional conditions; the strength and duration of the current business cycle; existing general economic and business conditions in our lending areas; credit quality trends, including trends in our nonaccruing loans; our historical loan charge-off experience; and the results of bank regulatory examinations.

Investment Securities

All of our investment securities are classified as available for sale and recorded at current market value on our Consolidated Statements of Condition. Unrealized gains or losses, net of deferred taxes, are reported in other comprehensive income as a separate component of stockholders’ equity. Fair value is based upon quoted market prices of identical assets or liabilities, where available. Where sufficient data is not available to produce a fair valuation, fair value is based on broker quotes of similar assets or liabilities. Broker quotes may be adjusted to ensure that financial instruments are recorded at fair value. Adjustments may include amounts to reflect counterparty credit quality and our creditworthiness, among other things, as well as unobservable parameters. Any such valuation adjustments are applied consistently over time. If quoted prices are not available, fair value is based upon valuation models that use cash flow, security structure, and other observable information.

We conduct a quarterly review and evaluation of our securities portfolio to determine if any declines in fair value are other than temporary. In making this determination we consider 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, the delinquency or default rates of underlying collateral, credit enhancement, projected losses, level of credit loss, and projected cash flows. In addition, we consider our ability and intent to hold the investment securities currently in an unrealized loss position until they mature or for a sufficient period of time to allow for a recovery in their fair value. Any valuation decline that we determine 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 utilizes the market comparable or income approach as the primary indicators of fair value of our business segments. 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 2008 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.

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RESULTS FOR THE THREE MONTHS ENDED MARCH 31, 2009

Overview

Net income for the three months ended March 31, 2009 remained consistent with the same period in 2008. Our diluted earnings per share for the first quarter of 2009 was $0.14 compared to $0.18 per share for the first quarter of 2008, which reflects the impact of $2.7 million of preferred stock dividends and discount accretion related to preferred stock issued to the U.S. Department of the Treasury (“Treasury”) during the fourth quarter of 2008.

Results for the first quarter of 2009 as compared to the first quarter of 2008 reflect a number of positive trends highlighted by a 28 basis point increase in our net interest margin to 3.61%. This increase was the result of disciplined deposit pricing combined with a decrease in wholesale borrowing costs partially offset by downward repricing of our interest rate sensitive loan portfolios. Other highlights are as follows:

• Net interest income increased by $12.6 million, or 21%, primarily due to a reduction in our funding costs.

• Yields on our interest bearing liabilities declined 115 basis points to their lowest quarterly level in almost four years, reflective of the maturation of higher rate certificates of deposit accounts, the shift in customer preference to lower rate money market deposit accounts, and a reduction in our wholesale borrowing costs.

• Results were impacted by a $1.3 million increase in federal deposit insurance premiums and the settlement of a service mark infringement matter for $2.8 million, net of insurance reimbursements.

Analysis of Financial Condition at March 31, 2009

Total assets increased $256.6 million from $9.3 billion at December 31, 2008 to $9.6 billion at March 31, 2009, primarily due to the $227.8 increase in our securities available for sale portfolio resulting from the deployment of the proceeds from our October 2008 follow-on stock offering and issuance of preferred stock under the Capital Purchase Program (“CPP”) in November of 2008. In addition, we noted the following balance trends during 2009:

• Higher-yielding commercial loans have grown $67.1 million, or 7% annualized, since December 31, 2008.

• Deposits increased $284.5 million, or 19% annualized, resulting from seasonal and new account growth.

• Residential real estate loans, which we generally do not hold in our portfolio, decreased $76.1 million since December 31, 2008 due to sales of long-term fixed rate loans in the secondary market.

• All of our capital ratios remain above the “well-capitalized” level.

