UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K

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

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

Commission File No. 000-23975

FIRST NIAGARA FINANCIAL GROUP, INC.

Delaware		42-1556195
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)
726 Exchange Street, Suite 618, Buffalo, NY (Address of Principal Executive Offices)		14210 (Zip Code)

(716) 819-5500
(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:

Common Stock, par value $0.01 per share		The NASDAQ Stock Market LLC
(Title of Class)		(Name of Exchange on which Registered)

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YES þ NO o

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). YES o NO o

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. o

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

Large accelerated filer þ		Accelerated filer o		Non-accelerated filer o		Smaller reporting company o

Indicate by check mark whether the Registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act). YES o NO þ

As of February 22, 2010, there were issued and outstanding 188,515,378 shares of the Registrant’s Common Stock. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2009, as reported by The NASDAQ Stock Market LLC, was approximately $1,690,881,892.

 

 

DOCUMENTS INCORPORATED
BY REFERENCE

The following documents, in whole or in part, are specifically incorporated by reference in the indicated part of our Proxy Statement:

Document		Part
Proxy Statement for the 2010 Annual Meeting of Stockholders		Part III, Item 10 “Directors, Executive Officers and Corporate Governance”
		Part III, Item 11 “Executive Compensation”
		Part III, Item 12 “Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”
		Part III, Item 13 “Certain Relationships and Related Transactions, and Director Independence”
		Part III, Item 14 “Principal Accountant Fees and Services”

TABLE OF CONTENTS

ITEM		PAGE
NUMBER		NUMBER
PART I
1 Business			4
1A Risk Factors			23
1B Unresolved Staff Comments			28
2 Properties			28
3 Legal Proceedings			29
4 Submission of Matters to a Vote of Security Holders			29
PART II
5 Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities			30
6 Selected Financial Data			32
7 Management’s Discussion and Analysis of Financial Condition and Results of Operations			35
7A Quantitative and Qualitative Disclosures About Market Risk			58
8 Financial Statements and Supplementary Data			60
9 Changes in and Disagreements With Accountants on Accounting and Financial Disclosure			107
9A Controls and Procedures			107
9B Other Information			107
PART III
10 Directors, Executive Officers, and Corporate Governance			108
11 Executive Compensation			108
12 Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters			108
13 Certain Relationships and Related Transactions, and Director Independence			108
14 Principal Accountant Fees and Services			108
PART IV
15 Exhibits and Financial Statement Schedules			109
Signatures			110
Exhibit 23
Exhibit 31.1
Exhibit 31.2
Exhibit 32

Unless the context otherwise requires, the terms “we”, “us”, and “our” refer to First Niagara Financial Group, Inc. and its subsidiary on a consolidated basis.

PART I

ITEM 1. Business

GENERAL

First Niagara Financial Group, Inc.

First Niagara Financial Group, Inc., (the “Company”), a Delaware corporation whose principal executive offices are located at 726 Exchange Street, Suite 618, Buffalo, New York, provides a wide range of retail and commercial banking as well as other financial services through our wholly-owned, federally chartered savings bank subsidiary, First Niagara Bank (the “Bank”). In September 2009, we acquired 57 branch locations in Western Pennsylvania from National City Bank and our proposed merger with Harleysville National Corporation, which is expected to close early in the second quarter of 2010, will add 83 branch locations in Southeastern Pennsylvania. In November 2009, the Company applied to the Board of Governors of the Federal Reserve System (“Federal Reserve”) to convert from a savings and loan holding company to a bank holding company, which will allow us to acquire both savings and loan associations and commercial banks, as well as provide more flexibility in the execution and completion of acquisitions.

We are positioned as one of the leading community banks in Upstate New York and Western Pennsylvania, providing our retail consumer and business customers with banking services including residential and commercial real estate loans, commercial business loans and leases, consumer loans, wealth management products, as well as retail and commercial deposit products. Additionally, we offer insurance and employee benefits consulting services through a wholly-owned subsidiary of the Bank. At December 31, 2009, we had $14.6 billion of assets and stockholders’ equity of $2.4 billion.

We were organized in April 1998 in connection with the conversion of First Niagara Bank from a New York State chartered mutual savings bank to a New York State chartered stock savings bank and a reorganization to a two-tiered mutual holding company. In November 2002, we converted First Niagara Bank and the mutual holding company to a federal charter subject to Office of Thrift Supervision (“OTS”) regulation. In January 2003, we converted the mutual holding company to stock form, with our shares of common stock owned by the mutual holding company being sold to depositors and other investors.

Since 1998, we deployed the proceeds from several stock offerings through multiple whole-bank and nonbank financial services company acquisitions, as well as the opening of several de novo branches in target markets across Upstate New York. This strategy, coupled with our organic growth initiatives, which includes an emphasis on expanding our commercial operations and financial services businesses, has resulted in our successful transition from a traditional thrift to a commercial bank.

First Niagara Bank

First Niagara Bank was organized in 1870, and is a community-oriented savings bank providing financial services to individuals, families, and businesses through our branch network located across Upstate New York and Western Pennsylvania. As of December 31, 2009, the Bank and all of its subsidiaries had $14.5 billion of assets, $9.7 billion of deposits, $1.9 billion of stockholder’s equity, employed almost 3,000 people, and operated through 171 branches and several financial services subsidiaries. In December 2009, the Bank applied to the Office of the Comptroller of the Currency (the “OCC”) to become a national bank, in order to provide us with more flexibility in serving the diverse financial needs of our growing customer base.

The Bank’s subsidiaries provide a range of financial services to individuals and small and medium size companies in our market areas. These subsidiaries include: First Niagara Commercial Bank (the “Commercial Bank”), our New York State chartered bank whose primary purpose is to generate municipal deposits; First Niagara Funding, Inc., our real estate investment trust (“REIT”) which primarily originates and holds some of our commercial real estate and business loans; and First Niagara Risk Management, Inc. (“FNRM”), our full service insurance agency and employee benefits consulting firm engaged in the sale of insurance products including commercial and personal insurance, surety bonds, life, disability and long-term care coverage, as well as other risk management advisory services. FNRM’s risk management consulting business includes alternative risk and self-insurance, claims investigation and adjusting services, and third party administration of self insured workers’ compensation plans. FNRM’s employee benefits consulting business includes a retirement plan practice, compliance services, benefit plan administration, as well as a compensation consulting practice. FNRM also provides industry specific insurance programs related to long-term care, moving and storage, ice rinks and municipalities.

OTHER INFORMATION

We maintain a website at www.fnfg.com. Our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are made available, free of charge, on the Investor Relations page on our website, as soon as reasonably practicable after we electronically file them or furnish them to the Securities and Exchange Commission (“SEC”). You may also obtain copies, without charge, by writing to our Investor Relations Department, 726 Exchange Street, Suite 618, Buffalo, New York 14210.

We have adopted a Code of Ethics that is applicable to our senior financial officers, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller, among others. The Code of Ethics is available on the Investor Relations page of our website along with any amendments to or waivers from that policy. Additionally, we have adopted a general Code of Ethics that sets forth standards of ethical business conduct for all of our directors, officers and employees. This Code of Ethics is also available on our website.

FORWARD LOOKING STATEMENTS

Certain statements we make in this document may be considered “forward-looking statements” as that term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. You can identify these forward-looking statements by our use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect, and other similar expressions. These forward-looking statements include: statements of our goals, intentions, and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the asset quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

•

General economic conditions, either nationally or in our market areas, that are worse than expected;

•

Significantly increased competition among depository and other financial institutions;

•

Inflation and changes in the interest rate environment that reduce our margins or fair value of financial instruments;

•

Changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements;

•

Our ability to enter new markets successfully and capitalize on growth opportunities;

•

Our ability to successfully integrate acquired entities;

•

Changes in consumer spending, borrowing, and savings habits;

•

Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board; and

•

Changes in our organization, compensation, and benefit plans.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

MARKET AREAS AND COMPETITION

Our primary lending and deposit gathering areas are generally concentrated in the same counties as our branches. We face significant competition in both making loans and attracting deposits in our markets as the Upstate New York and Western Pennsylvania regions have a high density of financial institutions, some of which are significantly larger than we are and have greater financial resources. Our competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks and credit unions. We face additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies.

We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community. As of December 31, 2009 we operated 171 bank branches, including 114 in Upstate New York primarily located near Buffalo, Rochester, Syracuse and Albany, which have a combined total population of nearly four million and are the top four Metropolitan Statistical Areas in New York State outside of New York City. We also operated 57 branches in Western Pennsylvania primarily located near Pittsburgh, Erie, and Warren, which have a combined total population of approximately three million.

LENDING ACTIVITIES

Our principal lending activity has been the origination of business and commercial real estate loans, leases, and residential mortgages to customers located within our primary market areas. Consistent with our long-term customer relationship focus, we generally retain the servicing rights on residential mortgage loans that we sell which results in monthly service fee income to us. We also originate and retain in our lending portfolio various types of home equity and consumer loan products.

Commercial Real Estate and Multi-family Lending

We originate commercial real estate loans secured predominantly by first liens on apartment houses, office buildings, shopping centers, and industrial and warehouse properties. Our current policy with regard to these loans is to minimize our risk by emphasizing geographic distribution within our market areas and diversification of these property types.

As part of our ongoing strategic initiative to manage interest rate risk, commercial and multi-family real estate loans that we originate are generally limited to three, five, or seven year adjustable-rate products which we initially price at prevailing market interest rates. These interest rates, subject to interest rate floors, subsequently reset annually after completion of the initial adjustment period at new market rates that generally range at a spread over the current applicable market index such as Federal Home Loan Bank (“FHLB”) Advance Rates. The maximum term that we offer for commercial real estate loans is generally not more than 10 years, with a payment schedule based on not more than a 30-year amortization schedule for multi-family loans, and 20 years for commercial real estate loans.

As part of our product mix, we also offer the availability of commercial real estate and multi-family construction loans to our relationship borrowers. We make most of our construction loans as “construction/permanent” loans, which provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete and either tenant lease-up provisions or prescribed debt service coverage ratios are met. We make the construction phase of the loan on a short-term basis, usually not exceeding two years, with floating interest rates that are indexed to either a London Inter-Bank Offered Rate (“LIBOR”) or prime rate. The construction loan application process includes the same criteria which are required for our permanent commercial mortgage loans, as well as a submission of completed plans, specifications, and cost estimates related to the proposed construction. We use these items as an additional basis to determine the appraised value of the subject property. The appraisal is an important component because construction loans involve additional risks related to advancing loan funds upon the security of the project under construction, which is of uncertain value prior to the completion of construction and subsequent pro-forma lease-up.

We continue to emphasize commercial real estate and multi-family lending because of the higher interest rates associated with this asset class. Commercial real estate and multi-family loans, however, carry significantly more risk as compared to residential mortgage lending, because they typically involve larger loan balances concentrated with a single borrower or groups of related borrowers. Additionally, the payment experience on loans that are secured by income producing properties is typically dependent on the successful operation of the related real estate project and thus, may subject us to adverse conditions in the real estate market or to the general economy. To help manage this risk, we have put in place concentration limits based upon property types and maximum amounts that we lend to an individual or group of borrowers. In addition, our policy for commercial lending generally requires a maximum loan-to-value (“LTV”) ratio of 75% on purchases of existing commercial real estate and 80% on purchases of existing multi-family real estate. For construction loans, the maximum LTV ratio varies depending on the project, however it generally does not exceed the lesser of 75% to 80% LTV based on property type or 90% of cost.

Commercial Business Loans

Our commercial business loans portfolio includes business term loans and lines of credit issued to small and medium size companies in our market areas, some of which are secured in part by additional owner occupied real estate. Additionally, we make secured and unsecured commercial loans and extend lines of credit for the purpose of financing equipment purchases, inventory, business expansion, working capital, and other general business purposes. The terms of these loans generally range from less than one year to seven years with either a fixed interest rate or a variable interest rate indexed to a LIBOR or our prime rate. Our lines of credit generally expire after one year and typically carry a variable interest rate indexed to either LIBOR or our prime rate. As part of the Bank’s strategic initiatives to fully service clients located within our retail branch geographic footprint, the Bank also purchases loan participations in various Shared National Credit (“SNC”) syndications. Our balance exposure to SNCs amounted to $151.8 million and $146.4 million at December 31, 2009 and 2008, respectively. The recent acquisition of the National City (“NatCity”) branch network in Western Pennsylvania, together with the accompanying $657.3 million commercial loan portfolio, emphasizes the Bank’s ongoing commitment to the development of commercial business relationships as the Bank looks to allocate a greater portion of our available funds and personnel resources to both our commercial middle market and small business lending markets. To facilitate expansion in these areas, we offer additional commercial business products and services such as letters of credit, cash management, remote deposit capture, merchant services, wire transfer capabilities, lock-box, business credit and debit cards, and online banking.

We also make commercial business and real estate loans which are 50% to 85% government guaranteed through the Small Business Administration. Terms of these loans range from one year to twenty years and generally carry a variable rate of interest indexed to the prime rate. This product allows us to better meet the needs of our small business customers while protecting us from undue credit risk.

Commercial business lending is generally considered to involve a higher degree of credit risk than secured real estate lending. The repayment of unsecured commercial business loans are wholly dependent upon the success of the borrower’s business, while secured commercial business loans may be secured by collateral that we cannot readily market.

Specialized Lending

Our specialized lending portfolio consists of commercial leases and loans to finance insurance premiums. The bank has traditionally offered installment direct financing “small ticket” equipment leases, generally in amounts between $15 thousand and $125 thousand. Terms of these leases are up to 60 months, generally guaranteed by the principals of the lessee, collateralized by the leased equipment and typically bear interest rates that are higher than traditional commercial lending. During 2009, we expanded and redefined our equipment financing product offering by developing the capability to provide both middle market and municipal leases to both existing and new customers in amounts up to $5.0 million.

