First Niagara Financial 10Q 2011 Q3 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 September 30, 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 November 7, 2011, there were issued and outstanding 294,893,209 shares of the Registrant’s Common Stock, $0.01 par value.

FIRST NIAGARA FINANCIAL GROUP, INC.
FORM 10-Q
For the Quarterly Period Ended September 30, 2011
TABLE OF CONTENTS


Item Number	Page Number

PART I — FINANCIAL INFORMATION

1. Financial Statements

Consolidated Statements of Condition at September 30, 2011 (unaudited) and December 31, 2010		3

Consolidated Statements of Income for the three and nine months ended September 30, 2011 and 2010 (unaudited)		4

Consolidated Statements of Comprehensive Income for the three and nine months ended September 30, 2011 and 2010 (unaudited)		5

Consolidated Statements of Changes in Stockholders’ Equity for the nine months ended September 30, 2011 and 2010 (unaudited)		6

Consolidated Statements of Cash Flows for the nine months ended September 30, 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		42

3. Quantitative and Qualitative Disclosures About Market Risk		76

4. Controls and Procedures		76

PART II — OTHER INFORMATION

1. Legal Proceedings		76

1A. Risk Factors		76

2. Unregistered Sales of Equity Securities and Use of Proceeds		77

3. Defaults Upon Senior Securities		78

4. [Removed and Reserved]

5. Other Information		78

6. Exhibits		78

Signatures		79

Exhibit 12
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)


	September 30,			December 31,
	2011			2010
	(unaudited)

ASSETS

Cash and cash equivalents	$	332,437		$	213,820
Investment securities:
Available for sale, at fair value (amortized cost of $8,160,822 and $7,175,442 in 2011 and 2010; includes pledged securities that can be sold or repledged of $1,829,760 and $4,052,259 in 2011 and 2010)		8,349,237			7,289,455
Held to maturity, at amortized cost (fair value of $2,944,976 and $1,043,803 in 2011 and 2010; includes pledged securities that can be sold or repledged of $1,218,188 in 2011)		2,830,744			1,025,724
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost and fair value		331,747			183,800
Loans held for sale		79,820			37,977
Loans and leases (net of allowance for loan losses of $112,749 and $95,354 in 2011 and 2010)		16,252,617			10,388,060
Bank owned life insurance		416,449			230,718
Premises and equipment, net		303,634			217,555
Goodwill		1,710,311			1,023,977
Core deposit and other intangibles, net		102,317			90,167
Other assets		500,194			382,600


Total assets	$	31,209,507		$	21,083,853


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Deposits	$	19,624,177		$	13,148,844
Short-term borrowings		1,156,711			1,788,566
Long-term borrowings		5,928,632			3,104,908
Other		499,312			276,465


Total liabilities		27,208,832			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; 309,090,281 and 215,105,566 shares issued in 2011 and 2010		3,091			2,151
Additional paid-in capital		3,759,945			2,430,571
Retained earnings		363,376			376,670
Accumulated other comprehensive income		89,690			57,871
Common stock held by employee stock ownership plan, 2,421,176 and 2,621,978 shares in 2011 and 2010		(19,481	)		(20,758	)
Treasury stock, at cost, 14,192,407 and 5,993,906 shares in 2011 and 2010		(195,946	)		(81,435	)


Total stockholders’ equity		4,000,675			2,765,070


Total liabilities and stockholders’ equity	$	31,209,507		$	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				Nine months ended
	September 30,				September 30,
	2011		2010		2011		2010
Interest income:
Loans and leases	$	192,772	$	131,862	$	509,230	$	362,006
Investment securities and other		94,375		68,774		264,171		178,262

Total interest income		287,147		200,636		773,401		540,268

Interest expense:
Deposits		24,771		19,244		61,716		54,325
Borrowings		26,947		20,113		72,951		55,737

Total interest expense		51,718		39,357		134,667		110,062

Net interest income		235,429		161,279		638,734		430,206

Provision for credit losses		14,500		11,000		44,707		35,131


Net interest income after provision for credit losses		220,929		150,279		594,027		395,075


Noninterest income:
Banking services		26,384		21,007		70,003		58,543
Insurance commissions		16,886		13,573		49,685		38,504
Wealth management services		7,933		5,939		22,550		14,898
Mortgage banking		5,254		3,320		9,903		6,178
Lending and leasing		3,582		3,045		10,156		7,599
Bank owned life insurance		2,742		2,067		7,827		5,267
Other		5,874		554		11,500		1,514

Total noninterest income		68,655		49,505		181,624		132,503


Noninterest expense:
Salaries and employee benefits		89,131		68,603		253,099		180,921
Occupancy and equipment		20,434		15,582		55,583		38,911
Technology and communications		16,634		12,769		43,434		32,821
Marketing and advertising		7,554		5,782		14,126		15,005
Professional services		9,171		4,426		24,348		10,990
Amortization of intangibles		6,896		5,453		18,958		14,011
Federal deposit insurance premiums		10,301		4,630		22,763		13,052
Merger and acquisition integration expenses		9,008		1,916		92,012		43,985
Restructuring charges		16,326		—		29,038		—
Other		18,416		13,448		50,801		34,298

Total noninterest expense		203,871		132,609		604,162		383,994


Income before income taxes		85,713		67,175		171,489		143,584
Income taxes		28,732		21,579		56,040		49,086


Net income	$	56,981	$	45,596	$	115,449	$	94,498


Earnings per share:
Basic	$	0.19	$	0.22	$	0.44	$	0.48
Diluted	$	0.19	$	0.22	$	0.44	$	0.47

Weighted average common shares outstanding:
Basic		292,211		205,821		260,259		198,378
Diluted		292,503		206,058		260,689		198,686

Dividends per common share	$	0.16	$	0.14	$	0.48	$	0.42

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					Nine months ended
	September 30,					September 30,
	2011			2010		2011			2010
Net income	$	56,981		$	45,596	$	115,449		$	94,498

Other comprehensive income, net of income taxes:
Securities available for sale:
Net unrealized gains arising during the period		13,912			14,150		49,932			114,366
Reclassification adjustment for net unrealized holding gains on securities transferred to held to maturity during the period		—			—		(3,956	)		—

		13,912			14,150		45,976			114,366

Net unrealized holding gains on securities transferred from available for sale to held to maturity:
Net unrealized holding gains on securities transferred during the period		—			—		3,956			—
Less: amortization of net unrealized holding gains to income during the period		(355	)		—		(762	)		—

		(355	)		—		3,194			—

Net unrealized (losses) gains on interest rate swaps designated as cash flow hedges arising during the period		(14,274	)		162		(18,775	)		332

Amortization of net loss related to pension and post-retirement plans		865			161		1,424			119


Total other comprehensive income		148			14,473		31,819			114,817


Total comprehensive income	$	57,129		$	60,069	$	147,268		$	209,315

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		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		—		—			115,449			—		—			—			115,449
Total other comprehensive income, net		—		—			—			31,819		—			—			31,819
Purchases of treasury stock (9,106,000 shares)		—		—			—			—		—			(126,876	)		(126,876	)
Common stock issued for the acquisition of NewAlliance Bancshares, Inc. (93,984,715 shares)		940		1,330,612			—			—		—			—			1,331,552
ESOP shares committed to be released (200,802 shares)		—		759			—			—		1,277			—			2,036
Stock-based compensation expense		—		5,670			—			—		—			—			5,670
Excess tax benefit from stock-based compensation		—		291			—			—		—			—			291
Exercise of stock options and restricted stock activity (907,499 shares)		—		(7,958	)		(893	)		—		—			12,365			3,514
Common stock dividends of $0.48 per share		—		—			(127,850	)		—		—			—			(127,850	)


Balances at September 30, 2011	$	3,091	$	3,759,945		$	363,376		$	89,690	$	(19,481	)	$	(195,946	)	$	4,000,675


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

Net income		—		—			94,498			—		—			—			94,498
Total other comprehensive income, net		—		—			—			114,817		—			—			114,817
Common stock issued for the acquisition of Harleysville National Corporation (20,295,305 shares)		203		299,700			—			—		—			—			299,903
Purchase of noncontrolling interest in consolidated subsidiary, net of tax		—		(614	)		—			—		—			—			(614	)
ESOP shares committed to be released (190,842 shares)		—		838			—			—		1,227			—			2,065
Stock-based compensation expense		—		4,066			—			—		—			—			4,066
Excess tax benefit from stock-based compensation		—		827			—			—		—			—			827
Exercise of stock options and restricted stock activity (548,541 shares)		—		(4,458	)		(1,888	)		—		—			7,398			1,052
Common stock dividends of $0.42 per share		—		—			(83,714	)		—		—			—			(83,714	)


Balances at September 30, 2010	$	2,151	$	2,428,555		$	361,844		$	117,331	$	(21,155	)	$	(82,165	)	$	2,806,561

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows(unaudited)

(in thousands)


	Nine months ended September 30,
	2011			2010
Cash flows from operating activities:
Net income	$	115,449		$	94,498
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of fees and discounts, net		3,479			(1,400	)
Provision for credit losses		44,707			35,131
Depreciation of premises and equipment		24,395			17,242
Amortization of intangibles		18,958			14,011
Origination of loans held for sale		(482,721	)		(441,777	)
Proceeds from sales of loans held for sale		441,713			426,098
ESOP and stock based-compensation expense		7,706			6,131
Deferred income tax expense		364			29,785
Other, net		63,126			35,444


Net cash provided by operating activities		237,176			215,163


Cash flows from investing activities:
Proceeds from maturities of securities available for sale		360,436			122,655
Proceeds from sales of securities available for sale		555,078			583,549
Principal payments received on securities available for sale		922,176			714,094
Purchases of securities available for sale		(2,019,747	)		(3,227,060	)
Principal payments received on securities held to maturity		266,276			165,949
Purchases of securities held to maturity		(87,458	)		(204,629	)
Purchases of Federal Home Loan Bank and Federal Reserve Bank common stock		(27,126	)		(43,954	)
Purchase of bank owned life insurance		(35,000	)		—
Net increase in loans and leases		(795,386	)		(181,475	)
Acquisitions, net of cash and cash equivalents		(51,344	)		1,144,427
Purchases of premises and equipment		(50,940	)		(21,885	)
Other, net		4,957			10,253


Net cash used in investing activities		(958,078	)		(938,076	)


Cash flows from financing activities:
Net increase (decrease) in deposits		1,190,524			(255,127	)
Repayments of short-term borrowings, net		(322,252	)		(457,494	)
Proceeds from long-term borrowings		551,966			1,746,534
Repayments of long-term borrowings		(332,585	)		(150,000	)
Purchases of treasury stock		(126,876	)		—
Proceeds from exercise of stock options		6,301			1,216
Excess tax benefit from stock-based compensation		291			827
Dividends paid on common stock		(127,850	)		(83,703	)


Net cash provided by financing activities		839,519			802,253


Net increase in cash and cash equivalents		118,617			79,340

Cash and cash equivalents at beginning of period		213,820			236,268


Cash and cash equivalents at end of period	$	332,437		$	315,608


Supplemental disclosures
Cash paid during the period for:
Income taxes	$	64,961		$	30,209
Interest expense		178,527			125,886

Acquisition of noncash assets and liabilities:
Assets acquired		9,074,250			4,153,049
Liabilities assumed		7,691,354			4,998,057
Other noncash activity:
Securities available for sale purchased not settled		60,042			15,479
Securities transferred from available for sale to held to maturity (at fair value)		1,994,913			—

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 nine months ended September 30, 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, for total consideration of $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. The results of NewAlliance’s operations are included in our Consolidated Statements of Income from the date of acquisition.