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):

	March 31, 2009						December 31, 2008
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	2,262,505			35.3	%	$	2,211,402			34.4	%
Construction		331,247			5.2			340,564			5.3
Business		969,836			15.1			940,304			14.6
Specialized lending		174,711			2.7			178,916			2.8
Total commercial loans		3,738,299			58.3			3,671,186			57.1
Residential real estate		1,914,691			29.8			1,990,784			31.0
Home equity		629,916			9.8			624,495			9.7
Other consumer		134,689			2.1			143,989			2.2
Total loans and leases		6,417,595			100.0	%		6,430,454			100.0	%
Net deferred costs and unearned discounts		31,813						33,321
Allowance for credit losses		(79,613	)					(77,793	)
Total loans and leases, net	$	6,369,795					$	6,385,982

During the first quarter of 2009, we experienced a 7% annualized increase in our higher yielding commercial loan portfolio as a result of our continued strategic focus on the portfolio and decreased competition as larger banks and nonbank entities continue to face liquidity and capital issues. This increase was more than offset by a 16% annualized decline in our residential real estate loan portfolio. While we experienced a significant increase in residential loan refinancing, including loans currently held by other financial institutions, ongoing consumer preference is for long-term fixed rate products which we generally do not maintain in our portfolio. This preference, combined with run-off in our own portfolio resulted in the decline in our residential real estate loan portfolio. In addition, we experienced a decrease in our other consumer loans portfolio, as we continue to deemphasize certain types of consumer loans, including indirect auto loans

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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).

	Three months ended March 31,
	2009			2008
Balance at beginning of period	$	77,793		$	70,247
Net charge-offs:
Charge-offs		(7,305	)		(2,710	)
Recoveries		375			756
Net charge-offs		(6,930	)		(1,954	)
Acquired at acquisition date		—			2,890
Provision for credit losses		8,750			3,100
Balance at end of period	$	79,613		$	74,283
Ratio of annualized net charge-offs to average loans outstanding during the period		0.44	%		0.13	%
Ratio of annualized provision for credit losses to average loans outstanding during the period		0.55	%		0.21	%

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.

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

	March 31,			December 31,
	2009			2008
Nonaccruing loans:
Commercial real estate	$	33,708		$	26,546
Commercial business		3,772			7,411
Specialized lending		4,728			4,354
Residential real estate		6,600			5,516
Home equity		2,791			2,076
Other consumer		319			514
Total nonaccruing loans		51,918			46,417
Real estate owned		2,001			2,001
Total nonperforming assets	$	53,919		$	48,418
Total nonaccruing loans as a percentage of total loans		0.81	%		0.72	%
Total nonperforming assets as a percentage of total assets		0.56	%		0.52	%
Allowance for credit losses to total loans		1.23	%		1.20	%
Allowance for credit losses to nonaccruing loans		153	%		168	%

During the quarter ended March 31, 2009 our total nonaccruing loans increased $5.5 million from the prior quarter. The increase is largely attributable to one relationship that we believe is well secured. As a result, our nonaccruing loans represent 0.81% of our total loans as compared to 0.72% at December 31, 2008. As a percentage, our allowance for credit losses to nonaccruing loans decreased to 153% at March 31, 2009 from 168% at December 31, 2008. Net annualized charge-offs to average loans outstanding for the current quarter increased to 0.44% from 0.13% for the quarter ended March 31, 2008. We continue to have no direct exposure to subprime or Alt-A mortgages. 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 and government sponsored enterprise debt securities; mortgage backed securities; collateralized mortgage obligations secured by U.S. government agencies and government sponsored enterprises; and to a lesser extent, non-agency issued collateralized mortgage obligations; and obligations of states and political subdivisions. Portions of our portfolio are utilized to meet pledging requirements for deposits of state and local subdivisions, securities sold under repurchase agreements, and FHLB advances.

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During the quarter ended March 31, 2009 the balance of our securities portfolio increased $227.8 million to $1.8 billion from $1.6 billion at December 31, 2008, which was primarily attributable to the deployment of the proceeds from our October 2008 follow-on stock offering and our November 2008 sale of preferred stock to the Treasury. The majority of the funds were invested in mortgage-backed securities guaranteed by the Federal National Mortgage Association, Federal Home Loan Mortgage Association, or Government National Mortgage Association with an expected average life ranging from two to three years. Our investment portfolio remains well positioned to provide a stable source of cash flow with a weighted average estimated remaining life of 3.4 years at March 31, 2009.

