FIRST NIAGARA FINANCIAL GROUP
401(k) PLAN
Financial Statements as of
December 31, 2005 and 2004
And
Supplemental Schedule
Together with
Reports of Independent Registered
Public Accounting Firms
REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM
June 26, 2006
The Compensation Committee of
First Niagara Financial Group, Inc.:
We have audited the accompanying statement of net assets available for plan
benefits of the First Niagara Financial Group 401(k) Plan (the Plan) as of
December 31, 2005, and the related statement of changes in net assets available
for plan benefits for the year then ended. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audit. The 2004 financial
statements of the First Niagara Financial Group 401(k) Plan were audited by
another independent registered public accounting firm, whose report dated June
24, 2005 expressed an unqualified opinion on those statements.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit also includes examining,
on a test basis, evidence supporting the amounts and disclosures in the
financial statements, assessing the accounting principles used and significant
estimates made by management, and evaluating the overall financial statement
presentation. We believe that our audit provides a reasonable basis for our
opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of the Plan at
December 31, 2005, and the changes in its net assets available for plan benefits
for the year then ended, in conformity with accounting principles generally
accepted in the United States.
Our audit was performed for the purpose of forming an opinion on the financial
statements taken as a whole. The accompanying supplemental schedule of assets
held for investment as of December 31, 2005 is presented for purposes of
additional analysis and is not a required part of the financial statements but
is supplementary information required by the Department of Labor's Rules and
Regulations for Reporting and Disclosure under the Employee Retirement Income
Security Act of 1974. This supplemental schedule is the responsibility of the
Plan's management. The supplemental schedule has been subjected to the auditing
procedures applied in our audit of the financial statements and, in our opinion,
is fairly stated in all material respects in relation to the financial
statements taken as a whole.
/s/ Bonadio & Co., LLP
Report of Independent Registered Public Accounting Firm
The Compensation Committee of
First Niagara Financial Group, Inc.:
We have audited the accompanying statement of net assets available for plan
benefits of the First Niagara Financial Group 401(k) Plan (the Plan) as of
December 31, 2004, and the related statement of changes in net assets available
for plan benefits for the year then ended. These financial statements are the
responsibility of the Plan's management. Our responsibility is to express an
opinion on these financial statements based on our audit.
We conducted our audit in accordance with the standards of the Public Company
Accounting Oversight Board (United States). Those standards require that we plan
and perform the audit to obtain reasonable assurance about whether the financial
statements are free of material misstatement. An audit includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial
statements. An audit also includes assessing the accounting principles used and
significant estimates made by management, as well as evaluating the overall
financial statement presentation. We believe that our audit provides a
reasonable basis for our opinion.
In our opinion, the financial statements referred to above present fairly, in
all material respects, the net assets available for plan benefits of the Plan as
of December 31, 2004, and the changes in net assets available for plan benefits
for the year then ended in conformity with U.S. generally accepted accounting
principles.
/s/ KPMG LLP
June 24, 2005
FIRST NIAGARA FINANCIAL GROUP 401(k) PLAN
STATEMENTS OF NET ASSETS AVAILABLE FOR PLAN BENEFITS
DECEMBER 31, 2005 AND 2004
- --------------------------------------------------------------------------------
2005 2004
----------- -----------
ASSETS
Investments:
Pooled separate accounts $31,937,982 $21,386,427
Mutual funds 12,199,527 9,214,323
Guaranteed interest accounts 2,289,238 2,272,635
Common collective trusts 1,094,703 --
First Niagara Financial Group, Inc. common stock 32,499,280 16,923,752
Participant loans 1,577,303 1,012,488
----------- -----------
Total investments 81,598,033 50,809,625
Receivables:
Employer contribution receivable -- 2,871
----------- -----------
Total receivables -- 2,871
----------- -----------
Net assets available for plan benefits $81,598,033 $50,812,496
=========== ===========
The accompanying notes are an integral part of these statements.
