First Niagara. Focused.

2001 was another excellent year for First Niagara. We generated record earnings, made continued progress in our transformation to a diverse financial services company, and as shareholders are all gratified by the 56% increase in the market value of First Niagara stock in 2001. As I reflect on our growth and progress since our initial public offering (IPO) just four years ago, the common thread that ties all of our successes together is that First Niagara has evolved as a truly focused company. We are a company focused on doing the right things for all of our major stakeholders: shareholders, customers, employees, and the communities in which we do business. Because the financial services business is one based on trust and providing customers with service, expertise, and value, we are convinced that this approach is the best way to continue building our valuable First Niagara franchise and consistently produce strong results and value over the long term.

Another Year of Consistent Performance and Steady Progress

Our financial results continue to demonstrate steady and consistent growth. For 2001, First Niagara's cash net income, which excludes amortization for intangible assets like goodwill, increased 19% to $26.9 million, or $1.08 per diluted share from $22.6 million, or $0.91 per diluted share for 2000. Net income increased 9% to $21.2 million, or $0.85 per diluted share, from $19.5 million, or $0.79 per diluted share in 2000. With our adoption of Statement of Financial Accounting Standards No. 142, "Goodwill and Other Intangible Assets," on January 1, 2002, we will significantly reduce our future amortization expense. Based on this change, we believe that current cash results are a more relevant measure of our financial performance. Along with our continued growth in earnings, we made further progress in increasing our cash return on equity, which for 2001 rose to 10.52% from 9.69% for 2000.

A full year contribution from our Cayuga Bank and Cortland Savings Bank acquisitions, combined with internal growth and the shift in our loan portfolio mix to become more commercial bank-like, is producing significant financial benefits for First Niagara. In 2001, net interest income increased 31% and noninterest income rose 23%. A 29% increase in commercial real estate and business loans contributed to a widening of our net interest spread during the year, increasing to 3.17% for the 2001 fourth quarter from 2.86% for the 2001 first quarter.

Our balance sheet also remains in excellent shape. Deposits increased 4% to $2.0 billion in 2001, with lower-cost core (non-time) deposits rising 6% in 2001. We also reduced our interest-rate sensitivity by holding lower volumes of fixed-rate residential mortgage loans in portfolio, while still remaining a significant originator of residential mortgages - a record $201.6 million in 2001. Our asset quality remains strong and First Niagara's capital ratios continue to exceed all regulatory requirements for a well-capitalized financial institution.

The year was also noteworthy in that we completed the integration of our acquisitions. In total, we have made three bank acquisitions and four non-bank acquisitions since our IPO in 1998 and have developed a successful track record in making and integrating acquisitions. We also launched our Adding Value Always (AVA) initiative in May, which is designed to enhance our efficiency and focus our efforts on value-added decision-making and activities.

A Focused Strategy for Continued Growth

First Niagara's strategy to maintain our growth momentum covers three major areas of focus: customer relationships, optimizing performance and increasing our market share in all of our businesses. Because we are known for building and maintaining loyal customer relationships, we are confident that we can leverage that ability to generate new internal growth from our franchise. A key component of this strategy will be to expand our offerings of relationship-based products and pricing. We will continue our efforts at developing a sales culture that best identifies ways to serve the needs of our customers, service them beyond their expectations and fully realize all the opportunity our franchise holds.

Optimizing our financial performance is also an important component of our growth strategy. With the AVA awareness process and initial basic productivity gains well underway, in 2002 we will move onto AVA's next steps of completing basic productivity gains and beginning implementation of significant process improvement and best practices. As part of this effort, we will also be setting performance benchmarks in 2002 at every level of our organization.

We recognize and value the importance of technology in optimizing performance. Reflecting the size of our organization, our corporate technology goal is to be "in the game" and invest at appropriate levels to stay competitive and in step with customer needs and financial industry changes.

Increasing our market share and position is also a significant part of First Niagara's growth strategy. While we now have the capacity to generate fairly meaningful growth internally, we continue to see acquisitions as an effective way to accelerate growing our business, market share and geographic market reach. Our growth strategy going forward will include a combination of building (de novo and internal growth) and buying (acquisition). Our expansion over the last few years demonstrates that we have the ability to do both successfully. Because we have fully employed the additional capital raised in our IPO, we would likely access the capital markets again if we make another sizable banking acquisition. First Niagara's ability to raise additional capital is enhanced by our track record as a public company and as an acquirer.

Staying Focused to Stay the Course

First Niagara is an organization rich in human capital. The strength and ability of our team - over 1,000 strong - to work together to profitably grow the company is a key ingredient to our success. The explosion of capability in our most important asset, our employees, has allowed First Niagara to prosper. Thanks to each of you for your efforts in 2001 on behalf of our company.

I would like to personally thank Christa Caldwell, a retired director of the Lockport Public Library and a First Niagara director since 1986, who retired from the Boards of First Niagara Bank and First Niagara Financial Group in January 2002. Christa's guidance and direction during a period of substantial growth for First Niagara are greatly appreciated.

As we all continue to read the headlines about corporate mistrust, it focuses my attention even more on how important it is today for companies to build and maintain trust.The most desired leadership trait is honesty. Honesty and integrity build trust and trust creates lasting relationships. You may rest assured that our company insists on the highest level of corporate and personal integrity in everything we do. Our Leadership Creed calls for First Niagara leaders to be "role models" and "exemplary representatives." As your CEO, I pledge to you that we will never waiver from our integrity-based values.

We are pleased with our success in employing capital and operating as a public company. As 2002 begins, we are in an excellent position to leverage First Niagara's expanded business and reach for the benefit of our customers and shareholders while staying on our course of steady growth and consistent performance. Our goal is to deliver greater shareholder value by staying focused on the right things and by remaining true to our integrity-based values and our genuine commitment to our customers - the core of First Niagara's approach to the financial services business.

Thank you for your continued loyalty and support.

William E. Swan
Chairman, President and Chief Executive Officer