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 Company 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.

In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following table:


Consideration paid:
First Niagara Financial Group, Inc. common stock issued	$	1,315,786
Cash payments to NewAlliance stockholders		198,681
Fair value of NewAlliance employee stock options		15,766


Total consideration paid		1,530,233


Recognized amounts of identifiable assets acquired and (liablities assumed), at fair value:
Cash and cash equivalents	$	126,322
Investment securities available for sale		2,759,329
Loans		5,113,195
Federal Home Loan Bank common stock		120,820
Bank owned life insurance		137,359
Premises and equipment		65,306
Core deposit intangible		23,800
Other assets		193,176
Deposits		(5,312,265	)
Borrowings		(2,299,321	)
Other liabilities		(76,181	)

Total identifiable net assets		851,540


Goodwill	$	678,693

We estimated the fair value of loans acquired from NewAlliance by utilizing a methodology wherein similar loans were aggregated into pools. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value based on a market rate for similar loans. There was no carryover of NewAlliance’s allowance for loan losses associated with the loans we acquired as the loans were initially recorded at fair value.

Information about the acquired NewAlliance loan portfolio as of April 15, 2011 is as follows:


Contractually required principal and interest at acquisition	$	6,472,506
Contractual cash flows not expected to be collected (nonaccretable discount)		(212,724	)

Expected cash flows at acquisition		6,259,782
Interest component of expected cash flows (accretable discount)		(1,146,587	)

Fair value of acquired loans	$	5,113,195

The core deposit intangible asset recognized as part of the NewAlliance merger is being amortized over its estimated useful life of approximately seven years utilizing an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is not deductible for tax purposes.

The fair values of savings and transaction deposit accounts acquired from NewAlliance were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity.

The fair value of borrowings, which were largely comprised of Federal Home Loan Bank (“FHLB”) advances, was determined by obtaining settlement quotes from the FHLB.

Direct costs related to the NewAlliance acquisition were expensed as incurred and amounted to $89.5 million for the nine months ended September 30, 2011. Severance costs comprised more than half of these acquisition and integration expenses, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses.

The following table presents financial information regarding the former NewAlliance operations included in our Consolidated Statement of Income from the date of acquisition through September 30, 2011 under the column “Actual from acquisition date through September 30, 2011.” These amounts do not include merger and acquisition integration expenses. In addition, the following table presents unaudited pro forma information as if the acquisition of NewAlliance had occurred on January 1, 2010 under the “Pro forma” columns. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Merger and acquisition integration costs of $89.5 million related to the NewAlliance merger that we incurred during the nine months ended September 30, 2011 are not reflected in the unaudited pro forma amounts. Similarly, merger and acquisition integration costs of $44.0 million related to our April 9, 2010 merger with Harleysville National Corporation that we incurred during the nine months ended September 30, 2010 are not reflected in the unaudited pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with NewAlliance at the beginning of 2010. Cost savings are also not reflected in the unaudited pro forma amounts for the nine months ended September 30, 2011 and 2010.


	Actual from acquisition		Pro forma
	date through		nine months ended September 30,
	September 30, 2011		2011		2010

Net interest income	$	118,235	$	708,302	$	614,405
Noninterest income		23,303		194,236		178,407
Net income		37,866		189,079		172,423

Pro forma earnings per share:
Basic			$	0.66	$	0.64
Diluted				0.66		0.64

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 all of Harleysville National Bank and Trust Company’s 83 branch locations across nine Eastern Pennsylvania counties. 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.

In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following table:


Consideration paid:
First Niagara Financial Group, Inc. common stock issued	$	298,747
Cash in lieu of fractional shares paid to Harleysville stockholders		41
Fair value of Harleysville employee stock options		1,115


Total consideration paid		299,903


Recognized amounts of identifiable assets acquired and (liablities assumed), at fair value:
Cash and cash equivalents		1,148,704
Investment securities available for sale		945,570
Loans		2,644,256
Federal Home Loan Bank common stock		42,992
Bank owned life insurance		91,042
Premises and equipment		44,511
Core deposit intangible		42,200
Other assets		205,692
Deposits		(3,953,333	)
Borrowings		(960,259	)
Other liabilities		(82,361	)

Total identifiable net assets		169,014


Goodwill	$	130,889

We estimated the fair value for most loans acquired from Harleysville by utilizing a methodology wherein loans with comparable characteristics were aggregated by type of collateral, remaining maturity, and repricing terms. Cash flows for each pool were determined by estimating future credit losses and the rate of prepayments. Projected monthly cash flows were then discounted to present value using a risk-adjusted market rate for similar loans. To estimate the fair value of the remaining loans, we analyzed the value of the underlying collateral of the loans, assuming the fair values of the loans were derived from the eventual sale of the collateral. The value of the collateral was based on recently completed appraisals adjusted to the valuation date based on recognized industry indices. We discounted those values using market derived rates of return, with consideration given to the period of time and costs associated with the foreclosure and disposition of the collateral. There was no carryover of Harleysville’s allowance for loan losses associated with the loans we acquired as the loans were initially recorded at fair value.

Information about the acquired Harleysville loan portfolio as of April 9, 2010 is as follows:


Contractually required principal and interest at acquisition	$	3,383,245
Contractual cash flows not expected to be collected (nonaccretable discount)		(326,287	)

Expected cash flows at acquisition		3,056,958
Interest component of expected cash flows (accretable discount)		(412,702	)

Fair value of acquired loans	$	2,644,256

The core deposit intangible asset recognized as part of the Harleysville merger is being amortized over its estimated useful life of approximately nine years utilizing an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is not deductible for tax purposes.

The fair values of savings and transaction deposit accounts acquired from Harleysville were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated based on contractual rates. The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity.

The fair value of borrowings assumed was determined by estimating projected future cash outflows and discounting them at a market rate of interest.

Direct costs related to the Harleysville acquisition were expensed as incurred and amounted to $44.0 million during the nine months ended September 30, 2010. These merger and acquisition integration expenses included salaries and benefits, technology and communications, occupancy and equipment, marketing and advertising, professional services, a contribution to First Niagara Bank Foundation to support charitable giving in Eastern Pennsylvania where the Harleysville branches are located, and other noninterest expenses.

The following table presents financial information regarding the former Harleysville operations included in our Consolidated Statement of Income from the date of acquisition through September 30, 2010. The amounts presented do not include merger and acquisition integration costs or a $7.5 million contribution to First Niagara Bank Foundation in support of charitable giving in Eastern Pennsylvania. The following table also presents unaudited pro forma information as if the acquisition of Harleysville had occurred on January 1, 2010. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with Harleysville at the beginning of 2010 and cost savings are also not reflected in the unaudited pro forma amounts.


	Actual from acquisition		Pro forma
	date through		Nine months ended
	September 30, 2010		September 30, 2010

Net interest income	$	86,121	$	464,667
Noninterest income		16,875		145,818
Net income		27,565		86,714

Pro forma earnings per share:
Basic			$	0.43
Diluted				0.42

HSBC Bank Branches

On July 30, 2011, First Niagara Bank, N.A., entered into an Agreement with HSBC Bank USA, National Association (“HSBC”) and affiliates to acquire, after estimated divestitures, approximately $11.0 billion of deposit liabilities and approximately $2.0 billion in loans in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets for a deposit premium of 6.67% (the “HSBC Acquisition”). Without considering expected proceeds from estimated divestitures, the purchase price totals approximately $1 billion, based on May 31, 2011 balances. The goodwill recorded will be tax deductible. At closing, the Bank will not receive any loans greater than 60 days delinquent. The Bank will also acquire certain wealth management relationships, and approximately $4.3 billion of assets under management of such relationships, of HSBC Securities (USA) Inc. Direct costs related to the HSBC Acquisition are expensed as incurred and amounted to $1.3 million for the three months ended September 30, 2011. We expect to incur approximately $150 million to $175 million in additional pre-tax expenses related to the acquisition, which includes prepayment penalties on borrowings, with the vast majority of these expenses expected to be recognized in the first and second quarters of 2012.

The HSBC Acquisition, which is expected to close in the second quarter of 2012, is subject to receipt of all required governmental approvals. See Item II, Management’s Discussion and Analysis of Financial Condition and Results of Operations for further information about the HSBC Acquisition, and see Part II, Item 1A, for a discussion of Risk Factors surrounding the HSBC 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 14, 2011, we acquired Pierson & Smith, an insurance brokerage, consulting and third party administration firm in Norwalk, Connecticut. Further, 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

The amortized cost, gross unrealized gains and losses, and fair value of our investment securities at the dates indicated are summarized as follows:


	Amortized		Unrealized		Unrealized			Fair
September 30, 2011:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	670,071	$	18,051	$	(184	)	$	687,938
U.S. Treasury		19,926		674		—			20,600
U.S. government agencies		5,575		4		(8	)		5,571
U.S. government sponsored enterprises		477,433		14,399		(286	)		491,546
Corporate		336,234		364		(11,622	)		324,976
Trust preferred securities		29,733		80		(4,661	)		25,152


Total debt securities		1,538,972		33,572		(16,761	)		1,555,783


Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		94,716		2,959		—			97,675
Federal National Mortgage Association		809,695		24,317		(166	)		833,846
Federal Home Loan Mortgage Corporation		718,694		16,852		(68	)		735,478
Collateralized mortgage obligations:
Government National Mortgage Association		2,557,310		95,903		(5	)		2,653,208
Federal National Mortgage Association		664,925		15,870		(256	)		680,539
Federal Home Loan Mortgage Corporation		711,704		20,878		(241	)		732,341
Non-agency issued		106,175		1,464		(1,153	)		106,486


Total collateralized mortgage obligations		4,040,114		134,115		(1,655	)		4,172,574


Total residential mortgage-backed securities		5,663,219		178,243		(1,889	)		5,839,573

Commercial mortgage-backed securities:
Non-agency issued		902,775		1,561		(6,756	)		897,580


Total mortgage-backed securities		6,565,994		179,804		(8,645	)		6,737,153
Asset-backed securities		25,007		200		(9	)		25,198
Other		30,849		338		(84	)		31,103


Total securities available for sale	$	8,160,822	$	213,914	$	(25,499	)	$	8,349,237


Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	6,768	$	258	$	(15	)	$	7,011
Federal National Mortgage Association		16,603		387		—			16,990
Federal Home Loan Mortgage Corporation		13,890		483		—			14,373

Collateralized mortgage obligations:
Government National Mortgage Association		1,970,888		70,454		—			2,041,342
Federal National Mortgage Association		225,870		8,132		—			234,002
Federal Home Loan Mortgage Corporation		596,725		34,533		—			631,258


Total collateralized mortgage obligations		2,793,483		113,119		—			2,906,602


Total securities held to maturity	$	2,830,744	$	114,247	$	(15	)	$	2,944,976


	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
September 30, 2011:	value		losses				value		losses			value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	31,955	$	(117	)		$	3,903	$	(67	)	$	35,858	$	(184	)
U.S. government agencies		817		(1	)			2,213		(7	)		3,030		(8	)
U.S. government sponsored enterprises		61,776		(286	)			—		—			61,776		(286	)
Corporate		273,026		(11,096	)			14,692		(526	)		287,718		(11,622	)
Trust preferred securities		19,318		(3,852	)			840		(809	)		20,158		(4,661	)

