First Niagara Financial 10Q 2011 Q1 Quarterly report

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended March 31, 2011


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

For the transition period from to

Commission file number 000-23975

FIRST NIAGARA FINANCIAL GROUP, INC.

(exact name of registrant as specified in its charter)


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


726 Exchange Street, Suite 618, Buffalo, NY		14210
(Address of principal executive offices)		(Zip Code)

(716) 819-5500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days. YESþ NOo

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

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


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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS: Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.
YESo NOo

As of May 4, 2011, there were issued and outstanding 303,205,717 shares of the Registrant’s Common Stock, $0.01 par value.

FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended March 31, 2011
TABLE OF CONTENTS


Item Number	Page Number

PART I — FINANCIAL INFORMATION

1. Financial Statements

Consolidated Statements of Condition at March 31, 2011 (unaudited) and December 31, 2010		3

Consolidated Statements of Income for the three months ended March 31, 2011 and 2010 (unaudited)		4

Consolidated Statements of Comprehensive Income for the three months ended March 31, 2011 and 2010 (unaudited)		5

Consolidated Statements of Changes in Stockholders’ Equity for the three months ended March 31, 2011 and 2010 (unaudited)		6

Consolidated Statements of Cash Flows for the three months ended March 31, 2011 and 2010 (unaudited)		7

Notes to Consolidated Financial Statements (unaudited)		8

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		34

3. Quantitative and Qualitative Disclosures About Market Risk		60

4. Controls and Procedures		60

PART II — OTHER INFORMATION

1. Legal Proceedings		61

1A. Risk Factors		61

2. Unregistered Sales of Equity Securities and Use of Proceeds		61

3. Defaults Upon Senior Securities		61

4. [Removed and Reserved]

5. Other Information		61

6. Exhibits		61

Signatures		62

Exhibit 10.1
Exhibit 31.1
Exhibit 31.2
Exhibit 32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT

PART I. FINANCIAL INFORMATION


ITEM 1.		Financial Statements

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

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


	March 31,			December 31,
	2011			2010
	(unaudited)

ASSETS

Cash and cash equivalents	$	220,997		$	213,820
Investment securities:
Available for sale, at fair value (amortized cost of $5,328,060 and $7,175,442 in 2011 and 2010; includes pledged securities that can be sold or repledged of $3,412,244 and $4,052,259 in 2011 and 2010)		5,424,731			7,289,455
Held to maturity, at amortized cost (fair value of $3,053,320 and $1,043,803 in 2011 and 2010; includes pledged securities that can be sold or repledged of $2,958,282 in 2011)		3,030,320			1,025,724
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost and fair value		166,357			183,800
Loans held for sale		26,955			37,977
Loans and leases (net of allowance for credit losses of $100,126 and $95,354 in 2011 and 2010)		10,611,117			10,388,060
Bank owned life insurance		232,748			230,718
Premises and equipment, net		227,136			217,555
Goodwill		1,023,977			1,023,977
Core deposit and other intangibles, net		84,834			90,167
Other assets		390,673			382,600


Total assets	$	21,439,845		$	21,083,853


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Deposits	$	13,455,823		$	13,148,844
Short-term borrowings		970,262			1,788,566
Long-term borrowings		3,933,791			3,104,908
Other		304,937			276,465


Total liabilities		18,664,813			18,318,783


Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 500,000,000 shares authorized; 215,105,566 shares issued in 2011 and 2010		2,151			2,151
Additional paid-in capital		2,429,389			2,430,571
Retained earnings		388,133			376,670
Accumulated other comprehensive income		52,841			57,871
Common stock held by employee stock ownership plan, 2,562,079 and 2,621,978 shares in 2011 and 2010		(20,368	)		(20,758	)
Treasury stock, at cost, 5,673,828 and 5,993,906 shares in 2011 and 2010		(77,114	)		(81,435	)


Total stockholders’ equity		2,775,032			2,765,070


Total liabilities and stockholders’ equity	$	21,439,845		$	21,083,853

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income(unaudited)
(in thousands, except per share amounts)


	Three months ended
	March 31,
	2011		2010
Interest income:
Loans and leases	$	132,117	$	96,580
Investment securities and other		76,767		47,923

Total interest income		208,884		144,503

Interest expense:
Deposits		15,621		14,383
Borrowings		20,395		15,951

Total interest expense		36,016		30,334


Net interest income		172,868		114,169
Provision for credit losses		12,900		13,131


Net interest income after provision for credit losses		159,968		101,038


Noninterest income:
Banking services		19,006		16,007
Insurance and benefits consulting		15,755		12,163
Wealth management services		6,734		3,248
Mortgage banking		1,263		1,232
Lending and leasing		3,763		2,044
Bank owned life insurance		2,030		1,224
Other		3,523		1,030

Total noninterest income		52,074		36,948


Noninterest expense:
Salaries and employee benefits		74,511		48,237
Occupancy and equipment		16,197		9,907
Technology and communications		12,871		8,649
Marketing and advertising		2,692		1,532
Professional services		6,360		2,510
Amortization of intangibles		5,489		3,247
Federal deposit insurance premiums		6,195		3,463
Merger and acquisition integration expenses		6,176		6,232
Other		14,659		9,405

Total noninterest expense		145,150		93,182


Income before income taxes		66,892		44,804
Income taxes		21,974		15,905


Net income	$	44,918	$	28,899


Earnings per share:
Basic	$	0.22	$	0.16
Diluted	$	0.22	$	0.16

Weighted average common shares outstanding:
Basic		206,124		185,121
Diluted		206,644		185,585

Dividends per common share	$	0.16	$	0.14

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income(unaudited)
(in thousands)


	Three months ended March 31,
	2011			2010
Net income	$	44,918		$	28,899

Other comprehensive (loss) income, net of income taxes:
Securities available for sale:
Net unrealized (losses) gains arising during the period		(6,797	)		25,764
Reclassification adjustment for net unrealized holding gains on securities transferred to held to maturity		(3,956	)		—

		(10,753	)		25,764

Net unrealized holding gains on securities transferred from available for sale to held to maturity:
Net unrealized holding gains transferred during the period		3,956			—

Net unrealized gains on interest rate swaps designated as cash flow hedges arising during the period		1,564			9

Amortization of net loss related to pension and post-retirement plans		203			156


Total other comprehensive (loss) income		(5,030	)		25,929


Total comprehensive income	$	39,888		$	54,828

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)
(in thousands, except share and per share amounts)


									Accumulated			Common
			Additional						other			stock
	Common		paid-in			Retained			comprehensive			held by			Treasury
	stock		capital			earnings			income (loss)			ESOP			stock			Total

Balances at January 1, 2011	$	2,151	$	2,430,571		$	376,670		$	57,871		$	(20,758	)	$	(81,435	)	$	2,765,070

Net income		—		—			44,918			—			—			—			44,918
Total other comprehensive loss, net		—		—			—			(5,030	)		—			—			(5,030	)
ESOP shares committed to be released (59,899 shares)		—		265			—			—			390			—			655
Stock-based compensation expense		—		1,724			—			—			—			—			1,724
Excess tax benefit from stock-based compensation		—		1,217			—			—			—			—			1,217
Exercise of stock options and restricted stock activity (320,078 shares)		—		(4,388	)		(378	)		—			—			4,321			(445	)
Common stock dividends of $0.16 per share		—		—			(33,077	)		—			—			—			(33,077	)


Balances at March 31, 2011	$	2,151	$	2,429,389		$	388,133		$	52,841		$	(20,368	)	$	(77,114	)	$	2,775,032


Balances at January 1, 2010	$	1,948	$	2,128,196		$	352,948		$	2,514		$	(22,382	)	$	(89,563	)	$	2,373,661

Net income		—		—			28,899			—			—			—			28,899
Total other comprehensive income, net		—		—			—			25,929			—			—			25,929
ESOP shares committed to be released (72,028 shares)		—		386			—			—			452			—			838
Stock-based compensation expense		—		1,299			—			—			—			—			1,299
Excess tax benefit from stock-based compensation		—		906			—			—			—			—			906
Exercise of stock options and restricted stock activity (503,936 shares)		—		(3,849	)		(1,867	)		—			—			6,789			1,073
Common stock dividends of $0.14 per share		—		—			(25,983	)		—			—			—			(25,983	)


Balances at March 31, 2010	$	1,948	$	2,126,938		$	353,997		$	28,443		$	(21,930	)	$	(82,774	)	$	2,406,622

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

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


	Three months ended March 31,
	2011			2010
Cash flows from operating activities:
Net income	$	44,918		$	28,899
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion) amortization of fees and discounts, net		(1,684	)		12,292
Provision for credit losses		12,900			13,131
Depreciation of premises and equipment		7,387			4,276
Amortization of intangibles		5,489			3,247
Origination of loans held for sale		(105,797	)		(85,254	)
Proceeds from sales of loans held for sale		116,441			87,393
ESOP and stock based-compensation expense		2,379			2,137
Deferred income tax expense		53			1,635
Other, net		(9,435	)		(14,676	)

Net cash provided by operating activities		72,651			53,080


Cash flows from investing activities:
Proceeds from sales of securities available for sale		17,127			16,881
Proceeds from maturities of securities available for sale		17,531			66,126
Principal payments received on securities available for sale		341,763			174,267
Purchases of securities available for sale		(509,424	)		(560,239	)
Principal payments received on securities held to maturity		75,317			51,531
Purchases of securities held to maturity		(69,931	)		—
Proceeds from sales of Federal Home Loan Bank and Federal
Reserve Bank common stock		17,443			23,364
Net increase in loans and leases		(236,370	)		(92,265	)
Other, net		(15,719	)		(12,822	)

Net cash used in investing activities		(362,263	)		(333,157	)


Cash flows from financing activities:
Net increase in deposits		313,877			64,903
Proceeds from (repayments of) short-term borrowings, net		78,800			(680,846	)
Proceeds from long-term borrowings		—			872,720
Repayments of long-term borrowings		(64,779	)		(2,206	)
Proceeds from exercise of stock options		744			1,144
Excess tax benefit from stock-based compensation		1,217			906
Dividends paid on common stock		(33,070	)		(25,980	)

Net cash provided by financing activities		296,789			230,641

Net increase (decrease) in cash and cash equivalents		7,177			(49,436	)
Cash and cash equivalents at beginning of period		213,820			236,268

Cash and cash equivalents at end of period	$	220,997		$	186,832


Supplemental disclosures
Cash paid during the period for:
Income taxes	$	16,197		$	6,539
Interest expense		48,249			29,064
Other noncash activity:
Secutities available for sale purchases not settled		37,207			8,630
Securities transferred from available for sale to held to maturity (at fair value)		1,994,193			—

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(unaudited)
(in thousands, except as noted and per share amounts)

The accompanying consolidated financial statements of First Niagara Financial Group, Inc. (the “Company”), including its wholly owned subsidiary First Niagara Bank, N.A. (the “Bank”), have been prepared using U.S. generally accepted accounting principles (“GAAP”) for interim financial information.

These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2010 Annual Report on Form 10-K. Results for the three months ended March 31, 2011 do not necessarily reflect the results that may be expected for the year ending December 31, 2011. We reviewed subsequent events and determined that no further disclosures or adjustments were required. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current period presentation. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

Note 1. Acquisitions

NewAlliance Bancshares, Inc.

On April 15, 2011, the Company acquired all of the outstanding common shares of NewAlliance Bancshares, Inc. (“NewAlliance”), the parent company of NewAlliance Bank, in a transaction totaling $1.5 billion, and thereby acquired NewAlliance Bank’s 88 branch locations across eight counties from Greenwich, Connecticut to Springfield, Massachusetts. The merger with NewAlliance enabled us to expand into the New England market, improve our core deposit base, and add additional scale in our banking operations. Under the terms of the merger agreement, as amended, each outstanding share of NewAlliance stock was converted into the right to receive either 1.10 shares of common stock of the Company, or $14.28 in cash, or a combination thereof. As a result, NewAlliance stockholders received 94 million shares of First Niagara Financial Group, Inc. common stock, valued at $1.3 billion based on the $14.00 closing price of the Company’s stock on April 15, 2011, and cash consideration of $199 million. Also under the terms of the merger agreement, NewAlliance employees became 100% vested in any NewAlliance stock options they held and these options converted into options to purchase Company common stock. These options had a fair value of $16 million on the date of acquisition.

Direct costs related to the NewAlliance acquisition were expensed as incurred. During the three months ended March 31, 2011, we incurred $6.0 million in merger and acquisition integration expenses related to the NewAlliance transaction, including $0.7 million in salaries and benefits, $0.4 million in technology and communications, $0.3 million in occupancy and equipment, $1.0 million in marketing and advertising, $2.4 million in professional services, and $1.2 million in other noninterest expenses.

We are still evaluating the estimated fair values of the assets acquired and liabilities assumed. Accordingly, the amount of any goodwill to be recognized in connection with this transaction is also yet to be determined. The results of NewAlliance’s operations will be included in our Consolidated Statement of Income after April 15, 2011, the date of acquisition.

Harleysville National Corporation

On April 9, 2010, the Company acquired all of the outstanding common shares of Harleysville National Corporation (“Harleysville”), the parent company of Harleysville National Bank and Trust Company, and thereby acquired Harleysville National Bank and Trust Company’s 83 branch locations across nine Eastern Pennsylvania counties including $1.1 billion in cash, loans with a fair value of $2.6 billion, and core deposit intangible of $42 million, as well as deposits with a fair value of $4.0 billion, and borrowings with a fair value of $960 million.

Under the terms of the merger agreement, Harleysville stockholders received 0.474 shares of First Niagara Financial Group, Inc. common stock in exchange for each share of Harleysville common stock, resulting in our issuance of 20.3 million common shares of Company common stock with an acquisition date fair value of $299 million. Also under the terms of the merger agreement, Harleysville employees became 100% vested in any Harleysville stock options they held. These options had a fair value of $1 million on the date of acquisition. The merger with Harleysville enabled us to expand into the Eastern Pennsylvania market, improve our core deposit base, and add additional scale in our banking operations. The results of Harleysville’s operations are included in our Consolidated Statements of Income from the date of acquisition.

Other

As part of our plan to enhance our risk management operations, workforce, and products and services to benefit customers in our newly added New England market, on April 15, 2011, we acquired Pierson & Smith, an insurance brokerage, consulting and third party administration firm in Norwalk, Connecticut. In an effort to expand our risk management and employee benefits consulting services to our Pennsylvania markets, we acquired several insurance agencies in 2010. In August 2010, we acquired RTI Insurance Services, Inc. and Three Rivers Financial Services, Inc., in November 2010, we acquired Summit Insurance Group Inc. and Summit Benefits, LLC, and in December 2010, we acquired Banyan Consulting, LLC. These acquisitions, either individually or in the aggregate, did not have a material impact on our consolidated financial condition or operations.

Note 2. Investment Securities

At March 31, 2011, we transferred $2.0 billion of investment securities from available for sale to held to maturity. The amortized cost, unrealized gains and losses, and fair value of these transferred investment securities immediately prior to the transfer are as follows:


	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Residential mortgage-backed securities:
Government National Mortgage Association	$	2,207	$	80	$	—		$	2,287
Federal National Mortgage Association		18,283		318		—			18,601
Federal Home Loan Mortgage Corporation		16,100		496		—			16,596
Collateralized mortgage obligations:
Government National Mortgage Association		1,584,892		26,759		(10,663	)		1,600,988
Federal National Mortgage Association		6,792		58		—			6,850
Federal Home Loan Mortgage Corporation		359,539		775		(11,443	)		348,871

Total collateralized mortgage obligations		1,951,223		27,592		(22,106	)		1,956,709

Total residential mortgage-backed securities	$	1,987,813	$	28,486	$	(22,106	)	$	1,994,193

The amortized cost, gross unrealized gains and losses, and fair value of our investment securities at March 31, 2011 and December 31, 2010 are summarized as follows:


	Amortized		Unrealized		Unrealized			Fair
March 31, 2011:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	638,247	$	5,868	$	(2,151	)	$	641,964
U.S. government agencies		2,312		—		(13	)		2,299
U.S. government sponsored enterprises		184,267		3,331		(914	)		186,684
Corporate		173,617		657		(1,850	)		172,424


Total debt securities		998,443		9,856		(4,928	)		1,003,371


Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		69,108		1,679		—			70,787
Federal National Mortgage Association		135,119		4,733		—			139,852
Federal Home Loan Mortgage Corporation		93,219		3,382		(18	)		96,583

Collateralized mortgage obligations:
Government National Mortgage Association		2,703,104		64,080		(2,941	)		2,764,243
Federal National Mortgage Association		458,560		11,818		(23	)		470,355
Federal Home Loan Mortgage Corporation		385,173		8,598		(2	)		393,769
Non-agency issued		126,089		1,945		(648	)		127,386

Total collateralized mortgage obligations		3,672,926		86,441		(3,614	)		3,755,753

Total residential mortgage-backed securities		3,970,372		96,235		(3,632	)		4,062,975

Commercial mortgage-backed securities:
Non-agency issued		343,049		1,441		(2,229	)		342,261

Total mortgage-backed securities		4,313,421		97,676		(5,861	)		4,405,236
Asset-backed securities		147		—		(4	)		143
Other		16,049		8		(76	)		15,981

Total securities available for sale	$	5,328,060	$	107,540	$	(10,869	)	$	5,424,731


Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	6,954	$	89	$	—		$	7,043
Federal National Mortgage Association		19,704		340		—			20,044
Federal Home Loan Mortgage Corporation		16,596		496		—			17,092

Collateralized mortgage obligations:
Government National Mortgage Association		2,093,627		38,925		(14,173	)		2,118,379
Federal National Mortgage Association		634,735		4,803		(846	)		638,692
Federal Home Loan Mortgage Corporation		258,704		6,907		(13,541	)		252,070

Total collateralized mortgage obligations		2,987,066		50,635		(28,560	)		3,009,141

Total securities held to maturity	$	3,030,320	$	51,560	$	(28,560	)	$	3,053,320


	Amortized		Unrealized		Unrealized			Fair
December 31, 2010:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	595,978	$	4,631	$	(3,175	)	$	597,434
U.S. government sponsored enterprises		184,569		3,751		(1,113	)		187,207
Corporate		123,475		166		(2,525	)		121,116


Total debt securities		904,022		8,548		(6,813	)		905,757

Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		75,874		1,916		—			77,790
Federal National Mortgage Association		167,355		5,788		(4	)		173,139
Federal Home Loan Mortgage Corporation		121,785		4,381		(7	)		126,159

Collateralized mortgage obligations:
Government National Mortgage Association		4,462,585		95,351		(9,019	)		4,548,917
Federal National Mortgage Association		561,430		14,342		(2,742	)		573,030
Federal Home Loan Mortgage Corporation		544,447		11,248		(9,543	)		546,152
Non-agency issued		150,243		2,056		(1,525	)		150,774