1
FIRST NIAGARA FINANCIAL GROUP 401(k) PLAN
STATEMENTS OF CHANGES IN NET ASSETS AVAILABLE FOR PLAN BENEFITS
FOR THE YEARS ENDED DECEMBER 31, 2005 AND 2004
- --------------------------------------------------------------------------------
2005 2004
----------- -----------
ADDITIONS:
Employee contributions $ 4,573,298 $ 3,147,216
Employer contributions 2,523,074 1,701,010
Rollover contributions 8,871,150 811,305
Interest and dividend income 883,514 443,614
Net appreciation in fair value of investments,
including realized gains and losses on sales 4,522,060 1,885,005
----------- -----------
Total additions 21,373,096 7,988,150
TRANSFERS:
Transfer from Hudson River Bank and Trust Company 401(k) Savings Plan 17,983,826 --
Transfer from C.W. Bostwick, Inc. 401(k) Plan 1,271,522
Transfer of Burke Group, Inc. 401(k) Plan accounts 1,532,101 --
Transfer from Troy Savings Bank 401(k) Savings Plan -- 7,490,806
----------- -----------
Total transfers 20,787,449 7,490,806
DEDUCTIONS:
Distributions to participants 11,086,273 4,610,370
Administrative expenses 266,700 241,319
Other 22,035 --
----------- -----------
Total deductions 11,375,008 4,851,689
----------- -----------
Net increase 30,785,537 10,627,267
Net assets available for plan benefits - beginning of year 50,812,496 40,185,229
----------- -----------
Net assets available for plan benefits - end of year $81,598,033 $50,812,496
=========== ===========
The accompanying notes are an integral part of these statements.
2
FIRST NIAGARA FINANCIAL GROUP 401(k) PLAN
NOTES TO FINANCIAL STATEMENTS
DECEMBER 31, 2005 AND 2004
- --------------------------------------------------------------------------------
1. DESCRIPTION OF PLAN
The following description of the First Niagara Financial Group 401(k) Plan (the
Plan) provides only general information. Participants should refer to the Plan
document for a more complete description of the Plan's provisions.
General
The plan is a defined contribution plan with salary reduction features as
permitted under Section 401(k) of the Internal Revenue Code. The Plan is funded
by employee and employer contributions and covers substantially all eligible
employees of First Niagara Bank and its Subsidiaries, which is owned by First
Niagara Financial Group, Inc. (collectively, the Company). It is intended to
conform with the provisions of the Employee Retirement Income Security Act of
1974 (ERISA) and subsequent legislation, when applicable.
At December 31, 2005 the assets of the Plan are maintained in investment funds
held by Principal Life Insurance Company (Principal). Broker commissions
associated with investment transactions and investment management fees are paid
by the Plan. Administrative fees not paid by the Plan are paid by the Company.
As a result of the acquisition of the sponsoring entities, the assets of Hudson
River Bank and Trust Company 401(k) Savings Plan, C.W. Bostwick, Inc. 401(k)
Plan, and Burke Group, Inc. 401(k) Plan were transferred into the Plan during
2005. The assets of Troy Savings Bank 401(k) Savings Plan were transferred into
the Plan during 2004.
Eligibility
All eligible employees who have completed three months of service, as defined in
the Plan, have attained the age of 21 and who are not represented by a
collective bargaining unit are eligible to participate in the Plan.
Contributions
Employees who are eligible to participate in the Plan may elect to contribute up
to 100% of their annual compensation, as defined in the Plan, subject to certain
limitations. Employees who are age 50 or older by the end of the calendar year
are allowed to make an additional "catch-up" contribution. This contribution was
limited to $4,000 in 2005 and $3,000 in 2004. This limit was increased to $5,000
in 2006. The "catch-up" contribution is not subject to the employer matching
contribution.
The Company contributes a matching contribution to those participating employees
who have elected to make employee contributions. The matching contribution is
equal to 100% of an employee's contribution up to 2% of the employee's
compensation (as defined in the Plan), plus 75% of an employee's contribution
between 2% and 6% of the employee's compensation. Matching contributions for an
employee shall not be more than 5% of the employee's compensation in a Plan
year.
3
1. DESCRIPTION OF PLAN (Continued)
Contributions (Continued)
The Company may also make an annual discretionary contribution to the Plan. No
discretionary contributions were made to the Plan during 2005 and 2004.