Both the traditional small ticket leasing and financed insurance premium product lines have been impacted by the current economic environment. This is evidenced by the ongoing softness in the insurance markets that are driving down the dollar amount of insurance premiums being financed, and in the small business leasing market, which has been the traditional target for our equipment leasing activities.

Residential Real Estate Lending

We originate mortgage loans to enable our customers to finance residential real estate, both owner occupied and non-owner occupied, in our primary market areas. We offer traditional fixed-rate and adjustable-rate mortgage (“ARM”) products, with monthly and bi-weekly payment options, that have maturities generally up to 30 years, and maximum loan amounts generally up to $750 thousand. Our bi-weekly mortgages feature an accelerated repayment schedule and are linked to a deposit account to facilitate payments.

We generally sell newly originated conventional 15 to 30 year fixed-rate loans as well as FHA and VA loans in the secondary market to government sponsored enterprises such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) or to wholesale lenders. We intend to continue to hold our newly originated ARMs in our portfolio. Our LTV requirements for residential real estate loans vary depending on the loan program as well as the secondary market investor. Loans with LTVs in excess of 85% are required to carry private mortgage insurance. We generally originate loans that meet accepted secondary market underwriting standards.

We offer monthly ARM products secured by residential properties. These ARMs have terms generally up to 30 years, with rates that generally adjust annually after three, five, or seven years. After that initial fixed rate period of time, the interest rate on these loans is reset based upon a spread or margin above a specified index (e.g. a U.S. Treasury Constant Maturity Index). The appropriate index utilized at each interest rate change date depends on the initial adjustment period of the loan. Our ARM loans are generally subject to limitations on interest rate increases and decreases of up to 2% per adjustment period and a total adjustment of up to 6% over the life of the loan. These loans require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the term, and thus, do not permit any of the increased payment to be added to the principal amount of the loan, commonly referred to as negative amortization.

ARMs generally pose higher credit risks relative to fixed-rate loans primarily because, as interest rates rise, the payment amounts due from the borrowers rise, thereby increasing the potential for default. In order to manage this risk, we do not originate adjustable-rate loans with less than an initial fixed term of three years. Adjustable rate loans with less than a five year fixed term are subject to more stringent underwriting standards. Additionally, we do not offer ARM loans with initial teaser rates.

Home Equity Lending

We offer fixed-rate, fixed-term, monthly and bi-weekly home equity loans, and prime-based home equity lines of credit (“HELOCs”) in our market areas. We offer both fixed-rate and floating-rate home equity products in amounts up to 85% of the appraised value of the property (including the first mortgage) with a maximum loan amount generally up to $500 thousand. We offer monthly fixed-rate home equity loans with repayment terms generally up to 15 years and HELOCs with terms up to 30 years. We also offer an “Ultraflex” home equity line of credit which allows borrowers the option of a five year interest only draw period or a 10 year draw period with principal and interest payments. Additionally, with this product we offer a card option to access available funds and an option that allows our customers to convert their variable rate line to a fixed rate loan up to three times over the term of the line. The minimum line of credit is $10 thousand and the maximum is $500 thousand (limited to $100 thousand if the loan to value exceeds 80%).

Consumer Loans

We offer a variety of fixed-rate installment and variable rate line-of-credit consumer loans, including indirect mobile home loans as well as personal secured and unsecured loans. Consumer loans generally entail greater risk of loss than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles and mobile homes. Mobile home loans have shorter terms to maturity and higher yields than traditional single-family residential mortgage loans. We generally offer mobile home loans with fixed-rate, fully amortizing terms of 10 to 20 years. We originate mobile home loans at higher interest rates than residential mortgage loans because mobile homes typically decline in value following their initial sale, potentially resulting in the value of the collateral being less than the loan balance. At the time of origination, we require appraisals on all mobile homes to substantiate their current market values.

We contract with an independent third party to generate all mobile home loan applications for us. However, we underwrite all loans prior to funding them. As part of the negotiated servicing contract, the third party originator contacts borrowers who become delinquent in their payments and when necessary, will oversee the repossession and sale of mobile homes on our behalf. For these services we pay the originator a fee at loan funding, of which generally 50% is deposited into a noninterest bearing escrow account that we control in order to compensate us for any early prepayments and future losses which we may incur on these loans.

We also originate personal secured and unsecured fixed rate installment loans and variable rate credit cards and lines of credit. Terms of these loans range from 6 months to 72 months and generally do not exceed $50 thousand. Secured loans are collateralized by vehicles, savings accounts, or certificates of deposit. We only approve unsecured loans for our more creditworthy customers.

Classification of Assets

We review loans on a regular basis and place them on nonaccrual status when, in our opinion, the collection of principal or interest is less than probable or when contractual payments are 90 days or more past due. At that time, we reverse interest accrued and unpaid from interest income.

Consistent with regulatory guidelines, we provide for the classification of loans which are considered to be of lesser quality as “substandard,” “doubtful,” or “loss.” We consider a loan substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans include those loans where there is the distinct possibility that we will sustain some loss of principal if the deficiencies are not corrected. Loans that we classify as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. Loans that we classify as loss are those considered uncollectible and of such little value that their continuance as assets without the establishment of a substantial specific loss reserve is not warranted. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are designated “special mention.”

When we classify problem loans as either substandard or doubtful, we evaluate them for impairment. When we classify problem loans as a loss, we charge-off such amount against the allowance for credit losses. Our determination as to the classification of our loans and the amount of our allowance is subject to ongoing review by regulatory agencies, which can require us to establish additional general or specific loss allowances. We regularly review our loan portfolio to determine whether any loans require classification in accordance with our policy or applicable regulations.

Allowance for Credit Losses

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

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

Prior to 2009, we also maintained an unallocated portion of our allowance for credit losses related to a general assessment of potential variability of applicable qualitative considerations subject to a higher degree of uncertainty. During the first quarter of 2009, we refined our estimation methodology related to the allocation of the allowance. The result was the allocation of the previous unallocated portion of the allowance for credit losses to the specific loan portfolios related to a general assessment of each respective portfolio's potential variability of applicable qualitative considerations subject to a higher degree of uncertainty. Management does not consider this refinement to the methodology to be significant.

INVESTMENT ACTIVITIES

Our investment policy provides that investment decisions will be made based on the ability of an investment to generate earnings consistent with factors of quality, maturity, marketability, and risk diversification.

We limit our investments to U.S. Government and agency securities, municipal bonds, corporate debt obligations, and corporate equity securities. In addition, our policy permits investments in mortgage-backed securities, including collateralized mortgage obligations (“CMOs”) issued and guaranteed by FNMA, FHLMC, Government National Mortgage Association (“GNMA”), or non-agency issued and backed by residential conventional “whole loans.” Also permitted are investments in asset-backed securities (“ABS”), supported by auto loans, credit card receivables, home equity loans, student loans, and home improvement loans. Our investment strategy generally utilizes a risk management approach of diversified investing to optimize investment yields while managing our overall interest rate risk position. To accomplish these objectives, we focus on investments in mortgage related securities, including CMOs, while we utilize U.S. Government and agency and other non-amortizing securities for call protection and liquidity purposes. We attempt to maintain a high degree of liquidity in our investment securities and generally do not invest in debt securities with expected average lives at purchase in excess of five years. At December 31, 2009, $4.4 billion of securities within our investment portfolio were designated as available for sale and $1.1 billion were designated as held to maturity. These amounts included securities issued by FHLMC, FNMA and GNMA with a fair value of $1.1 billion, $1.2 billion, and $2.5 billion, respectively. We had no other investments in securities of a single issuer that exceeded 10% of our stockholders’ equity.

WEALTH MANAGEMENT

We offer wealth management services to manage client funds utilizing various third party investment vehicles including stocks, bonds, mutual funds, annuities, and other investment products, including individual retirement accounts, education savings plans, and retirement plans for both our retail and commercial clients. We offer mutual funds and annuities as well as other investment products through our branch network using financial consultants and appropriately licensed employees.

Revenue from mutual funds and annuities consists primarily of commissions paid by our clients, investment managers, and third party product providers. New business activity and the corresponding revenue that we earn are particularly affected by fluctuations in stock and bond market prices, the development of new products, markets and services, the relative attractiveness of investment products offered under current market conditions, and changes in the investment patterns of our clients.

SOURCES OF FUNDS

Deposits and borrowed funds, primarily FHLB advances and repurchase agreements, are the primary sources of funds we use in lending, investing, and other general purposes. In addition, we receive repayments on and proceeds from our sales of loans and securities, and cash flows from our operations. We have available lines of credit with the FHLB of New York, Federal Reserve Bank (“FRB”), and two commercial banks, which can provide us liquidity if the above funding sources are not sufficient to meet our short-term liquidity needs.

Deposits

We offer a variety of deposit products with a range of interest rates and terms. Our retail deposit accounts consist of savings, negotiable order of withdrawal (“NOW”), checking, money market, and certificate of deposit accounts. Our commercial account offerings include business savings and checking, money market, cash management accounts, and a totally free checking product. We also accept deposits on a limited basis through the Certificate of Deposit Account Registry Service (“CDARS”). Additionally, we accept municipal deposits through our Commercial Bank.

Borrowed Funds

We utilize borrowings to manage the overall maturity of our liabilities and to leverage our capital for the purpose of improving our return on equity. These borrowings primarily consist of advances and repurchase agreements with the FHLB, nationally recognized securities brokerage firms, and with our commercial and municipal customers. In January 2010, Moody’s Investors Service and Standard & Poor’s Ratings Services announced that they assigned first time long-term issuer credit ratings of Baa1 and BBB-, respectively, to us, complementing our existing BBB long-term issuer credit rating from Fitch Ratings that was last affirmed in July 2009. These ratings will increase our ability to efficiently access the capital markets to meet our liquidity needs.

FINANCIAL SERVICES

To complement our traditional core banking business, we offer a wide range of insurance products and consulting services to help both our retail and commercial customers achieve their financial goals. These products and services are delivered through our financial services business, which includes risk management (insurance) and employee benefits and compensation consulting services.

Risk Management

Through FNRM, we offer a wide range of commercial and personal insurance products and services including our claims investigation and adjusting services, third party administration of self insured workers compensation plans, alternative risk management services, as well as self insurance consulting services. FNRM also provides industry specific insurance programs related to long-term care, moving and storage, ice rinks, and municipalities.

The revenue attributable to FNRM consists primarily of fees paid by our clients as well as commissions, fees, and contingent profit sharing paid by insurance carriers. Commission rates that we earn vary based on the type of insurance product, the carrier being represented, and the services that our agency provides. We are currently servicing approximately $410.7 million in annual insurance premium volume.

Employee Benefits Consulting

We also offer full service employee benefits plan and compensation consulting through FNRM. Our primary practice areas include health and welfare plan consulting, defined contribution plan consulting and administration, defined benefit plan consulting and actuarial valuations, compensation consulting and salary administration, and worksite benefits enrollment and on-going administration. We are paid on a flat fee basis on certain of our services in accordance with service agreements with our clients. Our fees vary based on the number of participants in the plans, the amount of assets that we service, and the amount of hours required to perform the services. Revenue from certain other services is received based on the fair value of assets being managed and is, therefore, subject to changes in market conditions.

SEGMENT INFORMATION

Information about our business segments is included in Note 20 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” We have identified two business segments, banking and financial services. Our financial services activities consist of insurance and employee benefits consulting services. All of our other activities are considered banking.

SUPERVISION AND REGULATION

We are currently a savings and loan holding company examined and supervised by the OTS, while our Bank is currently a federal savings association examined and supervised by the OTS and, to a lesser extent, the Federal Deposit Insurance Corporation (“FDIC”). This regulation and supervision establishes a comprehensive framework of activities that we may engage in and is intended primarily for the protection of the FDIC’s deposit insurance fund and depositors. Under this system of federal regulation, we are periodically examined to ensure that we satisfy applicable standards with respect to our capital adequacy, assets, management, earnings, liquidity, and sensitivity to market interest rates. Following completion of an examination, the OTS evaluates our operations and assigns our Bank a rating (known as a CAMELS rating). Under federal law, we may not disclose our CAMELS rating to the public. Additionally, our Bank is regulated, to a lesser extent, by the Board of Governors of the Federal Reserve System, governing reserves that we are required to maintain against deposits and other operational matters. The OTS examines us and prepares reports for the consideration of our Board of Directors on any operating deficiencies that they may identify. Our relationship with our depositors and borrowers are also regulated to a great extent by both federal and state laws, especially in matters concerning privacy, the ownership of deposit accounts, and the form and content of loan documents. Any change in these laws or regulations, whether by the OTS or Congress, could have a material impact on us and our operations.

In November 2009, the Company applied to the Federal Reserve to convert from a savings and loan holding company to a bank holding company, which will allow us to acquire both thrifts and commercial banks, as well as provide more flexibility in the execution and completion of acquisitions. Upon approval by the Federal Reserve, we will be subject to supervision and regulation by the Federal Reserve under the Bank Holding Company Act of 1956, as amended (the “BHC Act”). The Federal Reserve will require regular reports from us and will be authorized to conduct regular examinations of us. For more information, see “Regulation as a Bank Holding Company with National Bank Subsidiary.”