Total collateralized mortgage obligations		5,718,705		122,997		(22,829	)		5,818,873

Total residential mortgage-backed securities		6,083,719		135,082		(22,840	)		6,195,961

Commercial mortgage-backed securities:
Non-agency issued		162,669		—		—			162,669

Total mortgage-backed securities		6,246,388		135,082		(22,840	)		6,358,630
Asset-backed securities		2,755		—		(24	)		2,731
Other		22,277		136		(76	)		22,337

Total securities available for sale	$	7,175,442	$	143,766	$	(29,753	)	$	7,289,455


Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	497,310	$	12,443	$	(4,095	)	$	505,658
Federal National Mortgage Association		244,664		5,857		(960	)		249,561
Federal Home Loan Mortgage Corporation		283,750		7,580		(2,746	)		288,584

Total securities held to maturity	$	1,025,724	$	25,880	$	(7,801	)	$	1,043,803

The table below details certain information regarding our investment securities that were in an unrealized loss position at the dates indicated by the length of time those securities were in a continuous loss position:


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
March 31, 2011:	value		losses			value		losses			value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	183,093	$	(2,151	)	$	—	$	—		$	183,093	$	(2,151	)
U.S. government agencies		—		—			2,300		(13	)		2,300		(13	)
U.S. government sponsored enterprises		52,620		(914	)		—		—			52,620		(914	)
Corporate		107,982		(1,107	)		900		(743	)		108,882		(1,850	)

Total debt securities		343,695		(4,172	)		3,200		(756	)		346,895		(4,928	)


Mortgage-backed securities:

Residential mortgage-backed securities:
Federal Home Loan Mortgage Corporation		3,501		(18	)		—		—			3,501		(18	)

Collateralized mortgage obligations:
Government National Mortgage Association		189,123		(2,941	)		—		—			189,123		(2,941	)
Federal National Mortgage Association		—		—			5,901		(23	)		5,901		(23	)
Federal Home Loan Mortgage Corporation		—		—			773		(2	)		773		(2	)
Non-agency issued		14,966		(117	)		16,945		(531	)		31,911		(648	)

Total collateralized mortgage obligations		204,089		(3,058	)		23,619		(556	)		227,708		(3,614	)

Total residential mortgage-backed securities		207,590		(3,076	)		23,619		(556	)		231,209		(3,632	)

Commercial mortgage-backed securities:
Non-agency issued		224,592		(2,229	)		—		—			224,592		(2,229	)

Total mortgage-backed securities		432,182		(5,305	)		23,619		(556	)		455,801		(5,861	)

Asset-backed securities		—		—			143		(4	)		143		(4	)
Other		3,194		(76	)		—		—			3,194		(76	)

Total securities available for sale in an unrealized loss position	$	779,071	$	(9,553	)	$	26,962	$	(1,316	)	$	806,033	$	(10,869	)

Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	471,857	$	(14,173	)	$	—	$	—		$	471,857	$	(14,173	)
Federal National Mortgage Association		24,007		(846	)		—		—			24,007		(846	)
Federal Home Loan Mortgage Corporation		362,792		(13,541	)		—		—			362,792		(13,541	)

Total securities held to maturity in an unrealized loss position	$	858,656	$	(28,560	)	$	—	$	—		$	858,656	$	(28,560	)


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
December 31, 2010:	value		losses			value		losses			value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	209,984	$	(3,175	)	$	—	$	—		$	209,984	$	(3,175	)
U.S. government sponsored enterprises		52,467		(1,113	)		—		—			52,467		(1,113	)
Corporate		96,222		(1,669	)		785		(856	)		97,007		(2,525	)

Total debt securities		358,673		(5,957	)		785		(856	)		359,458		(6,813	)


Mortgage-backed securities:
Residential mortgage-backed securities:
Federal National Mortgage Association		798		(4	)		—		—			798		(4	)
Federal Home Loan Mortgage Corporation		447		(7	)		—		—			447		(7	)

Collateralized mortgage obligations:
Government National Mortgage Association		473,275		(9,019	)		—		—			473,275		(9,019	)
Federal National Mortgage Association		38,640		(2,742	)		—		—			38,640		(2,742	)
Federal Home Loan Mortgage Corporation		148,911		(9,543	)		—		—			148,911		(9,543	)
Non-agency issued		37,352		(294	)		20,923		(1,231	)		58,275		(1,525	)

Total collateralized mortgage obligations		698,178		(21,598	)		20,923		(1,231	)		719,101		(22,829	)


Total mortgage-backed securities		699,423		(21,609	)		20,923		(1,231	)		720,346		(22,840	)

Asset-backed securities		—		—			2,731		(24	)		2,731		(24	)
Other		3,194		(76	)		—		—			3,194		(76	)


Total securities available for sale in an unrealized loss position	$	1,061,290	$	(27,642	)	$	24,439	$	(2,111	)	$	1,085,729	$	(29,753	)

Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	72,842	$	(4,095	)	$	—	$	—		$	72,842	$	(4,095	)
Federal National Mortgage Association		24,292		(960	)		—		—			24,292		(960	)
Federal Home Loan Mortgage Corporation		47,254		(2,746	)		—		—			47,254		(2,746	)


Total securities held to maturity in an unrealized loss position	$	144,388	$	(7,801	)	$	—	$	—		$	144,388	$	(7,801	)

In the discussion of our investment portfolio below, we have included certain credit rating information because the information indicates the degree of credit risk to which we are exposed, and significant changes in ratings classifications for our investment portfolio, could result in increased risk for us.

As of March 31, 2011, 99% of the fair value of our investment securities portfolio was rated investment grade or better and 98% was rated A- or higher. At March 31, 2011, we transferred $2.0 billion of securities from our available for sale portfolio to our held to maturity portfolio as we determined that we have the intent and ability to hold these securities to maturity, resulting in total securities classified as held to maturity of $3.0 billion. The transferred securities were primarily mortgage-backed securities and collateralized mortgage obligations (“CMOs”) issued by the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”), and had unrealized gains, net of tax, of $4.0 million on the date of transfer, which will be amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the premium on the same transferred debt securities.

Non-Agency Collateralized Mortgage Obligations

Our non-agency residential CMO portfolio consists primarily of investment grade securities. All of our non-agency CMOs carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. These securities were purchased based on the underlying loan characteristics such as loan-to-value ratio, credit scores, property type, location, and the level of credit enhancement. Current characteristics of each security such as credit rating, delinquency and foreclosure levels, credit enhancement, projected collateral losses, and the level of credit loss and coverage are reviewed regularly by management. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. When the level of credit loss coverage for an individual security significantly deteriorates, we expand our analysis of the security to include detailed cash flow projections based upon loan level credit characteristics and prepayment assumptions. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings.

At March 31, 2011, of the 11 non-agency CMOs in an unrealized loss position, seven were in a continuous unrealized loss position for 12 months or more. At December 31, 2010, of the 22 non-agency CMOs in an unrealized loss position, eight were in a continuous unrealized loss position for 12 months or more. We have assessed these securities in an unrealized loss position at March 31, 2011 and December 31, 2010 and determined that the declines in fair value below amortized cost were temporary. We believe the initial decline in fair value below amortized cost was caused by the significant widening in liquidity spreads during the financial crisis. As market conditions have stabilized, those spreads have begun to normalize; however, sufficient volatility remained in the market place preventing a full retracement in liquidity spreads and a subsequent return to amortized cost basis at period end. In making the determination that the impairment was temporary, we considered the period of time the securities were in a loss position, the percentage decline in comparison to the securities’ amortized costs, the securities’ credit ratings, and the delinquency or default rates of the underlying collateral and levels of credit enhancement. We also do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity. It is possible that the underlying loan collateral of these securities will perform worse than expectations, which may lead to adverse changes in cash flows on these securities and potential future other than temporary impairment losses. Events that may trigger material declines in fair values for these securities in the future would include, but are not limited to, deterioration of credit metrics, such as significantly higher levels of default and severity of loss on the underlying collateral, deteriorating credit enhancement and loss coverage ratios, or further illiquidity in the non-agency CMO market.

Scheduled contractual maturities of our investment securities at March 31, 2011 are as follows:


	Amortized		Fair
	cost		value
Debt securities:
Within one year	$	137,248	$	137,768
After one year through five years		392,260		397,855
After five years through ten years		418,982		418,211
After ten years		49,953		49,537


Total debt securities		998,443		1,003,371

Mortgage-backed securities		7,343,741		7,458,556
Asset-backed securities		147		143
Other		16,049		15,981

	$	8,358,380	$	8,478,051

While the contractual maturities of our mortgage-backed securities, asset-backed securities, and other securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of the mortgage-backed, asset-backed, and other securities that we own. The weighted average estimated remaining life of our securities available for sale was 4.0 years at March 31, 2011, as compared to 4.3 years at December 31, 2010. The decrease in the weighted average estimated remaining life is the result of the transfer of securities with higher weighted average lives from our available for sale portfolio to our held to maturity portfolio.

Our investment in FHLB stock consists of $68 million and $30 million of FHLB of New York common stock and FHLB of Pittsburgh common stock, respectively, at March 31, 2011 and $86 million and $30 million of FHLB of New York common stock and FHLB of Pittsburgh common stock, at December 31, 2010, respectively. Our investment in Federal Reserve Bank of New York stock amounted to $68 million at March 31, 2011 and December 31, 2010.

Note 3. Loans and Leases

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


	March 31,			December 31,
	2011			2010
Commercial:
Real estate	$	4,160,359		$	3,964,106
Construction		381,380			406,751
Business		2,697,274			2,623,079


Total commercial		7,239,013			6,993,936

Residential real estate		1,701,544			1,692,198
Home equity		1,507,292			1,524,570
Other consumer		263,394			272,710


Total loans and leases		10,711,243			10,483,414

Allowance for credit losses		(100,126	)		(95,354	)


Total loans and leases, net	$	10,611,117		$	10,388,060

Our commercial business loans include our portfolio of shared national credits. The balance of our shared national credits was $731 million and $680 million as of March 31, 2011 and December 31, 2010, respectively.

Our loan portfolio is made up of two segments, commercial loans and consumer loans. Those segments are further segregated between our loans accounted for under the amortized cost method (referred to as “legacy” loans) and loans acquired after January 1, 2009 (referred to as “acquired” loans). The outstanding principal balance and the related carrying amount of our acquired loans included in our Consolidated Statements of Condition at the dates indicated are as follows:


	March 31,		December 31,
	2011		2010

Outstanding principal balance	$	2,592,652	$	2,750,133
Carrying amount		2,501,137		2,649,719

The following table presents changes in the accretable discount for the dates indicated:


Balance at January 1, 2010	$	(79,388	)
Harleysville acquisition		(412,702	)
Accretion		131,166

Balance at December 31, 2010		(360,924	)
Accretion		34,723

Balance at March 31, 2011	$	(326,201	)

During the first quarter of 2011, we refined our process used to estimate the allowance for credit losses by improving the granularity of historical net loss experience data utilized for both our commercial and consumer portfolio segments.

Prior to the first quarter of 2011, we estimated a portion of the allowance for credit losses within our commercial loan portfolio segment utilizing historical net charge-off rates that were specific to the different loan types within the portfolio segment. As our commercial portfolio continues to grow, we believe that our estimate of the allowance would be enhanced through application of loss rates at a more granular level. Accordingly, we now estimate the allowance for these loans considering its type and grade.

Similarly, in the first quarter of 2011, we improved the nature of historical net loss experience data used to estimate a portion of the allowance for credit within our consumer loan portfolio segment. Prior to the first quarter, we estimated losses on our consumer loan portfolio segment utilizing average loss rates for each loan type based on historical net charge-offs. The enhancement in the first quarter provides further granularity by incorporating both loan type and delinquency rate trends into our loss rates. The enhanced approach estimates the interest loss in the current portfolio based on their loan type and current delinquency status.

We assessed the impact of the changes and concluded that they did not have a significant impact when compared to our estimates based on our previous approach for either portfolio segment.

The following table presents the activity in our allowance for credit losses by portfolio segment for the three months ended March 31:


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for credit losses:
Balance at beginning of period	$	89,001		$	6,353		$	—		$	—	$	95,354
Provision for credit losses		10,267			2,559			74			—		12,900
Charge-offs		(7,711	)		(2,198	)		(74	)		—		(9,983	)
Recoveries		1,388			467			—			—		1,855


Balance at end of period	$	92,945		$	7,181		$	—		$	—	$	100,126


Allowance for credit losses:
Individually evaluated for impairment	$	8,320		$	873		$	—		$	—	$	9,193
Collectively evaluated for impairment		84,625			6,308			—			—		90,933


Total	$	92,945		$	7,181		$	—		$	—	$	100,126


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	69,209		$	13,797		$	—		$	—	$	83,006
Collectively evaluated for impairment		5,602,042			2,525,058			—			—		8,127,100
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			1,567,762			933,375		2,501,137


Total	$	5,671,251		$	2,538,855		$	1,567,762		$	933,375	$	10,711,243


*2010*
Allowance for credit losses:
Balance at beginning of period	$	82,813		$	5,490		$	—		$	—	$	88,303
Provision for credit losses		12,470			661			—			—		13,131
Charge-offs		(11,766	)		(908	)		—			—		(12,674	)
Recoveries		356			372			—			—		728


Balance at end of period	$	83,873		$	5,615		$	—		$	—	$	89,488


Allowance for credit losses:
Individually evaluated for impairment	$	8,126		$	20		$	—		$	—	$	8,146
Collectively evaluated for impairment		75,747			5,595			—			—		81,342


Total	$	83,873		$	5,615		$	—		$	—	$	89,488


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	66,172		$	8,590		$	—		$	—	$	74,762
Collectively evaluated for impairment		4,236,316		$	2,462,619			—			—		6,698,935
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			579,986			54,523		634,509


Total	$	4,302,488		$	2,471,209		$	579,986		$	54,523	$	7,408,206


⁽¹⁾		Includes all loans acquired subsequent to January 1, 2009.

Our nonaccruing loans consisted of the following at the dates indicated:


	March 31,		December 31,
	2011		2010
Commercial:
Commercial real estate:
Acquisition and development	$	1,693	$	1,870
Multifamily		553		3,075
Investment real estate		20,895		24,536
Owner occupied		14,205		14,584

Total commercial real estate		37,346		44,065
Business		24,823		25,819

Total commercial		62,169		69,884

Consumer:
Residential real estate		13,433		14,461
Home equity		4,467		4,604
Other consumer		299		374

Total consumer		18,199		19,439


Total	$	80,368	$	89,323

The following table details additional information on our loans at March 31:


	2011		2010
Interest income that would have been recorded if nonaccrual loans were performing in accordance with original terms	$	1,169	$	1,394

Loans 90 days past due and accruing interest⁽¹⁾		62,942		—

Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accuing interest		27,027		18,857
Nonaccrual		28,180		18,621

Total troubled debt restructurings		55,207		37,478


⁽¹⁾		All such loans represent acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows.

The following table details the amount of our legacy impaired loans by class with no related allowance for credit losses, as well as the amount of impaired loans for which there is a related allowance for credit losses as of March 31, 2011 and December 31, 2010. Loans with no related allowance for credit losses have adequate collateral securing their carrying value and in some circumstances, have been charged down to their current carrying value.


	March 31, 2011						December 31, 2010
			Unpaid						Unpaid
	Recorded		principal		Related		Recorded		principal		Related
	investment		balance		allowance		investment		balance		allowance
With no related allowance recorded:
Commercial:
Commercial real estate:
Acquisition and development	$	261	$	261	$	—	$	311	$	311	$	—
Multifamily		2,797		4,365		—		2,243		7,783		—
Investment real estate		10,566		16,896		—		7,767		14,442		—
Owner occupied		9,597		11,138		—		4,662		7,315		—

Total commercial real estate		23,221		32,660		—		14,983		29,851		—
Business		8,795		14,567		—		6,154		9,403		—

Total commercial		32,016		47,227		—		21,137		39,254		—
Consumer:
Residential real estate		3,119		3,117		—		8,855		8,794		—

Total	$	35,135	$	50,344	$	—	$	29,992	$	48,048	$	—


With a related allowance recorded:
Commercial:
Commercial real estate:
Acquisition and development	$	7,887	$	8,387	$	1,302	$	8,012	$	8,512	$	443
Multifamily		142		3,561		142		388		397		15
Investment real estate		12,545		15,277		1,546		17,451		21,413		1,786
Owner occupied		2,342		4,034		960		7,365		7,481		1,482

Total commercial real estate		22,916		31,259		3,950		33,216		37,803		3,726
Business		14,277		15,791		4,370		17,388		17,599		1,594

Total commercial		37,193		47,050		8,320		50,604		55,402		5,320
Consumer:
Residential real estate		10,678		10,788		873		2,270		2,302		173


Total	$	47,871	$	57,838	$	9,193	$	52,874	$	57,704	$	5,493

Total
Commercial:
Commercial real estate:
Acquisition and development	$	8,148	$	8,648	$	1,302	$	8,323	$	8,823	$	443
Multifamily		2,939		7,926		142		2,631		8,180		15
Investment real estate		23,111		32,173		1,546		25,218		35,855		1,786
Owner occupied		11,939		15,172		960		12,027		14,796		1,482

Total commercial real estate		46,137		63,919		3,950		48,199		67,654		3,726
Business		23,072		30,358		4,370		23,542		27,002		1,594

Total commercial		69,209		94,277		8,320		71,741		94,656		5,320
Consumer:
Residential real estate		13,797		13,905		873		11,125		11,096		173


Total	$	83,006	$	108,182	$	9,193	$	82,866	$	105,752	$	5,493

At March 31, 2011 and December 31, 2010, nonaccrual loans were less than total impaired loans as troubled debt restructurings (“TDRs”), which are considered impaired loans, were accruing interest due to the satisfactory performance of the borrowers under the restructured terms of the loans. Also contributing to the difference are nonaccrual loans less than $200 thousand not modified in a TDR and consumer loans not modified in a TDR. Loans less than $200 thousand are not considered impaired, as they are evaluated collectively when determining the allowance for credit losses, unless they have been modified in a TDR. The following table is a reconciliation between nonaccrual loans and impaired loans at the dates indicated:


	Commercial			Consumer			Total
March 31, 2011:
Nonaccrual loans	$	62,169		$	18,199		$	80,368
Accruing TDRs		13,781			13,246			27,027
Smaller balance nonaccrual loans evaluated collectively when determining the allowance for credit losses		(6,741	)		(17,648	)		(24,389	)