Total debt securities		386,892		(15,352	)			21,648		(1,409	)		408,540		(16,761	)


Mortgage-backed securities:

Residential mortgage-backed securities:
Federal National Mortgage Association		41,202		(166	)	��		—		—			41,202		(166	)
Federal Home Loan Mortgage Corporation		9,144		(67	)			336		(1	)		9,480		(68	)

Collateralized mortgage obligations:
Government National Mortgage Association		5,974		(5	)			—		—			5,974		(5	)
Federal National Mortgage Association		78,867		(256	)			—		—			78,867		(256	)
Federal Home Loan Mortgage Corporation		56,916		(241	)			—		—			56,916		(241	)
Non-agency issued		42,887		(1,023	)			5,515		(130	)		48,402		(1,153	)


Total collateralized mortgage obligations		184,644		(1,525	)			5,515		(130	)		190,159		(1,655	)


Total residential mortgage-backed securities		234,990		(1,758	)			5,851		(131	)		240,841		(1,889	)

Commercial mortgage-backed securities:
Non-agency issued		579,239		(6,756	)			—		—			579,239		(6,756	)

Total mortgage-backed securities		814,229		(8,514	)			5,851		(131	)		820,080		(8,645	)

Asset-backed securities		—		—				112		(9	)		112		(9	)
Other		1,330		(84	)			—		—			1,330		(84	)


Total securities available for sale in an unrealized loss position	$	1,202,451	$	(23,950	)		$	27,611	$	(1,549	)	$	1,230,062	$	(25,499	)


Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	2,183	$	(15	)		$	—	$	—		$	2,183	$	(15	)


	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 September 30, 2011, 99% of the fair value of our investment securities portfolio was rated A- or higher. At September 30, 2011, of the 17 non-agency collateralized mortgage obligations (“CMOs”) in an unrealized loss position, two 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. At September 30, 2011, of the 40 corporate debt securities in an unrealized loss position, three were in a continuous unrealized loss position for 12 months or more. At December 31, 2010, of the 19 corporate debt securities in an unrealized loss position, two were in a continuous unrealized loss position for 12 months or more. As of September 30, 2011, the unrealized losses on our corporate debt securities and non-agency commercial mortgage-backed securities were due to the general widening of credit spreads for these types of securities, causing their fair values to decrease. We have assessed these securities in an unrealized loss position at September 30, 2011 and December 31, 2010 and determined that the declines in fair value below amortized cost were temporary.

Scheduled contractual maturities of our investment securities at September 30, 2011 are as follows:


	Amortized		Fair
	cost		value
Debt securities:
Within one year	$	90,338	$	90,875
After one year through five years		711,357		720,740
After five years through ten years		676,992		687,511
After ten years		60,285		56,657


Total debt securities		1,538,972		1,555,783

Mortgage-backed securities		9,396,738		9,682,129
Asset-backed securities		25,007		25,198
Other		30,849		31,103

	$	10,991,566	$	11,294,213

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 duration of our securities available for sale increased to 4.16 years at September 30, 2011 from 3.73 years at December 31, 2010 as a result of an increase in the weighted average life of our portfolio caused by slowing prepayments in our mortgage-backed securities portfolio, which, in turn, extends the life of the bonds.

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. The transferred securities consisted of residential mortgage-backed securities and CMOs and had net unrealized gains, net of tax, of $4 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. 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

Note 3. Loans and Leases

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


	September 30,			December 31,
	2011			2010
Commercial:
Real estate	$	5,666,028		$	3,964,106
Construction		482,960			406,751
Business		3,588,733			2,623,079


Total commercial		9,737,721			6,993,936

Residential real estate		4,171,374			1,692,198
Home equity		2,177,772			1,524,570
Other consumer		278,499			272,710


Total loans and leases		16,365,366			10,483,414

Allowance for loan losses		(112,749	)		(95,354	)


Total loans and leases, net	$	16,252,617		$	10,388,060

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:


	September 30,		December 31,
	2011		2010

Outstanding principal balance	$	7,104,887	$	2,750,133
Carrying amount		6,940,172		2,649,719

The following table presents changes in the accretable discount, which includes income recognized from contractual interest cash flows, 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	)
NewAlliance acquisition		(1,146,587	)
Net reclassifications to nonaccretable yield		884
Accretion		210,066

Balance at September 30, 2011	$	(1,296,561	)

During the first quarter of 2011, we refined our process used to estimate the allowance for loan losses by increasing 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 loan 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 is enhanced through application of loss rates at a more granular level. Accordingly, we now estimate the allowance for these loans considering its type and loan grade. Our loan grading system is described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-Q under the heading “Credit Risk.”

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 loan losses 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 inherent 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 loan losses and related recorded investment of the associated loans by portfolio segment for the nine months ended September 30:


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for loan losses:
Balance at beginning of period	$	89,001		$	6,353		$	—		$	—	$	95,354
Provision for loan losses		34,087			6,216			882			—		41,185
Charge-offs		(23,495	)		(5,158	)		(882	)		—		(29,535	)
Recoveries		4,051			1,694			—			—		5,745


Balance at end of period	$	103,644		$	9,105		$	—		$	—	$	112,749


Allowance for loan losses:
Individually evaluated for impairment	$	6,337		$	1,932		$	—		$	—	$	8,269
Collectively evaluated for impairment		97,307			7,173			—			—		104,480


Total	$	103,644		$	9,105		$	—		$	—	$	112,749


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	88,071		$	11,983		$	—		$	—	$	100,054
Collectively evaluated for impairment		6,373,767			2,951,373			—			—		9,325,140
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			3,275,883			3,664,289		6,940,172


Total	$	6,461,838		$	2,963,356		$	3,275,883		$	3,664,289	$	16,365,366


*2010*
Allowance for loan losses:
Balance at beginning of period	$	82,813		$	5,490		$	—		$	—	$	88,303
Provision for loan losses		31,949			3,182			—			—		35,131
Charge-offs		(28,638	)		(2,874	)		—			—		(31,512	)
Recoveries		1,456			1,154			—			—		2,610


Balance at end of period	$	87,580		$	6,952		$	—		$	—	$	94,532


Allowance for loan losses:
Individually evaluated for impairment	$	9,480		$	1,514		$	—		$	—	$	10,994
Collectively evaluated for impairment		78,100			5,438			—			—		83,538


Total	$	87,580		$	6,952		$	—		$	—	$	94,532


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	64,183		$	10,251		$	—		$	—	$	74,434
Collectively evaluated for impairment		4,725,479			2,440,026			—			—		7,165,505
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			1,767,123			1,066,422		2,833,545


Total	$	4,789,662		$	2,450,277		$	1,767,123		$	1,066,422	$	10,073,484


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

The following table presents the activity in our allowance for loan losses for the three months ended September 30:


	Legacy						Acquired
	Commercial			Consumer			Commercial		Consumer		Total

*2011*
Allowance for loan losses:
Balance at beginning of period	$	99,904		$	7,124		$	—	$	—	$	107,028
Provision for loan losses		11,443			2,403			—		—		13,846
Charge-offs		(8,330	)		(1,086	)		—		—		(9,416	)
Recoveries		627			664			—		—		1,291


Balance at end of period	$	103,644		$	9,105		$	—	$	—	$	112,749


*2010*
Allowance for loan losses:
Balance at beginning of period	$	83,379		$	7,030		$	—	$	—	$	90,409
Provision for loan losses		10,466			534			—		—		11,000
Charge-offs		(6,630	)		(950	)		—		—		(7,580	)
Recoveries		365			338			—		—		703


Balance at end of period	$	87,580		$	6,952		$	—	$	—	$	94,532

As of September 30, 2011, we had a liability for unfunded commitments of $6.4 million, which included $2.9 million in purchase accounting adjustments related to our acquired unfunded commitments. For the three and nine months ending September 30, 2011, we recognized provision for credit losses related to our unfunded commitments of $0.7 million and $3.5 million, respectively.

As of September 30, 2011, we expect to fully collect the carrying value of our acquired loans and have determined that we can reasonably estimate their future cash flows, including those loans that are 90 days or more past due. As a result, we do not consider our acquired loans that are 90 days or more past due to be nonaccrual or nonperforming and continue to recognize interest income on these loans, including the impact of the loans’ accretable discount. Our nonaccruing loans from our legacy portfolio segment consisted of the following at the dates indicated:


	September 30,		December 31,
	2011		2010
Commercial:
Commercial real estate:
Acquisition and development	$	6,615	$	1,870
Multifamily		366		3,075
Investment real estate		19,751		24,536
Owner occupied		14,563		14,584

Total commercial real estate		41,295		44,065
Business		18,839		25,819

Total commercial		60,134		69,884

Consumer:
Residential real estate		15,555		14,461
Home equity		5,428		4,605
Other consumer		769		373

Total consumer		21,752		19,439


Total	$	81,886	$	89,323

The following table details additional information on our nonaccrual loans in our legacy portfolio segment for the nine months ending September 30 and our total troubled debt restructurings (“TDRs”) at September 30:


	2011		2010
Interest income that would have been recorded if nonaccrual loans were performing in accordance with original terms	$	4,074	$	4,392

Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accruing interest		45,282		18,932
Nonaccrual		32,680		28,097

Total troubled debt restructurings	$	77,962	$	47,029

The modifications made to restructured loans typically consist of an extension of the payment terms or providing for a period with interest-only payments with deferred principal payments. We generally do not forgive principal when restructuring loans. In accordance with the Financial Accounting Standards Board’s (“FASB”) newly issued, and now effective, accounting guidance for TDRs, we were required to retrospectively reassess all loan modifications that occurred on or after January 1, 2011 for identification as TDRs in the current quarter. As a result of this reassessment, we identified $21 million of additional loan modifications which we began classifying as TDRs under the new guidance in the third quarter of 2011. The recorded investment in these new TDRs as of September 30, 2011 was $18 million.

The $18 million of newly identified TDRs primarily consisted of renewals or extensions of terms to troubled commercial borrowers which were not at market rates. Of these newly identified TDRs, $15 million were accruing interest as of September 30, 2011 as the borrower has demonstrated the ability to perform in accordance with the restructured terms, either immediately before or after the restructuring, for six consecutive payments.

The financial effects of our modifications made during the three months and nine months ended September 30, 2011 are below:


			New TDR activity for nine months ending September 30, 2011
	Count of		Post-modification recorded		Pre-modification		Post-modification allowance
	TDRs		investment⁽¹⁾		allowance for loan losses		for loan losses

Commercial:
Commercial real estate:
Acquisition and development		11	$	4,962	$	103	$	375
Multifamily		4		7,532		194		1,279
Investment real estate		9		10,945		1,752		165
Owner occupied		6		2,444		266		135

Total commercial real estate		30		25,883		2,315		1,954
Business		21		16,612		2,075		110

Total commercial		51		42,495		4,390		2,064
Consumer:
Residential real estate		28		3,190		3		383
Home Equity		6		326		1		68
Consumer		1		10		—		1

Total		86	$	46,021	$	4,394	$	2,516


	New TDR activity for three months ending September 30, 2011⁽²⁾
	Count of		Post-modification recorded		Pre-modification		Post-modification allowance
	TDRs		investment		allowance for loan losses		for loan losses
Commercial:
Commercial real estate:
Acquisition and development		11	$	4,962	$	103	$	375
Multifamily		3		4,735		176		1,279
Investment real estate		9		10,945		1,752		165
Owner occupied		5		2,227		266		135

Total commercial real estate		28		22,869		2,297		1,954
Business		18		15,123		1,901		110

Total commercial		46		37,992		4,198		2,064
Consumer:
Residential real estate		7		758		—		157
Home Equity		4		141		—		17
Consumer		1		10		—		1

Total		58	$	38,901	$	4,198	$	2,239


⁽¹⁾		Post-modification balances approximate pre-modification balances. The aggregate amount of charge-offs as a result of the restructuring is not significant.