Recent market disruptions have led to numerous proposals in the United States for potentially significant changes in the regulation of the financial services industry. See “Risk Factors—Proposed Legislative and Regulatory Reforms Could, If Enacted or Adopted, Result in Our Business Becoming Subject to Significant and Extensive Additional Regulations and/or Could Adversely Affect Our Results of Operations and Financial Condition” for a further discussion of some of these proposals and their potential impact on us.

Federal Regulation of Our Savings Bank

Business Activities

Our Bank’s lending and investment powers come from the Home Owners’ Loan Act, as amended, and the regulations of the OTS. Under these laws and regulations, our Bank may primarily invest in mortgage loans secured by residential and commercial real estate, commercial business and consumer loans, certain types of debt securities, and certain other assets. We also may establish subsidiaries that may engage in activities not otherwise permissible for our Bank, including real estate investment and securities and insurance brokerage.

In December 2009, our Bank applied to the OCC to become a national bank organized under the National Bank Act, providing us with more flexibility in serving the diverse financial needs of our growing customer base. If that application is granted, our Bank would have as its primary regulator the OCC rather than the OTS. The various laws and regulations administered by the OCC affect corporate practices such as payments of dividends, incurring debt, and acquisition of financial institutions and other companies. Supervision and regulation by the OCC also affects business practices, such as interest on deposits, the charging of interest on loans, types of business conducted, and location of offices.

Capital Requirements

OTS regulations require our Bank to meet three minimum capital standards: A 1.5% tangible capital ratio, a 4% leverage (core) ratio, and an 8% total risk-based capital ratio. The OTS prompt corrective action rules discussed below, in effect, establish a minimum 2% tangible capital standard.

The risk-based capital rules require our Bank to maintain Tier 1 (core) and total capital (which is defined as core capital and supplementary capital) to risk-weighted assets of at least 4% and 8%, respectively. In determining the amount of our risk-weighted assets, all of our Bank’s assets, including certain off-balance sheet assets, are multiplied by a risk-weight factor of 0% to 200%, which is assigned by OTS regulation based on the risks they believe are inherent in the type of asset. Core capital is defined as common stockholders’ equity (including retained earnings), certain noncumulative perpetual preferred stock, and related surplus and minority interests in equity accounts of consolidated subsidiaries, less intangibles other than certain mortgage servicing rights and credit card relationships. The components of supplementary capital currently include certain cumulative preferred stock, long-term perpetual preferred stock, mandatory convertible securities, subordinated debt, and intermediate preferred stock, the allowance for credit losses (limited to a maximum of 1.25% of risk-weighted assets), and up to 45% of net unrealized gains on available for sale equity securities with readily determinable fair market values. Overall, the amount of supplementary capital included as part of our Bank’s total capital cannot exceed 100% of core capital.

At December 31, 2009, our Bank exceeded all minimum regulatory capital requirements. In 2009, to further strengthen our Bank’s capital, the Company contributed $353.6 million of the proceeds from our follow-on stock offerings to the Bank. The current requirements and our actual capital levels are detailed in Note 14 of “Notes to Consolidated Financial Statements” filed in Part II, Item 8, “Financial Statements and Supplementary Data.”

Prompt Corrective Action Regulations

Under the prompt corrective action regulations, the OTS is required and authorized to take supervisory actions against undercapitalized savings banks. For this purpose, a bank is placed in one of the following five categories based on its capital levels:

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Well-capitalized (at least 5% leverage (core) capital, 6% Tier 1 risk-based capital and 10% total risk-based capital);

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Adequately capitalized (at least 4% leverage (core) capital, 4% Tier 1 risk-based capital and 8% total risk-based capital);

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Undercapitalized (less than 4% leverage (core) capital, 4% Tier 1 risk-based capital, or 8% total risk-based capital);

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Significantly undercapitalized (less than 3% leverage (core) capital, 3% Tier 1 risk-based capital, or 6% total risk-based capital); or

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Critically undercapitalized (less than 2% tangible capital).

Generally, the banking regulator is required to appoint a receiver or conservator if a bank is “critically undercapitalized.” The regulation also provides that a capital restoration plan must be filed with the OTS within 45 days of the date on which a bank receives notice that it is “undercapitalized,” “significantly undercapitalized,” or “critically undercapitalized.” A capital restoration plan must disclose, among other things, the steps that would be taken to become adequately capitalized without appreciably increasing the risk to which the bank is exposed. In addition, each company that controls the savings bank must guarantee that the savings bank will comply with the plan until the savings bank has been adequately capitalized on average during each of four consecutive calendar quarters. Further, numerous mandatory supervisory actions become immediately applicable, including, but not limited to, restrictions on growth, investment activities, capital distributions, and affiliate transactions. The OTS may also take any one of a number of discretionary supervisory actions, including the issuance of a capital directive and the replacement of senior executive officers and directors.

At December 31, 2009, our Bank met the criteria for being considered “well-capitalized.” The current requirements and the actual levels for our Bank are detailed in Note 14 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.”

Loans-to-One-Borrower

Our Bank generally may not make a loan or extend credit to a single borrower in excess of 15% of our unimpaired capital and surplus on either a secured or unsecured basis. As of December 31, 2009, our Bank was in compliance with loans-to-one-borrower limitations (15% of unimpaired capital and surplus) of $164.7 million based upon $1.1 billion of unimpaired capital and surplus. However, given our desire to diversify credit risk, we have established an internal loans-to-one-borrower limit of approximately $109.8 million (10% of unimpaired capital and surplus) as of December 31, 2009. Borrower concentration levels in excess of this threshold are reviewed quarterly by the Risk Committee of the Board of Directors, with a full portfolio review of these borrower concentrations on an annual basis.

Qualified Thrift Lender Test

Our Bank is also currently subject to a qualified thrift lender (“QTL”) test. Under the QTL test, our Bank must maintain at least 65% of its “portfolio assets” in “qualified thrift investments” in at least nine months of the most recent 12 month period. As of December 31, 2009, our Bank had 80% of its portfolio assets in qualified thrift investments. “Portfolio assets” generally means total assets of a savings bank, less the sum of specified liquid assets up to 20% of total assets, goodwill and other intangible assets, and the value of property used in the conduct of our Bank’s business.

“Qualified thrift investments” include various types of loans that our Bank makes for residential and housing purposes, investments related to those purposes, including certain mortgage-backed and related securities, and loans that our Bank makes for personal, family, household, and certain other purposes up to a limit of 20% of our Bank’s portfolio assets. “Qualified thrift investments” can also include 100% of our Bank’s small business loans. Our Bank also may satisfy the QTL test by qualifying as a “domestic building and loan association” as defined by the Internal Revenue Code of 1986, as amended.

Capital Distributions

The Company is a legal entity separate and distinct from its bank subsidiaries and other subsidiaries. Dividends and interest from our subsidiaries are our principal sources of funds to make capital contributions or loans to our Bank subsidiaries and other subsidiaries, or to pay dividends on our own equity securities. OTS regulations govern capital distributions that our Bank can make to our holding company. Our Bank must file an application for approval of a capital distribution if the total capital distribution for the applicable calendar year exceeds the sum of current year to date net income plus retained net income for the preceding two years that is still available for distribution; our Bank would not be at least adequately capitalized following the distribution; the distribution would violate any applicable statute, regulation, agreement, or OTS-imposed condition; or our Bank is not eligible for expedited treatment of its filings.

Even if an application is not otherwise required, our Bank must file a notice with the OTS before a dividend or capital distribution is remitted to shareholders. The OTS may disapprove our notice or application within 30 days if: our Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation, or agreement. Our Bank did not pay a dividend to our holding company in 2009 in order to maintain our Bank’s strong capital levels.

Community Reinvestment Act and Fair Lending Laws

We have a responsibility under the Community Reinvestment Act (“CRA”) and related regulations of the OTS to help meet the credit needs of our communities, including low and moderate income neighborhoods. In connection with its examination, the OTS assesses our Bank’s record of compliance with the CRA. In addition, the Equal Credit Opportunity Act and the Fair Housing Act prohibit us from discriminating in our lending practices on the basis of characteristics specified in those statutes. Our failure to comply with the provisions of the CRA could, at a minimum, result in regulatory restrictions on our activities. Our failure to comply with the Equal Credit Opportunity Act and the Fair Housing Act could result in enforcement actions against us by the OTS, as well as other federal regulatory agencies and the Department of Justice. Our Bank received a “Satisfactory” CRA rating on our most recent federal examination.

Transactions with Our Holding Company

Our Bank’s authority to engage in transactions with our holding company and any nonbank subsidiary of our holding company is limited by Sections 23A and 23B of the Federal Reserve Act (the “FRA”) and its implementing regulations. In general, transactions with our holding company must be on terms comparable to transactions with unrelated third parties. In addition, certain types of transactions are restricted to an aggregate percentage of capital. Collateral in specified amounts must usually be provided by our holding company in order to receive loans.

Loans to Insiders

Our Bank’s authority to make loans to insiders (our directors, executive officers, and 10% stockholders, as well as to companies controlled by these people) is currently governed by the requirements of Sections 22(g) and 22(h) of the FRA and its implementing regulations. These provisions require that loans to our insiders (i) be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those for comparable transactions with unaffiliated persons and that do not involve more than the normal risk of repayment or present other unfavorable features, and (ii) do not exceed certain limitations on the amount of the loan extended to insiders, individually and in the aggregate, which limits are based, in part, on the amount of our capital. In addition, loans in excess of certain limits must be approved by our Board of Directors. Total credit facilities extended to certain of our officers and directors and affiliates amounted to $3.2 million and $4.1 million at December 31, 2009 and 2008, respectively. During 2009, new loans to these officers and directors amounted to $346 thousand and principal repayments amounted to $150 thousand. The balances due from these insiders under these facilities amounted to $2.4 million and $2.6 million at December 31, 2009 and 2008, respectively. The remaining change from 2008 to 2009 is due to changes in insiders’ status.

Standards for Safety and Soundness

Federal law requires each federal banking agency to prescribe certain standards for all insured banks. These standards relate to, among other things, internal controls, information and audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, compensation, and other operational and managerial standards as the agency deems appropriate. The federal banking agencies adopted “Interagency Guidelines Prescribing Standards for Safety and Soundness” to implement the safety and soundness standards required under federal law. The guidelines set forth the standards that the federal banking agencies use to identify and address problems at insured banks before capital becomes impaired. If the appropriate federal banking agency determines that a bank fails to meet any standard prescribed by the guidelines, the agency may require the bank to submit to the agency an acceptable plan to achieve compliance with the standard. If a bank fails to meet these standards, the appropriate federal banking agency may require the bank to submit a compliance plan.

Insurance of Deposit Accounts

Our deposit accounts are insured by the FDIC up to applicable legal limits under the FDIC’s general deposit insurance rules. The FDIC’s deposit insurance fund is funded by assessments on insured depository institutions, which depend on the risk category of an institution and the amount of insured deposits that it holds. The FDIC may increase or decrease the assessment rate schedule on a semi-annual basis. Effective April 2009, assessment rates are subject to adjustments based upon the insured depository institution’s ratio of (i) long-term unsecured debt to domestic deposits, (ii) secured liabilities to domestic deposits and (iii) brokered deposits to domestic deposits (if greater than 10%).

Federal legislation establishes a range of 1.15% to 1.50% for the FDIC’s designated reserve ratio; and grants the FDIC discretion to set insurance premium rates according to the risk for all insured banks regardless of the level of the reserve ratio. The legislation also granted a one-time initial assessment credit to certain banks in recognition of their past contributions to the fund. During 2009 and 2008, our Bank used $1.1 million and $2.6 million in credits, respectively, to offset insurance premiums assessed by the FDIC. At December 31, 2009, we had no further credits available to offset assessments by the FDIC.

In conjunction with the October 2008 enactment of the Emergency Economic Stabilization Act of 2008 (“EESA”), the limit on FDIC insurance coverage was increased to $250,000 for all accounts through December 31, 2009, which Congress has since extended through December 31, 2013.

In addition, in October 2008, the Secretary of the Treasury invoked the systemic risk exception of the FDIC Improvement Act of 1991, allowing the FDIC to provide a 100% guarantee for newly issued senior unsecured debt issued before June 30, 2009 and noninterest bearing transaction deposit accounts through December 31, 2009 at FDIC insured institutions under the Temporary Liquidity Guarantee Program (“TLGP”). Fees for coverage were waived for the first 30 days of the program. We elected to participate in the program beyond this time period for coverage of noninterest bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000, but not for the guarantee of senior unsecured debt. An annual surcharge of 10 basis points is applied to noninterest bearing transaction deposit amounts in excess of $250,000. On August 26, 2009, the FDIC extended this coverage under the TLGP through June 30, 2010 for noninterest bearing transaction deposit accounts not otherwise covered by the existing deposit insurance limit of $250,000. We did not elect to participate in this extension of the TLGP, and accordingly, such coverage ended on December 31, 2009.

On May 22, 2009, the FDIC adopted a rule levying a five basis point special assessment on each insured depository institution’s assets minus Tier 1 capital as of June 30, 2009. The special assessment was payable on September 30, 2009. We recorded an expense of $5.4 million during the second quarter of 2009 to reflect the special assessment. On September 29, 2009 the FDIC increased assessment rates on deposit insurance premiums by three basis points effective January 1, 2011. In addition, in lieu of another special assessment, on November 12, 2009, the FDIC board adopted a final rule requiring insured institutions to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009, as well as for all of 2010, 2011, and 2012 on December 30, 2009, which amounted to $38.5 million for us. The rate increases and special assessment resulted in a significant increase to our FDIC insurance premiums, to $16.7 million in 2009 from $1.3 million in 2008.