Total	$	69,209		$	13,797		$	83,006


December 31, 2010:
Nonaccrual loans	$	69,884		$	19,439		$	89,323
Accruing TDRs		10,713			10,894			21,607
Smaller balance nonaccrual loans evaluated collectively when determining the allowance for credit losses		(8,856	)		(19,208	)		(28,064	)

Total	$	71,741		$	11,125		$	82,866

The following table details the average recorded investment and interest income recognized for our impaired loans for the three months ending March 31:


	2011				2010
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized

Commercial:
Commercial real estate:
Acquisition and development	$	8,239	$	58	$	8,417	$	108
Multifamily		2,943		39		3,507		—
Investment real estate		23,157		30		26,537		24
Owner occupied		12,014		9		12,827		46

Total commercial real estate		46,353		136		51,288		178
Business		23,687		12		14,335		13

Total commercial		70,040		148		65,623		191
Consumer:
Residential real estate		13,954		195		8,519		25


Total	$	83,994	$	343	$	74,142	$	216

The following table contains an aging analysis of our loans by class at the dates indicated:


	30-59 days		60-89 days		Greater than 90		Total				Total loans		Greater than 90
March 31, 2011	past due		past due		days past due		past due		Current		receivable		days and accruing

Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	1,547	$	1,547	$	107,667	$	109,214		—
Multifamily		—		—		328		328		1,039,467		1,039,795		—
Investment real estate		258		148		15,269		15,675		1,433,904		1,449,579		—
Owner occupied		2,780		—		6,813		9,593		889,299		898,892		—

Total commercial real estate		3,038		148		23,957		27,143		3,470,337		3,497,480		—
Business		4,808		444		6,957	$	12,209		2,161,562		2,173,771		—

Total commercial		7,846		592		30,914		39,352		5,631,899		5,671,251		—


Consumer:
Residential real estate		4,674		3,827		12,059	$	20,560		1,430,544		1,451,104		—
Home equity		2,159		1,701		4,394		8,254		934,357		942,611		—
Other consumer		923		300		276		1,499		143,641		145,140		—

Total consumer		7,756		5,828		16,729		30,313		2,508,542		2,538,855		—

Total	$	15,602	$	6,420	$	47,643	$	69,665	$	8,140,441	$	8,210,106	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	582	$	—	$	2,792	$	3,374	$	15,547	$	18,921	$	2,792
Multifamily		278		—		84		362		75,565		75,927		84
Investment real estate		4,801		557		25,391		30,749		393,861		424,610		25,391
Owner occupied		2,784		4,255		8,278		15,317		509,484		524,801		8,278

Total commercial real estate		8,445		4,812		36,545		49,802		994,457		1,044,259		36,545
Business		1,313		1,156		7,172	$	9,641		513,862		523,503		7,172

Total commercial		9,758		5,968		43,717		59,443		1,508,319		1,567,762		43,717


Consumer:
Residential real estate		5,546		5,172		5,418	$	16,136		234,304		250,440	$	5,418
Home equity		4,337		3,067		12,208		19,612		545,069		564,681		12,208
Other consumer		1,859		926		1,599		4,384		113,870		118,254		1,599

Total consumer		11,742		9,165		19,225		40,132		893,243		933,375		19,225


Total	$	21,500	$	15,133	$	62,942	$	99,575	$	2,401,562	$	2,501,137	$	62,942


	30-59 days		60-89 days		Greater than 90		Total				Total loans		Greater than 90
December 31, 2010	past due		past due		days past due		past due		Current		receivable		days and accruing

Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	1,722	$	1,722	$	112,102	$	113,824	$	—
Multifamily		—		—		601		601		948,519		949,120		—
Investment real estate		954		750		17,891		19,595		1,521,444		1,541,039		—
Owner occupied		347		604		9,477		10,428		749,393		759,821		—

Total commercial real estate		1,301		1,354		29,691		32,346		3,331,458		3,363,804		—
Business		2,126		1,027		7,634		10,787		1,960,582		1,971,369		—

Total commercial		3,427		2,381		37,325		43,133		5,292,040		5,335,173		—


Consumer:
Residential real estate		5,228		3,571		14,138		22,937		1,404,136		1,427,073		—
Home equity		2,450		1,328		4,551		8,329		915,388		923,717		—
Other consumer		1,262		413		301		1,976		145,756		147,732		—

Total consumer		8,940		5,312		18,990		33,242		2,465,280		2,498,522		—

Total	$	12,367	$	7,693	$	56,315	$	76,375	$	7,757,320	$	7,833,695	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	3,840	$	1,355	$	1,355	$	6,550	$	14,797	$	21,347	$	1,355
Multifamily		—		—		190		190		133,291		133,481		190
Investment real estate		1,554		422		23,770		25,746		295,349		321,095		23,770
Owner occupied		1,481		497		7,344		9,322		521,808		531,130		7,344

Total commercial real estate		6,875		2,274		32,659		41,808		965,245		1,007,053		32,659
Business		1,423		1,299		6,354		9,076		642,634		651,710		6,354

Total commercial		8,298		3,573		39,013		50,884		1,607,879		1,658,763		39,013


Consumer:
Residential real estate		2,321		2,200		5,514		10,035		255,090		265,125	$	5,514
Home equity		7,158		2,741		12,168		22,067		578,786		600,853		12,168
Other consumer		2,617		750		1,402		4,769		120,209		124,978		1,402

Total consumer		12,096		5,691		19,084		36,871		954,085		990,956		19,084


Total	$	20,394	$	9,264	$	58,097	$	87,755	$	2,561,964	$	2,649,719	$	58,097

The following table presents additional information about the credit quality of our commercial portfolio at the dates indicated:


	Commercial real estate
	Acquisition and				Investment		Owner						Percent
	development		Multifamily		real estate		occupied		Business		Total		of Total

*March 31, 2011*
Legacy loans:
Pass	$	3,759	$	1,012,072	$	1,258,844	$	806,620	$	1,965,956	$	5,047,251		89.0	%
Criticized:⁽¹⁾
Accrual		103,762		27,170		169,840		78,067		182,992		561,831		9.9	%
Nonaccrual		1,693		553		20,895		14,205		24,823		62,169		1.1	%

Total criticized		105,455		27,723		190,735		92,272		207,815		624,000		11.0	%

Total	$	109,214	$	1,039,795	$	1,449,579	$	898,892	$	2,173,771	$	5,671,251		100.0	%


Acquired loans:
Pass	$	1,727	$	69,720	$	336,378	$	427,404	$	436,803	$	1,272,032		81.1	%
Criticized:⁽¹⁾
Accrual		17,194		6,207		88,232		97,397		86,700		295,730		18.9	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		17,194		6,207		88,232		97,397		86,700		295,730		18.9	%

Total	$	18,921	$	75,927	$	424,610	$	524,801	$	523,503	$	1,567,762		100.0	%


*December 31, 2010*
Legacy loans:
Pass	$	31,533	$	918,441	$	1,358,263	$	680,764	$	1,753,412	$	4,742,413		88.9	%
Criticized:⁽¹⁾
Accrual		80,421		27,604		158,240		64,473		192,138		522,876		9.8	%
Nonaccrual		1,870		3,075		24,536		14,584		25,819		69,884		1.3	%

Total criticized		82,291		30,679		182,776		79,057		217,957		592,760		11.1	%

Total	$	113,824	$	949,120	$	1,541,039	$	759,821	$	1,971,369	$	5,335,173		100.0	%


Acquired loans:
Pass	$	691	$	131,155	$	235,973	$	443,856	$	546,433	$	1,358,108		81.9	%
Criticized:⁽¹⁾
Accrual		20,656		2,326		85,122		87,274		105,277		300,655		18.1	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		20,656		2,326		85,122		87,274		105,277		300,655		18.1	%

Total	$	21,347	$	133,481	$	321,095	$	531,130	$	651,710	$	1,658,763		100.0	%


⁽¹⁾		Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2010.

⁽²⁾		Acquired loans were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows.

Borrower FICO scores are a credit quality indicator that provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that a debtor will repay their debts. The scores are obtained from a nationally recognized consumer rating agency in the respective quarter and are presented in the table below at the dates indicated:


	Residential		Home		Other				Percent
	real estate		equity		consumer		Total		of Total
*March 31, 2011*
Legacy loans by refreshed FICO score:
Over 700	$	1,115,759	$	720,454	$	72,157	$	1,908,370		75.1	%
660-700		147,827		115,514		21,518		284,859		11.2	%
620-660		67,863		47,377		13,170		128,410		5.1	%
580-620		41,054		21,342		6,861		69,257		2.7	%
Less than 580		64,376		32,899		10,892		108,167		4.3	%
No score		14,225		5,025		20,542		39,792		1.6	%

Total	$	1,451,104	$	942,611	$	145,140	$	2,538,855		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	130,296	$	376,252	$	50,945	$	557,493		59.7	%
660-700		30,476		60,686		17,440		108,602		11.6	%
620-660		15,596		31,087		9,423		56,106		6.0	%
580-620		14,858		22,351		5,529		42,738		4.6	%
Less than 580		23,730		48,095		9,987		81,812		8.8	%
No score		35,484		26,210		24,930		86,624		9.3	%

Total	$	250,440	$	564,681	$	118,254	$	933,375		100.0	%


*December 31, 2010*
Legacy loans by refreshed FICO score:
Over 700	$	1,092,172	$	705,211	$	72,524	$	1,869,907		74.8	%
660-700		138,265		112,141		21,017		271,423		10.9	%
620-660		73,488		45,887		13,242		132,617		5.3	%
580-620		40,409		20,530		7,673		68,612		2.7	%
Less than 580		67,096		32,867		11,320		111,283		4.5	%
No score		15,643		7,081		21,956		44,680		1.8	%

Total	$	1,427,073	$	923,717	$	147,732	$	2,498,522		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	139,706	$	400,341	$	54,765	$	594,812		60.0	%
660-700		29,981		64,904		18,076		112,961		11.4	%
620-660		15,272		34,267		9,253		58,792		5.9	%
580-620		17,482		26,287		5,516		49,285		5.0	%
Less than 580		22,859		46,528		11,511		80,898		8.2	%
No score		39,825		28,526		25,857		94,208		9.5	%

Total	$	265,125	$	600,853	$	124,978	$	990,956		100.0	%

Information about our residential mortgage loans is as follows for the three months ended March 31:


	2011		2010
Loans sold during the period	$	116,819	$	87,256

Gains on sale of loans, net		431		781

Information about our residential mortgage loans is as follows as of the dates indicated:


	March 31,		December 31,
	2011		2010
Mortgages serviced for others	$	1,572,925	$	1,554,083

Mortgage servicing asset recorded for loans serviced for others, net		12,615		12,591

Note 4. Derivative Financial Instruments

We are a party to derivative financial instruments in the normal course of business to meet the financing needs of our customers and to manage our own exposure to fluctuations in interest rates. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and often contain master netting and collateral provisions protecting the party at risk. We believe that the credit risk inherent in all of our derivative contracts is minimal based on our credit standards and the presence of the netting and collateral provisions within the interest rate swap agreements.

Our derivative positions include both instruments that are designated as hedging instruments and instruments that are not designated in hedging relationships. The following table presents information regarding our derivative financial instruments, at the dates indicated:


	Asset Derivatives				Liability Derivatives
	Notional				Notional
	amount		Fair value⁽¹⁾		amount		Fair value⁽²⁾
*March 31, 2011*
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	700,000	$	8,007	$	65,756	$	2,432

Derivatives not designated as hedging instruments:
Interest rate swap agreements		523,748		22,372		523,748		22,559

Total derivatives	$	1,223,748	$	30,379	$	589,504	$	24,991


*December 31, 2010*
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	500,000	$	5,856	$	65,912	$	3,040

Derivatives not designated as hedging instruments:
Interest rate swap agreements		416,520		24,331		416,520		24,466

Total derivatives	$	916,520	$	30,187	$	482,432	$	27,506


⁽¹⁾		Included in other assets in our Consolidated Statements of Condition.

⁽²⁾		Included in other liabilities in our Consolidated Statements of Condition.

Derivatives designated in hedging relationships

We designate interest rate swap agreements used to manage changes in the fair value of loans due to interest rate changes as fair value hedges. We have designated the risk of changes in the fair value of loans attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the fair value of the hedged items or derivatives attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The change in fair value of the derivatives, including both the effective and ineffective portions, is recognized in earnings and, so long as our fair value hedging relationships remain highly effective, such change is offset by the gain or loss due to the change in fair value of the loans.

We have also entered into interest rate swaps to offset the variability in the interest cash outflows of London Inter-Bank Offered Rate (LIBOR) based borrowings. These derivative instruments are designated as cash flow hedges. We have designated the risk of changes in the amount of interest payment cash flows to be made during the term of the borrowings attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the amount of interest payment cash flows for the hedged items or derivatives attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. Our interest rate swaps designated as cash flow hedges have maturities that correspond to the maturity of the related hedged borrowing. The maturities of the hedged borrowings range from 2011 to 2014. Any gain or loss associated with the effective portion of our cash flow hedges is recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings. Any gain or loss associated with the ineffective portion of our cash flow hedges is recognized immediately in earnings. During the next twelve months, we expect to reclassify $3.2 million of pretax net loss on cash flow hedges from accumulated other comprehensive income to earnings. This amount is estimated and could differ from amounts actually recognized due to changes in interest rates.

The following tables present information about amounts recognized for our derivative financial instruments designated in hedging relationships for the three months ended March 31:


	Amount of gain (loss) on
Fair Value Hedges⁽¹⁾	derivative instruments⁽²⁾

2011:
Interest rate swap agreements	$	237


2010:
Interest rate swap agreements	$	(148	)


⁽¹⁾		Hedged items in designated fair value relationships are loans.

⁽²⁾		Recognized in other noninterest income in our Consolidated Statements of Income.


	Amount of gain on		Amount of gain (loss) on
	derivatives recognized in		derivatives reclassifed
	other comprehensive		from other comprehenive
Cash Flow Hedges	income, net of tax		income to income⁽¹⁾

2011:
Interest rate swap agreements	$	1,564	$	1,069


2010:
Interest rate swap agreements	$	9	$	(393	)


⁽¹⁾		Recognized in interest expense on borrowings in our Consolidated Statements of Income.

Derivatives not designated in hedging relationships

In addition to our derivatives designated in hedge relationships, we act as an interest rate swap counterparty for certain commercial borrowers, which are accounted for as free standing derivatives. We economically hedge our exposure to such interest rate swaps by simultaneously entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps we have with the commercial borrowers. These positions (referred to as “back-to-back swaps”) directly offset each other and our exposure is the positive fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. In exchange for our participation in the back-to-back swaps, we earn fee income, which amounted to $2.2 million for the quarter ending March 31, 2011.

The following table presents information about amounts recognized for our back-to-back swaps due to changes in fair value for the three months ended March 31:


Derivatives not designated as hedging instruments	2011			2010

(Loss) gain on interest rate swap agreements⁽¹⁾	$	(52	)	$	132


⁽¹⁾		Recognized in other noninterest income in our Consolidated Statements of Income.

Note 5. Earnings Per Share

The following table is a computation of our basic and diluted earnings per share using the two-class method for the three months ended March 31:


	2011			2010
Net income	$	44,918		$	28,899
Less income allocable to unvested restricted stock awards		125			73


Net income allocable to common stockholders	$	44,793		$	28,826


Weighted average common shares outstanding:
Total shares issued		215,106			194,810
Unallocated employee stock ownership plan shares		(2,622	)		(2,861	)
Unvested restricted stock awards		(563	)		(475	)
Treasury shares		(5,797	)		(6,353	)

Total basic weighted average common shares outstanding		206,124			185,121

Incremental shares from assumed exercise of stock options		221			307
Incremental shares from assumed vesting of restricted stock awards		299			157

Total diluted weighted average common shares outstanding		206,644			185,585


Basic earnings per common share	$	0.22		$	0.16

Diluted earnings per common share	$	0.22		$	0.16

Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations		1,708			1,259

Note 6. Other Comprehensive Income

The following table presents the activity in our other comprehensive income for the three months ended March 31:


	Pretax			Income taxes			Net
2011:
Securities available for sale:
Net unrealized holding losses arising during the period	$	(10,962	)	$	(4,165	)	$	(6,797	)
Reclassification adjustment for net unrealized holding gains on securities transferred to held to maturity		(6,380	)		(2,424	)		(3,956	)

Net unrealized losses on securities available for sale		(17,342	)		(6,589	)		(10,753	)

Net unrealized holding gains on securities transferred from available for sale to held to maturity:
Net unrealized holding gains transferred during the period		6,380			2,424			3,956

Interest rate swaps designated as cash flow hedges:
Net unrealized gains arising during the period		3,591			1,364			2,227
Reclassification adjustment for realized gains included in net income		(1,069	)		(406	)		(663	)

Net unrealized gains on interest rate swaps designated as cash flow hedges		2,522			958			1,564
Amortization of net loss related to pension and post-retirement plans		309			106			203

Total other comprehensive income	$	(8,131	)	$	(3,101	)	$	(5,030	)


2010:
Securities available for sale:
Net unrealized holding gains arising during the period	$	42,675		$	16,911		$	25,764
Interest rate swaps designated as cash flow hedges:
Net unrealized losses arising during the period		(378	)		(151	)		(227	)
Reclassification adjustment for realized losses included in net income		393			157			236

Net unrealized gains on interest rate swaps designated as cash flow hedges		15			6			9
Amortization of net loss related to pension and post-retirement plans		259			103			156

Total other comprehensive income	$	42,949		$	17,020		$	25,929

The following table presents the activity in our accumulated other comprehensive income for the periods indicated:


				Net unrealized
				gains on securities		Unrealized gains
	Net unrealized			transferred from		(losses) on interest
	gains on securities			available for sale to		rate swaps designated			Defined benefit
	available for sale			held to maturity		as cash flow hedges			plans			Total
Balance, January 1, 2011	$	70,690		$	—	$	2,978		$	(15,797	)	$	57,871
Period change, net of tax		(10,753	)		3,956		1,564			203			(5,030	)

Balance March 31, 2011	$	59,937		$	3,956	$	4,542		$	(15,594	)	$	52,841


Balance, January 1, 2010	$	17,206		$	—	$	(1,154	)	$	(13,538	)	$	2,514
Period change, net of tax		25,764			—		9			156			25,929

Balance March 31, 2010	$	42,970		$	—	$	(1,145	)	$	(13,382	)	$	28,443

Note 7. Fair Value Measurements

Fair value is defined as the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date. Current accounting guidance establishes a fair value hierarchy based on the transparency of inputs participants use to price an asset or liability. The fair value hierarchy prioritizes these inputs into the following three levels:

Level 1 Inputs— Unadjusted quoted prices in active markets for identical assets or liabilities that are available at the measurement date.