During the quarter ended March 31, 2009, we experienced a $13.6 million improvement, net of deferred taxes, in the value of our available for sale investment securities, resulting in an unrealized gain of $852 thousand, net of deferred taxes, at quarter end. Generally, the value of our investment securities fluctuates in response to changes in market interest rates, changes in credit spreads, or a temporary lack of liquidity in the market. The unrealized gain represents the difference between the estimated fair value and the amortized cost of our securities, net of deferred taxes. At March 31, 2009, our pre-tax net gains were $1.4 million with an amortized cost of $1.8 billion. We have assessed the securities available for sale that were in an unrealized loss position at March 31, 2009 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 guarantor, 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.

Deposits

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

	March 31, 2009					December 31, 2008
	Amount		Percent			Amount		Percent
Core Deposits:
Savings	$	786,535		12.6	%	$	788,767		13.3	%
Interest-bearing checking		503,863		8.1			485,220		8.2
Money market deposit accounts		2,216,321		35.6			1,940,136		32.6
Noninterest-bearing		705,965		11.3			718,593		12.1
Total core deposits		4,212,684		67.6			3,932,716		66.2
Certificates		2,015,412		32.4			2,010,897		33.8
Total deposits	$	6,228,096		100.0	%	$	5,943,613		100.0	%

During the first three months of 2009, we experienced a 19% annualized increase in our total deposit balances primarily as the result of seasonal and new account growth in money market and interest-bearing checking accounts, indicative of customer preferences for short term products and our focus on growing these profitable relationships. As a result, core deposits now comprise 68% of total deposits, up from 66% at December 31, 2008 and 62% in the same quarter in 2008. Our municipal deposit balances increased $174.6 million to $859.0 million at March 31, 2009, from $684.4 million at December 31, 2008 due to seasonal inflow of tax payment collections as well as new account growth.

Borrowings

Wholesale borrowings decreased $93.3 million during the first three months of 2009 to $1.4 billion as we were able to use the increase in our deposits to pay down $90.4 million of short-term borrowings. Multiple reductions in the federal funds interest rate during 2008 resulted in a 97 basis point decline in our borrowing costs during the first quarter of 2009 as compared to the same period in 2008.

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RESULTS OF OPERATIONS FOR THE THREE MONTHS ENDED MARCH 31, 2009 AND 2008

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 March 31,
	2009									2008
	Average			Interest						Average			Interest
	outstanding			earned/			Yield/			outstanding			earned/			Yield/
	balance			paid			rate			balance			paid			rate
Interest-earning assets:
Loans and leases(1)	$	6,450,237		$	87,312			5.45	%	$	6,045,060		$	94,260			6.25	%
Securities available for sale and other investments(2)		1,774,559			19,917			4.49			1,380,918			17,526			5.08
Total interest-earning assets		8,224,796			107,229			5.24			7,425,978			111,786			6.03
Noninterest-earning assets(3)(4)		1,212,191									1,167,805
Total assets	$	9,436,987								$	8,593,783
Interest-bearing liabilities:
Savings deposits	$	774,262			452			0.24	%	$	782,804		$	646			0.33	%
Checking deposits		486,663			191			0.16			468,411			383			0.33
Money market deposits		2,083,102			6,969			1.36			1,753,468			12,978			2.98
Certificates of deposit		2,012,120			13,301			2.68			2,235,016			23,101			4.16
Borrowed funds		1,507,374			12,276			3.29			1,205,857			12,817			4.26
Total interest-bearing liabilities		6,863,521			33,189			1.96			6,445,556			49,925			3.11
Noninterest-bearing deposits		689,596									627,762
Other noninterest-bearing liabilities		147,734									124,934
Total liabilities		7,700,851									7,198,252
Stockholders’ equity(3)		1,736,136									1,395,531
Total liabilities and stockholders’ equity	$	9,436,987								$	8,593,783
Net interest income				$	74,040								$	61,861
Net interest rate spread								3.28	%								2.92	%
Net earning assets	$	1,361,275								$	980,422
Net interest rate margin					3.61	%								3.33	%
Ratio of average interest-earning assets to average interest-bearing liabilities		119.83	%								115.21	%

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

Our taxable equivalent net interest rate margin improved 28 basis points for the first quarter of 2009 as compared to the first quarter of 2008, reflecting:

• Product mix shift in 2008 from maturing higher yielding certificates of deposit accounts to lower rate money market deposit accounts resulting in a more favorable funding mix in 2009.