FDIC guidance provides that as of December 31, 2009, and each quarter thereafter, each insured institution will be required to record an expense for its regular quarterly assessment and an offsetting credit to the prepaid assessment until the prepaid asset is exhausted. Once the asset is exhausted, the institution will resume paying and accounting for quarterly deposit insurance assessments as it currently does. Any further special assessments that the FDIC levies will be recorded as an expense during the appropriate period.

Prohibitions Against Tying Arrangements

We are prohibited, subject to some exceptions, from making loans or offering any other services, or fixing or varying the payment for making loans or providing services, on the condition that a customer obtains some additional service from us or not obtain services from one of our competitors.

Federal Home Loan Bank System

We are a member of the FHLB System, which consists of 12 regional Federal Home Loan Banks. The FHLB System provides a central credit facility primarily for member banks. As a member of the FHLB of New York, we are required to acquire and hold shares of capital stock in the FHLB in an amount equal to 0.2% of the total principal amount of our unpaid residential mortgage loans, commercial real estate loans, home equity loans, CMOs, and other similar obligations at the beginning of each year, and 4.5% of our borrowings from the FHLB. At December 31, 2009, we were in compliance with this requirement.

Federal Reserve System

Federal Reserve regulations require us to maintain noninterest-earning cash reserves against our transaction accounts, such as NOW and regular checking accounts. Our reserve balances of $600 thousand at December 31, 2009 and 2008 were in compliance with the reserve requirements. We may use balances maintained to meet the reserve requirements imposed by the Federal Reserve to satisfy our liquidity requirements imposed by the OTS.

Privacy Standards

Federal regulations require us to disclose our privacy policy, including identifying with whom we share “nonpublic personal information,” to our customers at the time the customer establishes a relationship with us and annually thereafter. In addition, we are required to provide our customers with the ability to “opt-out” of having us share their nonpublic personal information with nonaffiliated third parties before we can disclose that information, subject to certain exceptions.

The federal banking agencies adopted guidelines establishing standards for safeguarding our customer information. The guidelines describe the agencies’ expectation that we create, implement, and maintain an information security program, which would include administrative, technical, and physical safeguards appropriate to our size and complexity and the nature and scope of our activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of our customer records and information, protect against any anticipated threats or hazards to the security or integrity of our customer records, and protect against unauthorized access to records or information that could result in substantial harm or inconvenience to our customers. Additionally, the guidance states that banks, such as our Bank, should develop and implement a response program to address security breaches involving customer information, including customer notification procedures. We have developed such a program.

Holding Company Regulation

As a savings and loan holding company, we are subject to regulation and supervision by the OTS, which has enforcement authority over us. Among other responsibilities, this authority permits the OTS to restrict or prohibit activities that are determined to be a significant risk to our Bank.

The Gramm-Leach-Bliley Act of 1999 (the “GLB Act”) restricts us to those activities permissible for financial holding companies. As such, we may engage in activities that are financial in nature, including underwriting equity securities and insurance, incidental to financial activities or complementary to a financial activity. Federal law prohibits us, directly or indirectly, or through one or more subsidiaries, from acquiring control of another savings bank or holding company without prior written approval of the OTS. It also prohibits us from acquiring or retaining, with specified exceptions, more than 5% of the equity securities of a company engaged in activities that are not closely related to banking or financial in nature, or acquiring or retaining control of a bank that is not federally insured. In evaluating applications by holding companies to acquire savings banks, the OTS considers the financial and managerial resources, future prospects of the savings bank involved, the effect of the acquisition on the risk to the Deposit Insurance Fund, the convenience and needs of the community, and competitive factors.

In November 2009, the Company applied to the Federal Reserve to convert from a savings and loan holding company into a bank holding company, which will allow us to acquire both thrifts and commercial banks, as well as provide more flexibility in the execution and completion of acquisitions.

For more information, see “Regulation as a Bank Holding Company with National Bank Subsidiary.”

Commercial Bank Regulation

Our Commercial Bank is subject to extensive regulation by the New York State Banking Department (“NYSBD”) as its chartering agency and by the FDIC as its federal regulator and deposit insurer. Our Commercial Bank must file reports with the NYSBD and the FDIC concerning its activities and financial condition, and must obtain regulatory approval prior to entering into certain transactions, such as mergers with, or acquisitions of, other banks and opening or acquiring branch offices. The NYSBD and the FDIC conduct periodic examinations to assess compliance with various regulatory requirements. This regulation and supervision is intended primarily for the protection of the Deposit Insurance Fund and depositors. The regulatory authorities have extensive discretion in connection with the exercise of their supervisory and enforcement activities. This enforcement authority includes, among other things, the ability to assess civil monetary penalties, to issue cease and desist orders, and to remove directors and officers. These enforcement actions may be initiated in response to violations of laws, regulations or unsafe or unsound practices.

Our Commercial Bank derives its authority primarily from the applicable provisions of the New York Banking Law and the regulations adopted under that law. We are limited in our investments and the activities that we may engage in to those permissible under applicable state law and those permissible for national banks and their subsidiaries, unless those investments and activities are specifically permitted by the Federal Deposit Insurance Act or the FDIC determines that the activity or investment would pose no significant risk to the Deposit Insurance Fund. We limit our Commercial Bank activities to accepting municipal deposits and acquiring municipal and other securities.

Under New York Banking Law, our Commercial Bank is not permitted to declare, credit, or pay any dividends if its capital stock is impaired or would be impaired as a result of the dividend. In addition, the New York Banking Law provides that our Commercial Bank cannot declare nor pay dividends in any calendar year in excess of “net profits” for such year combined with “retained net profits” of the two preceding years, less any required transfer to surplus or a fund for the retirement of preferred stock, without prior regulatory approval.

Our Commercial Bank is subject to minimum capital requirements imposed by the FDIC that are substantially similar to the capital requirements imposed on our Bank. The FDIC regulations require that our Commercial Bank maintain a minimum ratio of qualifying total capital to risk-weighted assets of 8%, and a minimum ratio of Tier 1 capital to risk-weighted assets of 4%. In addition, under the minimum leverage-based capital requirement adopted by the FDIC, our Commercial Bank must maintain a ratio of Tier 1 capital to average total assets (leverage ratio) of at least 3% to 5%, depending on our Commercial Bank’s CAMELS composite examination rating. Capital requirements higher than the generally applicable minimum requirements may be established for a particular bank if the FDIC determines that a bank’s capital is, or may become, inadequate in view of the bank’s particular circumstances. Failure to meet capital guidelines could subject a bank to a variety of enforcement actions, including actions under the FDIC’s prompt corrective action regulations.

At December 31, 2009, our Commercial Bank met the criteria for being considered “well-capitalized.” The current requirements and the actual levels for our Commercial Bank are detailed in Note 14 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” For more information on proposed changes to currently applicable capital and liquidity requirements, see “—Proposed Capital and Liquidity Requirements.”

In connection our Bank’s planned conversion from a savings bank to a national commercial bank, we plan to merge our Commercial Bank into First Niagara Bank during 2010.

Regulation as a Bank Holding Company With a National Bank Subsidiary

If our applications to become a bank holding company under the BHC Act, and to convert our Bank to a national banking association are accepted, the laws and regulations applicable to us as a bank holding company whose principal subsidiary is a national banking association will be the same or similar in most respects to those described above under “Federal Regulation of Our Savings Bank” and “Holding Company Regulation.” However, they will differ in some respects from the laws and regulations to which we are currently subject. See “Federal Regulations of Our Savings Bank—Business Activities” and the discussion below of certain of those differences.

Scope of Permitted Activities

We have applied to the Federal Reserve to become a bank holding company under the BHC Act but have not applied for the broader powers that are permitted to bank holding companies that are also “financial holding companies.” In general, the BHC Act limits the business of bank holding companies that are not financial holding companies to banking, managing or controlling banks, performing certain surfacing activities for subsidiaries, and engaging in activities that the Federal Reserve has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto. As a savings and loan company, the regulations currently applicable to us permit us to engage not only in those activities but also to engage in the broader range of activities permitted for financial holding companies — that is, activities that are financial in nature, including underwriting equity securities and insurance and other activities that are incidental to financial activities or complementary to a financial activity. We do not currently engage in any activities other than those permitted for bank holding companies that are not financial holding companies.

Capital Requirements

As a bank holding company having as its principal subsidiary a national bank, the Company will be subject to formal quantitative capital requirements under the capital guidelines of the Federal Reserve and our Bank, as a national bank, will be subject to the capital regulations of the OCC. Although the OTS regulates the capital of savings and loan holding companies such as the Company, it does not apply specific capital regulations or guidelines to savings and loan holding companies.

The Federal Reserve’s risk-based capital guidelines applicable to bank holding companies, and the OCC’s risk-based capital regulations applicable to national banks, require that the holding company or bank maintain Tier 1 and total capital to risk-weighted assets of at least 4% and 8%, respectively. The definitions of Tier 1 capital and total capital and the determinations or risk-weighted assets, as applicable to the Company and the Bank under the Federal Reserve’s and OCC’s guidelines and regulations, are similar to those in the OTS regulations that currently apply to the Bank, as described above under “—Federal Regulation of Our Savings Bank —Capital Requirements.” There are differences, however, including that bank holding companies may include a limited amount of cumulative perpetual preferred stock and trust preferred securities in Tier 1 capital.

The Federal Reserve capital guidelines and OCC capital regulations require bank holding companies and national banks to comply with a minimum leverage ratio requirement. The leverage ratio is the ratio of the banking institution’s Tier 1 capital to its total consolidated quarterly average assets (as defined for regulatory purposes), net of the loan loss reserve, goodwill and certain other intangible assets. The guidelines and regulations require a minimum leverage ratio of 3% for banking institutions that either have the highest supervisory rating or have implemented the relevant regulator’s (the Federal Reserve as to a bank holding company and the OCC as to a national bank) risk-adjusted measure for market risks. All other bank holding companies and national banks are required to maintain a minimum leverage ratio of 4%.

The Federal Reserve’s capital guidelines provide that banking organizations experiencing internal growth or making acquisitions are expected to maintain strong capital positions substantially above the minimum supervisory levels, without significant reliance on intangible assets.

Although the Federal Reserve and the OCC guidelines and regulations do not include a minimum tangible capital ratio, the Federal Reserve’s guidelines indicate that the Federal Reserve will consider a “tangible Tier 1 leverage ratio” in evaluating proposals for expansion or new activities. The tangible Tier 1 leverage ratio is the ratio of a banking organization’s Tier 1 capital (excluding intangibles) to total assets (excluding intangibles).

Dividend Restrictions

If our Bank converts to a national banking association charter as contemplated, under the National Bank Act and OCC regulations, it will be subject to limitations on dividends similar to those described above applicable to our Bank under OTS regulations. The amount of dividends that may be paid by a national bank without prior OCC approval is limited to the lesser of the amounts calculated under a “recent earnings” test and an “undivided profits” test. Under the recent earnings test, a dividend may not be paid if the total of all dividends declared by a bank in any calendar year is in excess of the current year’s net income combined with the retained net income of the two preceding years, unless the bank obtains the approval of the OCC. Under the undivided profits test, a dividend may not be paid in excess of a bank’s “undivided profits”.

In addition to the dividend restrictions described above, the OCC has the authority to prohibit or limit the payment of dividends by a national bank if, in the OCC’s opinion, payment of a dividend would constitute an unsafe or unsound practice in light of the financial condition of the national bank.

It is also the policy of the Federal Reserve that a bank holding company generally only pay dividends on common stock out of net income available to common shareholders over the past year and only if the prospective rate of earnings retention appears consistent with the bank holding company’s capital needs, asset quality, and overall financial condition. In the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and discouraged dividend payout ratios that are at the 100% level unless both asset quality and capital are very strong. A bank holding company also should not maintain a dividend level that places undue pressure on the capital of bank depository institution subsidiaries, or that may undermine the bank holding company’s ability to serve as a source of strength for such bank depository institution subsidiaries.

Source of Strength

Under the BHC Act and Federal Reserve regulations, as a bank holding company the Company would be expected to act as a source of financial strength to its bank subsidiaries and to commit capital and financial resources to those subsidiaries. Such support may be required by the Federal Reserve at times when we might otherwise determine not to provide it. In addition, any loans by the Company to its bank subsidiaries will be subordinate in right of payment to depositors and to certain other indebtedness of the bank. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a federal bank regulator to maintain the capital of a subsidiary will be assumed by the bankruptcy trustee and entitled to a priority of payment.

Provisions Applicable to Savings and Loan Holding Companies and Savings Associations That Do Not Apply to Bank Holding Companies and National Banks

The QTL test, described above under “Federal Regulation of Our Savings Bank—Qualified Thrift Lender Test” will not apply to the Bank as a national bank.

Proposed Capital and Liquidity Requirements

The risk-based capital guidelines currently applicable to us and that will apply to us as a bank holding company owning a national bank are based on the 1998 Capital Accord (“Basel I”) of the Basel Committee on Banking Supervision (the “Basel Committee”).

In December 2009, the Basel Committee issued two consultative documents proposing reforms to bank capital and liquidity regulation. The Basel Committee’s capital proposals would significantly revise the definitions of Tier 1 capital and Tier 2 capital. Among other things, they would:

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re-emphasize that common equity is the “predominant” component of Tier 1 capital by adding a minimum common equity to risk-weighted assets ratio, with the ratio itself to be determined based on the outcome of an impact study that the Basel Committee is conducting, and requiring that goodwill, general intangibles and certain other items that currently must be deducted from Tier 1 capital instead be deducted from common equity as a component of Tier 1 capital;

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disqualify innovative capital instruments, including trust preferred securities and other instruments that effectively pay cumulative dividends, from Tier 1 capital status;

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strengthen the risk coverage of the capital framework, particularly with respect to counterparty credit risk exposures arising from derivatives, repurchase agreements and securities financing activities;

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introduce a leverage ratio requirement as an international standard; and

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implement measures to promote the build up of capital buffers in good times that can be drawn upon during periods of stress, introducing a countercyclical component designed to address the concern that existing capital requirements are procyclical (that is, they encourage reducing capital buffers in good times, when capital could more easily be raised, and increasing capital buffers in times of distress, when access to capital markets may be limited or they may effectively be closed).