Level 2 Inputs— Inputs, other than quoted prices included within Level 1, that are observable for the asset or liability, either directly or indirectly. These might include quoted prices for similar assets or liabilities in active markets, quoted prices for identical or similar assets or liabilities in markets that are not active, inputs other than quoted prices that are observable for the asset or liability (such as interest rates, volatilities, prepayment speeds, credit risks, etc.), or inputs that are derived principally from or corroborated by market data by correlation or other means.

Level 3 Inputs— Unobservable inputs for determining the fair value of the asset or liability and are based on the entity’s own assumptions about the assumptions that market participants would use to price the asset or liability.

A financial instrument’s categorization within the valuation hierarchy is based on the lowest level of input that is significant to the fair value measurement. A description of the valuation methodologies used for instruments measured at fair value, as well as the general classification of such instruments pursuant to the valuation hierarchy, is set forth below.

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following table summarizes our assets and liabilities measured at fair value on a recurring basis at the dates indicated:


	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
March 31, 2011
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	641,964	$	—	$	641,964	$	—
U.S. government agencies		2,299		—		2,299		—
U.S. government sponsored enterprises		186,684		—		186,684		—
Corporate		172,424		—		171,367		1,057

Total debt securities		1,003,371		—		1,002,314		1,057
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		70,787		—		70,787		—
Federal National Mortgage Association		139,852		—		139,852		—
Federal Home Loan Mortgage Corporation		96,583		—		96,583		—

Collateralized mortgage obligations:
Government National Mortgage Association		2,764,243		—		2,764,243		—
Federal National Mortgage Association		470,355		—		470,355		—
Federal Home Loan Mortgage Corporation		393,769		—		393,769		—
Non-agency issued		127,386		—		127,386		—

Total collateralized mortgage obligations		3,755,753		—		3,755,753		—


Total residential mortgage-backed securities		4,062,975		—		4,062,975		—
Commercial mortgage-backed securities:
Non-agency issued		342,261		—		342,261		—

Total mortgage-backed securities		4,405,236		—		4,405,236		—

Asset-backed securities		143		—		143		—
Other		15,981		14,695		1,286		—

Total securities available for sale		5,424,731		14,695		5,408,979		1,057

Interest rate swaps		30,379		—		30,379		—

Total assets	$	5,455,110	$	14,695	$	5,439,358	$	1,057


Liabilities:
Interest rate swaps	$	24,991	$	—	$	24,991	$	—

There were no significant transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the three months ended March 31, 2011. However, as described in Note 2, Investment Securities, we transferred $2.0 billion of securities from our available for sale portfolio to our held to maturity portfolio as of March 31, 2011. All such securities were classified as Level 2 fair value measurements. These securities, which were transferred at fair value, are not included in the table above and will no longer be recorded at fair value on a recurring basis in our Statement of Financial Condition.


	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
December 31, 2010
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	597,434	$	—	$	597,434	$	—
U.S. government sponsored enterprises		187,207		—		187,207		—
Corporate		121,116		—		120,197		919


Total debt securities		905,757		—		904,838		919

Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		77,790		—		77,790		—
Federal National Mortgage Association		173,139		—		173,139		—
Federal Home Loan Mortgage Corporation		126,159		—		126,159		—

Collateralized mortgage obligations:
Government National Mortgage Association		4,548,917		—		4,548,917		—
Federal National Mortgage Association		573,030		—		573,030		—
Federal Home Loan Mortgage Corporation		546,152		—		546,152		—
Non-agency issued		150,774		—		150,774		—

Total collateralized mortgage obligations		5,818,873		—		5,818,873		—

Total residential mortgage-backed securities		6,195,961		—		6,195,961		—
Commercial mortgage-backed securities		162,669		—		162,669		—


Total mortgage-backed securities		6,358,630		—		6,358,630		—
Asset-backed securities		2,731		—		2,731		—
Other		22,337		14,731		7,606		—

Total securities available for sale		7,289,455		14,731		7,273,805		919
Interest rate swaps		30,187		—		30,187		—

Total assets	$	7,319,642	$	14,731	$	7,303,992	$	919


Liabilities:
Interest rate swaps	$	27,506	$	—	$	27,506	$	—

There were no significant transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the year ended December 31, 2010.

Securities Available for Sale

The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available (Level 1). However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. We obtain fair value estimates from third parties and review these values, on a quarterly basis, by comparing them to values provided by a different independent pricing service. We also review detailed valuation methodologies provided to us by our pricing services based on our market knowledge.

Due to the lack of observable market data, we have classified our collateralized debt obligations (“CDOs”), included in corporate debt securities, in Level 3 of the fair value hierarchy. We determined the fair value of these securities using a projected cash flow model that considers prepayment speeds, discount rates, defaults, subordination protection, and contractual payments.

Interest Rate Swaps

We obtain fair value measurements of our interest rate swaps from a third party. The fair value measurements are determined using a market standard methodology of netting discounted future fixed cash receipts (or payments) and the discounted expected variable cash payments (or receipts). Variable cash payments (or receipts) are based on an expectation of future interest rates derived from observable market interest rate curves. Credit valuation adjustments are incorporated to appropriately reflect our nonperformance risk as well as the counterparty’s nonperformance risk. The impact of netting and any applicable credit enhancements, such as bilateral collateral postings, thresholds, mutual puts, and guarantees are also considered in the fair value measurement.

The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However, Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current credit quality to evaluate the likelihood of default. We have determined that the impact of these credit valuation adjustments is not significant to the overall valuation of our interest rate swaps. Therefore, we have classified the entire fair value of our interest rate swaps in Level 2 of the fair value hierarchy.

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis were as follows for the three months ended March 31:


	2011		2010
Balance at beginning of period	$	919	$	480
Gains included in other comprehensive income		138		126

Balance at end of period	$	1,057	$	606

The amount of total gains or losses for the period included in earnings attributable to the change in unrealized gains or losses relating to assets still held at the reporting date	$	—	$	—

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table summarizes our assets and liabilities measured at fair value on a nonrecurring basis for the three months ended March 31:


	Fair Value Measurements								Total
	Total		Level 1		Level 2		Level 3		(losses)
2011
Collateral dependent impaired loans	$	28,967	$	—	$	10,218	$	18,749	$	(4,115	)

2010
Collateral dependent impaired loans	$	18,465	$	—	$	18,465	$	—	$	(2,984	)

Collateral Dependent Impaired Loans

We record nonrecurring adjustments to the carrying value of collateral dependent impaired loans when establishing the allowance for credit losses. Such amounts are generally based on the fair value of the underlying collateral supporting the loan less estimated costs to sell the collateral. When the fair value of such collateral, less costs to sell, is less than the carrying value of the loan, a specific allowance is created through a provision for credit losses. Real estate collateral is typically valued using independent appraisals that we review for acceptability, or other indications of value based on recent comparable sales of similar properties or assumptions generally observable in the marketplace and the related nonrecurring fair value measurements have been classified as Level 2. Under certain circumstances significant adjustments may be made to the appraisal value due to the lack of direct marketplace information. Such adjustments are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral. When the fair value of collateral dependent impaired loans is based on appraisals containing significant adjustments, such collateral dependent impaired loans are classified as Level 3. We obtain new appraisals from an approved list of certified appraisers. Updated appraisals are obtained when necessary but at least every 18 to 24 months.

During the three months ended March 31, 2011 and 2010, we recorded an increase of $4.1 million and $3.0 million, respectively, to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $29 million and $19 million at March 31, 2011 and 2010, respectively.

Fair Value of Financial Instruments

The carrying value and estimated fair value of our financial instruments, including those that are not measured and reported at fair value on a recurring basis or nonrecurring basis, at the dates indicated are as follows:


	March 31, 2011				December 31, 2010
			Estimated fair				Estimated fair
	Carryingvalue		value		Carryingvalue		value
Financial assets:
Cash and cash equivalents	$	220,997	$	220,997	$	213,820	$	213,820
Investment securities available for sale		5,424,731		5,424,731		7,289,455		7,289,455
Investment securities held to maturity		3,030,320		3,053,320		1,025,724		1,043,803
Federal Home Loan Bank and Federal Reserve Bank common stock		166,357		166,357		183,800		183,800
Loans held for sale		26,955		27,237		37,977		38,357
Loans and leases, net		10,611,117		10,573,692		10,388,060		10,422,730
Mortgage servicing rights		12,615		13,417		12,591		13,178
Interest rate swap agreements		30,379		30,379		30,187		30,187
Accrued interest receivable		74,950		74,950		70,233		70,233

Financial liabilities:
Deposits	$	13,455,823	$	13,482,030	$	13,148,844	$	13,110,504
Borrowings		4,904,053		4,878,230		4,893,474		4,885,827
Interest rate swap agreements		24,991		24,991		27,506		27,506
Accrued interest payable		12,079		12,079		13,821		13,821

Our fair value estimates are based on our existing on and off balance sheet financial instruments without attempting to estimate the value of any anticipated future business and the value of assets and liabilities that are not considered financial instruments. In addition, the tax impact related to the realization of the unrealized gains and losses can have a significant effect on our fair value estimates and have not been considered in these estimates.

Our fair value estimates are made as of the dates indicated, based on relevant market information and information about the financial instruments, including our judgments regarding future expected loss experience, current economic conditions, risk characteristics of various financial instruments, and other factors. These estimates are subjective in nature and involve uncertainties and matters of significant judgment and therefore cannot be determined with precision. Changes in our assumptions could significantly affect the estimates. Our fair value estimates, methods, and assumptions are set forth below for each type of financial instrument. The method of estimating the fair value of the financial instruments disclosed in the table above does not necessarily incorporate the exit price concept used to record financial instruments at fair value in our Consolidated Statements of Condition.

Cash and Cash Equivalents

The carrying value of our cash and cash equivalents approximates fair value because these instruments have original maturities of three months or less.

Investment Securities

The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available. However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities. Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. We obtain fair value measurements from third parties.

Federal Home Loan Bank and Federal Reserve Bank Common Stock

The carrying value of our Federal Home Loan Bank and Federal Reserve Bank common stock approximates fair value.

Loans and Leases

Our variable rate loans reprice as the associated rate index changes. Therefore, the carrying value of these loans approximates fair value. We calculated the fair value of our fixed-rate loans and leases by discounting scheduled cash flows through the estimated maturity using credit adjusted period end origination rates. Our estimate of maturity is based on the contractual cash flows adjusted for prepayment estimates based on current economic and lending conditions.

Accrued Interest Receivable and Accrued Interest Payable

The carrying value of accrued interest receivable and accrued interest payable approximates fair value.

Deposits

The fair value of our deposits with no stated maturity, such as savings and checking, as well as mortgagors’ payments held in escrow, is equal to the amount payable on demand. The fair value of our certificates of deposit is based on the discounted value of contractual cash flows, using the period end rates offered for deposits of similar remaining maturities.

Borrowings

The fair value of our borrowings is calculated by discounting scheduled cash flows through the estimated maturity using period end market rates for borrowings of similar remaining maturities.

Commitments

The fair value of our commitments to extend credit, standby letters of credit, and financial guarantees are not included in the above table as the carrying value generally approximates fair value. These instruments generate fees that approximate those currently charged to originate similar commitments.

Note 8. Segment Information

We have two business segments: banking and financial services. Our banking segment includes all of our retail and commercial banking operations. Our financial services segment includes our insurance and employee benefits consulting operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation.

Selected financial information for our segments follows for the three months ended March 31:


			Financial			Consolidated
	Banking		services			total
2011:
Net interest income	$	172,930	$	(62	)	$	172,868
Provision for credit losses		12,900		—			12,900

Net interest income after provision for credit losses		160,030		(62	)		159,968
Noninterest income		36,283		15,791			52,074
Amortization of core deposit and other intangibles		4,463		1,026			5,489
Other noninterest expense		126,279		13,382			139,661

Income before income taxes		65,571		1,321			66,892
Income tax expense		21,472		502			21,974

Net income	$	44,099	$	819		$	44,918


2010:
Net interest income	$	114,169	$	—		$	114,169
Provision for credit losses		13,131		—			13,131

Net interest income after provision for credit losses		101,038		—			101,038
Noninterest income		24,585		12,363			36,948
Amortization of core deposit and other intangibles		2,565		682			3,247
Other noninterest expense		79,955		9,980			89,935

Income before income taxes		43,103		1,701			44,804
Income tax expense		15,225		680			15,905


Net income	$	27,878	$	1,021		$	28,899


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

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future performance and perceived opportunities in the market. Our actual results may differ significantly from the results, performance, and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, changes in the credit quality of our borrowers and obligors on investment securities we own, increased regulation of financial institutions or other effects of recently enacted legislation, and other factors discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 under Item 1A. “Risk Factors.” First Niagara Financial Group, Inc. does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.

OVERVIEW

First Niagara Financial Group, Inc. is a Delaware corporation and a bank holding company (the “Company”), subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”), a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”). At March 31, 2011, we had $21.4 billion in assets, $13.5 billion in deposits, and 257 full-service branch locations across Upstate New York and Pennsylvania. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

On April 15, 2011, we acquired all of the outstanding common shares of NewAlliance Bancshares, Inc. (“NewAlliance”), the parent company of NewAlliance Bank, and thereby acquired NewAlliance Bank’s 88 branch locations in Connecticut and Western Massachusetts. Under the terms of the merger agreement, NewAlliance stockholders received 94 million shares of Company common stock and cash consideration of $199 million.

On April 9, 2010, we acquired all of the outstanding common shares of Harleysville National Corporation (“Harleysville”), the parent company of Harleysville National Bank and Trust Company, and thereby acquired Harleysville National Bank’s 83 branch locations in Eastern Pennsylvania. As a result of the merger, we acquired assets with a fair value of $5.3 billion, including cash of $1.1 billion and loans with a fair value of $2.6 billion, and we assumed deposits with a fair value of $4.0 billion and borrowings with a fair value of $960 million. Under the terms of the merger agreement, Harleysville stockholders received 20.3 million shares of First Niagara Financial Group, Inc. common stock.

BUSINESS AND INDUSTRY

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

Our profitability is primarily dependent on the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates and competition within our markets. This net interest spread is also sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as policies of the federal government and its regulatory agencies. We manage our interest rate risk as described in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

The Federal Reserve implements national monetary policies (with objectives such as curbing inflation and combating recession) through its open-market operations in U.S. Government securities, by adjusting depository institutions reserve requirements, and by varying the target federal funds and discount rates. The actions of the Federal Reserve in these areas may influence the growth of our loans, investments, and deposits, and may also affect interest rates that we earn on interest-earning assets and that we pay on interest-bearing liabilities.

MARKET AREAS AND COMPETITION

Our business operations are concentrated in Upstate New York, Pennsylvania, and beginning April 15, 2011, Connecticut and Western Massachusetts; therefore, our financial results are affected by economic conditions in these geographic areas. If economic conditions in our markets deteriorate or if we are unable to sustain our competitive posture, our ability to expand our business and the quality of our loan portfolio could materially impact our financial results.

Our primary lending and deposit gathering areas are generally concentrated in the same markets as our branches. We face significant competition in both making loans and attracting deposits in our markets as they have a high concentration of financial institutions, some of which are significantly larger than we are and have greater financial resources. Our competition for loans comes principally from other commercial banks, savings and loan associations, mortgage banking companies, credit unions, and other financial services companies. Our most direct competition for deposits has historically come from other 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. In these marketplaces, opportunities to grow and expand are primarily a function of how we are able to differentiate our product offerings and customer experience from our competitors.

REGULATORY REFORM

We continue to monitor the potential effects on our businesses of regulatory reform, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, signed into law by President Obama on July 21, 2010, and the revised capital and liquidity frameworks published by the Basel Committee on Banking Supervision in December 2010 and known as “Basel III.” Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2010 under Item 1, “Business — Supervision and Regulation,” and Item 1A, “Risk Factors.”

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, investment securities accounting, 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. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2010 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:

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 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 net loan loss experience, and other factors that warrant recognition in determining our allowance for credit losses. We continue to monitor and modify the level of our allowance for credit losses to ensure it is adequate to cover losses inherent in our loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for credit losses.

We determined our allowance for credit losses by portfolio segment, which consist of commercial loans and consumer loans. We further segregate these segments between loans accounted for under the amortized cost method (referred to as “legacy” loans) and loans acquired after January 1, 2009 (referred to as “acquired” loans), as acquired loans were originally recorded at fair value with no carryover of the related allowance for credit losses.

Our commercial loan portfolio segments include both business and commercial real estate loans. Our consumer portfolio segments include residential real estate, home equity, and other consumer loans.

For our legacy loans, our allowance for credit losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired 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.

For our legacy loans, when current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of a business or commercial real estate loan greater than $200 thousand, such loan will be classified as impaired. Additionally, all loans modified in a troubled debt restructuring (“TDR”) are considered impaired. Specific valuation allowances are determined for all impaired loans. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if collateral dependent, or the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for credit losses for these loans. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading process to use as the basis for the fair value of the underlying collateral.

We estimate the inherent risk of loss on all other loans by portfolio segment based primarily on our historical net loss experience, industry trends, trends in the local real estate market, and the current business and economic environment in our market areas.

We assessed the impact of the changes and concluded that they did not have a significant impact when compared to our estimates based on our previous approach for either portfolio segment.

Acquired Loans

Loans that we acquire in acquisitions subsequent to January 1, 2009 are recorded at fair value with no carryover of the related allowance for credit losses. Determining the 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 represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for credit losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect is performed in a similar manner as that used to determine our allowance for credit losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.

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, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying 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. We have determined that we can reasonably estimate future cash flows on our current portfolio of acquired loans that are past due 90 days or more and on which we are accruing interest and we expect to fully collect the carrying value of the loans.

Investment Securities

As of March 31, 2011, our available for sale and held to maturity investment securities totaled $8.5 billion, or 39% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised almost entirely of Level 2 fair value measured 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 determined using valuation models that consider cash flow, security structure, and other observable information. We review the prices received from these third parties, on a quarterly basis, by comparing them to prices provided by a different independent pricing service. We have also reviewed detailed valuation methodologies provided to us by our pricing services. We did not adjust any of the prices provided to us by the independent pricing services at March 31, 2011 or December 31, 2010. Where sufficient information is not available to the pricing services to produce a reliable valuation, fair value is based on broker quotes.

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 the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in fair value 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 earnings. 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.

Our investment securities portfolio includes residential mortgage backed securities and collateralized mortgage obligations. As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we estimate future principal prepayments of the underlying residential mortgage loans to determine the constant effective yield used to apply the interest method.

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 each 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 utilize both the income and market approaches to determine fair value. The income approach is based on discounted cash flows derived from assumptions of balance sheet and income statement activity. For the market approach, earnings and tangible book value multiples of comparable public companies are selected and applied to the Banking reporting unit’s applicable metrics.