⁽²⁾		New TDR activity includes newly identified TDRs resulting from the application of the new TDR accounting guidance.

The recorded investment in loans modified within 12 months of the balance sheet date and for which there was a payment default during the period is shown below:


	TDRs with payment default during		TDRs with payment default during
	nine months ending		three months ending
	September 30, 2011⁽¹⁾		September 30, 2011⁽¹⁾

Commercial:
Commercial real estate:
Acquisition and development	$	7,827	$	1,903
Multifamily		—		—
Investment real estate		617		—
Owner occupied		346		346

Total commercial real estate		8,790		2,249
Business		1,252		1,252

Total commercial		10,042		3,501
Consumer:
Residential real estate		682		220

Total	$	10,724	$	3,721


⁽¹⁾		All such loans were on nonaccrual status as of September 30, 2011

The following table details the amount of our legacy impaired loans by class with no related allowance for loan losses, as well as the amount of impaired loans for which there is a related allowance for loan losses as of September 30, 2011 and December 31, 2010. Loans with no related allowance for loan losses have adequate collateral securing their carrying value and in some circumstances, have been charged down to their current carrying value which is based on the fair value of the collateral. At September 30, 2011, the carrying value of our impaired loans, less any related allowance for loan losses, is 68% of the loans’ contractual principal balance.


	September 30, 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	$	4,605	$	4,621	$	—	$	311	$	311	$	—
Multifamily		2,779		4,348		—		2,243		7,783		—
Investment real estate		20,191		27,437		—		7,767		14,442		—
Owner occupied		11,915		15,510		—		4,662		7,315		—

Total commercial real estate		39,490		51,916		—		14,983		29,851		—
Business		18,179		23,824		—		6,154		9,403		—

Total commercial		57,669		75,740		—		21,137		39,254		—
Consumer:
Residential real estate		221		219		—		8,855		8,794		—


Total	$	57,890	$	75,959	$	—	$	29,992	$	48,048	$	—


With a related allowance recorded:
Commercial:
Commercial real estate:
Acquisition and development	$	5,503	$	7,537	$	822	$	8,012	$	8,512	$	443
Multifamily		4,736		8,190		1,279		388		397		15
Investment real estate		8,084		13,614		229		17,451		21,413		1,786
Owner occupied		3,026		3,365		444		7,365		7,481		1,482

Total commercial real estate		21,349		32,706		2,774		33,216		37,803		3,726
Business		9,053		13,695		3,563		17,388		17,599		1,594

Total commercial		30,402		46,401		6,337		50,604		55,402		5,320
Consumer:
Residential real estate		11,178		12,429		1,813		2,270		2,302		173
Home Equity		575		573		118		—		—		—
Consumer		9		9		1		—		—		—

Total consumer		11,762		13,011		1,932		2,270		2,302		173


Total	$	42,164	$	59,412	$	8,269	$	52,874	$	57,704	$	5,493

Total
Commercial:
Commercial real estate:
Acquisition and development	$	10,108	$	12,158	$	822	$	8,323	$	8,823	$	443
Multifamily		7,515		12,538		1,279		2,631		8,180		15
Investment real estate		28,275		41,051		229		25,218		35,855		1,786
Owner occupied		14,941		18,875		444		12,027		14,796		1,482

Total commercial real estate		60,839		84,622		2,774		48,199		67,654		3,726
Business		27,232		37,519		3,563		23,542		27,002		1,594

Total commercial		88,071		122,141		6,337		71,741		94,656		5,320
Consumer:
Residential real estate		11,399		12,648		1,813		11,125		11,096		173
Home Equity		575		573		118		—		—		—
Consumer		9		9		1		—		—		—

Total consumer		11,983		13,230		1,932		11,125		11,096		173


Total	$	100,054	$	135,371	$	8,269	$	82,866	$	105,752	$	5,493

At September 30, 2011 and December 31, 2010, nonaccrual loans differed from the amount of total impaired loans as certain 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 commercial loans less than $200 thousand and nonaccrual consumer loans, which are not considered impaired unless they have been modified in a TDR as they are evaluated collectively when determining the allowance for loan losses. The following table is a reconciliation between nonaccrual loans and impaired loans at the dates indicated:


	Commercial			Consumer			Total
September 30, 2011:
Nonaccrual loans	$	60,134		$	21,752		$	81,886
Plus: Accruing TDRs		35,185			10,097			45,282
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses		(7,248	)		(19,866	)		(27,114	)

Total impaired loans	$	88,071		$	11,983		$	100,054


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

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

The following table details the average recorded investment and interest income recognized for our impaired loans for the nine months ended September 30:


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

Commercial:
Commercial real estate:
Acquisition and development	$	11,481	$	191	$	9,271	$	319
Multifamily		7,541		334		1,878		—
Investment real estate		26,540		365		25,705		37
Owner occupied		16,534		122		10,992		54

Total commercial real estate		62,096		1,012		47,846		410
Business		29,414		308		19,048		28

Total commercial		91,510		1,320		66,894		438
Consumer:
Residential real estate		12,762		449		9,656		70
Home Equity		582		7		—		—
Consumer		10		—		—		—

Total	$	104,864	$	1,776	$	76,550	$	508

The following table details the average recorded investment and interest income recognized for our impaired loans for the three months ending September 30:


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

Commercial:
Commercial real estate:
Acquisition and development	$	8,282	$	133	$	7,189	$	121
Multifamily		5,228		268		2,279		—
Investment real estate		24,532		320		25,621		5
Owner occupied		14,529		101		9,242		6

Total commercial real estate		52,571		822		44,331		132
Business		22,671		273		12,254		5

Total commercial		75,242		1,095		56,585		137
Consumer:
Residential real estate		11,929		161		10,189		8
Home Equity		287		7		—		—
Consumer		5		—		—		—

Total	$	87,463	$	1,263	$	66,774	$	145

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
September 30, 2011	past due		past due		days past due		past due		Current		receivable		days and accruing⁽¹⁾
Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	780	$	780	$	100,866	$	101,646	$	—
Multifamily		—		128		174		302		1,121,436		1,121,738		—
Investment real estate		8,561		—		10,175		18,736		1,535,731		1,554,467		—
Owner occupied		2,882		861		9,272		13,015		1,002,771		1,015,786		—

Total commercial real estate		11,443		989		20,401		32,833		3,760,804		3,793,637		—
Business		7,673		675		8,130		16,478		2,651,723		2,668,201		—

Total commercial		19,116		1,664		28,531		49,311		6,412,527		6,461,838		—


Consumer:
Residential real estate		8,414		5,009		14,143		27,566		1,686,248		1,713,814		—
Home equity		2,471		2,335		4,781		9,587		1,077,327		1,086,914		—
Other consumer		1,237		455		719		2,411		160,217		162,628		—

Total consumer		12,122		7,799		19,643		39,564		2,923,792		2,963,356		—


Total	$	31,238	$	9,463	$	48,174	$	88,875	$	9,336,318	$	9,425,193	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	12	$	—	$	1,173	$	1,185	$	12,791	$	13,976	$	1,173
Multifamily		188		—		998		1,186		226,709		227,895		998
Investment real estate		8,638		18,481		35,849		62,968		1,282,089		1,345,057		35,849
Owner occupied		4,255		1,566		11,906		17,727		750,696		768,423		11,906

Total commercial real estate		13,093		20,047		49,926		83,066		2,272,285		2,355,351		49,926
Business		5,176		555		11,874		17,605		902,927		920,532		11,874

Total commercial		18,269		20,602		61,800		100,671		3,175,212		3,275,883		61,800


Consumer:
Residential real estate		20,306		10,082		62,124		92,512		2,365,048		2,457,560		62,124
Home equity		8,482		4,973		17,352		30,807		1,060,051		1,090,858		17,352
Other consumer		2,301		1,112		1,994		5,407		110,464		115,871		1,994

Total consumer		31,089		16,167		81,470		128,726		3,535,563		3,664,289		81,470


Total	$	49,358	$	36,769	$	143,270	$	229,397	$	6,710,776	$	6,940,173	$	143,270


⁽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 into interest income.


	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⁽¹⁾

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


⁽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 into interest income.

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


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

*September 30, 2011*
Legacy loans:
Pass	$	27,538	$	1,082,718	$	1,367,774	$	890,123	$	2,411,856	$	5,780,009		89.4	%
Criticized:⁽¹⁾
Accrual		67,493		38,654		166,942		111,100		237,506		621,695		9.6	%
Nonaccrual		6,615		366		19,751		14,563		18,839		60,134		1.0	%

Total criticized		74,108		39,020		186,693		125,663		256,345		681,829		10.6	%

Total	$	101,646	$	1,121,738	$	1,554,467	$	1,015,786	$	2,668,201	$	6,461,838		100.0	%


Acquired loans:
Pass	$	1,339	$	196,800	$	1,189,449	$	623,496	$	771,972	$	2,783,056		85.0	%
Criticized:⁽¹⁾
Accrual		12,637		31,095		155,608		144,927		148,560		492,827		15.0	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		12,637		31,095		155,608		144,927		148,560		492,827		15.0	%

Total	$	13,976	$	227,895	$	1,345,057	$	768,423	$	920,532	$	3,275,883		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 into interest income.

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 of
	real estate		equity			consumer		Total		Total
*September 30, 2011*
Legacy loans by refreshed FICO score:
Over 700	$	1,369,354	$	840,937		$	81,979	$	2,292,270		77.4	%
660-700		159,562		130,082			24,800		314,444		10.6	%
620-660		71,873		53,584			13,582		139,039		4.7	%
580-620		39,714		25,383			7,089		72,186		2.4	%
Less than 580		62,114		31,816			10,821		104,751		3.5	%
No score		11,197		5,112			24,357		40,666		1.4	%

Total	$	1,713,814	$	1,086,914		$	162,628	$	2,963,356		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	1,770,670	$	798,184		$	51,049	$	2,619,903		71.4	%
660-700		185,891		110,071			18,020		313,982		8.6	%
620-660		91,796		61,910			8,239		161,945		4.4	%
580-620		257,873		36,656			5,421		299,950		8.2	%
Less than 580		109,743		58,594			9,636		177,973		4.9	%
No score		41,587		25,443			23,506		90,536		2.5	%

Total	$	2,457,560	$	1,090,858		$	115,871	$	3,664,289		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 residential mortgage loans we service for others is as follows at the dates indicated:


	September 30,		December 31,
	2011		2010
Mortgages serviced for others	$	1,922,592	$	1,554,083
Mortgage servicing rights		15,162		12,591

Note 4. Derivative Financial Instruments

We are a party to derivative financial instruments in the normal course of business to manage our own exposure to fluctuations in interest rates and to meet the needs of our customers. These financial instruments have been limited to interest rate swap agreements, which are entered into with counterparties that meet established credit standards and, where appropriate, 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 customer related and 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⁾
*September 30, 2011*
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	1,815,440	$	27,894

Derivatives not designated as hedging instruments:
Interest rate swap agreements		758,338		54,252		758,338		54,915

Total derivatives	$	758,338	$	54,252	$	2,573,778	$	82,809


*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, including forward starting swaps to hedge our planned issuance of senior and subordinated debt. 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 2013 to 2021. 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 $11.9 million of pre-tax 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. In connection with our cash flow hedges, we provided $11.9 million of cash collateral to our counterparties as of September 30, 2011, which we have offset against the fair value liabilities of our derivatives designated in cash flow hedging relationships in our Consolidated Statements of Condition.