• Increase in average checking deposit balances of $18.3 million, or 16% annualized, as compared to the first quarter of 2008.

• Reductions in the federal funds interest rate in late 2008 resulted in funding costs at their lowest quarterly level in almost four years.

• Continued shift in our balance sheet mix from lower yielding residential real estate loans and retail consumer loans to higher yielding commercial loans.

Provision for Credit Losses

Our provision for credit losses is based upon our assessment of the adequacy of our allowance for credit losses with consideration given to such interrelated factors as the composition of and risk in our loan portfolio, the level of our nonaccruing and delinquent loans, and related collateral or government guarantees, charge-offs, and economic considerations. The provision charged to income increased to $8.8 million for the three months ended March 31, 2009, or 0.55% of average loans, as compared to $3.1 million, or 0.21% of average loans, for the three months ended March 31, 2008. The increase was primarily due to an increase in nonaccruing commercial real estate loans resulting from deteriorations in economic conditions and the increased size of our higher risk commercial loan portfolio.

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Noninterest Income

Noninterest income decreased slightly to $28.5 million for the quarter ended March 31, 2009 as compared to $29.3 million for the same quarter in 2008. We experienced a modest increase in transaction-based revenues from banking services despite a significant shift in consumer spending habits due to the recent economic decline. This was offset by a $971 thousand decrease in revenues related to gains on partnership investments recognized in the first quarter of 2008.

Although noninterest income as a percent of total revenues decreased to 28% for the quarter ended March 31, 2009 from 33% for the first quarter of 2008, the decrease was primarily attributable to the increased level of our net interest income. Noninterest income continues to be a significant source of stable revenue not subject to the potential volatility of changing interest rates.

Noninterest Expense

Noninterest expenses increased $5.6 million for the quarter ended March 31, 2009 as compared to the same quarter in 2008, resulting primarily from an increase in federal deposit insurance (“FDIC”) premiums and the settlement of a service mark infringement legal matter, as well as a full quarter of Great Lakes Bancorp, Inc. operating expenses. FDIC premiums increased $1.3 million due to the effects of the temporary increase to $250,000 of FDIC coverage on all accounts as well as our participation in the Temporary Liquidity Guarantee Program for noninterest bearing accounts. We expect to incur a 10 basis point, or $6.0 million, special assessment of FDIC premiums during the second quarter of 2009. We settled a service mark infringement legal matter during the first quarter of 2009 for $2.8 million, net of insurance reimbursements. In addition, we incurred $1.7 million in professional services during the current quarter in connection with the acquisition of 57 branches from National City Bank, which is expected to close in the third quarter of 2009.

Our increased net interest income and disciplined management of expenses facilitated the improvement in our efficiency ratio for the current quarter to 62.5% as compared to 64.4% for the same period in 2008. Excluding the impact of the professional services associated with the branch acquisitions and the settlement of the service mark infringement matter, our efficiency ratio improved to 57.4% for the quarter ending March 31, 2009, which compares to 62.1% for the same quarter in 2008, excluding the expenses associated with the acquisition of Great Lakes Bancorp, Inc.

Income Taxes

Our effective tax rate for the three months ended March 31, 2009 increased to 35.8% as compared to 34.5% for the same period in the prior year, due to New York State legislation partially phasing out the exclusion of dividends paid by our real estate investment trust (“REIT”) to First Niagara Bank and the limitation on deductibility of certain executive compensation under the terms of the CPP. Our effective tax rate is calculated quarterly based upon current assumptions relating to the full year’s estimated operating results and certain tax-related items.