For our financial services reporting unit, we utilize both the income and market approaches to determine fair value. The income approach is primarily based on discounted cash flows derived from assumptions of income statement activity. For the market approach, earnings multiples of comparable companies are selected and applied to the financial services reporting unit’s applicable metrics.

The aggregate fair market values of these units are compared to our market capitalization as an assessment of the appropriateness of the fair value measurements. A control premium analysis is performed to determine whether 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.

SELECTED FINANCIAL DATA


	2011			2010
At or for the quarter ended	March 31			December 31		September 30		June 30		March 31
	(In thousands, except per share amounts)
Selected financial condition data:
Total assets	$	21,439,845		$	21,083,853	$	20,871,540	$	20,518,359	$	14,968,078
Loans and leases, net		10,611,117			10,388,060		9,978,952		9,874,111		7,283,550
Investment securities:
Available for sale		5,424,731	⁽¹⁾		7,289,455		7,341,505		7,131,393		4,876,925
Held to maturity		3,030,320	⁽¹⁾		1,025,724		1,125,184		1,038,866		1,038,566
Goodwill and other intangibles		1,108,811			1,114,144		1,099,446		1,099,155		931,347
Deposits		13,455,823			13,148,844		13,395,183		13,758,174		9,794,461
Borrowings		4,904,053			4,893,474		4,343,120		3,666,557		2,481,628
Stockholders’ equity	$	2,775,032		$	2,765,070	$	2,806,561	$	2,773,465	$	2,406,622
Common shares outstanding		209,432			209,112		209,059		209,040		188,719

Selected operations data:
Interest income	$	208,884		$	205,320	$	200,636	$	195,129	$	144,503
Interest expense		36,016			37,772		39,357		40,371		30,334

Net interest income		172,868			167,548		161,279		154,758		114,169
Provision for credit losses		12,900			13,500		11,000		11,000		13,131

Net interest income after provision for credit losses		159,968			154,048		150,279		143,758		101,038
Noninterest income		52,074			54,112		49,505		46,050		36,948
Noninterest expense		145,150			139,334		132,609		158,203		93,182

Income before income taxes		66,892			68,826		67,175		31,605		44,804
Income taxes		21,974			22,971		21,579		11,602		15,905


Net income	$	44,918		$	45,855	$	45,596	$	20,003	$	28,899

Stock and related per share data:
Earnings per common share:
Basic	$	0.22		$	0.22	$	0.22	$	0.10	$	0.16
Diluted		0.22			0.22		0.22		0.10		0.16
Cash dividends		0.16			0.15		0.14		0.14		0.14
Book value		13.45			13.42		13.63		13.48		12.98
Market Price (NASDAQ: FNFG):
High		15.10			14.40		13.79		14.88		14.86
Low		13.54			11.51		11.23		12.25		13.00
Close	$	13.58		$	13.98	$	11.65	$	12.53	$	14.23


⁽¹⁾		As of March 31, 2011 we transferred $2.0 billion of investment securities classified as available for sale to a held to maturity classification. See Item 1, Note 2, Investment Securities.


	2011			2010
At or for the quarter ended	March 31			December 31			September 30			June 30			March 31
	(Dollar amounts in thousands)
Selected financial ratios and other data:

Performance ratios⁽¹⁾:
Return on average assets		0.86	%		0.87	%		0.88	%		0.41	%		0.81	%
Return on average equity		6.56			6.46			6.44			2.97			4.88
Return on average tangible equity⁽²⁾		10.94			10.64			10.59			5.05			7.98

Net interest rate spread		3.68			3.52			3.47			3.52			3.42
Net interest rate margin		3.80			3.65			3.61			3.68			3.61
Efficiency ratio⁽³⁾		64.5			62.9			62.9			78.8			61.7
Dividend payout ratio		72.73	%		68.18	%		63.64	%		140.00	%		87.50	%

Capital ratios:
*First Niagara Financial Group, Inc.*
Total risk-based capital		14.13	%		14.35	%		15.09	%		15.09	%		18.65	%
Tier 1 risk-based capital		13.32			13.54			14.25			14.27			17.54
Tier 1 common capital⁽⁴⁾		12.56			12.76			13.42			13.43			17.39
Leverage ratio⁽⁵⁾		8.21			8.14			8.37			8.75			—
Tangible capital⁽⁵⁾		—			—			—			—			10.15
Ratio of stockholders’ equity to total assets		12.94			13.11			13.45			13.52			16.08
Ratio of tangible stockholders’ equity to tangible assets⁽⁶⁾		8.20	%		8.27	%		8.63	%		8.62	%		10.51	%
*First Niagara Bank, N.A.:*
Total risk-based capital		12.04	%		11.86	%		12.72	%		12.40	%		14.20	%
Tier 1 risk-based capital		11.23			11.06			11.88			11.59			13.08
Leverage ratio⁽⁵⁾		6.92			6.64			6.97			7.10			—
Tangible capital⁽⁵⁾		—			—			—			—			7.55

Asset quality:
Total nonaccruing loans	$	80,368		$	89,323		$	94,180		$	74,338		$	77,920
Other nonperforming assets		6,955			8,647			8,619			8,559			6,774
Total criticized loans⁽⁷⁾		954,037			925,421			841,279			792,638			537,401
Allowance for credit losses		100,126			95,354			94,532			90,409			89,488
Net loan charge-offs	$	8,128		$	12,679		$	6,877		$	10,079		$	11,946
Net charge-offs to average loans (annualized)		0.31	%		0.49	%		0.27	%		0.41	%		0.66	%
Provision to average loans (annualized)		0.49			0.53			0.43			0.45			0.73
Total nonaccruing loans to total loans		0.75			0.85			0.93			0.74			1.05
Total nonperforming assets to total assets		0.41			0.46			0.49			0.40			0.57
Allowance for credit losses to total loans		0.93			0.91			0.93			0.90			1.21
Allowance for credit losses to legacy loans⁽⁸⁾		1.22			1.21			1.30			1.29			1.32
Allowance for credit losses to nonaccruing loans		124.6			106.8			100.4			121.6			114.9
Texas ratio⁽⁹⁾		8.51	%		8.94	%		8.85	%		7.43	%		5.41	%

Other data:
Number of branches		257			257			255			255			172
Full time equivalent employees		3,825			3,791			3,725			3,748			2,966


⁽¹⁾		Computed using daily averages. Annualized where appropriate.

⁽²⁾		Average tangible equity excludes average goodwill and other intangibles of $1.1 billion, $1.1 billion, $1.1 billion, $1.1 billion, and $933 million for the quarters ended March 31, 2011, December 31, 2010, September 30, 2010, June 30, 2010, and March 31, 2010, respectively. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and condition.

⁽³⁾		Computed by dividing noninterest expense by the sum of net interest income and noninterest income.

⁽⁴⁾		Tier 1 common capital is computed by subtracting the subordinated debentures associated with trust preferred securities from Tier I capital, divided by risk weighted assets. Tier 1 common capital, as calculated for purposes of this financial data and the earnings release, does not reflect the adjustments provided for in Basel III. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and position.

⁽⁵⁾		Tangible capital ratio presented for periods ended prior to First Niagara Bank’s conversion to a national bank regulated by the OCC. Leverage ratio presented for periods ended subsequent to such conversion.

⁽⁶⁾		Tangible common stockholders’ equity and tangible assets exclude goodwill and other intangibles. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and condition.

⁽⁷⁾		Includes consumer loans, which are considered criticized when they are 60 days or more past due. Criticized loans include special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2010.

⁽⁸⁾		Legacy loans are those loans accounted for under the amortized cost method, and do not include loans acquired subsequent to January 1, 2009. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

⁽⁹⁾		The Texas ratio is computed by dividing the sum of nonperforming assets and loans 90 days past due still accruing by the sum of tangible equity and the allowance for credit losses. This is a non-GAAP measure that we believe provides investors with information that is useful in understanding our financial performance and position.

RESULTS OF OPERATIONS

Overview

Net income for the three months ended March 31, 2011 amounted to $45 million, or $0.22 per diluted common share, compared to $29 million, or $0.16 per diluted common share for the three months ended March 31, 2010 and $46 million, or $0.22 per diluted common share for the three months ended December 31, 2010. The increase in net income from the first quarter of 2010 to the first quarter of 2011 reflects our larger franchise resulting from our Eastern Pennsylvania merger with Harleysville in April 2010. While our weighted average diluted shares increased by over 11% during this time, net income increased by 55%, reflecting the growth from our merger with Harleysville and growth in our franchise, resulting in the increase in our diluted earnings per share. Our returns on average assets were 0.86%, 0.81%, and 0.87% for the quarters ended March 31, 2011, March 31, 2010, and December 31, 2010, respectively. Our returns on average equity were 6.56%, 4.88%, and 6.46% for the quarters ended March 31, 2011, March 31, 2010, and December 31, 2010, respectively.

“Operating” net income for the three months ended March 31, 2011, which represents net income excluding $5 million in after-tax merger and acquisition integration expenses and restructuring charges, amounted to $50 million, or $0.24 per diluted share. Operating net income for the three months ended March 31, 2010, which is net income excluding $4 million in after-tax merger and acquisition integration expenses, amounted to $33 million, or $0.18 per diluted share. Operating net income for the three months ended December 31, 2010, which is net income excluding $4 million in after-tax merger and acquisition integration expenses, amounted to $50 million, or $0.24 per diluted share. Operating income is a non-GAAP measure which provides a meaningful comparison of our underlying operational performance and we believe facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry.

Results for the first three months of 2011 compared to the first three months of 2010 were most significantly impacted by a $61 million, or 53%, increase in our taxable equivalent net interest income driven by our expansion into Pennsylvania and organic loan growth. Our average interest-earning assets increased by 47% while our average interest-bearing liabilities increased by 51%. Additionally, our net interest spread widened by 26 basis points and our taxable equivalent net interest rate margin increased by 19 basis points to 3.80%. Net interest income increased over $5 million during the quarter ended March 31, 2011 to $173 million from $168 million for the quarter ended December 31, 2010, primarily as a result of the positive impact of lower amortization of the securities premiums as mortgage rates rose in the market, slowing the rate of principal prepayments. A portion of this positive impact is unlikely to recur in the future, as it represented a cumulative catch-up in our calculation of the constant effective yield used to apply the interest method for income recognition. The higher securities yields were partially offset by a 25 basis point decrease in the yields earned on our commercial loan portfolio. Also contributing to our higher margin were modest decreases in rates paid on our deposits and borrowings.

The provision for credit losses remained steady at $13 million for the quarter ended March 31, 2011. This compared to the $13 million recorded in the first quarter of 2010, and decreased slightly from last quarter’s provision for credit losses of $14 million. Criticized loans of $954 million at March 31, 2011, compared to $925 million at December 31, 2010. Other credit quality metrics improved during the first quarter of 2011 compared to both the first and fourth quarters of 2010. Our net charge-offs decreased to $8 million for the quarter ended March 31, 2011 from $12 million and $13 million for the quarters ended March 31, 2010 and December 31, 2010, respectively. In addition, nonperforming loans decreased to 0.75% of total loans as of March 31, 2011 compared to 1.05% of total loans at March 31, 2010 and 0.85% of total loans at December 31, 2010.

Noninterest income amounted to $52 million for the quarter ended March 31, 2011, compared to $37 million for the quarter ended March 31, 2010 and $54 million for the quarter ended December 31, 2010. The increase from the first quarter of 2010 is primarily due to our merger with Harleysville and our insurance agency acquisitions during the second half of 2010. The decrease in noninterest income during the current quarter from the last quarter of 2010 was due to the seasonality of transaction revenues in banking services and lower mortgage banking income. The lower mortgage banking income resulted from lower mortgage refinancing demand as mortgage rates rose nationally. The impact of the lower levels of mortgage banking income was balanced by the higher yield experienced on the mortgage-backed securities portfolio. Insurance revenues increased due to the seasonality of these revenues as well as a full quarter impact of our November and December 2010 insurance agency acquisitions.

Noninterest expense amounted to $145 million for the quarter ended March 31, 2011, compared to $93 million for the quarter ended March 31, 2010 and $139 million for the quarter ended December 31, 2010. The increase from the first quarter of 2010 is also primarily due to our merger with Harleysville and our insurance agency acquisitions and the build out of our supporting infrastructure to support the growth in our franchise. The increase in noninterest expense for the quarter ended March 31, 2011 from the quarter ended December 31, 2010 is primarily due to the impact of a full quarter of salaries related to our late 2010 insurance agency acquisitions as well as a seasonal increase in payroll taxes due to the resetting of taxable wage limitations.

Net Interest Income

The following table presents our condensed average balance sheet information as well as taxable equivalent interest income and yields. We use a taxable equivalent basis in order to provide the most comparative yields among all types of interest-earning assets. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances (amounts in thousands):


	March 31,										Increase
	2011					2010					(decrease)
	Average					Average					Average
	outstanding					outstanding					outstanding
	balance		Yield/rate			balance		Yield/ rate			balance		Yield/ rate

Interest-earning assets:
Loans and leases⁽¹⁾
Commercial:
Real estate	$	4,430,619		5.56	%	$	3,084,272		5.71	%	$	1,346,347		(0.15	)%
Business		2,615,778		4.43			1,711,428		4.57			904,350		(0.14	)

Total commercial lending		7,046,397		5.14			4,795,700		5.30			2,250,697		(0.16	)
Residential real estate		1,738,384		4.96			1,645,693		5.24			92,691		(0.28	)
Home equity		1,508,189		4.52			704,450		4.89			803,739		(0.37	)
Other consumer		272,894		6.59			187,272		8.48			85,622		(1.89	)

Total loans		10,565,864		5.12			7,333,115		5.33			3,232,749		(0.21	)
Mortgage-backed securities⁽²⁾		7,155,225		3.81			4,702,756		3.60			2,452,469		0.21
Other investment securities⁽²⁾		948,783		3.95			750,461		3.29			198,322		0.66
Money market and other investments		193,430		4.15			87,000		3.36			106,430		0.79

Total interest-earning assets		18,863,302		4.58	%		12,873,332		4.57	%		5,989,970		0.01	%

Noninterest-earning assets⁽³⁾⁽⁴⁾		2,256,204					1,671,238					584,966


Total assets	$	21,119,506				$	14,544,570				$	6,574,936


Interest-bearing liabilities:
Deposits
Savings deposits	$	1,243,856		0.10	%	$	917,397		0.14	%	$	326,459		(0.04	)%
Checking accounts		1,732,971		0.11			1,034,659		0.13			698,312		(0.02	)
Money market deposits		5,012,521		0.48			3,689,294		0.69			1,323,227		(0.21	)
Certificates of deposit		3,253,538		1.11			2,823,804		1.07			429,734		0.04

Total interest-bearing deposits		11,242,886		0.56			8,465,154		0.69			2,777,732		(0.13	)
Borrowings
FHLB advances		1,437,270		1.96	%		642,187		3.71	%		795,083		(1.75	)%
Repurchase agreements		3,136,477		0.93			1,343,000		1.26			1,793,477		(0.33	)
Senior notes		296,783		7.05			193,026		10.83			103,757		(3.78	)
Other borrowings		92,557		4.82			55,149		4.92			37,408		(0.10	)

Total borrowings		4,963,087		1.67			2,233,362		2.89			2,729,725		(1.22	)

Total interest-bearing liabilities		16,205,973		0.90	%		10,698,516		1.15	%		5,507,457		(0.25	)%

Noninterest-bearing deposits		1,837,248					1,245,565					591,683
Other noninterest-bearing liabilities		299,019					198,857					100,162

Total liabilities		18,342,240					12,142,938					6,199,302
Stockholders’ equity⁽³⁾		2,777,266					2,401,632					375,634

Total liabilities and stockholders’ equity	$	21,119,506				$	14,544,570				$	6,574,936


Net interest rate spread				3.68	%				3.42	%				0.26	%

Net interst rate margin				3.80	%				3.61	%				0.19	%


⁽¹⁾		Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans and loans held for sale.

⁽²⁾		Average outstanding balances are at amortized cost.

⁽³⁾		Average outstanding balances include unrealized gains/losses on securities available for sale.

⁽⁴⁾		Average outstanding balances include allowance for credit losses and bank owned life insurance, earnings from which are reflected in noninterest income.

Our taxable equivalent net interest income increased $61 million, or 53%, for the first three months of 2011 compared to the first three months of 2010. This increase resulted from a $6.0 billion, or 47%, increase in our average interest-earning assets, and a $5.5 billion, or 51%, increase in our interest-bearing liabilities. The increase in average interest-earning assets and interest bearing liabilities was primarily due to the Harleysville merger, which we completed in the second quarter of 2010. In addition to the results of the merger, our year over year increases are the result of our focus on organic loan growth. Excluding the average balance of loans acquired from Harleysville of $2.0 billion, our average loan balance for the first quarter of 2011 was $8.6 billion, which was an increase of $1.2 billion over the same quarter in 2010. This increase was concentrated in commercial lending as it represented 94% of the year over year increase.

The following table presents our average balances and taxable equivalent yields for the three months ended (amounts in thousands):


	March 31,					December 31,					Increase
	2011					2010					(decrease)
	Average					Average					Average
	outstanding					outstanding					outstanding
	balance		Yield/rate			balance		Yield/rate			balance			Yield/rate

Interest-earning assets:
Loans and leases⁽¹⁾
Commercial:
Real estate	$	4,430,619		5.56	%	$	4,300,625		5.69	%	$	129,994			(0.13	)%
Business		2,615,778		4.43			2,447,918		4.86			167,860			(0.43	)

Total commercial lending		7,046,397		5.14			6,748,543		5.39			297,854			(0.25	)
Residential real estate		1,738,384		4.96			1,762,346		4.93			(23,962	)		0.03
Home equity		1,508,189		4.52			1,503,187		4.56			5,002			(0.04	)
Other consumer		272,894		6.59			269,090		7.27			3,804			(0.68	)

Total loans		10,565,864		5.12			10,283,166		5.24			282,698			(0.12	)
Mortgage-backed securities⁽²⁾		7,155,225		3.81			7,306,894		3.39			(151,669	)		0.42
Other investment securities⁽²⁾		948,783		3.95			907,139		3.91			41,644			0.04
Money market and other
investments		193,430		4.15			204,462		4.73			(11,032	)		(0.58	)

Total interest-earning assets		18,863,302		4.58	%		18,701,661		4.45	%		161,641			0.13	%

Noninterest-earning assets⁽³⁾⁽⁴⁾		2,256,204					2,307,483					(51,279	)


Total assets	$	21,119,506				$	21,009,144				$	110,362


Interest-bearing liabilities:
Deposits
Savings deposits	$	1,243,856		0.10	%	$	1,232,897		0.11	%	$	10,959			(0.01	)%
Checking accounts		1,732,971		0.11			1,710,655		0.16			22,316			(0.05	)
Money market deposits		5,012,521		0.48			4,994,303		0.48			18,218			(0.00	)
Certificates of deposit		3,253,538		1.11			3,441,656		1.12			(188,118	)		(0.01	)

Total interest-bearing deposits		11,242,886		0.56			11,379,511		0.59			(136,625	)		(0.03	)
Borrowings
FHLB advances		1,437,270		1.96	%		1,572,064		2.14	%		(134,794	)		(0.18	)%
Repurchase agreements		3,136,477		0.93			2,669,707		0.84			466,770			0.09
Senior notes		296,783		7.05			296,711		6.78			72			0.27
Other borrowings		92,557		4.82			92,924		6.83			(367	)		(2.01	)

Total borrowings		4,963,087		1.67			4,631,406		1.78			331,681			(0.11	)

Total interest-bearing liabilities		16,205,973		0.90	%		16,010,917		0.93	%		195,056			(0.03	)%

Noninterest-bearing deposits		1,837,248					1,873,709					(36,461	)
Other noninterest-bearing liabilities		299,019					306,253					(7,234	)

Total liabilities		18,342,240					18,190,879					151,361
Stockholders’ equity⁽³⁾		2,777,266					2,818,265					(40,999	)

Total liabilities and stockholders’ equity	$	21,119,506				$	21,009,144				$	110,362


Net interest rate spread				3.68	%				3.52	%					0.16	%

Net interst rate margin				3.80	%				3.65	%					0.15	%


⁽¹⁾		Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans and loans held for sale.