The following tables present information about amounts recognized for our derivative financial instruments designated in hedging relationships for the three and nine months ended September 30:


	Three months ended September 30,						Nine months ended September 30,
Fair Value Hedges⁽¹⁾	2011			2010			2011			2010
Interest rate swap agreements:
Amount of (loss) gain on derivative instruments⁽²⁾	$	(404	)	$	(4	)	$	(395	)	$	(482	)


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

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


	Three months ended September 30,						Nine months ended September 30,
Cash Flow Hedges	2011			2010			2011			2010
Interest rate swap agreements:
Amount of (loss) gain on derivatives recognized in other comprehensive income, net of tax	$	(14,274	)	$	162		$	(18,775	)	$	332

Amount of loss on derivatives reclassified from other comprehensive income to income⁽¹⁾		(2,241	)		(382	)		(4,860	)		(1,163	)


⁽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 in the normal course of servicing our customers, which are accounted for as free standing derivatives. We manage 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 “customer 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. We recognize revenue for this service that we provide our customers, as indicated in the table below.

The following table presents the revenue earned and recognized in other noninterest income in our Consolidated Statements of Income for our customer swaps due to changes in fair value for the three and nine months ended September 30:


	Three months ended					Nine months ended
	September 30,					September 30,
Derivatives not designated as hedging instruments	2011		2010			2011		2010
Derivative revenue	$	2,458	$	(306	)	$	5,278	$	(238	)

Note 5. Income Taxes

Our net deferred tax asset totaled $158 million and $123 million at September 30, 2011 and December 31, 2010, respectively. The increase primarily relates to the acquisition of deferred tax assets from NewAlliance partially offset by deferred tax liabilities resulting from the increase in the unrealized gain on securities available for sale.

A reconciliation of the beginning and ending amount of our liability for uncertain tax positions is as follows for the nine months ended September 30, 2011:


Balance at beginning of period	$	8,299
Additions for tax positions of prior year recorded due to current year acquisitions		260
Reductions for tax positions of prior years		(6,089	)
Reductions as a result of the lapse of the applicable statute of limitations		(101	)

Balance at end of period	$	2,369

The reduction in the balance of the liability for uncertain tax positions for prior years for the nine months ended September 30, 2011 relates to a revision of an uncertain tax position. Of this reduction, $4 million was recorded as a decrease in goodwill and $2 million was reclassified as a deferred tax asset valuation allowance. Additionally, related to this reduction, there was a $1 million decrease in income tax expense for the nine months ended September 30, 2011 due to the reversal of accrued interest.

Note 6. Restructuring Charges

These efforts commenced in 2011 and resulted in expenses of $16.3 million and $29.0 million in the three and nine months ended September 30, 2011, respectively. Concerning our plans to adjust our branch network, we recognized $4.5 million in the quarter ended September 30, 2011. For our plans to exit other acquired facilities, mostly in Eastern Pennsylvania, we recognized $5.2 million in the quarter ended September 30, 2011. Finally, for actions to restructure our back office services, we recognized $6.6 million in the quarter ended September 30, 2011. We expect to recognize, evenly over the next two quarters, approximately $5 million to $10 million related to these restructuring activities, resulting in lower overall restructuring expenses than originally estimated by $20 million to $25 million, due primarily to lower than expected lease exit costs. We expect that this restructuring effort will be completed by March 31, 2012. This activity is all attributable to our banking segment.

The activity in the restructuring reserve and related expenses is presented as follows for the periods indicated (amounts in thousands):


	Three months ended					Nine months ended
	September 30, 2011					September 30, 2011
	Expense		Liability			Expense		Liability
Beginning balance			$	3,045				$	—

Severance and other employee related costs		569		569			2,511		2,511
Lease exit costs		7,640		7,640			10,738		10,738
Other exit costs, professional services, and other		4,317		4,317			7,900		7,900

Total accrued		12,526		12,526			21,149		21,149

Payments related to:
Severance and other employee realted costs				(700	)				(1,334	)
Lease exit costs				(1,898	)				(3,659	)
Other exit costs, professional services, and other				(4,317	)				(7,500	)

Restructuring reserve			$	8,656				$	8,656


Other restructuring expense:
Asset write-offs and disposals		3,800					7,889


Total restructuring charges	$	16,326				$	29,038

Note 7. 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 and nine months ended September 30:


	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Net income	$	56,981		$	45,596		$	115,449		$	94,498
Less income allocable to unvested restricted stock awards		156			108			351			232


Net income allocable to common stockholders	$	56,825		$	45,488		$	115,098		$	94,266


Weighted average common shares outstanding:
Total shares issued		309,090			215,106			272,942			207,820
Unallocated employee stock ownership plan shares		(2,487	)		(2,742	)		(2,556	)		(2,801	)
Unvested restricted stock awards		(800	)		(489	)		(717	)		(483	)
Treasury shares		(13,592	)		(6,054	)		(9,410	)		(6,158	)

Total basic weighted average common shares outstanding		292,211			205,821			260,259			198,378

Incremental shares from assumed exercise of stock options		19			22			165			104
Incremental shares from assumed vesting of restricted stock awards		273			215			265			204


Total diluted weighted average common shares outstanding		292,503			206,058			260,689			198,686


Basic earnings per common share	$	0.19		$	0.22		$	0.44		$	0.48


Diluted earnings per common share	$	0.19		$	0.22		$	0.44		$	0.47


Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations		11,333			3,319			9,285			1,841

Note 8. Other Comprehensive Income

The following table presents the activity in our Other Comprehensive Income for the nine months ended September 30:


	Pretax			Income taxes			Net
2011:
Securities available for sale:
Net unrealized holding gains arising during the period	$	80,782		$	30,850		$	49,932
Reclassification adjustment for net unrealized holding gains on securities transferred to held to maturity		(6,380	)		(2,424	)		(3,956	)

Net unrealized gains on securities available for sale		74,402			28,426			45,976

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
Less: amortization of net unrealized holding gains to income during the period		(1,230	)		(468	)		(762	)

		5,150			1,956			3,194

Interest rate swaps designated as cash flow hedges:
Net unrealized losses arising during the period		(35,175	)		(13,387	)		(21,788	)
Reclassification adjustment for realized losses included in net income		4,860			1,847			3,013

Net unrealized losses on interest rate swaps designated as cash flow hedges		(30,315	)		(11,540	)		(18,775	)

Amortization of net loss related to pension and post-retirement plans		999			(425	)		1,424

Total other comprehensive income	$	50,236		$	18,417		$	31,819


2010:
Securities available for sale:
Unrealized holding gains arising during the period	$	183,732		$	69,366		$	114,366
Interest rate swaps designated as cash flow hedges:
Net unrealized losses arising during the period		(578	)		(189	)		(389	)
Reclassification adjustment for realized losses included in net income		1,163			442			721

Net unrealized gains on interest rate swaps designated as cash flow hedges		585			253			332
Amortization of net loss related to pension and post-retirement plans		776			657			119

Total other comprehensive income	$	185,093		$	70,276		$	114,817

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


			Net unrealized gains
			on securities		Unrealized gains (losses)
	Net unrealized gains		transferred from		on interest rate swaps
	on securities		available for sale to		designated as cash flow			Defined benefit
	available for sale		held to maturity		hedges			plans			Total
Balance, January 1, 2011	$	70,690	$	—	$	2,978		$	(15,797	)	$	57,871
Period change, net of tax		45,976		3,194		(18,775	)		1,424			31,819

Balance September 30, 2011	$	116,666	$	3,194	$	(15,797	)	$	(14,373	)	$	89,690

Balance, January 1, 2010	$	17,206	$	—	$	(1,154	)	$	(13,538	)	$	2,514
Period change, net of tax		114,366		—		332			119			114,817

Balance September 30, 2010	$	131,572	$	—	$	(822	)	$	(13,419	)	$	117,331

Note 9. 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 estimates 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
September 30, 2011
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	687,938	$	—	$	687,938	$	—
U.S. Treasury		20,600		20,600		—		—
U.S. government agencies		5,571		—		5,571		—
U.S. government sponsored enterprises		491,546		—		491,546		—
Corporate		324,976		—		324,976		—
Trust preferred securities		25,152		—		—		25,152

Total debt securities		1,555,783		20,600		1,510,031		25,152

Mortgage-backed securities:

Residential mortgage-backed securities:
Government National Mortgage Association		97,675		—		97,675		—
Federal National Mortgage Association		833,846		—		833,846		—
Federal Home Loan Mortgage Corporation		735,478		—		735,478		—

Collateralized mortgage obligations:
Government National Mortgage Association		2,653,208		—		2,653,208		—
Federal National Mortgage Association		680,539		—		680,539		—
Federal Home Loan Mortgage Corporation		732,341		—		732,341		—
Non-agency issued		106,486		—		106,486		—

Total collateralized mortgage obligations		4,172,574		—		4,172,574		—

Total residential mortgage-backed securities		5,839,573		—		5,839,573		—
Commercial mortgage-backed securities:
Non-agency issued		897,580		—		897,580		—

Total mortgage-backed securities		6,737,153		—		6,737,153		—

Asset-backed securities		25,198		—		25,198		—
Other		31,103		15,003		16,100		—

Total securities available for sale		8,349,237		35,603		8,288,482		25,152

Loans held for sale⁽¹⁾		79,820		—		79,820		—

Interest rate swaps		54,252		—		54,252		—

Total assets	$	8,483,309	$	35,603	$	8,422,554	$	25,152


Liabilities:
Interest rate swaps	$	82,809	$	—	$	82,809	$	—


⁽¹⁾		Represents loans for which we have elected the fair value option

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 nine months ended September 30, 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 trust preferred securities in Level 3 of the fair value hierarchy. We determined the fair value using third party pricing services including brokers.

Loans held for sale

Beginning in the second quarter of 2011, we have generally elected the fair value option upon origination of residential real estate loans held for sale as we believe the fair value measurement of such loans reduces certain timing differences in our Statement of Income and better aligns with our management of the portfolio from a business perspective. This election is made at the time of origination and is irrevocable. The secondary market for securities backed by similar loan types is actively traded, which provides readily observable market pricing to be used as input for the estimate for the fair value of our loans. Accordingly, we have classified this fair value measurement as Level 2. Interest income on these loans is recognized in Interest income — Loans and leases in our Consolidated Statements of Income. As of December 31, 2010, we had not elected the fair value option for any of the loans in our held for sale portfolio. Information about our loans held for sale, for which we elected the fair value option, is presented below for the third quarter of 2011:


					Fair value carrying
	Fair value carrying		Aggregate unpaid principal		amount less aggregate
At September 30, 2011	amount		balance		unpaid principal balance
Loans held for sale
Total loans	$	79,820	$	76,257	$	3,563
Nonaccrual loans		—		—		—
Loans 90 days or more past due and still accruing		—		—		—

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 arrangements, 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.