Participants may also contribute amounts representing distributions from other
qualified defined benefit or defined contribution plans.
Participants direct the investment of their contributions into various
investment options offered by the Plan. Participants may change their investment
allocation on a daily basis.
Participant Accounts
Each participant's account is credited with the participant's contribution and
an allocation of (a) the Company's contributions, (b) Plan earnings and losses,
and (c) administrative expenses. Allocations are based on participant earnings
or account balances, as defined. The benefit to which a participant is entitled
is the benefit that can be provided from the participant's vested account.
Vesting
All participants are immediately 100% vested in their contributions, plus
allocated earnings thereon. Participants vest in Company matching and
discretionary contributions as follows:
Less than 2 years 0%
2 years 20%
3 years 40%
4 years 60%
5 years 80%
6 years 100%
Loans to Participants
Participants may borrow from their accounts a minimum of $1,000 per loan up to a
maximum amount, which is the lesser of $50,000 or 50% of their vested account
balance. Loan terms range from 1-5 years or up to 15 years for the purchase of a
principal residence. The loans are collateralized by the participant's account
and bear interest at the rates available for comparable loans from commercial
lending institutions. Principal and interest is paid ratably through payroll
deductions.
Payment of Benefits
Employees are eligible for retirement benefits upon reaching age 65. Upon
termination of service due to death, disability, or retirement, a participant or
their beneficiary may elect to receive either a lump-sum amount equal to the
value of the participant's vested interest in his or her account, or
distributions based on various annuity options or fixed income payments. For
termination of service for other reasons, a participant may receive the value of
the vested interest in his or her account as a lump-sum distribution.
Participating employees may take financial hardship withdrawals under prescribed
circumstances, up to the value of their vested account balance.
Forfeited Accounts
Forfeitures of nonvested employer contributions may be used for Plan
administrative expenses or to reduce the employer's future contributions. During
2005 and 2004, forfeitures used to reduce employer contributions amounted to
$306,396 and $41,758, respectively. Unused forfeited account balances were
$218,546 and $116,527 at December 31, 2005 and 2004, respectively.
4
1. DESCRIPTION OF PLAN (Continued)
Plan Termination
Although it has not expressed any intent to do so, the Company has the right
under the Plan to discontinue its contributions at any time and to terminate the
Plan subject to the provisions of ERISA. In the event of plan termination,
participants will become 100% vested in their accounts.
2. SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES
Basis of Accounting
The accompanying financial statements have been prepared in conformity with
accounting principles generally accepted in the United States.
Use of Estimates
The preparation of financial statements in conformity with accounting principles
generally accepted in the United States requires management to make estimates
that affect the amounts reported in the financial statements and accompanying
notes. Actual results could differ from those estimates.
Risks and Uncertainties
The Plan's assets include various types of investment securities. Investment
securities are exposed to various risks, such as interest rate, market, and
credit risks. Due to the level of risk associated with certain investments and
the level of uncertainty related to the value of such investments, changes in
the values of investments will occur and such changes could materially affect
the amounts reported in the accompanying financial statements.
Investments
The investments in the guaranteed interest accounts, the pooled separate
accounts, and the common collective trust are valued at fair values as
determined by Principal. Investments in First Niagara Financial Group, Inc.
common stock and mutual funds are valued based on quoted market prices.
Participant loans are valued at their outstanding balances.
The guaranteed interest accounts are non fully benefit responsive, since
withdrawals prior to maturity for events other than death, disability,
termination, or retirement may be subject to a surrender charge. As such,
guaranteed interest accounts are recorded at fair value. The fair value of the
Plan's guaranteed interest accounts approximates contract value.
Purchases and sales of securities are recorded on a trade-date basis. Dividends
are recorded on the ex-dividend date.