⁽²⁾		Average outstanding balances are at amortized cost.

⁽³⁾		Average outstanding balances include unrealized gains/losses on securities available for sale.

⁽⁴⁾		Average outstanding balances include allowance for credit losses and bank owned life insurance, earnings from which are reflected in noninterest income.

Our taxable equivalent net interest income increased $6 million, or 14% on an annualized basis, the first three months of 2011 compared to the last three months of 2010. Our average interest earning assets increased $162 million and average interest bearing liabilities increased by $195 million. Our first quarter net interest rate spread and net interest rate margin increased by 16 basis points and 15 basis points, respectively, from the fourth quarter of 2010.

Significant changes in our period over period average balances and yields include:

•

A primary driver for our increase in net interest income was the slowdown in actual and estimated prepayments in our mortgage-backed securities, which resulted in lower amortization of the securities premiums in the first quarter of 2011 compared to the fourth quarter of 2010. Slower prepayment expectations resulted from a shift from the historically low rates in the fourth quarter, as seen through the 44 basis point increase in the average monthly rates from the Federal Home Loan Mortgage Corporation (“FHLMC”) Primary Mortgage Market Survey to 4.85% for the first three months of 2011. In addition, our yields were aided by our strategy to redeploy cash flows into higher yielding investment grade credit (non-U.S government backed) assets.

•

Our average commercial loan portfolio increased by $298 million during the first quarter, or 18% on an annualized basis, as we continue to focus on growing our commercial portfolio through capitalizing on opportunities in our expanded footprint. Our average commercial business loans increased by $168 million over the fourth quarter of 2010 driven, in part, by our capital markets business, including purchased loans and lead syndication activity. Our capital markets lending activities are subject to our traditional underwriting standards. Offsetting the increase in our average balances of total commercial loans was our decrease in yield of 25 basis points. The majority of the decrease was attributable to the decline in our commercial business loan portfolio, which decreased from 4.86% for the prior quarter to 4.43%. The 43 basis point decline stemmed from the combination of a full quarter of results incorporating the newer originations with lower rates in the fourth quarter and a decrease in the yield on acquired loans.

•

Our interest expense on deposits continued to benefit from a more favorable mix of account types as we continued to allow the highest paying certificates of deposit balances to runoff. Average balances of certificates of deposit declined by $188 million compared to the fourth quarter of 2010.

•

Our average total borrowings increased $332 million since the fourth quarter as we have continued to utilize wholesale funding to replace the runoff of our certificates of deposit balance discussed above. Our average rate on borrowings has benefitted from the lower rate environment.

Provision for Credit Losses

Our provision for credit losses is based upon our assessment of the adequacy of our allowance for credit losses with consideration given to such interrelated factors as the composition of and credit risk in our loan portfolio, the level of our nonaccruing and delinquent loans, and related collateral or government guarantees, net charge-offs, and economic considerations. The provision charged to income amounted to $13 million, or 0.49% of average loans, for the quarter ended March 31, 2011, compared to $14 million and $13 million, or 0.53% and 0.73% of average loans, for the quarters ended December 31, 2010 and March 31, 2010, respectively. Excluding average acquired loans, our provision as a percentage of average loans was 0.64% for the first quarter of 2011, 0.72% for the fourth quarter of 2010 and 0.80% for the first quarter of 2010. These acquired loans were originally recorded at fair value on the date of acquisition, with no carryover of the related allowance for loan loss. Criticized loans of $954 million at March 31, 2011, compared to $925 million at December 31, 2010. Other credit quality metrics improved during the first quarter of 2011 compared to both the first and fourth quarters of 2010. Our net charge-offs decreased to $8 million for the quarter ended March 31, 2011 from $12 million and $13 million for the quarters ended March 31, 2010 and December 31, 2010, respectively. In addition, nonperforming loans decreased to 0.75% of total loans as of March 31, 2011 compared to 1.05% of total loans at March 31, 2010 and 0.85% of total loans at December 31, 2010.

Noninterest Income

The following table presents our noninterest income for the three months ended (amounts in thousands):


	March 31,			December 31,			March 31,
	2011			2010			2010
Banking services	$	19,006		$	22,230		$	16,007
Insurance and benefits consulting		15,755			13,130			12,163
Wealth management services		6,734			4,940			3,248
Mortgage banking		1,263			6,052			1,232
Lending and leasing		3,763			3,850			2,044
Bank owned life insurance		2,030			1,994			1,224
Other		3,523			1,916			1,030


Total noninterest income	$	52,074		$	54,112		$	36,948


Noninterest income as a percentage of net revenue		23.1	%		24.4	%		24.4	%

Noninterest income increased $15 million, or 41% for the quarter ended March 31, 2011, compared to the first quarter of 2010. The increases in revenues from banking services, wealth management services, lending and leasing, and other noninterest income were primarily attributable to our April 2010 merger with Harleysville. The almost $4 million increase in insurance and benefits consulting revenues is all attributable to our insurance agency acquisitions in Pennsylvania during 2010. Revenues from mortgage banking remained unchanged from the first quarter of 2010 to the first quarter of 2011 as an increase in rates limited mortgage banking activity.

The decrease in noninterest income during the first quarter of 2011 from the fourth quarter of 2010 was the result of several factors. The decrease in revenues from banking services was primarily due to the seasonality of network interchange fees and nonsufficient funds fees, which tend to peak in the last quarter of the year. Nonsufficient funds fees have also been affected, and will continue to be affected, by recent regulations governing fees charged by banks. The decrease in mortgage banking revenues resulted from the considerable decrease in volumes as rates offered on 30 year mortgages increased 44 basis points on average during the current quarter from the last quarter of 2010. The low rate environment in the fourth quarter of 2010 caused significant refinance activity during that time. The impact of the lower levels of mortgage banking income was balanced by the higher yield experienced on the mortgage-backed securities portfolio. Lower margins on sold loans also affected mortgage banking income in the current quarter. The decreases in banking services and mortgage banking revenue were partially offset by an increase in revenues from insurance and benefits consulting which are also subject to seasonal fluctuations as renewals tend to be higher in the first quarter of the year compared to the last quarter of the year. The increase in these revenues is also reflective of a full quarter of revenues for our November 2010 and December 2010 insurance agency acquisitions.

Noninterest Expense

The following table presents our noninterest expense for the three months ended (amounts in thousands):


	March 31,			December 31,			March 31,
	2011			2010			2010
Salaries and benefits	$	74,511		$	65,698		$	48,237
Occupancy and equipment		16,197			16,053			9,907
Technology and communications		12,871			12,878			8,649
Marketing and advertising		2,692			3,383			1,532
Professional services		6,360			7,538			2,510
Amortization of intangibles		5,489			5,447			3,247
FDIC premiums		6,195			5,871			3,463
Merger and acquisition integration expenses		6,176			5,904			6,232
Other expense		14,659			16,562			9,405


Total noninterest expenses	$	145,150		$	139,334		$	93,182


Efficiency ratio		64.5	%		62.9	%		61.7	%

Noninterest expenses increased $52 million, or 56% for the quarter ended March 31, 2011, compared to the first quarter of 2010, which was primarily attributable to increased costs associated with our April 2010 merger with Harleysville as well as our insurance agency acquisitions during the last half of 2010. Salaries and benefits expenses increased 54% as we experienced an increase in the number of full time equivalent employees, from 2,966 at March 31, 2010 to 3,825 at March 31, 2011. The increases in occupancy and equipment and technology and communications resulted from the increase in our workforce during this time and from the increase in the number of branches from 172 at March 31, 2010 to 257 at March 31, 2011, a 49% increase.

Salaries and benefits increased during the quarter ended March 31, 2011 compared to the quarter ended December 31, 2010, which was the result of incremental salaries associated with our insurance agency acquisitions in November 2010 and December 2010, our infrastructure growth as we continued to strengthen our leadership structure to support our increasing size, and a seasonal increase in payroll taxes.

Merger and acquisition integration expenses of $6 million for the three months ended March 31, 2011 were primarily attributable to our merger with NewAlliance and included $1 million in salaries and benefits, $1 million in marketing and advertising, $2 million in professional services, and $2 million in other expenses. Merger and acquisition integration expenses also amounted to $6 million for the three months ended March 31, 2010 and December 31, 2010. These expenses were primarily attributable to our merger with Harleysville in the first three months of 2010 and our merger with NewAlliance for the three months ended December 31, 2010.

Our efficiency ratio for the current quarter increased to 64.5% compared to 62.9% for the quarter ended December 31, 2010, and 61.7% for the same quarter in 2010 reflecting the increase in our noninterest expenses as a result of the growth of our infrastructure. Excluding merger and acquisition integration expenses of $6 million for the quarters ended March 31, 2011, December 31, 2010, and March 31, 2010, as well as $1 million of restructuring charges for the quarter ended March 31, 2011, our efficiency ratio amounted to 61.3%, 60.2%, and 57.5% for the quarters ended March 31, 2011, December 31, 2010 and March 31, 2010, respectively. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income.

Beginning in the first quarter of 2011, we began to take certain measures to reposition elements of our business to enhance our performance. These measures will largely relate to facilities and will result in charges being recognized through the end of the third quarter of 2011. We expect to consolidate our branch network and reposition our staffing to make the distribution of our products more efficient and effective. We estimate the impact of this initiative to be a pre-tax charge in the range of $18 million to $22 million. We will also be taking action to enhance the delivery of our back office services in a manner that will make them more efficient, and we estimate the impact of this initiative to be a pre-tax charge in the range of $14 million to $17 million. Finally, we will take action related to certain other acquired facilities that are not essential to our business strategy. These facilities are mostly in Eastern Pennsylvania and we estimate the impact of exiting these facilities to be a pre-tax charge in the range of $19 million to $23 million.

Income Taxes

Our effective tax rate of 32.8% for the three months ended March 31, 2011 decreased from 33.4% and 35.5% for the three months ended December 31, 2010 and March 31, 2010, respectively. The decrease is primarily due to a decrease in projected state income tax and an increase in tax-exempt interest income in 2011.

ANALYSIS OF FINANCIAL CONDITION AT MARCH 31, 2011

Overview

Total assets increased $0.3 billion to $21.4 billion at March 31, 2011 from $21.1 billion at December 31, 2010. In addition, we noted the following balance trends:

•

Our investment securities available for sale portfolio decreased by $1.9 billion as we transferred $2.0 billion of securities into our held to maturity portfolio upon our determination that we have the intent and ability to hold these securities to maturity.

•

Total loans and leases increased $228 million, or 9% annualized, as our commercial loan portfolio continues to grow across our footprint.

•

Deposits increased $307 million, or almost 10% annualized, primarily in core deposits, which have increased to 76% of total deposits from 75% of total deposits at December 31, 2010. Certificate balances continue to decrease as repricing has caused customers to move to money market deposits accounts.

•

Total borrowings remained flat, however, we used wholesale borrowings to fund the run off of certificates and to provide an additional funding source for loans.

Lending Activities

Our primary lending activity is the origination of commercial real estate and business loans, as well as residential mortgage and home equity loans to customers located within our primary market areas. Our commercial real estate and business loans portfolio provides opportunities to cross sell other banking services. Consistent with our long-term customer relationship focus, we have historically retained the servicing rights on fixed rate, longer maturity residential mortgage loans that we sell resulting in monthly servicing fee income to us. We also originate and retain in our lending portfolio various types of home equity and consumer loan products given their customer relationship building benefits.

The following table presents the composition of our loan and lease portfolios at the dates indicated (amounts in thousands):


	March 31, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	4,160,359			38.8	%	$	3,964,106			37.8	%
Construction		381,380			3.6			406,751			3.9
Business		2,697,274			25.2			2,623,079			25.0


Total commercial		7,239,013			67.6			6,993,936			66.7

Residential real estate		1,701,544			15.9			1,692,198			16.1
Home equity		1,507,292			14.1			1,524,570			14.6
Other consumer		263,394			2.4			272,710			2.6

Total loans and leases		10,711,243			100.0	%		10,483,414			100.0	%

Allowance for credit losses		(100,126	)					(95,354	)

Total loans and leases, net	$	10,611,117					$	10,388,060

Included in the table above are acquired loans with a carrying value of $2.5 billion and $2.6 billion at March 31, 2011 and December 31, 2010, respectively. Such loans were acquired in the National City Bank branch acquisition and the Harleysville merger and were initially recorded at fair value with no carryover of any related allowance for credit losses. At March 31, 2011 and December 31, 2010 there was no allowance for credit losses related to these acquired loans.

The table below presents the composition of our loan and lease portfolios, including net deferred costs and unearned discounts, based on the region in which the loan was originated (in thousands):


	Upstate New		Western		Eastern		Total loans
	York		Pennsylvania		Pennsylvania		and leases
March 31, 2011:
Commercial:
Real estate	$	2,701,963	$	445,688	$	1,012,708	$	4,160,359
Construction		339,245		17,053		25,082		381,380
Business		1,515,651		806,416		375,207		2,697,274

Total commercial		4,556,859		1,269,157		1,412,997		7,239,013

Residential real estate		1,381,199		49,192		271,153		1,701,544
Home equity		769,117		118,829		619,346		1,507,292
Other consumer		156,246		57,137		50,011		263,394

Total loans and leases	$	6,863,421	$	1,494,315	$	2,353,507	$	10,711,243


December 31, 2010:
Commercial:
Real estate	$	2,610,001	$	388,227	$	965,878	$	3,964,106
Construction		363,828		20,521		22,402		406,751
Business		1,484,970		754,451		383,658		2,623,079

Total commercial		4,458,799		1,163,199		1,371,938		6,993,936

Residential real estate		1,389,880		36,249		266,069		1,692,198
Home equity		777,577		107,345		639,648		1,524,570
Other consumer		160,376		59,507		52,827		272,710

Total loans and leases	$	6,786,632	$	1,366,300	$	2,330,482	$	10,483,414

Our commercial loan portfolio increased $98 million, or 9% annualized, in Upstate New York and $106 million, or 37% annualized, in Western Pennsylvania during the first three months of 2011, as a result of our continued strategic focus on the portfolio. Our total average commercial loan portfolio increased 18% annualized during this time. This increase was concentrated in both commercial real estate loans and business loans. New commercial loans, including line of credit advances, increased to $795 million in Upstate New York during the three months ended March 31, 2011, from $645 million during the same period in 2010. New commercial loans, including line of credit advances, totaled $439 million and $228 million in Western and Eastern Pennsylvania, respectively, for the three months ended March 31, 2011.

While we originated $110 million in new residential loans during the first three months of 2011, our residential real estate loan portfolio increased by only $9 million as ongoing consumer preference is for long-term fixed rate products which we generally do not hold in our portfolio as well as our decision to sell 15 year ARMs, instead of holding them in our portfolio.

Our home equity and other consumer loan portfolios declined slightly period over period and the combined balances decreased by $27 million during the first three months of 2011 which was largely a factor of the increased rates in the first quarter resulting in a decline in home equity originations from $95 million in the fourth quarter of 2010 to $19 million in the first quarter of 2011.

Investment Securities Portfolio

Our investment securities portfolio remained nearly unchanged at $8.5 billion at March 31, 2011 compared to $8.3 billion at December 31, 2010. As of March 31, 2011, 99% of the fair value of our investment securities portfolio was rated investment grade or better and 98% was rated A- or higher. During the quarter ended March 31, 2011, we transferred $2.0 billion of securities from our available for sale portfolio to our held to maturity portfolio as we determined that we have the intent and ability to hold these securities to maturity, resulting in total securities classified as held to maturity of $3.0 billion. The transferred securities were primarily mortgage-backed securities and collateralized mortgage obligations (“CMOs”) issued by the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”), and had net unrealized gains, net of tax, of $4 million on the date of transfer, which is amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the premium on the same transferred debt securities.

Our available for sale securities portfolio is primarily invested in residential mortgage-backed securities, which comprised 75% and 85% of our total available for sale portfolio at March 31, 2011 and December 31, 2010, respectively. At March 31, 2011 and December 31, 2010, 97% and 98%, respectively, of our residential mortgage backed securities were issued by GNMA, FNMA, or FHLMC. GNMA, FNMA, and FHLMC guarantee the contractual cash flows of these investments. FNMA and FHLMC are government sponsored enterprises that are under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. Our non-agency CMO portfolio consists primarily of investment grade securities. All of our non-agency CMOs carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. While the markets for this asset class have been less active than for agency CMOs, the markets have been more active for securities that possess strong credit characteristics such as those securities in our portfolio, providing observable inputs for our valuation and liquidity should the need to sell arise.

Our investment securities available for sale portfolio remains well positioned to provide a stable source of cash flow with a weighted average estimated remaining life of 4.0 years at March 31, 2011, compared to 4.3 years at December 31, 2010. The decrease in the weighted average estimated remaining life is the result of the transfer of securities with higher weighted average lives from our available for sale portfolio to our held to maturity portfolio.

At March 31, 2011, the pre-tax net unrealized gains on our available for sale investment securities decreased to $97 million from $114 million at December 31, 2010. The unrealized gain represents the difference between the estimated fair value and the amortized cost of our securities. Generally, the value of our investment securities fluctuates in response to changes in market interest rates, changes in credit spreads, or levels of liquidity in the market. Interest rates have increased during the quarter ended March 31, 2011, thereby causing the fair values of our fixed rate securities to decrease.