The capital proposals do not specify a percentage for the new ratio of common equity to risk-weighted assets or changes in the current minimum Tier 1 capital (4%) and total capital (8%) risk-based capital requirements. Instead, they state that the minimum percentage requirements for the new ratio of common equity to risk-weighted assets and the other capital ratios, including Tier 1 capital to risk-weighted assets, total capital to risk-weighted assets and the new leverage ratio, will be included in a “fully calibrated, comprehensive set” of capital and liquidity proposals to be released by December 31, 2010. Independently in September 2009, the U.S. Department of the Treasury (the “Treasury”) issued a policy statement titled “Principals for Reforming the U.S. and International Regulatory Capital Framework for Banking Firms” setting forth core principals intended to address many of the same substantive items as the Basel Committee capital proposals and specifically calling for increased capital requirements for financial institutions.

The Basel Committee’s liquidity proposals, although similar in many respects to tests historically applied by banking organizations and regulators for management and supervisory purposes, if implemented, would for the first time be formulaic and required by regulation. They would impose two measures of liquidity risk exposure, one based on a 30 day time horizon and the other addressing longer term structural liquidity mismatches over a one year time period.

The Basel Committee indicated that it expects final provisions responsive to the proposals to be implemented by December 31, 2012. Ultimate implementation in individual countries, including the United States, is subject to the discretion of the bank regulators in those countries. The Basel Committee’s final proposals may differ from the proposals released in December 2010, and the regulations and guidelines adopted by regulatory authorities having jurisdiction over us may differ from the final accord of the Basel Committee. Moreover, although some aspects of the Basel Committee proposals were quite specific (for example, the definition of the components of capital), others were merely conceptual (for example, the description of the leverage test), and others not specifically addressed (for example, the minimum percentages for required capital ratios). We are not able to predict at this time the content of guidelines or regulations that will ultimately be adopted by regulatory agencies having authority over us or the impact of changes in capital and liquidity regulation upon us. However, a requirement that we maintain more capital, with common equity as a more predominant component, or manage the configuration of our assets and liabilities in order to comply with formulaic liquidity requirements, could significantly impact our financial condition, operations, capital position and ability to pursue business opportunities.

Other Regulatory Considerations

Cross Guarantee Provisions

Each insured depository institution that is “controlled” (as defined in the BHC Act) by the same holding company can be held liable to the FDIC for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of any other insured depository institution controlled by that holding company and for any assistance provided by the FDIC to any of those banks that is in danger of default. Such a “cross-guarantee” claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against that depository institution. If we become a bank holding company and, as contemplated, merge Harleysville National Bank and the Commercial Bank into First Niagara Bank, we will have only one insured depository institution for this purpose. However, if, in the future, we were to control other insured depository institutions, such cross-guarantee would apply to all such insured depository institutions.

Compensation Practices

If we become a bank holding company as contemplated, our compensation practices will be subject to oversight by the Federal Reserve. In October 2009, the Federal Reserve issued a comprehensive proposal on incentive compensation policies that applies to all banking organizations supervised by the Federal Reserve, including bank holding companies. The proposal sets forth three key principles for incentive compensation arrangements that are designed to help ensure that incentive compensation plans do not encourage excessive risk taking and are consistent with the safety and soundness of banking organizations. The three principles provide that a banking organization’s incentive compensation arrangements should provide incentives that do not encourage risk taking beyond the organization’s ability to effectively identify and manage risks, be compatible with effective internal controls and risk management, and be supported by strong corporate governance. The proposal also contemplates a detailed review by the Federal Reserve of the incentive compensation policies and practices of a number of “large, complex banking organizations,” including us. Any deficiencies in compensation practices that are identified may be incorporated into the organization’s supervisory ratings, which can affect its ability to make acquisitions or perform other actions. The proposal provides that enforcement actions may be taken against a banking organization if its incentive compensation arrangements or related risk management control or governance processes pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies. The scope and content of the Federal Reserve’s policies on executive compensation are continuing to develop, and we expect that these policies will evolve over a number of years.

Insolvency of an Insured Depository Institution

If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power:

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to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors;

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to enforce the terms of the depository institution’s contracts pursuant to their terms; or

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to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.

In addition, under federal law, the claims of holders of deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded a priority over other general unsecured claims against such an institution, including claims of debt holders of the institution, in the “liquidation or other resolution” of such an institution by any receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of our Bank, the debt holders would be treated differently from, and could receive, if anything, substantially less than, the depositors of the depository institution.

Other Legislation

USA PATRIOT Act of 2001

The USA PATRIOT Act of 2001 (the “PATRIOT Act”) was enacted to strengthen U.S. law enforcement and the intelligence communities’ abilities to work cohesively to combat money laundering and terrorist financing, and requires financial institutions to assist in the prevention, detection, and prosecution of such activities. The PATRIOT Act established anti-money laundering and financial transparency laws and requires cooperation among financial institutions, regulators, and law enforcement entities in identifying parties that may be involved in terrorism or money laundering.

Sarbanes-Oxley Act

The stated goals of the Sarbanes-Oxley Act of 2002 (“SOX”) are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

SOX addresses, among other matters, audit committees; certification of financial statements and internal controls by the Chief Executive Officer and Chief Financial Officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; a prohibition on insider trading during pension plan black out periods; disclosure of off-balance sheet transactions; a prohibition on certain loans to directors and officers; expedited filing requirements for Forms 4; disclosure of a code of ethics and filing a Form 8-K for significant changes or waivers of such code; “real time” filing of periodic reports; the formation of a public accounting oversight board; auditor independence; and various increased criminal penalties for violations of securities laws. The SEC has enacted rules to implement various provisions of SOX.

The Fair and Accurate Credit Transactions (“FACT”) Act of 2003

The FACT Act includes many provisions concerning national credit reporting standards, and permits consumers, including our customers, to opt out of information sharing among affiliated companies for marketing purposes. The FACT Act also requires us to notify our customers if we report negative information about them to credit bureaus or if the credit that we grant to them is on less favorable terms than are generally available. We also must comply with guidelines established by our federal banking regulators to help detect identity theft.

Troubled Assets Relief Program — Capital Purchase Program

On November 21, 2008, we sold to the Treasury for an aggregate purchase price of $184.0 million, 184 thousand shares of preferred stock and a warrant to purchase 1.9 million shares of common stock under the Troubled Assets Relief Program (“TARP”) Capital Purchase Program (the “CPP”). Upon the February 2009 enactment of the American Recovery and Reinvestment Act of 2009, we were able to redeem the preferred stock at any time, and without regard to having proceeds from a qualified equity offering, subject to consultation with our primary federal regulator, the OTS. The terms of the CPP prohibited us from increasing the dividends on our common stock as well as from making repurchases of our common stock without the Treasury’s consent prior to November 21, 2011 unless we had fully redeemed the preferred stock. Furthermore, participation in the CPP limited the compensation and tax deductibility of the compensation we paid to certain of our executives.

On May 27, 2009, we redeemed the preferred stock and the related final accrued dividend for a total of $184.3 million. At the time of payment, all rights of the Treasury, as holder of the preferred stock, terminated. The redemption of the preferred stock, which had a carrying value of $176.3 million, required us to record $7.7 million of discount accretion for the difference between the redemption price and the carrying value of the preferred stock. The number of shares of common stock available under the warrant was reduced by one-half as a result of the capital we raised in our April 2009 common stock offering.

On June 24, 2009, we entered into a Warrant Repurchase Agreement with the Treasury to repurchase the warrant for the remaining 953 thousand shares of our common stock that we had issued and sold to the Treasury. As a result of the repurchase, our stockholders’ equity decreased by $2.7 million.

TAXATION

We are subject to federal and state income taxation in the same general manner as other corporations, with some exceptions discussed below. The following discussion of taxation is intended only to summarize certain pertinent federal and state income tax matters and is not a comprehensive description of the tax rules applicable to us.

Method of Accounting

For federal income tax purposes, we report our income and expenses on the accrual method of accounting and use a tax year ending December 31^st for filing our consolidated federal income tax returns.

Corporate Dividends

We may exclude from income 100% of dividends received from our Bank as a member of the same affiliated group of corporations.

Net Operating Loss Carryovers

We may carry back net operating losses to the preceding two taxable years for federal income tax purposes and forward to the succeeding twenty taxable years for federal and New York State income tax purposes, subject to certain limitations. At December 31, 2009, we had net operating loss carryforwards of $145.6 million for federal income tax purposes. We obtained these net operating loss carryforwards upon our acquisition of Great Lakes Bancorp, Inc. and expect to utilize the carryforwards, subject to an annual limitation, each year through 2020.

Taxable Distributions and Recapture

Under current federal law, bad debt reserves created prior to January 1, 1988 are subject to recapture into taxable income should our Bank make nondividend distributions, make distributions in excess of earnings and profits retained, as defined, or cease to maintain a banking type charter. At December 31, 2009, our Bank’s federal pre-1988 reserve, for which no federal income tax provision has been made, was approximately $42.0 million.

State of New York

We report income on a calendar year combined basis to New York State. New York State franchise tax on corporations is imposed in an amount equal to the greater of (a) 7.1% of “entire net income” allocable to New York State, (b) 3% of “alternative entire net income” allocable to New York State, (c) 0.01% of the average value of assets allocable to New York State, or (d) nominal minimum tax. Entire net income is based on Federal taxable income, subject to certain modifications. Alternative entire net income is based on entire net income with certain modifications. During 2008, New York State revised legislation that phases out the exclusion of dividends paid by a REIT to a bank when the taxable assets of the bank’s combined reporting group exceed $8 billion. In 2008, we were entitled to exclude from taxation 50% of our REIT’s taxable income and in 2009 and 2010, we are entitled to exclude from taxation 25% of our REIT’s taxable income. Without the 25% REIT dividend exclusion, our 2009 effective tax rate would have been approximately 34.9%, compared to our actual rate of 33.9%.

In its current form, we do not expect to be materially impacted by any provisions of the proposed 2010 New York State budget bill.

Commonwealth of Pennsylvania

We report income on a calendar year separate company basis in Pennsylvania. In 2009, our Bank was subject to the Pennsylvania Mutual Thrift Institutions Tax, which is imposed in an amount equal to 11.5% of taxable income allocable to Pennsylvania. Taxable income is based on financial statement net income, subject to certain modifications.

In 2010, due to the anticipated change in its charter, our Bank will be subject to the Pennsylvania Bank Shares Tax, which is imposed in an amount equal to 1.25% of taxable net equity allocable to Pennsylvania. Taxable net equity is based on consolidated financial statement net equity, subject to certain modifications.

Status of Audits by Taxing Authorities

We are subject to routine audits of our tax returns by the Internal Revenue Service and various state taxing authorities. With few exceptions, we are no longer subject to federal and state income tax examinations by tax authorities for years before 2004. As described in Note 15 to the Consolidated Financial Statements, there are no indications of any material adjustments relating to any examination currently being conducted by these taxing authorities.

ITEM 1A. Risk Factors

Making or continuing an investment in securities issued by the Company, including our common stock, involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company. Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

Economic Conditions May Adversely Affect Our Liquidity and Financial Condition

As a consequence of the economic slowdown that the United States has been experiencing, business activity across a wide range of industries faces serious difficulties due to the lack of consumer spending and the lack of liquidity in the global credit markets. Unemployment has also increased significantly. A sustained weakness or weakening in business and economic conditions generally or specifically in the principal markets in which we do business could have one or more of the following adverse effects on our business:

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A decrease in the demand for loans and other products and services offered by us;

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A decrease in the value of our loans held for sale or other assets secured by consumer or commercial real estate;

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An impairment of certain intangible assets, such as goodwill; and

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An increase in the number of clients and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses, and valuation adjustments on loans held for sale.

Commercial Real Estate and Business Loans Increase Our Exposure to Credit Risks

At December 31, 2009, our portfolio of commercial real estate and business loans totaled $4.8 billion, or 65% of total loans. We plan to continue to emphasize the origination of these types of loans, which generally exposes us to a greater risk of nonpayment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Also, many of our borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate loan.

We target our business lending and marketing strategy towards small to medium-sized businesses. These small to medium-sized businesses generally have fewer financial resources in terms of capital or borrowing capacity than larger entities. If general economic conditions negatively impact these businesses, our results of operations and financial condition may be adversely affected.

Increases to the Allowance for Credit Losses May Cause Our Earnings to Decrease

Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for credit losses, we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for credit losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease our net income.

Our emphasis on the origination of commercial real estate and business loans is one of the more significant factors in evaluating our allowance for credit losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and as a result would decrease our earnings.

Bank regulators periodically review our allowance for credit losses and may require us to increase our provision for credit losses or loan charge-offs. Any increase in our allowance for credit losses or loan charge-offs as required by these regulatory authorities could have a materially adverse effect on our results of operations and/or financial condition.

Concentration of Loans in Our Primary Market Area May Increase Risk

Our success depends primarily on the general economic conditions in the geographic areas in which we operate, currently Upstate New York and Western Pennsylvania and, if the Harleysville acquisition is completed, Southeastern Pennsylvania. Accordingly, the local economic conditions in both Upstate New York and Western Pennsylvania, and Southeastern Pennsylvania after the merger, have a significant impact on the ability of borrowers to repay loans. As such, a decline in real estate valuations in these markets would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond our control could increase default rates on those loans and otherwise negatively affect our financial results.

Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition

Our results of operations and financial condition could be significantly affected by unanticipated changes in interest rates. Our financial results depend substantially on net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally would tend to result in a decrease in our net interest income.

Changes in interest rates also affect the value of our interest-earning assets and in particular our investment securities available for sale. Generally, the value of our investment securities fluctuates inversely with changes in interest rates. Decreases in the fair value of our securities available for sale, therefore, could have an adverse effect on our stockholders’ equity or our earnings if the decrease in fair value is deemed to be other than temporary.

Changes in interest rates may also affect the average life of our loans and mortgage-related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. Under these circumstances, we are subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on our existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.

Our Ability to Grow May Be Limited if We Cannot Make Acquisitions

In an effort to fully deploy our capital and to increase our loans and deposits, we intend to continue to acquire other financial institutions, financial services companies, or branches. We compete with other financial institutions with respect to proposed acquisitions. We cannot predict if or when we will be able to identify and attract acquisition candidates or make acquisitions on favorable terms. Additionally, acquisitions are subject to approvals by Federal and state bank regulatory authorities, and we cannot predict whether acquisitions we may wish to make will receive the required approvals. We incur risks and challenges associated with the integration of acquired institutions in a timely and efficient manner, and we cannot guarantee that we will be successful in retaining existing customer relationships or achieving anticipated operating efficiencies.

Growing By Acquisition Entails Certain Risks

In September 2009, we acquired 57 branch locations in Western Pennsylvania from National City Bank and have pending a proposed merger with Harleysville National Corporation, which is expected to close in the second quarter of 2010 and will add at least 83 branch locations in Southeastern Pennsylvania. As indicated above under “Our Ability to Grow May Be Limited If We Cannot Make Acquisitions,” we intend to continue to acquire other financial institutions, financial service companies or branches. Growth by acquisition involves risks. The success of our acquisitions may depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of the acquired company with our businesses in a manner that does not result in decreased revenues resulting from disruption of existing customer relationships of the acquired company. If we are not able to achieve these objectives, the anticipated benefits of an acquisition may not be realized fully or at all or may take longer to realize than planned.

Further, the asset quality or other financial characteristics of a company we plan to acquire may deteriorate between the date a merger or other acquisition agreement is entered into and the transaction is completed. Depending upon the terms we negotiate in the related merger or acquisition agreement, the deterioration may not allow us to fail to close the proposed transaction. Or, we may be required to close the proposed transaction with such a company to the detriment of our future financial condition.

Strong Competition May Limit Our Growth and Profitability

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than us and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market area.

We May Not Be Able to Attract and Retain Skilled People

Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of financial institutions. Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire people or to retain them.

We Operate in a Highly Regulated Environment and May Be Adversely Affected by Changes in Laws and Regulations

We are subject to extensive regulation, supervision, and examination by the OTS, the FDIC, and the NYSBD. Assuming that our Bank becomes a national bank, the Federal Reserve will be the primary federal bank regulatory agency for our holding company and the OCC for our Bank. Such regulators govern the activities in which we may engage, primarily for the protection of depositors. These regulatory authorities have extensive discretion in connection with their supervisory and enforcement activities, including the imposition of restrictions on the operation of a bank, the classification of assets by a bank, and the adequacy of a bank’s allowance for credit losses. Any change in such regulation and oversight, whether in the form of regulatory policy, regulations, or legislation, could have a material impact on us and our operations. We believe we are in substantial compliance with applicable federal, state and local laws, rules and regulations. Because our business is highly regulated, the laws, rules and applicable regulations are subject to regular modification and change. There can be no assurance that proposed laws, rules and regulations, or any other laws, rules, or regulation, will not be adopted in the future, which could make compliance more difficult or expensive or otherwise adversely affect our business, financial condition or prospects.

Proposed Legislative and Regulatory Reforms Could, if Enacted or Adopted, Result in Our Business Becoming Subject to Significant and Extensive Additional Regulations and/or Could Adversely Affect Our Results of Operations and Financial Condition

The extreme disruptions in the capital markets since mid-2007 and the resulting instability and failure of numerous financial institutions have led to numerous proposals for legislative and regulatory reform that could substantially intensify the regulation of the financial services industry and that may significantly impact our business. These proposals include the following:

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tightening controls on the ability of banking institutions to engage in transactions with affiliates;

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limiting the size and activities of financial institutions;

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amending regulatory capital standards, and increasing regulatory capital requirements, for banks and other financial institutions and establishing new formulaic liquidity requirements applicable to financial institutions, including those proposals described above under “Supervision and Regulation—Proposed Capital and Liquidity Requirements;”

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establishing a new Financial Services Oversight Council chaired by the Treasury and a Consumer Financial Protection Agency;

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establishing greater government powers to regulate risk across the financial system; and

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establishing heightened standards for and increased scrutiny of compensation policies at financial institutions.

Lawmakers and regulators in the United States continue to consider these and a number of other wide ranging and comprehensive proposals for altering the structure, regulation, and competitive relationships of the nation’s financial institutions. For example, separate comprehensive financial reform bills were introduced in both houses of Congress in the second half of 2009, and the U.S. House of Representatives passed a financial reform bill in December of 2009, which has not been passed by the U.S. Senate.

We cannot predict the final form, or effects on us, of these or other potential or proposed reforms. These and other potential or proposed legislative and regulatory changes could adversely impact the profitability our business activities, limit our ability to pursue business opportunities, require us to change certain of our business practices or alter our relationships with customers, affect retention of key Company personnel, or expose us to additional costs (including increased compliance costs and increased risk of litigation). Such changes also may require us to invest significant management attention and resources to make any necessary changes and could adversely affect our results of operations and financial condition.

See “Supervision and Regulation” for more information about the regulation to which we are subject.

Any Future FDIC Insurance Premiums May Adversely Affect our Earnings

We are generally unable to control the amount of premiums that we are required to pay for FDIC insurance. If there are additional bank or financial institution failures, we may be required to pay even higher FDIC premiums than the recently increased levels. Further, on January 12, 2010, the FDIC requested comments on a proposed rule tying assessment rates of FDIC insured institutions to the institution’s employee compensation programs. The exact requirements of and whether such a rule ultimately will be adopted are not yet known, but such a rule could increase the amount of premiums the Company must pay for FDIC insurance. These announced increases and any future increases or required prepayments of FDIC insurance premiums may adversely impact our earnings.

We Are a Holding Company and Depend on Our Subsidiaries for Dividends, Distributions and Other Payments

We are a legal entity separate and distinct from our banking and other subsidiaries. Our principal source of cash flow, including cash flow to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividends from our Bank. There are statutory and regulatory limitations on the payment of dividends by our Bank to us, as well as by us to our stockholders. Regulations of the OTS and, upon our Bank’s conversion to a national bank charter, the OCC affect or will affect the ability of our Bank to pay dividends and other distributions to us and to make loans to us. If our Bank is unable to make dividend payments to us and sufficient capital is not otherwise available, we may not be able to make dividend payments to our common stockholders or principal and interest payments on our outstanding debt. See “—Federal Regulation of Our Savings Bank—Capital Distributions” and “—Regulation as a Bank Holding Company With a National Bank Subsidiary—Dividend Restrictions” above under “Supervision and Regulation” in Item 1 of this Annual Report on Form 10-K.

In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

We Hold Certain Intangible Assets that Could Be Classified as Impaired in The Future. If These Assets Are Considered to Be Either Partially or Fully Impaired in the Future, the Book Values of These Assets Would Decrease.

We are required to test our goodwill and core deposit intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. It is possible that future impairment testing could result in a partial or full impairment of the value of our goodwill or core deposit intangible assets, or both. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels.

We Are Subject to a Variety of Operational Risks, Including Reputational Risk, Legal and Compliance Risk, the Risk of Fraud or Theft by Employees or Outsiders, Which May Adversely Affect Our Business and Results of Operations

We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about our other business.

If personal, nonpublic, confidential, or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees, or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and the large transaction volumes may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of its operating systems arising from events that are wholly or partially beyond its control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business, potential liability to clients, reputational damage, and regulatory intervention, which could adversely affect our business, financial condition, and results of operations, perhaps materially.

Our Information Systems May Experience an Interruption or Security Breach

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems or disclosure of confidential or proprietary information of our clients. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny, or expose us to civil litigation and possible financial liability.

Anti-takeover Laws and Certain Agreements and Charter Provisions May Adversely Affect Share Value

Certain provisions of state and federal law and our certificate of incorporation may make it more difficult for someone to acquire control of us without our board of directors’ approval. Under federal law, subject to certain exemptions, a person, entity or group must notify the federal banking agencies before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a thrift bank holding company, state member bank or national bank, including shares of our common stock, creates a rebuttable presumption that the acquiror “controls” the bank holding company or state member bank. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the Bank. There also are provisions in our certificate of incorporation that may be used to delay or block a takeover attempt. As a result, these statutory provisions and provisions in our certificate of incorporation could result in the Company being less attractive to a potential acquiror.

ITEM 1B. Unresolved Staff Comments

None.

ITEM 2. Properties

In 2009, we relocated our executive offices to our regional market center at 726 Exchange Street, Suite 618, Buffalo, New York where we lease 88,000 square feet of space. At December 31, 2009, we conducted our business through 171 full-service branches located across Upstate New York and Western Pennsylvania as well as several financial services subsidiaries. Seventy-three of our branches are owned and 98 are leased.

In addition to our branch network and Buffalo regional market center, we occupy office space in our four other regional market centers located in Rochester, Albany, and Syracuse, New York and Pittsburgh, Pennsylvania, where we conduct financial services and certain back office operations. We also lease or own other facilities which are used for training centers, tenant rental, and storage. These properties include 20 leased offices and 11 buildings which we own with a total occupancy of approximately 454,000 square feet, including our administrative center in Lockport, New York which has 76,000 square feet. At December 31, 2009, our premises and equipment had a net book value of $156.2 million. See Note 5 of the “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” for further detail on our premises and equipment. All of these properties are generally in good condition and are appropriate for their intended use.

ITEM 3. Legal Proceedings

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

The Company has been named as a defendant in two separate class actions pending in the Court of Common Pleas, Montgomery County, Pennsylvania: Seibert v. Harleysville National Corp., et al.; and McAuvic v. Geraghty, et al. Both actions challenge the terms of the proposed merger. The Seibert and McAuvic complaints each charge that Harleysville and its directors breached their fiduciary duties to Harleysville stockholders by failing to negotiate a fair price for Harleysville National Corporation stock. In addition, the plaintiffs claim that the process leading to the proposed merger was unfair. The complaints allege that the Company aided and abetted the breaches of fiduciary duty by Harleysville and its directors. The complaints seek to enjoin the proposed merger and to recover money damages. There are also five substantially similar cases pending (four in Philadelphia County and one in Montgomery County) naming only Harleysville and its directors as defendants. The Company believes the claims in the complaints are without merit.

On January 6, 2010, the plaintiffs in the Seibert and McAuvic cases moved to lift the stay of proceedings previously stipulated by the parties, and sought an order granting expedited discovery and scheduling a preliminary injunction hearing. On January 7, 2010, the Court denied plaintiffs’ motions in their entirety.

On January 4, 2010, a complaint was filed in the United States District Court for the Eastern District of Pennsylvania in a case entitled Valerius, et al. v. Geraghty, et al. That complaint alleges that the Harleysville proxy issued in connection with the proposed merger was materially misleading. It names Harleysville and its directors as defendants and seeks to enjoin the proposed merger. On January 15, 2010, the Company was sued in the United States District Court for the Eastern District of Pennsylvania in a case entitled Shoemaker, et al. v. Geraghty, et al. The complaint names the Company and Harleysville and its directors as defendants and asserts that the Harleysville proxy issued in connection with the proposed merger transaction was incomplete and materially misleading. On January 15, 2010, plaintiffs in the Valerius and Shoemaker actions both filed motions for temporary restraining orders barring the Harleysville shareholder vote on the proposed merger from going forward. On January 15, 2010, Harleysville and its directors moved to dismiss the Valerius complaint. On January 21, 2010, the Court denied plaintiffs’ motions to restrain the Harleysville shareholder vote and ruled that plaintiffs had failed to show a likelihood that they would succeed on their claims.

On January 27, 2010, Harleysville and its directors moved to dismiss the Shoemaker complaint. The Company moved to dismiss the Shoemaker complaint on February 2, 2010.

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

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

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

PART II

ITEM 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded under the symbol ‘FNFG’ on the NASDAQ Global Select Market. At December 31, 2009, we had approximately 16,400 stockholders of record. During 2009, the high sales price of our common stock was $16.32 and the low sales price of our common stock was $9.48. We paid dividends of $0.56 per common share during the year ended December 31, 2009. See additional information regarding the market price and dividends paid filed herewith in Part II, Item 6, “Selected Financial Data.”

Our ability to pay dividends to our stockholders is substantially dependent upon the ability of First Niagara Bank to pay dividends to the Company. The payment of dividends by our Bank is subject to OTS regulations and continued compliance with minimum regulatory capital requirements. The OTS may disapprove a dividend if: our Bank would be undercapitalized following the distribution; the proposed capital distribution raises safety and soundness concerns; or the capital distribution would violate a prohibition contained in any statute, regulation or agreement. Management does not believe these regulatory requirements will affect our Bank’s ability to pay dividends in the future given its well-capitalized position. See “Part I — Item 1 — Supervision and Regulation — Capital Distributions” for a discussion of the OTS’ regulatory restrictions on dividend payments by the Bank.