CAPITAL RESOURCES

During the first quarter of 2009, our stockholders’ equity increased $15.1 million. The increase was primarily the result of $13.6 million of unrealized gains, net of deferred taxes, on our available for sale securities and our earnings (net of common stock dividends declared). These increases were partially offset by $2.1 million in preferred stock dividends and accretion related to the CPP.

For the three months ended March 31, 2009, we declared common stock dividends of $0.14 per share, or $16.2 million, representing a payout ratio of 100%. 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 economic environment. Until November 21, 2011 or until we have fully redeemed the preferred stock, approval from the Treasury is required for us to increase our common stock dividend.

On April 20, 2009, in an effort to further enhance our strong capital levels in anticipation of the closing of our acquisition of 57 Western Pennsylvania branches from National City Bank (“National City”), to facilitate repayment of the $184.0 million of preferred stock and common stock warrant issued to the Treasury pursuant to the CPP, and for general corporate purposes, we issued 31.1 million shares of common stock in an underwritten stock offering at a price of $12.25 per share. Net proceeds totaled approximately $360.7 million after deducting underwriting discounts and commissions and offering expenses of $19.6 million.

Additionally, in order to provide us with an alternative funding source, concurrent with our entry into the agreement to purchase the 57 Western Pennsylvania branches from National City, we entered into a Securities Purchase Agreement with The PNC Financial Services Group, Inc. (“PNC”) and National City (the “Securities Purchase Agreement”) pursuant to which we have the right to require PNC to purchase the lesser of 6.8 million shares of our common stock and the number of shares of our common stock that would result in an aggregate purchase price of $75.0 million, in each case at a per share purchase price equal to the five-day volume weighted average price at closing of the acquisition. Additionally, we have the right to require National City to purchase our 12% Senior Notes due 2014 in an aggregate principal amount of up to $150.0 million less the purchase price paid by PNC for any common stock issued pursuant to the Securities Purchase Agreement. We have until September 30, 2009 to exercise our rights under the Securities Purchase Agreement.

At March 31, 2009, we held more than 6.7 million shares of our common stock as treasury shares. As part of our capital management initiatives, we may repurchase additional shares under our current share repurchase program. However, approval is required from the Treasury prior to any purchases until the earlier of November 21, 2011 or until their shares of preferred stock are fully redeemed. In addition, we are not likely to make additional purchases until the economy and capital markets stabilize. During the first quarter of 2009, we did not make any repurchases of our common stock, and as of March 31, 2009, we are authorized to repurchase an additional 3.5 million shares under current repurchase programs. We issued 189 thousand shares from treasury stock in connection with restricted stock awards during the first quarter of 2009.

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Our capital ratios continue to exceed the regulatory guidelines for well-capitalized institutions. The following table shows the Bank’s ratios as of March 31, 2009. 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	$	738,891		8.48	%		130,624		1.50	%		N/A		N/A	%
Tier 1 (core) capital		738,891		8.48			348,332		4.00			435,414		5.00
Tier 1 risk based capital		738,891		11.53			256,250		4.00			384,375		6.00
Total risk based capital		818,033		12.77			512,500		8.00			640,624		10.00

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

We also consider certain non-GAAP financial measures to be meaningful measures of capital quality. Tangible common equity to tangible assets represents common stockholders’ equity less goodwill and core deposit and other intangibles. This ratio amounted to 8.89% and 8.96% at March 31, 2009 and December 31, 2008, respectively. Tangible common equity to risk-weighted assets represents common stockholders’ equity less goodwill and core deposit and other intangibles divided by risk-weighted assets. Risk-weighted assets are calculated by assigning asset and off-balance sheet items to one of four risk categories, which are assigned risk weights of zero percent, 20 percent, 50 percent, and 100 percent. This ratio amounted to 12.21% and 12.26% at March 31, 2009 and December 31, 2008, respectively.

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.

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

Our standing in the national markets, and our ability to obtain funding from them, 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 March 31, 2009, our total available cash, interest-bearing demand accounts, federal funds sold, and other money market investments was $161.9 million. In addition to cash flow from operations, deposits, and borrowings, funding is provided from the principal and interest payments received on loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, deposit balances and the pace of mortgage prepayments are greatly influenced by the level of interest rates, the economic environment, and local competitive conditions.