Deposits

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


	March 31, 2011					December 31, 2010					Increase
	Amount		Percent			Amount		Percent			(decrease)
Core deposits:
Savings	$	1,271,494		9.5	%	$	1,235,004		9.4	%	$	36,490
Interest-bearing checking		1,726,379		12.8			1,705,537		13.0			20,842
Money market deposits		5,177,242		38.5			4,919,014		37.4			258,228
Noninterest-bearing		2,050,034		15.2			1,989,505		15.1			60,529

Total core deposits		10,225,149		76.0			9,849,060		74.9			376,089
Certificates		3,230,674		24.0			3,299,784		25.1			(69,110	)


Total deposits	$	13,455,823		100.0	%	$	13,148,844		100.0	%	$	306,979

The table below contains selected information on the composition of our deposits, geographic region at the dates indicated (in thousands):


	Upstate New		Western		Eastern		Total
	York		Pennsylvania		Pennsylvania		deposits
March 31, 2011
Core deposits:
Savings	$	872,314	$	136,405	$	262,775	$	1,271,494
Interest-bearing checking		654,596		503,261		568,522		1,726,379
Money market deposits		3,300,666		977,303		899,273		5,177,242
Noninterest-bearing		1,047,389		558,611		444,034		2,050,034


Total core deposits		5,874,965		2,175,580		2,174,604		10,225,149
Certificates		1,234,869		1,000,790		995,015		3,230,674


Total deposits	$	7,109,834	$	3,176,370	$	3,169,619	$	13,455,823


December 31, 2010
Core deposits:
Savings	$	846,859	$	130,361	$	257,784	$	1,235,004
Interest-bearing checking		617,845		502,345		585,347		1,705,537
Money market deposits		3,107,727		961,233		850,054		4,919,014
Noninterest-bearing		1,012,715		526,673		450,117		1,989,505


Total core deposits		5,585,146		2,120,612		2,143,302		9,849,060
Certificates		1,234,347		1,011,659		1,053,778		3,299,784


Total deposits	$	6,819,493	$	3,132,271	$	3,197,080	$	13,148,844

At March 31, 2011, our total deposits increased $307 million from December 31, 2010, and core deposits have increased to 76% of total deposits. Money market deposit accounts have increased across our footprint by $258 million, or 21% annualized, during the first quarter of 2011 due to two factors. Municipal money market deposits increased $130 million due to seasonal tax collections. Additionally, our participation in a program whereby we receive money market deposits through a financial intermediary contributed $113 million to the total increase in money market deposits. Municipal deposits, predominantly consisting of money market deposits, increased $190 million from $1.4 billion at December 31, 2010 to $1.6 billion at March 31, 2011.

Borrowings

Borrowings remained stable at March 31, 2011 at $4.9 billion. Short term borrowings decreased by $818 million from December 31, 2010 to $970 million, which was offset by an increase of $829 million in long term borrowings during that same period to $3.9 billion as we worked to achieve a more favorable cost of funds. Wholesale borrowings were used to fund the run off of certificates and provide an additional funding source for loans, which helped us to effectively manage our borrowing costs.

Capital

During the first three months of 2011, our stockholders’ equity remained unchanged from December 31, 2010 at $2.8 billion. Our net income of $45 million was offset by common stock dividends paid during this period and a decrease in net unrealized gains, net of taxes, on our securities available for sale arising during the three months ended March 31, 2011. For the three months ended March 31, 2011, we declared common stock dividends of $0.16 per share, or $33 million.

At March 31, 2011, we held more than 5.6 million shares of our common stock as treasury shares. While we did not make any repurchases of our common stock during the first three months of 2011, we currently have authorization from our Board of Directors to repurchase up to 21 million shares of our common stock as part of our capital management initiatives. From April 1, 2011 through May 9, 2011, we repurchased 1.6 million shares of our common stock at an average price of $14.09 per share. We issued 0.3 million shares from treasury stock in connection with the exercise of stock options and grants of restricted stock awards during the first three months of 2011. Although treasury stock purchases are an important component of our capital management strategy, the extent to which we repurchase shares in the future will depend on a number of factors including the market price of our stock and alternative uses for our capital.

First Niagara Financial Group, Inc. and our bank subsidiary, First Niagara Bank, N.A., are subject to regulatory capital requirements administered by the Federal Reserve and OCC, respectively. Failure to meet minimum capital requirements can initiate certain mandatory and possibly additional discretionary actions by regulators that, if undertaken, could have a direct material effect on our financial statements.

The actual capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. at March 31, 2011 are presented in the following table (amounts in thousands):


						Minimum amount to be
	Actual					well-capitalized
	Amount		Ratio			Amount		Ratio

First Niagara Financial Group, Inc.:
Leverage ratio	$	1,632,307		8.21	%		N/A		N/A
Tier 1 risk-based capital		1,632,307		13.32		$	735,273		6.00	%
Total risk-based capital		1,732,433		14.13			1,226,067		10.00

First Niagara Bank, N.A.:
Leverage ratio	$	1,373,059		6.92	%	$	989,236		5.00	%
Tier 1 risk-based capital		1,373,059		11.23			733,602		6.00
Total risk-based capital		1,473,185		12.04			1,223,576		10.00

As of March 31, 2011, we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the prompt corrective action regulations.

Our ability to pay dividends to our stockholders is substantially dependent upon the ability of the Bank to pay dividends to the Company. Subject to First Niagara Bank, N.A. meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by First Niagara Bank, N.A. in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, First Niagara Bank, N.A. could pay aggregate dividends of approximately $238 million to the Company, without obtaining affirmative regulatory approvals, as of March 31, 2011.

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

RISK MANAGEMENT

Credit Risk

Allowance for Credit Losses and Nonperforming Assets

Credit risk is the risk associated with the potential inability of our borrowers to repay their loans according to contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.

The primary indicators of credit quality are our internal loan gradings for our commercial loan portfolio segment and FICO scores for our consumer loan portfolio segment. We place legacy loans on nonaccrual status when they become more than 90 days past due, or earlier if we do not expect the full collection of interest or principal. When a loan is placed on nonaccrual status, any interest previously accrued and not collected is reversed from interest income.

Our evaluation of our allowance for credit losses is based on a continuous 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 use an internal loan grading system with eight categories of loan grades used in evaluating our business and commercial real estate loans. In our loan grading system, pass loans are graded 1 through 4, special mention loans are graded 5, substandard loans are graded 6, doubtful loans are graded 7 and loss loans (which are fully charged off) are graded 8. Our definition of special mention, substandard, doubtful and loss are consistent with regulatory definitions.

In the normal course of our loan monitoring process, we review all pass graded individual commercial and commercial real estate loans and/or total loan concentration to one borrower greater than $500 thousand and less than $1 million no less frequently than every 36 months and those loans over $1 million no less frequently than every 18 months.

As part of our credit monitoring process, our loan officers perform formal reviews based upon the credit attributes of the respective loans. Pass graded loans are continually monitored through our review of current information related to each loan. The nature of the current information available and used by us includes, as applicable, review of payment status and delinquency reporting, receipt and analysis of interim and annual financial statements, rent roll data, delinquent property tax searches, periodic loan officer inspections of properties, and loan officer knowledge of their borrowers, as well as the business environment in their respective market areas. We perform a formal review on a more frequent basis if the above considerations indicate that such review is warranted. Further, based upon consideration of the above information, if appropriate, loan grading can be reevaluated prior to the scheduled full review.

Substandard loans, including all impaired business and commercial real estate loans greater than $200 thousand, are reviewed on a quarterly basis by either the Classified Loan Review Committee (for such loans greater than $1 million) or by a senior credit manager (for such loans between $200 thousand and $1 million). Such review considers, as applicable, current payment status, payment history, charge-off amounts, collateral valuation information (including appraisal dates), and commentary on collateral valuations, guarantor information, interim financial data, cash flow historical data and projections, rent roll data, and account history. Similar information is also reviewed for all special mention loans greater than $250 thousand and substandard or worse loans greater than $200 thousand and less than $1 million by a Senior Credit Manager. Loans below these thresholds are reviewed by a loan officer on a quarterly basis ensuring that loan gradings are appropriate.

Real estate collateral supporting substandard loans greater than $500 thousand are required to have an appraisal or evaluation performed at least every 18 months and real estate collateral supporting substandard loans less than $500 thousand are required to have an appraisal or an evaluation performed at least every 24 months. However, a more current appraisal is obtained prior to these required time frames when it is determined to be appropriate in the judgment of management. Non-real estate collateral is reappraised on an as-needed basis, as determined by the loan officer, our Classified Loan Review Committee, or by credit risk management based upon the facts and circumstances of the individual relationship.

Among other factors, our quarterly reviews consist of an assessment of the fair value of collateral for all loans reviewed, including collateral dependent impaired loans. During this review process, an internal estimate of collateral value, as of each quarterly review date, is determined utilizing current information such as comparables from more current appraisals in our possession for similar collateral in our portfolio, recent sale information, current rent rolls, operating statements and cash flow information for the specific collateral. Further, we have a Member of the Appraisal Institute (“MAI”) appraiser available on staff for consultation during our quarterly estimation of collateral fair value. This current information is compared to the assumptions made in the most recent appraisal as well as in previous quarters. Quarterly adjustments to the estimated fair value of the collateral are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral. Adjustments are made each quarter to the related allowance for credit losses for collateral dependent impaired loans to reflect the change, if any, in the estimated fair value of the collateral less estimated costs to sell as compared to the previous quarter. The determination of the appropriateness of obtaining new appraisals is also specifically addressed in each quarterly review. New appraisals will be obtained prior to the above noted required time frames if it is determined appropriate during these quarterly reviews. Further, our MAI appraiser is available for consultation regarding the need for new appraisals.

In addition to the credit monitoring procedures described above, our loan review department, which is independent of the lending function and is part of our risk management function, verifies the accuracy of loan grading, classification, and, if impaired, related allowance for credit losses.

The following table presents the activity in our allowance for credit losses for the three months ended March 31 (in thousands):


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for credit losses:
Balance at beginning of period	$	89,001		$	6,353		$	—		$	—	$	95,354
Provision for credit losses		10,267			2,559			74			—		12,900
Charge-offs		(7,711	)		(2,198	)		(74	)		—		(9,983	)
Recoveries		1,388			467			—			—		1,855

Balance at end of period	$	92,945		$	7,181		$	—		$	—	$	100,126


Allowance for credit losses:
Individually evaluated for impairment	$	8,320		$	873		$	—		$	—	$	9,193
Collectively evaluated for impairment		84,625			6,308			—			—		90,933

Total	$	92,945		$	7,181		$	—		$	—	$	100,126


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	69,209		$	13,797		$	—		$	—	$	83,006
Collectively evaluated for impairment		5,602,042			2,525,058			—			—		8,127,100
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			1,567,762			933,375		2,501,137

Total	$	5,671,251		$	2,538,855		$	1,567,762		$	933,375	$	10,711,243


*2010*
Allowance for credit losses:
Balance at beginning of period	$	82,813		$	5,490		$	—		$	—	$	88,303
Provision for credit losses		12,470			661			—			—		13,131
Charge-offs		(11,766	)		(908	)		—			—		(12,674	)
Recoveries		356			372			—			—		728

Balance at end of period	$	83,873		$	5,615		$	—		$	—	$	89,488


Allowance for credit losses:
Individually evaluated for impairment	$	8,126		$	20		$	—		$	—	$	8,146
Collectively evaluated for impairment		75,747			5,595			—			—		81,342

Total	$	83,873		$	5,615		$	—		$	—	$	89,488


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	66,172		$	8,590		$	—		$	—	$	74,762
Collectively evaluated for impairment		4,236,316		$	2,462,619			—			—		6,698,935
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			579,986			54,523		634,509

Total	$	4,302,488		$	2,471,209		$	579,986		$	54,523	$	7,408,206


⁽¹⁾		Includes all loans acquired subsequent to January 1, 2009.

The following table details our net charge-offs by loan category for the three months ended March 31 (in thousands):


	2011					2010
	Net		Percent of			Net		Percent of
	charge-offs		average loans			charge-offs		average loans
Commercial:
Real estate	$	2,006		0.18	%	$	4,275		0.56	%
Business		4,391		0.68	%		7,135		1.69	%

Total commercial		6,397		0.37	%		11,410		0.96	%

Residential real estate		662		0.15	%		56		0.01	%
Home equity		781		0.21	%		162		0.09	%
Other consumer		288		0.43	%		318		0.69	%

	$	8,128		0.31	%	$	11,946		0.66	%

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


	March 31,			December 31,
	2011			2010
Nonaccruing loans:
Commercial:
Commercial real estate:
Acquisition and development	$	1,693		$	1,870
Multifamily		553			3,075
Investment real estate		20,895			24,536
Owner occupied		14,205			14,584

Total commercial real estate		37,346			44,065
Business		24,823			25,819

Total commercial		62,169			69,884

Consumer:
Residential real estate		13,433			14,461
Home equity		4,467			4,604
Other consumer		299			374

Total consumer		18,199			19,439

Total	$	80,368		$	89,323
Real estate owned		6,955			8,647

Total nonperforming assets⁽¹⁾	$	87,323		$	97,970

Loans 90 days past due and still accruing interest⁽²⁾	$	62,942		$	58,097

Total nonperforming assets as a percentage of total assets		0.41	%		0.46	%

Total nonaccruing loans as a percentage of total loans		0.75	%		0.85	%

Allowance for credit losses to nonaccruing loans		124.6	%		106.8	%


⁽¹⁾		Nonperforming assets do not include $27 million and $22 million of performing renegotiated loans that are accruing interest at March 31, 2011 and December 31, 2010, respectively.

⁽²⁾		All such loans represent acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows.

The following table contains an aging analysis of our loans by class at March 31, 2011 (in thousands):


	30-59 days		60-89 days		Greater than 90		Total				Total loans		Greater than 90
March 31, 2011	past due		past due		days past due		past due		Current		receivable		days and accruing
Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	1,547	$	1,547	$	107,667	$	109,214		—
Multifamily		—		—		328		328		1,039,467		1,039,795		—
Investment real estate		258		148		15,269		15,675		1,433,904		1,449,579		—
Owner occupied		2,780		—		6,813		9,593		889,299		898,892		—

Total commercial real estate		3,038		148		23,957		27,143		3,470,337		3,497,480		—
Business		4,808		444		6,957	$	12,209		2,161,562		2,173,771		—

Total commercial		7,846		592		30,914		39,352		5,631,899		5,671,251		—


Consumer:
Residential real estate		4,674		3,827		12,059	$	20,560		1,430,544		1,451,104		—
Home equity		2,159		1,701		4,394		8,254		934,357		942,611		—
Other consumer		923		300		276		1,499		143,641		145,140		—

Total consumer		7,756		5,828		16,729		30,313		2,508,542		2,538,855		—

Total	$	15,602	$	6,420	$	47,643	$	69,665	$	8,140,441	$	8,210,106	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	582	$	—	$	2,792	$	3,374	$	15,547	$	18,921	$	2,792
Multifamily		278		—		84		362		75,565		75,927		84
Investment real estate		4,801		557		25,391		30,749		393,861		424,610		25,391
Owner occupied		2,784		4,255		8,278		15,317		509,484		524,801		8,278

Total commercial real estate		8,445		4,812		36,545		49,802		994,457		1,044,259		36,545
Business		1,313		1,156		7,172	$	9,641		513,862		523,503		7,172

Total commercial		9,758		5,968		43,717		59,443		1,508,319		1,567,762		43,717


Consumer:
Residential real estate		5,546		5,172		5,418	$	16,136		234,304		250,440	$	5,418
Home equity		4,337		3,067		12,208		19,612		545,069		564,681		12,208
Other consumer		1,859		926		1,599		4,384		113,870		118,254		1,599

Total consumer		11,742		9,165		19,225		40,132		893,243		933,375		19,225


Total	$	21,500	$	15,133	$	62,942	$	99,575	$	2,401,562	$	2,501,137	$	62,942

The following table contains an aging analysis of our loans by class at December 31, 2010 (in thousands):


	30-59 days		60-89 days		Greater than 90		Total				Total loans		Greater than 90
December 31, 2010	past due		past due		days past due		past due		Current		receivable		days and accruing
Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	1,722	$	1,722	$	112,102	$	113,824	$	—
Multifamily		—		—		601		601		948,519		949,120		—
Investment real estate		954		750		17,891		19,595		1,521,444		1,541,039		—
Owner occupied		347		604		9,477		10,428		749,393		759,821		—

Total commercial real estate		1,301		1,354		29,691		32,346		3,331,458		3,363,804		—
Business		2,126		1,027		7,634		10,787		1,960,582		1,971,369		—

Total commercial		3,427		2,381		37,325		43,133		5,292,040		5,335,173		—


Consumer:
Residential real estate		5,228		3,571		14,138		22,937		1,404,136		1,427,073		—
Home equity		2,450		1,328		4,551		8,329		915,388		923,717		—
Other consumer		1,262		413		301		1,976		145,756		147,732		—

Total consumer		8,940		5,312		18,990		33,242		2,465,280		2,498,522		—

Total	$	12,367	$	7,693	$	56,315	$	76,375	$	7,757,320	$	7,833,695	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	3,840	$	1,355	$	1,355	$	6,550	$	14,797	$	21,347	$	1,355
Multifamily		—		—		190		190		133,291		133,481		190
Investment real estate		1,554		422		23,770		25,746		295,349		321,095		23,770
Owner occupied		1,481		497		7,344		9,322		521,808		531,130		7,344

Total commercial real estate		6,875		2,274		32,659		41,808		965,245		1,007,053		32,659
Business		1,423		1,299		6,354		9,076		642,634		651,710		6,354

Total commercial		8,298		3,573		39,013		50,884		1,607,879		1,658,763		39,013


Consumer:
Residential real estate		2,321		2,200		5,514		10,035		255,090		265,125	$	5,514
Home equity		7,158		2,741		12,168		22,067		578,786		600,853		12,168
Other consumer		2,617		750		1,402		4,769		120,209		124,978		1,402

Total consumer		12,096		5,691		19,084		36,871		954,085		990,956		19,084


Total	$	20,394	$	9,264	$	58,097	$	87,755	$	2,561,964	$	2,649,719	$	58,097

The following table presents additional information about the credit quality of our commercial loan portfolio at the dates indicated (in thousands):


	Commercial real estate
	Acquisition and				Investment		Owner						Percent
	development		Multifamily		real estate		occupied		Business		Total		of Total
*March 31, 2011*
Legacy loans:
Pass	$	3,759	$	1,012,072	$	1,258,844	$	806,620	$	1,965,956	$	5,047,251		89.0	%
Criticized:⁽¹⁾
Accrual		103,762		27,170		169,840		78,067		182,992		561,831		9.9	%
Nonaccrual		1,693		553		20,895		14,205		24,823		62,169		1.1	%

Total criticized		105,455		27,723		190,735		92,272		207,815		624,000		11.0	%

Total	$	109,214	$	1,039,795	$	1,449,579	$	898,892	$	2,173,771	$	5,671,251		100.0	%


Acquired loans:

Pass	$	1,727	$	69,720	$	336,378	$	427,404	$	436,803	$	1,272,032		81.1	%
Criticized:⁽¹⁾
Accrual		17,194		6,207		88,232		97,397		86,700		295,730		18.9	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		17,194		6,207		88,232		97,397		86,700		295,730		18.9	%

Total	$	18,921	$	75,927	$	424,610	$	524,801	$	523,503	$	1,567,762		100.0	%


*December 31, 2010*
Legacy loans:
Pass	$	31,533	$	918,441	$	1,358,263	$	680,764	$	1,753,412	$	4,742,413		88.9	%
Criticized:⁽¹⁾
Accrual		80,421		27,604		158,240		64,473		192,138		522,876		9.8	%
Nonaccrual		1,870		3,075		24,536		14,584		25,819		69,884		1.3	%

Total criticized		82,291		30,679		182,776		79,057		217,957		592,760		11.1	%

Total	$	113,824	$	949,120	$	1,541,039	$	759,821	$	1,971,369	$	5,335,173		100.0	%


Acquired loans:

Pass	$	691	$	131,155	$	235,973	$	443,856	$	546,433	$	1,358,108		81.9	%
Criticized:⁽¹⁾
Accrual		20,656		2,326		85,122		87,274		105,277		300,655		18.1	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		20,656		2,326		85,122		87,274		105,277		300,655		18.1	%

Total	$	21,347	$	133,481	$	321,095	$	531,130	$	651,710	$	1,658,763		100.0	%


⁽¹⁾		Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2010.