Level 3 Assets

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis were as follows for the nine months ended September 30:


	2011			2010
Balance at beginning of period	$	919		$	480
NewAlliance acquisition		27,924			—
(Losses) gains included in other comprehensive income		(3,691	)		404

Balance at end of period	$	25,152		$	884

There were no gains or losses during the nine months ended September 30, 2011 and 2010 included in earnings related to any item classified as level 3 on a recurring basis in the fair value hierarchy.

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 nine months ended September 30:


	Fair Value Measurements								Total gains
	Total		Level 1		Level 2		Level 3		(losses)
2011
Collateral dependent impaired loans	$	20,289	$	—	$	8,750	$	11,539	$	(9,117	)

2010
Collateral dependent impaired loans	$	62,652	$	—	$	62,652	$	—	$	(10,674	)

Collateral Dependent Impaired Loans

We record nonrecurring adjustments to the carrying value of collateral dependent impaired loans when establishing the allowance for loan 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 appraiser. Updated appraisals are obtained at least every 18 to 24 months. An appraisal may be obtained more frequently than 18 to 24 months when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral.

During the nine months ended September 30, 2011 we recorded an increase of $9.1 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $20.3 million at September 30, 2011. During the nine months ended September 30, 2010 we recorded a net increase of $10.7 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $62.7 million at September 30, 2010.

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:


	September 30, 2011				December 31, 2010
			Estimated fair				Estimated fair
	Carrying value		value		Carrying value		value
Financial assets:
Cash and cash equivalents	$	332,437	$	332,437	$	213,820	$	213,820
Investment securities available for sale		8,349,237		8,349,237		7,289,455		7,289,455
Investment securities held to maturity		2,830,744		2,944,976		1,025,724		1,043,803
Federal Home Loan Bank and Federal Reserve Bank common stock		331,747		331,747		183,800		183,800
Loans held for sale		79,820		79,820		37,977		38,357
Loans and leases, net		16,252,617		16,545,488		10,388,060		10,422,730
Mortgage servicing rights		15,162		16,815		12,591		13,178
Interest rate swap agreements		54,252		54,252		30,187		30,187
Accrued interest receivable		102,289		102,289		70,233		70,233

Financial liabilities:
Deposits	$	19,624,177	$	19,687,579	$	13,148,844	$	13,110,504
Borrowings		7,085,343		7,223,869		4,893,474		4,885,827
Interest rate swap agreements		82,809		82,809		27,506		27,506
Accrued interest payable		19,560		19,560		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 investment 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 10. 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 risk management operations. Substantially all of our assets relate to the banking segment. Transactions between our banking and financial services segments are eliminated in consolidation.

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


			Financial			Consolidated
Three months ended:	Banking		services			total
September 30, 2011:
Net interest income	$	235,461	$	(32	)	$	235,429
Provision for credit losses		14,500		—			14,500

Net interest income after provision for credit losses		220,961		(32	)		220,929
Noninterest income		51,656		16,999			68,655
Amortization of core deposit and other intangibles		5,533		1,363			6,896
Other noninterest expense		184,098		12,877			196,975

Income before income taxes		82,986		2,727			85,713
Income tax expense		27,696		1,036			28,732

Net income	$	55,290	$	1,691		$	56,981


September 30, 2010:
Net interest income	$	161,279	$	—		$	161,279
Provision for credit losses		11,000		—			11,000

Net interest income after provision for credit losses		150,279		—			150,279
Noninterest income		36,343		13,162			49,505
Amortization of core deposit and other intangibles		4,757		696			5,453
Other noninterest expense		115,933		11,223			127,156

Income before income taxes		65,932		1,243			67,175
Income tax expense		21,082		497			21,579

Net income	$	44,850	$	746		$	45,596


			Financial			Consolidated
Nine months ended:	Banking		services			total
September 30, 2011:
Net interest income	$	638,921	$	(187	)	$	638,734
Provision for credit losses		44,707		—			44,707

Net interest income after provision for credit losses		594,214		(187	)		594,027
Noninterest income		132,030		49,594			181,624
Amortization of core deposit and other intangibles		15,329		3,629			18,958
Other noninterest expense		545,310		39,894			585,204

Income before income taxes		165,605		5,884			171,489
Income tax expense		53,804		2,236			56,040

Net income	$	111,801	$	3,648		$	115,449


September 30, 2010:
Net interest income	$	430,206	$	—		$	430,206
Provision for credit losses		35,131		—			35,131

Net interest income after provision for credit losses		395,075		—			395,075
Noninterest income		94,824		37,679			132,503
Amortization of core deposit and other intangibles		11,969		2,042			14,011
Other noninterest expense		338,766		31,217			369,983

Income before income taxes		139,164		4,420			143,584
Income tax expense		47,319		1,767			49,086

Net income	$	91,845	$	2,653		$	94,498


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 under Item 1A. “Risk Factors” in both this Quarterly Report on 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2010. 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 September 30, 2011, we had $31.2 billion in assets, $19.6 billion in deposits, and 332 full-service branch locations across Upstate New York, Pennsylvania, Connecticut, and Western Massachusetts. 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. As a result of the merger, we acquired assets with a fair value of $9.2 billion, including investment securities with a fair value of $2.8 billion, loans with a fair value of $5.1 billion, and we assumed deposits of $5.3 billion and borrowings of $2.3 billion. 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.

We have provided all necessary data to the DOJ and continue to expect that the required divestitures will be consistent with our original $1.6 billion estimate. We expect final DOJ approval in the near term and will commence marketing both the DOJ required divestitures and the divestiture of certain branches in select locations that are outside of our strategic focus following the receipt of the final approval.

The macroeconomic environment has changed significantly since the announcement of the HSBC Acquisition in ways that will currently preclude achieving certain original acquisition assumptions. Interest rates have fallen to historical lows, and capital markets, particularly in the banking sector, have been depressed and unusually volatile. We are currently assessing all our options including but not limited to offering a mix of common stock, preferred stock, convertible securities, and senior and subordinated debt, reducing the size of our balance sheet and the timing and price expected for both the DOJ divestitures and the divestiture of certain branches in select locations that are outside of our strategic focus. However, we continue to intend to use the cash received in the HSBC Acquisition to pay down borrowings as well as purchase investment securities. When we announced the transaction on July 31, 2011, we anticipated investment yields for securities we would purchase to be approximately 4.25%; however, due to current market conditions, we currently expect these investment yields to be approximately 3.5%.

See Part II, Item 1A, for a discussion of Risk Factors surrounding the HSBC Acquisition.

BUSINESS AND INDUSTRY

We operate as a community oriented bank that provides customers with a full range of products and services. 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 risk management 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.

During the third quarter of 2011 the Federal Reserve announced that it intended to keep interest rates low through mid-2013, and take certain actions designed to lower longer-term interest rates, referred to as “Operation Twist”. This action had the impact of flattening the yield curve and reducing the yields on earning assets that are (a) adjustable rate and directly tied to longer-term rates, such as certain commercial real estate loan products that we offer, and (b) fixed rate where the rate is based on longer-term rates, such as certain of our residential real estate loan products. These reductions in yields directly impacted our net interest income in three important ways: first, it reduced the yields on our assets which we were not able to fully offset by reducing the cost of our liabilities; second, it caused borrowers to repay their fixed rate loans at a faster rate; and third, it reduced the rates at which cash flows from these repayments could be reinvested. Additionally, the actions by the Federal Reserve were interpreted by investors as signaling a pessimistic bias toward the outlook of the direction of the US economy.

MARKET AREAS AND COMPETITION

Our business operations are concentrated in Upstate New York, Pennsylvania, 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, 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 loan 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 Loan Losses

We establish our allowance for loan 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 collectability 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 loan losses. We continue to monitor and modify the level of our allowance for loan 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 loan losses.

We determined our allowance for loan losses by portfolio segment, which consist of commercial loans and consumer loans. We further segregate these segments between loans which are 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 loan losses.

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

For our legacy loans, our allowance for loan 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 loan 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. During the first quarter of 2011, we refined our process used to estimate the allowance by increasing the granularity of the historical net loss experience data utilized for both the consumer and commercial portfolio segments. These changes enhance our estimates and provide an opportunity to better align our allowance assumptions with the dynamic nature of our loan portfolio composition. We assessed the impact of the changes and concluded that they did not have a significant impact when compared to our estimates based on previous methodologies for either portfolio segment.

Prior to the first quarter of 2011, we estimated a portion of the allowance for loan 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 loan grade. Our loan grading system is described in our Management’s Discussion and Analysis of Financial Condition and Results of Operations section of this Form 10-Q under the heading “Credit Risk.”

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 inherent loss in the current portfolio based on their loan type and current delinquency status.

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 loan 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 acquired loans. 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 acquired loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan 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 loan 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 September 30, 2011, our available for sale and held to maturity investment securities totaled $11.2 billion, or 36% 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 September 30, 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. Approximately 1.2% of the fair value of our portfolio at September 30, 2011 was valued using 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 a 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, based on current stock prices, 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	September 30,		June 30,		March 31			December 31		September 30
	(In thousands, except per share amounts)
Selected financial condition data:
Total assets	$	31,209,507	$	30,889,646	$	21,439,845		$	21,083,853	$	20,871,540
Loans and leases, net		16,252,617		16,062,197		10,611,117			10,388,060		9,978,952
Investment securities:
Available for sale		8,349,237		8,219,695		5,424,731	⁽¹⁾		7,289,455		7,341,505
Held to maturity		2,830,744		2,939,933		3,030,320	⁽¹⁾		1,025,724		1,125,184
Goodwill and other intangibles		1,812,628		1,829,712		1,108,811			1,114,144		1,099,446
Deposits		19,624,177		18,900,495		13,455,823			13,148,844		13,395,183
Borrowings		7,085,343		7,600,926		4,904,053			4,893,474		4,343,120
Stockholders’ equity	$	4,000,675	$	3,992,835	$	2,775,032		$	2,765,070	$	2,806,561
Common shares outstanding		294,898		295,245		209,432			209,112		209,059

Selected operations data:
Interest income	$	287,147	$	277,370	$	208,884		$	205,320	$	200,636
Interest expense		51,718		46,933		36,016			37,772		39,357

Net interest income		235,429		230,437		172,868			167,548		161,279
Provision for credit losses		14,500		17,307		12,900			13,500		11,000

Net interest income after provision for credit losses		220,929		213,130		159,968			154,048		150,279
Noninterest income		68,655		60,895		52,074			54,112		49,505
Noninterest expense⁽²⁾		203,871		255,141		145,150			139,334		132,609

Income before income taxes		85,713		18,884		66,892			68,826		67,175
Income tax expense		28,732		5,334		21,974			22,971		21,579


Net income	$	56,981	$	13,550	$	44,918		$	45,855	$	45,596

Stock and related per share data:
Earnings per common share:
Basic	$	0.19	$	0.05	$	0.22		$	0.22	$	0.22
Diluted		0.19		0.05		0.22			0.22		0.22
Cash dividends		0.16		0.16		0.16			0.15		0.14
Book value		13.72		13.68		13.45			13.42		13.63
Tangible book value per share⁽³⁾		7.50		7.41		8.08			8.01		8.29
Market Price (NASDAQ: FNFG):
High		13.59		14.54		15.10			14.40		13.79
Low		9.15		13.02		13.54			11.51		11.23
Close	$	9.15	$	13.20	$	13.58		$	13.98	$	11.65


⁽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 Note 2, Investment Securities.