Our primary investing activities are the origination of loans, the purchase of investment securities, and the acquisition of banking and financial services companies. Our higher level of commercial loan growth in 2009 has been funded primarily by cash flow generated from our deposit growth, principal and interest received from maturing assets, and the proceeds from our sale of preferred stock to the Treasury.

We have a total borrowing capacity of up to $2.3 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 $1.5 billion was utilized as of March 31, 2009.

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In the ordinary course of business, we extend commitments to originate commercial and residential mortgages, commercial loans, and other consumer loans. Commitments to extend credit are agreements to lend to a customer as long as conditions established under the contract are not violated. Our commitments generally have fixed expiration dates or other termination clauses, and may require payment of a fee by the customer. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. In addition, we may extend commitments on fixed rate loans which expose us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. As of March 31, 2009, we had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $1.3 billion.

Included in these commitments are lines of credit to both consumer and commercial customers. The borrower is able to draw on these lines as needed, therefore our funding requirements for these products are generally more difficult to predict. Our credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the total amount of these instruments. Unused commercial lines of credit amounted to $687.3 million at March 31, 2009 and generally have an expiration period of less than one year. Home equity and other consumer unused lines of credit totaled $317.9 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 our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Standby letters of credit amounted to $101.5 million at March 31, 2009 and generally have an expiration period of less than two years. Since a significant portion of our unused commercial lines of credit and the majority of our outstanding standby letters of credit expire without being funded, our obligation under the above commitment amounts may be substantially less than the amounts reported. It is anticipated that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations.

At the end of the current quarter, we were committed to sell residential mortgages amounting to $63.5 million, consistent with our approach to sell long-term fixed rate mortgages.

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 approves strategies to manage our exposure to interest rate risk. Our goal is to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates. 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 March 31, 2009. 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 decrease at March 31, 2009
Changes in interest rates(1)	Net interest income			% Change
	(in thousands)
+200 basis points	$	(1,043	)		(0.35)	%
+100 basis points		(189	)		(0.06	)

(1) The Federal Reserve benchmark overnight federal funds rate was 0.25% at March 31, 2009, therefore, the calculation of the effect of a decrease in interest rates is not measurable.

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ITEM 4. Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of March 31, 2009 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective as of March 31, 2009. During the quarter ended March 31, 2009, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION

ITEM 1. Legal Proceedings

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

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 claimed that it owned a United States common law service mark in the term FIRST NIAGARA and that the Company was infringing this mark. FN-Canada sought an injunction and damages of $532 million.

On March 10, 2009, the Company and FN-Canada reached a settlement of all disputes with respect to service marks using the term FIRST NIAGARA in the United States, whether for banking, insurance, or leasing services. As a result of the settlement, a Stipulation of Dismissal of the district court lawsuit has been filed, and approved by the Court, and United States service mark registrations for marks incorporating the FIRST NIAGARA mark are expected to be issued to the Company by the U.S. Patent and Trademark Office in due course. The specific terms of the settlement are subject to a confidentiality agreement and the settlement amount of $2.8 million, net of insurance reimbursements, is included in noninterest expense in our Consolidated Statements of Income for the quarter ended March 31, 2009.

ITEM 1A. Risk Factors

There are no material changes to the risk factors as previously disclosed in Item 1A. to Part I of our 2008 Form 10-K.

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

a)	Not applicable.
b)	Not applicable.
c)	We did not repurchase any shares of our common stock during the first quarter of 2009.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

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

No matters were submitted to a vote of security holders during the quarter ended March 31, 2009.

ITEM 5. Other Information

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

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ITEM 6. Exhibits

The following exhibits are filed herewith:

Exhibits

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

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SIGNATURES

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

	FIRST NIAGARA FINANCIAL GROUP, INC.
Date: May 8, 2009	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer
Date: May 8, 2009	By:	/s/ Michael W. Harrington
		Michael W. Harrington
		Chief Financial Officer

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EXHIBIT INDEX

Exhibit
No.		Description
	31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
	32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002

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