We did not repurchase any shares of our common stock during the fourth quarter of 2009.

Stock Performance Graph

Below is a stock performance graph comparing (a) the cumulative total return on our common stock for the period beginning December 31, 2004 as reported by the NASDAQ Global Select Market, through December 31, 2009, (b) the cumulative total return on stocks included in the NASDAQ Composite Index over the same period, and (c) the cumulative total return of publicly traded midcap banks and thrifts over the same period. Cumulative return assumes the reinvestment of dividends, and is expressed in dollars based on an assumed investment of $100.

FIRST NIAGARA FINANCIAL GROUP, INC.

		Period Ended
Index		12/31/04				12/31/05				12/31/06				12/31/07				12/31/08				12/31/09
First Niagara Financial Group, Inc.			100.00				106.62				113.09				95.34				133.26				119.62
NASDAQ Composite			100.00				101.37				111.03				121.92				72.49				104.31
SNL Mid Cap Bank & Thrift			100.00				95.34				103.40				81.99				43.16				36.87

ITEM 6. Selected Financial Data

At or for the year ended December 31,		2009(1)				2008				2007				2006				2005
		(In thousands, except per share amounts)
Selected financial condition data:
Total assets		$	14,584,833			$	9,331,372			$	8,096,228			$	7,945,526			$	8,064,832
Loans and leases, net(2)			7,241,153				6,385,982				5,654,705				5,593,512				5,216,299
Securities available for sale:
Mortgage-backed			3,650,058				1,232,383				817,614				717,601				867,037
Other			771,620				340,718				399,550				342,821				737,851
Securities held to maturity:
Mortgage-backed			1,093,552				—				—				—				—
Deposits			9,729,524				5,943,613				5,548,984				5,709,736				5,479,412
Borrowings			2,302,280				1,540,227				1,094,981				747,554				1,096,427
Stockholders’ equity		$	2,373,661			$	1,727,263			$	1,353,179			$	1,387,197			$	1,374,423
Common shares outstanding			188,215				118,562				104,770				110,719				112,808
Preferred shares outstanding			—				184				—				—				—
Selected operations data:
Interest income		$	490,758			$	441,138			$	422,772			$	415,830			$	375,217
Interest expense			126,358				172,561				198,594				169,349				125,067
Net interest income			364,400				268,577				224,178				246,481				250,150
Provision for credit losses			43,650				22,500				8,500				6,456				7,348
Net interest income after provision for credit losses			320,750				246,077				215,678				240,025				242,802
Noninterest income			125,975				115,735				131,811				111,218				90,663
Noninterest expense			326,672				228,410				222,466				211,851				188,206
Income before income taxes			120,053				133,402				125,023				139,392				145,259
Income taxes			40,676				44,964				40,938				47,533				52,400
Net income			79,377				88,438				84,085				91,859				92,859
Preferred stock dividend			3,731				1,022				—				—				—
Accretion of preferred stock discount			8,315				162				—				—				—
Net income available to common stockholders		$	67,331			$	87,254			$	84,085			$	91,859			$	92,859
Stock and related per share data:
Earnings per common share(1):
Basic		$	0.46			$	0.81			$	0.82			$	0.86			$	0.85
Diluted			0.46				0.81				0.81				0.85				0.84
Cash dividends			0.56				0.56				0.54				0.46				0.38
Book value			12.84				15.02				13.41				12.99				12.65
Market Price (NASDAQ: FNFG):
High			16.32				22.38				15.13				15.43				15.16
Low			9.48				9.98				11.15				13.38				12.05
Close		$	13.91			$	16.17			$	12.04			$	14.86			$	14.47

At or for the year ended December 31,		2009(1)				2008				2007				2006				2005
		(Dollar amounts in thousands)
Selected financial ratios and other data:
Performance ratios(2):
Return on average assets			0.69	%			0.99	%			1.05	%			1.14	%			1.18	%
Common equity:
Return on average common equity			3.47				5.99				6.24				6.67				6.76
Return on average tangible common equity(3)			6.06				13.19				14.12				14.75				14.41
Total equity:
Return on average equity			3.95				5.99				6.24				6.67				6.76
Return on average tangible equity(4)			6.71				12.98				14.12				14.75				14.41
Net interest rate spread			3.40				3.19				2.84				3.20				3.46
Net interest rate margin			3.65				3.55				3.33				3.61				3.75
Efficiency ratio(5)			66.62				59.43				62.49				59.23				55.22
Dividend payout ratio			121.74	%			69.14	%			65.85	%			53.49	%			44.71	%
Capital ratios:
First Niagara Bank:
Total risk-based capital			13.73	%			12.72	%			11.35	%			12.16	%			12.26	%
Tier 1 risk-based capital			12.63				11.48				10.10				10.91				11.01
Tier 1 (core) capital			7.48				8.47				7.54				7.73				7.56
Tangible capital			7.48				8.47				7.54				7.73				7.56
Consolidated equity:
Ratio of stockholders’ equity to total assets			16.27				18.51				16.71				17.46				17.04
Ratio of tangible common stockholders’ equity to tangible assets(6)			10.54	%			8.96	%			8.21	%			8.88	%			8.40	%
Asset quality:
Total nonaccruing loans		$	68,561			$	46,417			$	28,054			$	15,528			$	21,930
Other nonperforming assets			7,057				2,001				237				632				843
Allowance for credit losses			88,303				77,793				70,247				71,913				72,340
Net loan charge-offs		$	33,140			$	17,844			$	10,084			$	6,883			$	7,114
Total nonaccruing loans to total loans			0.94	%			0.72	%			0.49	%			0.27	%			0.41	%
Total nonperforming assets to total assets			0.52				0.52				0.35				0.20				0.28
Allowance for credit losses to nonaccruing loans			128.8				167.6				250.4				463.1				329.9
Allowance for credit losses to total loans			1.20				1.20				1.23				1.27				1.37
Net charge-offs to average loans			0.50	%			0.28	%			0.18	%			0.12	%			0.14	%
Other data:
Number of branches			171				114				110				119				118
Full time equivalent employees			2,816				1,909				1,824				1,922				1,984

		2009																2008
		Fourth				Third				Second				First				Fourth				Third				Second				First
		quarter				quarter				quarter				quarter				quarter				quarter				quarter				quarter
		(In thousands, except per share amounts)
Selected Quarterly Data:
Interest income		$	145,357			$	128,788			$	110,794			$	105,819			$	109,798			$	109,951			$	111,402			$	109,987
Interest expense			32,454				29,866				30,849				33,189				38,092				39,751				44,793				49,925
Net Interest income			112,903				98,922				79,945				72,630				71,706				70,200				66,609				60,062
Provision for credit losses			11,000				15,000				8,900				8,750				8,000				6,500				4,900				3,100
Net interest income after provision for credit losses			101,903				83,922				71,045				63,880				63,706				63,700				61,709				56,962
Noninterest income			35,517				33,224	(2)			28,774				28,460				27,643				29,189				29,636				29,267
Noninterest expense			94,720	(1)			100,720	(3)			68,085	(4)			63,147	(5)			57,555				56,754				56,594				57,507	(6)
Income before Income taxes			42,700				16,426				31,734				29,193				33,794				36,135				34,751				28,722
Income taxes			13,796				5,495				10,934				10,451				10,988				12,395				11,672				9,909
Net income			28,904				10,931				20,800				18,742				22,806				23,740				23,079				18,813
Preferred stock dividend			—				—				1,431				2,300				1,022				—				—				—
Accretion of preferred stock discount			—				—				7,947				368				162				—				—				—
Net income available to common stockholders		$	28,904			$	10,931			$	11,422			$	16,074			$	21,622			$	23,740			$	23,079			$	18,813
Earnings per share:
Basic		$	0.16			$	0.07			$	0.08			$	0.14			$	0.19			$	0.22			$	0.22			$	0.18
Diluted			0.16				0.07				0.08				0.14				0.19				0.22				0.22				0.18
Market price (NASDAQ: FNFG):
High			14.47				14.06				14.23				16.32				16.45				22.38				15.00				14.15
Low			12.40				10.73				10.53				9.48				11.00				11.68				12.60				9.98
Close			13.91				12.33				11.42				10.89				16.17				15.75				12.86				13.59
Cash dividends		$	0.14			$	0.14			$	0.14			$	0.14			$	0.14			$	0.14			$	0.14			$	0.14

ITEM 7. Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is an analysis of our financial condition and results of operations. You should read this item in conjunction with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of our business filed here within Part I, Item I, “Business.”

OVERVIEW

First Niagara Financial Group, Inc. holds all of the capital stock of First Niagara Bank, a federally chartered savings bank subject to OTS regulation. We are positioned as a multi-faceted community bank in Upstate New York and Western Pennsylvania with $14.6 billion of assets, $9.7 billion of deposits, and 171 branch locations as of December 31, 2009.

We were organized in April 1998 in connection with the conversion of First Niagara Bank from a mutual savings bank to a stock savings bank. Since that time we have strategically deployed capital through the acquisition of community banks and financial services companies throughout Upstate New York, and most recently through the acquisition of 57 National City Bank (“NatCity”) branch locations in Western Pennsylvania in September 2009. As a result, we provide our customers with a full range of products and services delivered through our customer focused operations, which include retail and commercial banking; financial services and risk management (insurance); and commercial business services. These include commercial real estate loans, commercial business loans and leases, residential, home equity and other consumer loans, as well as retail and commercial deposit products and insurance services. We also provide wealth management products and services.

In addition to acquiring banking and financial services organizations, our strategy includes steady organic growth, as we have continued to open de novo branch locations, especially in areas where acquisition opportunities have been more limited. We committed to a de novo branch expansion strategy in order to expand our service area and fill coverage gaps within our footprint. We have also significantly expanded our commercial lending and business services, to include a full complement of cash management and merchant banking services. We have redirected our lending focus such that our loan portfolio has become more like a commercial bank as opposed to a traditional thrift. This strategy has been effective in minimizing interest rate risk sensitivity and is a solid source of noninterest bearing deposits.

On July 26, 2009, First Niagara Financial Group, Inc. and Harleysville National Corporation (“Harleysville”), the holding company for Harleysville National Bank, jointly announced a definitive merger agreement under which Harleysville will merge into the Company in a transaction valued at approximately $237.0 million on the day of announcement. At December 31, 2009, Harleysville had total assets of approximately $5.2 billion, including $3.0 billion in loans, and deposits of approximately $3.9 billion in 83 branches across nine Southeastern Pennsylvania counties. Harleysville’s shareholders approved the merger on January 22, 2010. The merger is expected to be completed in the second quarter of 2010 and is subject to the approvals of the applicable regulatory agencies.

In December 2009, we lent $50.0 million to Harleysville, the proceeds of which Harleysville contributed to Harleysville National Bank as Tier 1 capital. Harleysville pledged the stock of Harleysville National Bank to us to secure repayment of the loan. In addition, in December 2009, First Niagara Bank purchased performing commercial loans with a fair value of $62.2 million from Harleysville National Bank.

FINANCIAL OVERVIEW

During 2009, continued turmoil in the financial sector resulted in a low level of confidence in financial markets among borrowers, lenders, and depositors, as well as extreme volatility in the capital and credit markets. The U.S. economy was in a recession, and housing prices continued to decline. Even under these difficult market conditions, we were able to raise additional capital by issuing 69.4 million shares of common stock in two separate underwritten “follow-on” stock offerings in 2009, resulting in net aggregate proceeds of $802.2 million, in addition to the 8.5 million shares of common stock we issued in a follow-on stock offering in 2008, which resulted in net proceeds of $108.8 million. A portion of the proceeds from the 2009 follow-on stock offerings was used to fully redeem the $184.0 million of preferred stock we issued and sold to the Treasury under the CPP and to repurchase the warrant for the shares of our common stock that we had issued and sold to the Treasury.

In 2009, we continued to capitalize on our financial strength and proven business model to drive profitable growth across our Upstate New York and Western Pennsylvania markets. The NatCity branch acquisition expanded our presence into the Pittsburgh, Erie, and Warren, Pennsylvania markets, growing our footprint and enabling us to cross-sell our products and services to this new customer base. We acquired 57 branch locations from NatCity, including cash of $3.1 billion, performing loans with a fair value of approximately $717.3 million, core deposit intangible of $29.8 million, and deposits with a fair value of $4.0 billion, resulting in goodwill of $130.1 million.

Our net income for the year ended December 31, 2009 was $79.4 million as compared to $88.4 million for 2008. Diluted earnings per share in 2009 was $0.46, compared to $0.81 in 2008, and reflected $31.5 million of merger and acquisition integration expenses, $15.4 million in additional FDIC insurance premiums, and the impact of the additional shares issued in our follow-on stock offerings. Net interest income increased significantly to $364.4 million in 2009, or 36% from 2008. This increase was driven by a number of factors including strong commercial loan growth, considerably lower funding costs, and the September acquisition of the NatCity branch locations. Our net interest margin increased each successive quarter during 2009 and amounted to 3.65% for 2009, an increase of 10 basis points compared to 2008. Noninterest income increased $10.2 million due primarily to higher deposit related banking fees, including those from the acquired NatCity branch locations. Excluding the $31.5 million in merger and acquisition integration expenses related to the NatCity acquisition and Harleysville merger and the $15.4 million increase in FDIC insurance premiums, our noninterest expense increased $51.4 million during 2009. This increase was primarily attributable to the acquired NatCity branches and targeted investments to build operational capacity to support the Harleysville acquisition as well as future growth opportunities.