⁽²⁾		Noninterest expense includes expenses related to our merger and acquisition integration or restructuring activities of $25 million, $88 million, $7 million, $6 million, and $2 million for the quarters ended September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010, and September 30, 2010, respectively.

⁽³⁾		Tangible book value per share excludes goodwill and other intangible assets of $1.8 billion, $1.8 billion, $1.1 billion, $1.1 billion, and $1.1 billion, as of September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010, and September 30, 2010, respectively, as well as unallocated ESOP shares and unvested restricted stock shares. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and condition.


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

Performance ratios⁽¹⁾:
Return on average assets		0.73	%		0.19	%		0.86	%		0.87	%		0.88	%
Return on average equity		5.61			1.42			6.56			6.46			6.44
Return on average tangible equity⁽²⁾		10.28			2.59			10.94			10.64			10.59

Net interest rate spread		3.35			3.53			3.68			3.52			3.47
Net interest rate margin		3.48			3.65			3.80			3.65			3.61
Efficiency ratio⁽³⁾		67.0			87.6			64.5			62.9			62.9
Dividend payout ratio		84.21	%		N/M			72.73	%		68.18	%		63.64	%

Capital ratios:
*First Niagara Financial Group, Inc.*
Total risk-based capital		12.56	%		12.69	%		14.13	%		14.35	%		15.09	%
Tier 1 risk-based capital		11.90	%		12.05			13.32			13.54			14.25
Tier 1 common risk-based capital⁽⁴⁾		11.29	%		11.41			12.56			12.76			13.42
Leverage ratio		7.42			7.81			8.21			8.14			8.37
Ratio of stockholders’ equity to total assets		12.82			12.93			12.94			13.11			13.45
Ratio of tangible stockholders’ equity to tangible assets⁽⁵⁾		7.44			7.44			8.20			8.27			8.63
*First Niagara Bank, N.A.:*
Total risk-based capital		12.17	%		12.37			12.04			11.86			12.72
Tier 1 risk-based capital		11.51	%		11.72			11.23			11.06			11.88
Leverage ratio		7.17	%		7.58	%		6.92	%		6.64	%		6.97	%

Asset quality:
Total nonaccruing loans	$	81,886		$	82,513		$	80,368		$	89,323		$	94,180
Other nonperforming assets		9,392			12,315			6,955			8,647			8,619
Total classified loans⁽⁶⁾		692,961			700,813			564,037			481,074			462,902
Total criticized loans⁽⁷⁾		1,268,879			1,253,937			972,148			942,941			859,219
Allowance for loan losses		112,749			107,028			100,126			95,354			94,532
Net loan charge-offs	$	8,125		$	7,537		$	8,128		$	12,679		$	6,877
Net charge-offs to average loans (annualized)		0.20	%		0.20	%		0.31	%		0.49	%		0.27	%
Provision to average loans (annualized)		0.34			0.38			0.49			0.53			0.43
Total nonaccruing loans to total loans		0.50			0.51			0.75			0.85			0.93
Total nonperforming assets to total assets		0.29			0.31			0.41			0.46			0.49
Allowance for loan losses to total loans		0.69			0.66			0.93			0.91			0.94
Allowance for loan losses to legacy loans⁽⁸⁾		1.20			1.21			1.22			1.22			1.31
Allowance for loan losses to nonaccruing loans		137.7			129.7			124.6			106.8			100.4
Texas ratio⁽⁹⁾		10.19	%		10.12	%		8.51	%		8.94	%		8.85	%

Other data:
Number of full service branches		332			346			257			257			255
Full time equivalent employees		4,712			4,751			3,825			3,791			3,725
Effective tax rate		33.5	%		28.2	%		32.8	%		33.4	%		32.1	%

N/M Not Meaningful


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

⁽²⁾		Average tangible equity excludes average goodwill and other intangibles of $1.8 billion, $1.7 billion, $1.1 billion, $1.1 billion, and $1.1 billion, for the quarters ended September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010, and September 30, 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 common stockholders’ equity and tangible assets exclude goodwill and other intangibles of $1.8 billion, $1.8 billion, $1.1 billion, $1.1 billion, and $1.1 billion as of September 30, 2011, June 30, 2011, March 31, 2011, December 31, 2010, and September 30, 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.


⁽⁶⁾		Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include 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.

⁽⁷⁾		Beginning in the third quarter of 2011, criticized loans includes consumer loans when they are 90 days or more past due. Prior to the third quarter of 2011, criticized loans includes consumer loans when they are 60 days or more past due. The impact of the change at September 30, 2011 was a reduction of criticized loans by $24 million. Criticized loans include special mention, substandard, doubtful, and loss.

⁽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 loan 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

The following table summarizes the results of operations for the quarters ended September 30, 2011 and June 30, 2011, and includes, for the quarter ended June 30, 2011, the results of operations normalized to account for the acquisition of NewAlliance completed on April 15, 2011 and to reflect an adjustment for Federal Deposit Insurance Corporation (“FDIC”) premium expense. The NewAlliance normalization adjustment (“normalization adjustment”) assumes 15 days of additional ownership of NewAlliance calculated as the estimated NewAlliance impact divided by the 76 days of ownership in the second quarter and multiplied by 15. We believe the normalization adjustment is useful to investors because it facilitates a comparison of the results of operations for the three months ended September 30, 2011 to the three months ended June 30, 2011 without the distorting effect of lower income statement items for the three months ended June 30, 2011 arising out of the fact that the NewAlliance merger did not occur until April 15, 2011. 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. In addition, we believe the exclusion of certain nonoperating items enables management to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations.


									Three months ended June 30, 2011
												Estimated New Alliance Impact
														Purchase
	Three months ended September 30, 2011													accounting											Normalized
				FDIC			Adjusted					Estimated		accretion						Normalization		FDIC			results
	Actual			adjustment⁽¹⁾			(Non-GAAP)		Actual			results⁽²⁾		(amortization)⁽³⁾			Other⁽⁴⁾			adjustment⁽⁵⁾		Adjustment⁽¹⁾			(Non-GAAP)

Total interest income	$	287,147					$	287,147	$	277,370		$	72,796	$	(7,153	)	$	(1,502	)	$	12,659				$	290,029
Total interest expense		51,718						51,718		46,933			21,563		(10,914	)					2,102					49,035


Net interest income		235,429						235,429		230,437			51,233		3,761			(1,502	)		10,557					240,994
Provision for credit losses		14,500						14,500		17,307			1,900								375					17,682

Net interest income after provision		220,929						220,929		213,130			49,333		3,761			(1,502	)		10,182					223,312
Total noninterest income		68,655						68,655		60,895			9,128		—			—			1,802					62,697
Total operating noninterest expense (Non-GAAP)		178,537			(1,574	)		176,963		166,657			35,955		1,417			(9,619	)		5,477		1,574			173,708


Income before income taxes (Non-GAAP)		111,047			1,574			112,621		107,368			22,506		2,344			8,117			6,507		(1,574	)		112,301
Income taxes		37,402			539			37,941		36,126			7,778		810			2,805			2,249		(539	)		37,836

Net operating income (Non-GAAP)		73,645		$	1,035		$	74,680		71,242		$	14,728	$	1,534		$	5,312		$	4,258	$	(1,035	)	$	74,465

Total nonoperating expenses, net of tax		(16,664	)							(57,692	)

Net income (GAAP)	$	56,981							$	13,550


⁽¹⁾		Adjustment of FDIC premium related to the second quarter that was recognized in the third quarter.

⁽²⁾		Estimated results based upon NewAlliance actual first quarter results prorated for number of days of First Niagara ownership of NewAlliance in second quarter.

⁽³⁾		Actual purchase accounting accretion or amortization related to NewAlliance recognized in the second quarter.

⁽⁴⁾		Other adjustments based upon cost of funding cash consideration and planned cost synergies at time of merger.

⁽⁵⁾		Normalization adjustment assumes 15 days of additional ownership of NewAlliance.

During the quarter ended September 30, 2011, GAAP net income amounted to $57 million, or $0.19 per diluted common share, compared to $14 million, or $0.05 per diluted common share, for the quarter ended June 30, 2011. The increase in GAAP net income is primarily due to increases in net interest income and noninterest income and a $68 million decrease in merger and acquisition integration expenses, offset by increases in restructuring charges and other noninterest expenses due to our larger franchise. Normalized net operating income remained nearly unchanged at $74 million for the quarter ended September 30, 2011 compared to the quarter ended June 30, 2011, reflecting the benefits of continuing growth in our capital markets business, commercial loan portfolio, and core deposits offset by net interest margin compression resulting in flat total revenues over second quarter levels.

The following table summarizes our operating results for the periods indicated. 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. In addition, we believe the exclusion of these non operating items enables management to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations (in thousands).


	Three months ended						Nine months ended
	September 30,						September 30,
	2011			2010			2011			2010
Operating results (Non-GAAP):
Net interest income	$	235,429		$	161,279		$	638,734		$	430,206
Provision for credit losses		14,500			11,000			44,707			35,131
Noninterest income		68,655			49,505			181,624			132,503
Noninterest expense		178,537			130,693			483,112			339,255
Income taxes		37,402			22,194			97,878			63,869


Net operating income (Non-GAAP)	$	73,645		$	46,897		$	194,661		$	124,454


Operating earnings per diluted share (Non-GAAP)	$	0.25		$	0.23		$	0.75		$	0.63


Reconciliation of net operating income to net income	$	73,645		$	46,897		$	194,661		$	124,454
Nonoperating expenses, net of tax at effective tax rate:
Merger and acquisition integration expenses		(5,925	)		(1,301	)		(60,164	)		(29,443	)
Restructuring charges		(10,739	)		—			(19,048	)		—
Other		—			—			—			(513	)


Net income	$	56,981		$	45,596		$	115,449		$	94,498


Earnings per diluted share	$	0.19		$	0.22		$	0.44		$	0.47

Net operating income for the three months ended September 30, 2011, increased to $74 million, or $0.25 per diluted common share, compared to $47 million, or $0.23 per diluted common share, for the three months ended September 30, 2010. Net operating income increased to $195 million, or $0.75 per diluted common share, for the nine months ended September 30, 2011 from $124 million, or $0.63 per diluted common share, for the nine months ended September 30, 2010. 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.

GAAP net income for the three months ended September 30, 2011 amounted to $57 million, or $0.19 per diluted common share, compared to $46 million, or $0.22 per diluted common share, for the three months ended September 30, 2010. GAAP net income for the nine months ended September 30, 2011 increased to $115 million, or $0.44 per diluted common share, from $94 million, or $0.47 per diluted common share, for the nine months ended September 30, 2010.

Our results reflect our larger franchise resulting from our April 2011 NewAlliance acquisition, our April 2010 Harleysville acquisition, and the growth of our infrastructure, as well as organic growth of our commercial loan portfolio and core deposits, and our strong credit quality.