⁽²⁾		Acquired loans were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows.


	Residential		Home		Other				Percent
	real estate		equity		consumer		Total		of Total
*March 31, 2011*
Legacy loans by refreshed FICO score:
Over 700	$	1,115,759	$	720,454	$	72,157	$	1,908,370		75.1	%
660-700		147,827		115,514		21,518		284,859		11.2	%
620-660		67,863		47,377		13,170		128,410		5.1	%
580-620		41,054		21,342		6,861		69,257		2.7	%
Less than 580		64,376		32,899		10,892		108,167		4.3	%
No score		14,225		5,025		20,542		39,792		1.6	%

Total	$	1,451,104	$	942,611	$	145,140	$	2,538,855		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	130,296	$	376,252	$	50,945	$	557,493		59.7	%
660-700		30,476		60,686		17,440		108,602		11.6	%
620-660		15,596		31,087		9,423		56,106		6.0	%
580-620		14,858		22,351		5,529		42,738		4.6	%
Less than 580		23,730		48,095		9,987		81,812		8.8	%
No score		35,484		26,210		24,930		86,624		9.3	%

Total	$	250,440	$	564,681	$	118,254	$	933,375		100.0	%


*December 31, 2010*
Legacy loans by refreshed FICO score:
Over 700	$	1,092,172	$	705,211	$	72,524	$	1,869,907		74.8	%
660-700		138,265		112,141		21,017		271,423		10.9	%
620-660		73,488		45,887		13,242		132,617		5.3	%
580-620		40,409		20,530		7,673		68,612		2.7	%
Less than 580		67,096		32,867		11,320		111,283		4.5	%
No score		15,643		7,081		21,956		44,680		1.8	%

Total	$	1,427,073	$	923,717	$	147,732	$	2,498,522		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	139,706	$	400,341	$	54,765	$	594,812		60.0	%
660-700		29,981		64,904		18,076		112,961		11.4	%
620-660		15,272		34,267		9,253		58,792		5.9	%
580-620		17,482		26,287		5,516		49,285		5.0	%
Less than 580		22,859		46,528		11,511		80,898		8.2	%
No score		39,825		28,526		25,857		94,208		9.5	%

Total	$	265,125	$	600,853	$	124,978	$	990,956		100.0	%

Although the economy in Upstate New York weathered the deteriorating credit conditions fairly well in comparison to other geographic areas, a slower real estate market finally permeated the region during 2010, which resulted in increases throughout 2010 in both our nonaccruing loans and net charge-offs. The credit environment in the first quarter of 2011, while showing signs of economic recovery, remains largely the same as the environment in late 2010. Our allowance for credit losses increased $5 million from December 31, 2010 to $100 million at March 31, 2011 as our provision for credit losses of $13 million exceeded our net charge-offs of $8 million. The ratio of our allowance for credit losses to total loans of 0.93% at March 31, 2011 remained stable compared to 0.91% at December 31, 2010.

While challenges in the credit environment continue, we also saw signs of improvement during the first quarter of 2011. Our annualized net charge-off ratio decreased to 0.31% at March 31, 2011 compared to the same measure of 0.49% for the quarter ending December 31, 2010. Our nonaccruing loans decreased to 0.75% of total loans at March 31, 2011 from 0.85% at December 31, 2010, primarily due to decrease in nonaccruing loans. The decreases in these metrics provide a contrast to the trends experienced throughout most of 2010; however, the natures of the metrics often lead to volatility on a quarter over quarter basis and sustained improvement has yet to be seen.

Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) remained unchanged since December 31, 2010 at $55 million at March 31, 2011. Of these balances, $27 million and $22 million were accruing interest at March 31, 2011 and December 31, 2010, respectively. The modifications made to these restructured loans typically consist of an extension of the payment terms or providing for a period with interest-only payments with deferred principal payments paid during the remainder of the term. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. We accrue interest on a TDR once the borrower has demonstrated the ability to perform in accordance with the restructured terms for six consecutive payments.

Certain pass-graded commercial loans may have repayment dates extended at or near original maturity dates in the normal course of business. When such extensions are considered to be concessions and provided as a result of the financial distress of the borrower, these loans are classified as TDRs and considered to be impaired. However, if such extensions or other modifications at or near the original maturity date or at any time during the life of a loan are not made as a result of financial distress related to the borrower, such a loan would not be classified as a TDR or as an impaired loan. Repayment extensions typically provided in a TDR are for periods of greater than six months. When providing loan modifications because of the financial distress of the borrowers, we consider that, after the modification, the borrower would be in a better position to continue with the payment of principal and interest. While such loans may be collateralized, they are not typically considered to be collateral dependent.

Residential Mortgage Banking

We often originate and sell residential mortgage loans with servicing retained. Our loan sales activity is generally conducted through loan sales in a secondary market sponsored by FNMA and FHLMC. Subsequent to the sale of mortgage loans, we do not typically retain any interest in the underlying loans except through our relationship as the servicer of the loans.

As is customary in the mortgage banking industry, we have made certain representations and warranties related to the sale of residential mortgage loans and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans; however, any loss would be reduced by any payments received on the loans or through the sale of collateral. At March 31, 2011 our liability of $4 million for repurchase obligations on our serviced loan portfolio remained unchanged from December 31, 2010.

We had $3 million and $2 million in serviced loans in foreclosure at March 31, 2011 and December 31, 2010, respectively. The delinquencies in our serviced loan portfolio were as follows at the dates indicated:


	March 31, 2011			December 31, 2010
30 to 59 days past due		0.66	%		0.66	%
60 to 89 days past due		0.22	%		0.26	%
Greater than 90 days past due		0.45	%		0.48	%

Total past due loans		1.33	%		1.40	%

Investments

We have assessed our securities that were in an unrealized loss position at March 31, 2011 and December 31, 2010 and determined that any decline in fair value below amortized cost was temporary. In making this determination we considered 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, levels of credit loss, and projected cash flows. We also do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. These securities were purchased based on the underlying loan characteristics such as LTV ratio, credit scores, property type, location, and the level of credit enhancement. Current characteristics of each security such as credit rating, delinquency and foreclosure levels, credit enhancement, projected collateral losses, and the level of credit loss and coverage are reviewed regularly by management. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. When the level of credit loss coverage for an individual security significantly deteriorates, we expand our analysis of the security to include detailed cash flow projections based upon credit characteristics and prepayment assumptions. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings.

Liquidity Risk

Liquidity risk is the risk to earnings or capital arising from our inability to meet our obligations as they come due. Liquidity risk arises from our failure to recognize or address changes in market conditions that affect the ability to liquidate assets quickly or to obtain adequate funding to continue to operate profitably.

Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. Our Asset and Liability Committee establishes procedures, guidelines and limits for managing and monitoring our liquidity to ensure we maintain adequate liquidity at all times. We manage our liquidity to ensure that we have sufficient cash to:

•

Support our operating activities,

•

Meet increases in demand for loans and other assets, and

•

Provide for repayments of deposits and borrowings.

Factors or conditions that could affect our liquidity management objectives include changes in the mix of assets and liabilities on our balance sheet; our investment, loan, and deposit balances; our reputation; and our credit rating. A significant change in our financial performance or credit rating could reduce the availability, or increase the cost, of funding from the national markets. To date, we have not seen any negative impact in availability of funding as a result of the broader credit and liquidity issues being seen elsewhere.

Sources of liquidity

We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest payments we receive from our investment and loan portfolios, short and long-term borrowings, as well as purchasing short-term federal funds, internally generated capital, and other credit facilities. The primary sources of our non-deposit borrowings are repurchase agreements and FHLB advances, of which we had $3.0 billion and $1.5 billion outstanding at March 31, 2011, respectively.

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

We have a total borrowing capacity of up to $7.7 billion from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $3.8 billion was available as of March 31, 2011.

Uses of liquidity

The primary uses of our liquidity are to support our operating activities, fund loans or obtain other assets, and provide for repayments of deposits and borrowings.

In the ordinary course of business, we extend commitments to originate commercial and residential mortgages, commercial loans, and other consumer loans. Commitments to extend credit are agreements to lend to a customer as long as conditions established under the contract are not violated. Our commitments generally have fixed expiration dates or other termination clauses, and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. At March 31, 2011, we had outstanding unfunded commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $3.5 billion.

Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Our credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the total amount of these instruments. Unused commercial lines of credit amounted to $2.1 billion at March 31, 2011 and generally have an expiration period of less than one year. Home equity and other consumer unused lines of credit totaled $1.0 billion at March 31, 2011 and have an expiration period of up to ten years.

In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Standby letters of credit amounted to $246 million at March 31, 2011 and generally have an expiration period of less than two years. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements are likely to be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in the issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.

Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rates on residential mortgage loans sold which results in monthly service fee income. We were committed to sell $92 million in residential mortgages at March 31, 2011.

Loan Maturity and Repricing Schedule

The following table sets forth certain information at March 31, 2011 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal (in thousands):


	Within one		One through		After five
	year		five years		years		Total
Commercial:
Real estate	$	1,650,607	$	2,137,013	$	372,739	$	4,160,359
Construction		312,936		37,325		31,119		381,380
Business		2,141,148		475,839		80,287		2,697,274

Total commercial		4,104,691		2,650,177		484,145		7,239,013

Residential real estate		426,930		436,979		837,635		1,701,544
Home equity		869,202		178,518		459,572		1,507,292
Other consumer		129,808		68,203		65,383		263,394

Total loans and leases	$	5,530,631	$	3,333,877	$	1,846,735	$	10,711,243

For the loans reported in the preceding table, the following sets forth at March 31, 2011, the dollar amount of all of our fixed-rate and adjustable-rate loans due after March 31, 2012 (in thousands):


	Fixed		Adjustable		Total
Commercial:
Real estate	$	1,270,166	$	1,239,586	$	2,509,752
Construction		53,679		14,765		68,444
Business		478,641		77,485		556,126

Total commercial		1,802,486		1,331,836		3,134,322

Residential real estate		1,212,737		61,877		1,274,614
Home equity		638,090		—		638,090
Other consumer		133,586		—		133,586

Total loans and leases	$	3,786,899	$	1,393,713	$	5,180,612

Our primary investing activities are the origination of loans, the purchase of investment securities, and the acquisition of banking and financial services companies.

Interest Rate and Market Risk

Our primary market risk is interest rate risk, which is defined as the potential variability of our earnings that arises from changes and volatility in market interest rates. Changes in market interest rates, whether they are increases or decreases, and the pace at which the changes occur can trigger repricings and changes in the pace of payments, which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively.

Most of the yields on our earning assets, including floating-rate loans and investments, and the rates we pay on interest-bearing deposits and liabilities are related to market interest rates. Interest rate risk occurs when the interest income (yields) we earn on our assets changes at a pace that differs from the interest expense (rates) we pay on liabilities.

The primary tool we use to assess our exposure to interest rate risk is a computer modeling technique that simulates the effects of variations in interest rates on net interest income. These simulations, which we conduct at least quarterly, compare multiple hypothetical interest rate scenarios to a stable or current interest rate environment. As a result of these simulations, we take actions to limit the variability on our net interest income due to changes in interest rates. Such actions include: (1) employing interest rate swaps (2) emphasizing the origination and retention of residential and commercial adjustable-rate loans, home equity loans, and residential fixed-rate mortgage loans having contractual maturities of no more than 20 years; (3) selling the majority of 30 year fixed-rate, residential mortgage loans into the secondary market without recourse; (4) investing in securities with strong cash flows which position us for increases in market interest rates; (5) growing core deposits; and (6) utilizing wholesale borrowings to support cash flow needs and help match asset repricing.

Our Asset and Liability Committee monitors our sensitivity to interest rates and approves strategies to manage our exposure to interest rate risk. Our goal is to maximize the growth of net interest income on a consistent basis by minimizing the effects of fluctuations associated with changing market interest rates.

The following table shows the estimated impact on net interest income for the next 12 months resulting from potential changes in interest rates. The calculated changes assume a gradual parallel shift across the yield curve over the next 12 months. These estimates require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. These assumptions are inherently uncertain and, as a result, we cannot precisely predict the impact of changes in interest rates on our net interest income. Actual results may differ significantly due to timing, magnitude, and frequency of interest rate changes and changes in market conditions (amounts in thousands):


	Calculated decrease at March 31, 2011
	Net interest
Changes in interest rates⁽¹⁾	income			% Change

+200 basis points⁽²⁾	$	(8,172	)		-(1.2	)%
+100 basis points		(5,073	)		(0.7	)


⁽¹⁾		The Federal Reserve benchmark overnight federal funds rate was 0.25% at March 31, 2011, therefore, the calculation of the effect of a decrease in interest rates is not measurable.

⁽²⁾		Our Board of Directors has established a policy limiting the adverse change to net interest income to less than 5% under this scenario.

Impact of New Accounting Standards

In April 2011, the Financial Accounting Standards Board (the “FASB”) released new guidance to develop consistent standards for creditors to use in their determination of whether a loan modification represents a troubled debt restructuring. Specifically, creditors are precluded from utilizing the borrower’s effective rate test to evaluate whether a concession is granted and clarifies the guidance for determining if a borrower is experiencing financial difficulty. In particular, it specifies that a borrower that is not in default may still be considered to be experiencing financial difficulty. This guidance will become effective for us in the third quarter and applied retrospectively to the beginning of 2011. We are still assessing the impact of this standard on our consolidated financial statements.

Also in April 2011, the FASB released amended guidance to improve the accounting for repurchase transactions by amending the “effective control” criteria for transactions involving repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The revised guidance removes the criterion requiring a transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in default by a transferee, from the assessment of effective control. As a result, the level of cash collateral received by the transferor in a repo or other similar agreement is no longer relevant in determining if a transfer should be accounted for as a sale. This guidance is to be applied prospectively upon adoption and will become effective for us in the first quarter of 2012. We do not expect the amended guidance to have a significant impact on our Consolidated Financial Statements.


ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk

A discussion regarding our management of market risk is included in the section entitled “Interest Rate and Market Risk” included within Item 2 of this Form 10-Q.


ITEM 4.		Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of March 31, 2011 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective as of March 31, 2011.

During the quarter ended March 31, 2011, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		Legal Proceedings

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

In late August and September 2010, following the announcement of the Company’s merger with NewAlliance, ten purported class actions were filed in Connecticut Superior Court and in the Delaware Court of Chancery of the State of Delaware, naming NewAlliance, the Company, and NewAlliance’s directors as defendants. Certain of these actions also name FNFG Merger Sub, Inc., a wholly owned subsidiary of the Company, and certain NewAlliance officers as defendants. These actions alleged, among other things, that NewAlliance’s directors breached their fiduciary duties to NewAlliance stockholders by failing to maximize stockholder value in approving the merger agreement with the Company and by providing incomplete disclosures to stockholders in advance of their upcoming vote whether to approve the merger. The actions further alleged that NewAlliance and the Company aided and abetted these alleged breaches of fiduciary duty. These actions sought to enjoin the merger on the agreed upon terms and also sought attorneys’ and experts’ fees.

On November 5, 2010, the plaintiffs in both actions advised NewAlliance that they had agreed to stay the Delaware actions and proceed in the Connecticut actions alone. After expedited discovery was conducted, the parties entered into a memorandum of understanding in which the Company and NewAlliance denied that they committed any of the wrongful acts alleged in the complaints, but agreed to amend the disclosures to stockholders in advance of the vote whether to approve the merger. The memorandum of understanding provides that the parties will enter into settlement agreements in both the Connecticut and Delaware actions, and provides for attorneys’ fees. The final settlement agreements will be subject to court approval.


ITEM 1A.		Risk Factors

There are no material changes to the risk factors as previously discussed in Item 1A, to Part I of our 2010 Annual Report on
Form 10-K.


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

Not applicable.

We did not repurchase any shares of our common stock during the first quarter of 2011.


ITEM 3.		Defaults Upon Senior Securities

Not applicable.


ITEM 5.		Other Information

(a)

Not applicable.

(b)

Not applicable.


ITEM 6.		Exhibits

The following exhibits are filed herewith:


Exhibits

	10.1	Gregory W. Norwood offer letter, dated April 4, 2011

	31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

	31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002

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

	101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail⁽¹⁾


⁽¹⁾		As provided in Rule 406T of Regulation S-T, this information is furnished and not filed for purposes of Sections 11 and 12 of the Securities Act of 1933 and Section 18 of the Securities Exchange Act of 1934.

SIGNATURES

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


	FIRST NIAGARA FINANCIAL GROUP, INC.
Date: May 10, 2011	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer (Principal Executive Officer)

Date: May 10, 2011	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

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First Niagara Financial (FNFG) Inactive 10-Q2011 Q1 Quarterly report

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