The NatCity branch acquisition resulted in higher loan, investment, and deposit balances. Excluding the loans acquired from NatCity, our higher yielding commercial loan portfolio increased $363.0 million, or 10%, and now comprises 65% of our total loans. While our total deposit balances decreased slightly to $5.8 billion, excluding deposits acquired from NatCity, our core deposits increased to 80% of our total deposits at the end of 2009, from 66% at the end of 2008, as repricing of our certificates of deposit resulted in a shift in customer preferences to lower cost money market deposits. Borrowings, which increased to $2.3 billion at the end of 2009 from $1.5 billion at the end of 2008, provided us with a low cost alternative to deposits for funding our loan growth.

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and that require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the adequacy of our allowance for credit losses, the valuation and other than temporary impairment analysis of our investment securities, the accounting treatment and valuation of our acquired loans, and the analysis of the carrying value of goodwill for impairment are deemed to be critical, as our judgments could have a material effect on our results of operations.

A detailed description of our methodology for calculating our allowance for credit losses and assumptions made is included within the “Lending Activities” section filed herewith in Part I, Item 1, “Business.”

Investment Securities

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

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

Acquired Loans

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

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount includes estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows will require us to evaluate the need for an additional allowance for credit losses. Subsequent improvement in expected cash flows will result in the reversal of a corresponding amount of the nonaccretable discount which we will then reclassify as accretable discount that will be recognized into interest income over the remaining life of the loan.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent. We expect to fully collect the new carrying value (i.e., fair value) of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. In addition, charge-offs on such loans would be first applied to the nonaccretable difference portion of the fair value adjustment.

Goodwill

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

The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. We have two reporting units: banking and financial services.

For our banking reporting unit, we utilized both the income and market approaches to determine fair value. The income approach was based on discounted cash flows derived from assumptions of balance sheet and income statement activity. An internal forecast was developed by considering several long-term key business drivers such as anticipated loan and deposit growth. For the market approach, earnings and market capitalization multiples of comparable public companies were selected and applied to the Banking reporting unit’s applicable metrics. The results of the income and market approaches were weighted equally to arrive at the final calculation of fair value.

For our financial services reporting unit, we utilized both the income and market approaches to determine fair value. The income approach was primarily based on discounted cash flows derived from assumptions of income statement activity. An internal forecast was developed by considering several long-term key business metrics such as revenue growth and operating margins. For the market approach, earnings and tangible book value multiples of comparable companies were selected and applied to the Financial Services reporting unit’s applicable metrics. The results of the income and market approaches were weighted equally to arrive at the final calculation of fair value.

The aggregate fair values were compared to our market capitalization as an assessment of the appropriateness of the fair value measurements. A control premium analysis indicated that the implied control premium was within range of overall control premiums observed in the market place.

The second step (Step 2) of impairment testing is necessary only if a reporting unit’s carrying amount exceeds its fair value. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit. As both of our reporting units’ fair values substantially exceeded their carrying amount, we were not required to perform Step 2.

ANALYSIS OF FINANCIAL CONDITION

Lending Activities

Our total loans and leases outstanding increased $873.1 million from December 31, 2008 to December 31, 2009, including the $717.3 million (fair value) of loans we acquired from the NatCity branch acquisition and a $92.3 million increase in our Western Pennsylvania portfolio from the acquisition date.

The $363.0 million, or 10%, increase in our commercial loans portfolio, excluding the NatCity acquired loans and Harleysville purchased loans, resulted from our continued strategic focus on the portfolio and decreased competition as larger banks and nonbank entities continued to face liquidity and capital issues. While the majority of this increase was in our Upstate New York portfolio, our Western Pennsylvania commercial loan portfolio contributed nearly $50.0 million since the acquisition date. Commercial loans now comprise 65% of our total loan portfolio as compared to 57% at December 31, 2008.

Despite originating $575.3 million in new residential real estate loans during 2009, we experienced a net decline in balances of $335.2 million in Upstate New York as consumer demand continued to be for long-term fixed rate products which we generally do not maintain in our loan portfolio for interest rate risk management purposes. Home equity balances increased by $66.6 million, including $17.0 million in Western Pennsylvania, as a result of our active marketing of this relationship building product which has a lower credit risk compared to other consumer lending products. Other consumer lending balances also decreased, excluding loans acquired from NatCity, as we reduced our emphasis on these loans from a business strategy standpoint.

Loan Portfolio Composition

The table below is selected information concerning the composition of our loan and lease portfolios, including loans held for sale, as of December 31 (amounts in thousands):

		2009								2008								2007								2006								2005
		Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent				Amount				Percent
Commercial:
Real estate		$	2,713,542				37.2	%		$	2,211,402				34.4	%		$	1,902,334				33.5	%		$	1,786,384				31.7	%		$	1,647,576				31.3	%
Construction			348,040				4.8				340,564				5.3				292,675				5.1				248,325				4.4				222,907				4.2
Business			1,481,845				20.3				940,304				14.6				730,029				12.8				561,323				10.0				473,571				9.0
Specialized lending			207,749				2.8				178,916				2.8				183,747				3.2				155,032				2.7				159,759				3.0
Total commercial			4,751,176				65.1				3,671,186				57.1				3,108,785				54.6				2,751,064				48.8				2,503,813				47.5
Residential real estate			1,674,961				22.9				1,990,784				31.0				1,955,690				34.3				2,252,473				40.0				2,182,907				41.4
Home equity			691,069				9.5				624,495				9.7				503,779				8.9				470,714				8.3				403,340				7.7
Other consumer			186,341				2.5				143,989				2.2				127,169				2.2				163,824				2.9				178,732				3.4
Total loans and leases			7,303,547				100.0	%			6,430,454				100.0	%			5,695,423				100.0	%			5,638,075				100.0	%			5,268,792				100.0	%
Net deferred costs and unearned discounts			25,909								33,321								29,529								27,350								19,847
Allowance for credit losses			(88,303	)							(77,793	)							(70,247	)							(71,913	)							(72,340	)
Total loans and leases, net		$	7,241,153							$	6,385,982							$	5,654,705							$	5,593,512							$	5,216,299

The table below is selected information concerning the composition of our loan and lease portfolios, including loans held for sale, by originating branch location as of December 31, 2009 (in thousands):

		Upstate New				Western				Total loans and
		York				Pennsylvania (1)				leases
Commercial:
Real estate		$	2,414,478			$	299,064			$	2,713,542
Construction			348,040				—				348,040
Business			1,013,995				467,850				1,481,845
Specialized lending			207,749				—				207,749
Total commercial			3,984,262				766,914				4,751,176
Residential real estate			1,655,627				19,334				1,674,961
Home equity			674,047				17,022				691,069
Other consumer			120,293				66,048				186,341
Total loans and leases		$	6,434,229			$	869,318			$	7,303,547

Allowance for Credit Losses and Nonperforming Assets

The following table details our allocation of our allowance for credit losses by loan category as of December 31 (amounts in thousands):

		2009								2008								2007								2006								2005
		Amount of								Amount of								Amount of								Amount of								Amount of
		allowance				Percent of				allowance				Percent of				allowance				Percent of				allowance				Percent of				allowance				Percent of
		for credit				loans to				for credit				loans to				for credit				loans to				for credit				loans to				for credit				loans to
		losses				toal loans				losses				toal loans				losses				toal loans				losses				toal loans				losses				toal loans
Commercial:
Real estate and construction		$	44,497				42.0	%		$	32,789				39.7	%		$	24,886				38.6	%		$	25,434				36.1	%		$	26,751				35.5	%
Business			30,972				20.3				25,816				14.6				19,107				12.8				18,209				10.0				15,644				9.0
Specialized lending			7,352				2.8				10,138				2.8				8,705				3.2				7,443				2.7				7,892				3.0
Total commercial			82,821				65.1				68,743				57.1				52,698				54.6				51,086				48.8				50,287				47.5
Residential real estate			1,825				22.9				1,663				31.0				3,384				34.3				3,898				40.0				4,036				41.4
Home equity			1,216				9.5				775				9.7				1,344				8.9				1,278				8.3				1,667				7.7
Other consumer			2,441				2.5				2,524				2.2				2,974				2.2				4,250				2.9				5,299				3.4
Unallocated			—				—				4,088				—				9,847				—				11,401				—				11,051				—
Total		$	88,303				100.0	%		$	77,793				100.0	%		$	70,247				100.0	%		$	71,913				100.0	%		$	72,340				100.0	%
Allowance for credit losses to total loans			1.20	%							1.20	%							1.23	%							1.27	%							1.37	%

In determining the level of our allowance, we consider our historical loss experience by type of credit and internal risk grade, specific homogeneous risk pools, and specific loss allocations, with adjustments for current events and conditions. Our process for establishing the level of the allowance for credit losses is designed to account for credit deterioration as it occurs. The provision for credit losses reflects loan quality trends, including the levels of and trends related to nonaccruing loans, past due loans, potential problem loans, criticized loans, and net charge-offs or recoveries, among other factors.

The level of the allowance reflects our continuing evaluation of industry concentrations, specific credit risks, loan loss experience, current loan portfolio quality, present economic, political, and regulatory conditions, and the estimate of losses inherent in the current loan portfolio. Portions of the allowance may be allocated for specific credits; however, the entire allowance is available for any credit that, in our judgment, should be charged off. While we utilize our best judgment and information currently available, the ultimate adequacy of the allowance is dependent upon a variety of factors beyond our control, including the performance of our loan portfolio, the economy, changes in interest rates, and the view of the regulatory authorities toward loan classifications.

Our allowance for credit losses consists of the following elements: (i) specific valuation allowances based on probable losses on specific loans and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar characteristics and trends, adjusted as appropriate for risk factors specific to respective loan types.

The allowance established for probable losses on specific loans is based on a regular analysis and evaluation of classified loans. Loans are classified based on an internal credit risk grading process that evaluates, among other things: (i) the obligor’s ability to repay; (ii) the underlying collateral, if any; and (iii) the economic environment and industry in which the borrower operates. This analysis is performed by our relationship managers for all commercial loans. Loans with a calculated grade that is below a predetermined grade are adversely classified. Once a loan is adversely classified, an analysis is performed to determine whether the loan is impaired and, if impaired, the need to specifically allocate a portion of the allowance to the loan is assessed. Specific valuation allowances are determined by analyzing the borrower’s ability to repay amounts owed based on an estimate of future cash flows expected to be received on the loan, discounted at the loan’s effective interest rate, or, if the loan is collateral dependent, based upon the fair value of the collateral, less costs to sell the collateral.

Valuation allowances are calculated based on the historical net loss experience of specific types of loans. We calculate historical loss ratios, adjusted as appropriate for risk factors specific to respective loan types, for pools of similar loans with similar characteristics based on the proportion of actual net charge-offs experienced to the total population of loans in the pool. The loss ratios are regularly updated based on actual net charge-off experience. A valuation allowance is established for each pool of similar loans based upon the product of the loss ratio impacting the total loan portfolio and the total dollar amount of the loans in the pool. Our pools of similar loans include similarly risk-graded groups of commercial and industrial loans, commercial real estate loans, consumer loans and 1-4 family residential mortgages.

Prior to 2009, we also maintained an unallocated portion of our allowance for credit losses related to a general assessment of potential variability of applicable qualitative considerations subject to a higher degree of uncertainty. During the first quarter of 2009, we refined our estimation methodology related to the allocation of the allowance. The result was the allocation of the previous unallocated portion of the allowance for credit losses to the specific loan portfolios related to a general assessment of each respective portfolio's potential variability of applicable qualitative considerations subject to a higher degree of uncertainty. Management does not consider this refinement to the methodology to be significant.

The following table sets forth information regarding our nonaccruing loans and other nonperforming assets as of December 31 (amounts in thousands):

		2009				2008				2007				2006				2005
Nonaccruing loans (1):
Commercial:
Real estate		$	37,129			$	26,546			$	16,229			$	4,513			$	6,755
Business			4,759				7,411				3,430				2,599				3,171
Specialized lending			1,962				4,354				2,920				1,751				4,573
Shared national credits			11,403				—				—				—				—
Total commercial			55,253				38,311				22,579				8,863				14,499
Residential real estate			9,468				5,516				3,741				4,490				5,911
Home equity			2,330				2,076				849				819				567
Other consumer			1,510				514				885				1,356				953
Total nonaccruing loans			68,561				46,417				28,054				15,528				21,930
Real estate owned			7,057				2,001				237				632				843
Total nonperforming assets (2)		$	75,618			$	48,418			$	28,291			$	16,160			$	22,773
Loans 90 days past due and still accruing interest		$	—			$	—			$	—			$	—			$	—
Total nonperforming assets as a percentage of total assets			0.52	%			0.52	%			0.35	%			0.20	%			0.28	%
Total nonaccruing loans as a percentage of total loans			0.94	%			0.72	%			0.49	%			0.27	%			0.41	%
Allowance for credit losses to nonaccruing loans			128.8	%			167.6	%			250.4	%			463.1	%			329.9	%

The following table details our net charge-offs by loan category for the years ended December 31 (amounts in thousands):

		2009				2008				2007				2006				2005
Commercial:
Real estate		$	9,679			$	5,295			$	4,729			$	1,285			$	421
Business			5,690				7,460				1,388				141				1,119
Specialized lending			6,588				3,532				2,123				1,640				2,260
Shared national credits			8,543				—				—				—				—
Total commercial			30,500				16,287				8,240				3,066				3,800
Residential real estate			157				77				219				258				131
Home equity			871				187				98				32				34
Other consumer			1,612				1,293				1,527				3,527				3,149
		$	33,140			$	17,844			$	10,084			$	6,883			$	7,114