3. INVESTMENTS
Contributions to the Plan are invested under a group annuity contract with
Principal, Gartmore Trust Company, Delaware Charter Guarantee and Trust Company,
and also in First Niagara Financial Group, Inc. common stock. Plan participants
may allocate their funds among one or more of the following investment accounts:
5
3. INVESTMENTS (Continued)
Group Annuity Contract with Principal (party-in-interest):
o Guaranteed Interest Account - A general investment account
comprised of guaranteed interest contracts yielding a
specified rate of interest maturing at various dates through
December 31, 2009.
o Bond and Mortgage Fund - A pooled separate account comprised
of intermediate-term commercial mortgages and mortgage-backed
securities.
o Large Cap Stock Index Fund - A pooled separate account
comprised of the stocks included in the Standard and Poor's
500 Stock Index.
o Small Company Blend Fund - A pooled separate account comprised
of equity securities of small to medium sized companies.
o Medium Company Blend Fund - A pooled separate account
comprised of equity securities of medium sized companies.
o Diversified International Fund - Invests in companies that
derive 50% or more of their revenue from goods or services
produced, or sales made, outside the U.S.
o Principal Financial Group, Inc. Stock Fund - A pooled separate
account, which is invested primarily in the stock of Principal
Financial Group, Inc.
o Small Company Growth Fund - A pooled separate account
comprised of stocks at the lower end of the market
capitalization range.
o Lifetime Strategic Income Fund - A pooled separate account,
which invests in shares of other Principal Investors Funds. It
is designed for participants close to retirement.
o Lifetime 2010 Fund - A pooled separate account, which invests
in shares of other Principal Investors Funds. It is designed
for participants who expect to retire around the year 2010.
o Lifetime 2020 Fund - A pooled separate account, which invests
in shares of other Principal Investors Funds. It is designed
for participants who expect to retire around the year 2020.
o Lifetime 2030 Fund - A pooled separate account, which invests
in shares of other Principal Investors Funds. It is designed
for participants who expect to retire around the year 2030.
o Lifetime 2040 Fund - A pooled separate account, which invests
in shares of other Principal Investors Funds. It is designed
for participants who expect to retire around the year 2040.
6
3. INVESTMENTS (Continued)
o Lifetime 2050 Fund - A pooled separate account, which invests
in shares of other Principal Investors Funds. It is designed
for participants who expect to retire around the year 2050.
o Principal Partners Large Capital Value Fund - a pooled
separate account, which invests primarily in common stocks of
larger capitalization domestic companies.
o Small Company Value Fund - A pooled separate account, which
invests primarily in common stock of small capitalization
companies.
Contract with Gartmore Trust Company:
o Stable Value Fund - Designed to produce higher returns than
money market funds while seeking safety and price stability.
Mutual Funds:
o American Century Vista Fund - Comprised of stocks of medium
sized and smaller companies that have earnings and revenues
that are growing at an accelerated pace.
o American Century Value Fund - Comprised of primarily U.S.
equity securities.
o T. Rowe Price Spectrum Growth Fund - Comprised of a
diversified group of T. Rowe Price mutual funds that invest
mainly in equities such as traditional growth stocks, small
aggressive growth stocks and income stocks, and international
securities.
o Janus Aspen Forty Fund - Comprised of common stocks selected
for their growth potential.
o Fidelity Advisor High Income Advantage I Fund - Comprised
mainly of low quality debt securities, preferred stocks,
convertible securities and zero coupon bonds.
Participants may also invest in First Niagara Financial Group, Inc. common stock
(party-in-interest).
7
3. INVESTMENTS (Continued)
At December 31, 2005 and 2004, the fair values of investments that represent 5%
or more of the Plan's net assets were as follows:
2005 2004
----------- -----------
Principal Guaranteed Interest Accounts $ -- $ 2,272,635
Principal Bond and Mortgage Fund 4,747,249 3,541,962
Principal Lifetime 2020 Fund 4,473,226 4,069,599
T. Rowe Price Spectrum Growth Fund 4,300,273 --
Principal Large Cap Stock Index Fund -- 3,549,281
Principal Lifetime 2030 Fund -- 2,568,778
First Niagara Financial Group, Inc. common stock 32,499,280 16,923,752
Net appreciation (depreciation) in fair value of investments, including realized
gains (losses) on investments sold during the years ended December 31, 2005 and
2004 are as follows:
2005 2004
----------- -----------
Group annuity contract with insurance company $ 2,183,550 $ 1,791,666
Mutual funds 920,900 939,461
First Niagara Financial Group, Inc. common stock 1,417,610 (846,122)
----------- -----------
$ 4,522,060 $ 1,885,005
=========== ===========
4. TAX STATUS
The Plan has received a determination letter from the Internal Revenue Service
dated May 5, 2003, stating that the Plan is qualified under Section 401(a) of
the Internal Revenue Code (the Code) and, therefore, the related trust is exempt
from taxation. Subsequent to this determination by the Internal Revenue Service,
the Plan was amended. Once qualified, the Plan is required to operate in
conformity with the Code to maintain its qualification. The Plan administrator
believes that the Plan is being operated in compliance with the applicable
requirements of the Code and therefore that the Plan, as amended, is qualified
and the related trust is tax-exempt.
5. SUBSEQUENT EVENTS
The Company acquired Hatch Leonard Naples, Inc. during 2005, and maintained
their existing 401(k) plan through December 31, 2005. Effective January 1, 2006,
employees of Hatch Leonard Naples, Inc. are eligible to participate in the Plan.
The balances in the Hatch Leonard Naples, Inc. 401(k) plan are expected to be
transferred into the Plan during 2006.
In June 2006, Plan participants were notified by the Plan Administrator of the
intention to change the Plan's recordkeeper and trustee. In connection with this
change, participants will temporarily be unable to change investments in their
individual accounts, to obtain a loan or distribution from the Plan, or to
obtain a hardship withdrawal from the Plan. This change is not expected to have
a material effect on the Plan's financial statements.
8
Schedule I
FIRST NIAGARA FINANCIAL GROUP 401(k) PLAN
SCHEDULE OF ASSETS HELD FOR INVESTMENT
DECEMBER 31, 2005
- --------------------------------------------------------------------------------
Description of # of shares Current
Identity of Issue Investment or units Value
- -------------------------- -------------------------------------------------- ----------- -----------
Guaranteed Interest Accounts:
-----------------------------
Principal Life * Maturity Date 12/31/05 $ 835,201
Insurance Company * Maturity Date 12/31/06 582,846
* Maturity Date 12/31/07 562,557
* Maturity Date 12/31/08 197,573
* Maturity Date 12/31/09 111,061
-----------
2,289,238
Pooled Separate Accounts:
-------------------------
Principal Life * Principal Bond and Mortgage Fund 6,452 4,747,249
Insurance Company * Principal Large Cap Stock Index Fund 82,308 3,875,115
* Principal Small Company Blend Fund 23,286 1,592,272
* Principal Medium Company Blend Fund 35,225 2,197,377
* Principal Diversified International Fund 64,895 3,203,032
* Principal Financial Group, Inc. Stock Fund 10,551 274,266
* Principal Small Company Growth Fund 95,851 1,847,857
* Principal Lifetime Stategic Income Fund 65,696 888,969
* Principal Lifetime 2010 Fund 200,757 2,772,792
* Principal Lifetime 2020 Fund 315,686 4,473,226
* Principal Lifetime 2030 Fund 219,028 3,073,105
* Principal Lifetime 2040 Fund 58,629 833,995
* Principal Lifetime 2050 Fund 7,722 106,124
* Principal Partners Large Capital Value Fund 102,049 1,412,124
* Principal Small Company Value Fund 16,953 640,479
-----------
31,937,982
Common Collective Trusts:
-------------------------
Gartmore Trust Company * Stable Value Fund 71,704 1,094,703
Mutual Funds:
-------------
Delaware Charter Guarantee American Century Vista Fund 45,895 725,602
and Trust Company American Century Value Fund 379,037 2,634,306
T. Rowe Price Spectrum Growth Fund 236,019 4,300,273
Janus Aspen Forty Fund 131,833 3,649,134
Fidelity Advisor High Income Advantage I Fund 94,804 890,212
-----------
12,199,527
First Niagara Financial * Common stock 2,245,977 32,499,280
Group, Inc.
Participant Loans * Interest Rates range from 4.00% to 11.80% 1,577,303
-----------
$81,598,033
===========
* Denotes party-in-interest
This schedule was prepared solely from information certified by Principal
Life Insurance Company. The accompanying notes are an integral part of
these statements.