Net Interest Income

Comparison to Prior Quarter

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):


	Three months ended					Three months ended
	September 30,					June 30,					Increase
	2011					2011					(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	$	6,143,211		5.23	%	$	5,807,141		5.42	%	$	336,070			(0.19	)%
Business		3,424,191		3.95			3,119,841		4.30			304,350			(0.35	)

Total commercial lending		9,567,402		4.78			8,926,982		5.03			640,420			(0.25	)
Residential real estate		4,226,732		4.49			3,848,440		4.56			378,292			(0.07	)
Home equity		2,166,657		4.55			2,038,870		4.58			127,787			(0.03	)
Other consumer		276,939		6.81			270,356		7.10			6,583			(0.29	)

Total loans		16,237,730		4.73			15,084,648		4.93			1,153,082			(0.20	)
Mortgage-backed securities⁽²⁾		9,345,974		3.41			9,041,368		3.58			304,606			(0.17	)
Other investment securities⁽²⁾		1,594,238		4.44			1,472,757		3.88			121,481			0.56
Money market and other investments		411,461		2.34			354,634		2.58			56,827			(0.24	)

Total interest-earning assets		27,589,403		4.22	%		25,953,407		4.37	%		1,635,996			(0.15	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		3,393,307					3,143,618					249,689


Total assets	$	30,982,710				$	29,097,025				$	1,885,685


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,699,164		0.25	%	$	2,554,837		0.29	%	$	144,327			(0.04	)%
Checking accounts		2,024,752		0.13			2,027,385		0.13			(2,633	)		—
Money market deposits		7,148,913		0.65			6,406,684		0.58			742,229			0.07
Certificates of deposit		4,443,668		0.96			4,355,235		0.88			88,433			0.08

Total interest-bearing deposits		16,316,497		0.60			15,344,141		0.56			972,356			0.04
Borrowings
FHLB advances		3,322,008		1.49	%		3,286,646		1.41	%		35,362			0.08
Repurchase agreements		3,602,627		0.86			3,272,284		0.93			330,343			(0.07	)
Senior notes		296,898		6.90			296,837		6.89			61			0.01
Other borrowings		129,465		4.43			127,317		4.37			2,148			0.06

Total borrowings		7,350,998		1.45			6,983,084		1.47			367,914			(0.02	)

Total interest-bearing liabilities		23,667,495		0.87	%		22,327,225		0.84	%		1,340,270			0.03	%

Noninterest-bearing deposits		2,856,425					2,542,134					314,291
Other noninterest-bearing liabilities		431,218					388,565					42,653

Total liabilities		26,955,138					25,257,924					1,697,214
Stockholders’ equity⁽³⁾		4,027,572					3,839,101					188,471

Total liabilities and stockholders’ equity	$	30,982,710				$	29,097,025				$	1,885,685


Net interest rate spread				3.35	%				3.53	%					(0.18	)%

Net interst rate margin				3.48	%				3.65	%					(0.17	)%

Our taxable equivalent net interest income increased $6 million for the quarter ending September 30, 2011 compared to the quarter ending June 30, 2011. Our average interest earning assets increased $1.6 billion and average interest bearing liabilities increased by $1.3 billion between these two periods. These period over period increases largely reflect the timing of our NewAlliance merger, which was completed on April 15, 2011. As a result, our average balances for the third quarter reflect the assets and liabilities acquired from NewAlliance for the full quarter and our second quarter average balances reflect the acquired assets and liabilities for two and a half months. Our third quarter net interest rate spread and net interest rate margin decreased by 18 basis points and 17 basis points from the second quarter of 2011, respectively.

The following table presents our condensed average balance sheet information as well as taxable equivalent interest income and yields, and includes, for the quarter ended June 30, 2011, normalized results to account for the acquisition of NewAlliance completed on April 15, 2011 as if it had been included for the entire quarter. We believe the normalization adjustment is useful to investors because it facilitates a comparison of the results of operations for the three months ended September 30, 2011 to the three months ended June 30, 2011 without the distorting effect of lower income statement items for the three months ended June 30, 2011 arising out of the fact that the NewAlliance merger did not occur until April 15, 2011. 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. 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):


	Three months ended,
						June 30,2011 Normalized					Increase
	September 30, 2011					(Non-GAAP)					(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	$	6,143,211		5.23	%	$	6,049,250		5.41	%	$	93,961			(0.18	)%
Business		3,424,191		3.95			3,191,150		4.35			233,041			(0.40	)

Total commercial lending		9,567,402		4.78			9,240,400		5.04			327,002			(0.26	)
Residential real estate		4,226,732		4.49			4,271,913		4.53			(45,181	)		(0.04	)
Home equity		2,166,657		4.55			2,143,107		4.59			23,550			(0.04	)
Other consumer		276,939		6.81			272,062		7.11			4,877			(0.30	)

Total loans		16,237,730		4.73			15,927,482		4.92			310,248			(0.19	)
Total securities⁽²⁾		10,940,212		3.56			10,968,959		3.57			(28,747	)		(0.01	)
Money market and other investments		411,461		2.34			374,550		2.47			36,911			(0.13	)

Total interest-earning assets		27,589,403		4.22	%		27,270,991		4.35	%		318,412			(0.13	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		3,393,307					3,310,751					82,556


Total assets	$	30,982,710				$	30,581,742				$	400,968


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,699,164		0.25	%	$	2,809,246		0.31	%	$	(110,082	)		(0.06	)%
Checking accounts		2,024,752		0.13			2,096,758		0.13			(72,006	)		—
Money market deposits		7,148,913		0.65			6,593,230		0.59			555,683			0.06
Certificates of deposit		4,443,668		0.96			4,606,089		0.85			(162,421	)		0.11

Total interest-bearing deposits		16,316,497		0.60			16,105,323		0.56			211,174			0.04
Total borrowings		7,350,998		1.45			7,362,093		1.45			(11,095	)		—

Total interest-bearing liabilities		23,667,495		0.87	%		23,467,416		0.84	%		200,079			0.03	%

Noninterest-bearing deposits		2,856,425					2,656,601					199,824
Other noninterest-bearing liabilities		431,218					399,137					32,081

Total liabilities		26,955,138					26,523,154					431,984
Stockholders’ equity⁽³⁾		4,027,572					4,058,588					(31,016	)

Total liabilities and stockholders’ equity	$	30,982,710				$	30,581,742				$	400,968


Net interest rate spread				3.35	%				3.51	%					(0.16	)%

Net interst rate margin				3.48	%				3.63	%					(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 allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income.

On a normalized basis:

•

Our average commercial loan portfolio increased by over $327 million during the third quarter, as we continue to focus on growing our commercial portfolio through capitalizing on opportunities in our expanded footprint. Over 70% of the increase in loans was related to commercial business loans.

•

Our average balance of residential real estate loans decreased by $45 million compared to the second quarter of 2011 reflecting the run-off of our portfolio loans that was not replaced by new production as our production is concentrated in long-term fixed rate products, which we generally do not hold in our portfolio.

•

Our core deposits grew by over $573 million, or 16% on an annualized basis, primarily driven by our money market accounts and noninterest-bearing deposits as they increased by $556 million and $200 million, respectively. Consistent with prior quarters, certificates of deposits decreased by 14% on an annual basis, as our pricing strategy has remained focused on allowing the runoff of our highest paying certificates of deposit balances.

The 17 basis points decrease in our net interest rate margin is due to a combination of factors related to our NewAlliance acquisition, business drivers, and other items. A reconciliation of the 17 basis points change is provided below:


Second quarter reported net interest rate margin	3.65	%
Normalization adjustment for timing of NewAlliance acquisition	(0.02	)

Normalized second quarter net interest rate margin (Non-GAAP)	3.63

Higher premium amortization and lower reinvestment yield on residential assets	(0.04	)
Lower yields on commercial business	(0.02	)
Promotional money market rates	(0.02	)
Effect of higher day count	(0.04	)
Miscellaneous items	(0.03	)

Third quarter reported net interest rate margin	3.48	%

As reflected in the normalization adjustment, the impact of having the acquired balance sheet from NewAlliance for 15 additional days was two basis points. The remaining decline in the net interest margin from the second quarter 2011 to the third quarter 2011 was as follows:

•

We had higher premium amortization on residential mortgage loan based assets. A lower rate environment contributed to higher prepayment speeds on both our residential real estate and mortgage-backed securities, which, in turn, caused an acceleration of premium amortization expense in the third quarter. Additionally, the proceeds from these prepayments were reinvested at lower rates. The impact of this was relatively higher for us, due to the size of collateralized mortgage obligations and mortgage-backed securities in our investment portfolio and the relative amount of acquired loans in our residential mortgage loan portfolio, all of which are prepaying faster than our original expectations, thus driving down the yield we earn on these assets due to the accelerated amortization of the interest rate related premiums established on these assets through purchase accounting at the time of acquisition.

•

Our commercial loans had lower yields. The size of the decline was driven by the magnitude of recent growth in our commercial loan portfolio and the high percentage of this growth that carried variable rates. The same price compression accounted for approximately 20 basis points of the 35 basis point decline quarter over quarter on our commercial business loan yields.

•

We had higher costs of our money market deposits. In connection with our money market deposit accounts acquisition strategy, promotional money market rates were paid in the third quarter, which increased the interest expense for the money market accounts.

•

A decrease of four basis points was attributable to the day-count factor pattern for residential loans and securities.

Comparison to Prior Year

The following tables present 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):


	Three months ended September 30,										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	$	6,143,211		5.23	%	$	4,245,670		5.70	%	$	1,897,541		(0.47	)%
Business		3,424,191		3.95			2,210,288		4.83			1,213,903		(0.88	)

Total commercial lending		9,567,402		4.78			6,455,958		5.40			3,111,444		(0.62	)
Residential real estate		4,226,732		4.49			1,853,018		5.04			2,373,714		(0.55	)
Home equity		2,166,657		4.55			1,460,801		4.50			705,856		0.05
Other consumer		276,939		6.81			270,416		7.56			6,523		(0.75	)

Total loans		16,237,730		4.73			10,040,193		5.26			6,197,537		(0.53	)
Mortgage-backed securities⁽²⁾		9,345,974		3.41			7,119,679		3.49			2,226,295		(0.08	)
Other investment securities⁽²⁾		1,594,238		4.44			794,091		3.65			800,147		0.79
Money market and other investments		411,461		2.34			191,649		3.10			219,812		(0.76	)

Total interest-earning assets		27,589,403		4.22	%		18,145,612		4.47	%		9,443,791		(0.25	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		3,393,307					2,313,178					1,080,129


Total assets	$	30,982,710				$	20,458,790				$	10,523,920


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,699,164		0.25	%	$	1,260,792		0.12	%	$	1,438,372		0.13	%
Checking accounts		2,024,752		0.13			1,734,463		0.20			290,289		(0.07	)
Money market deposits		7,148,913		0.65			4,881,109		0.59			2,267,804		0.06
Certificates of deposit		4,443,668		0.96			3,822,620		1.11			621,048		(0.15	)

Total interest-bearing deposits		16,316,497		0.60			11,698,984		0.65			4,617,513		(0.05	)
Borrowings
FHLB advances		3,322,008		1.49			1,604,303		1.92			1,717,705		(0.43	)
Repurchase agreements		3,602,627		0.86			1,839,436		1.20			1,763,191		(0.34	)
Senior notes		296,898		6.90			296,889		6.83			9		0.07
Other borrowings		129,465		4.43			93,083		6.76			36,382		(2.33	)

Total borrowings		7,350,998		1.45			3,833,711		2.07			3,517,287		(0.62	)

Total interest-bearing liabilities		23,667,495		0.87	%		15,532,695		1.00	%		8,134,800		(0.13	)%

Noninterest-bearing deposits		2,856,425					1,814,399					1,042,026
Other noninterest-bearing liabilities		431,218					303,199					128,019

Total liabilities		26,955,138					17,650,293					9,304,845
Stockholders’ equity⁽³⁾		4,027,572					2,808,497					1,219,075

Total liabilities and stockholders’ equity	$	30,982,710				$	20,458,790				$	10,523,920


Net interest rate spread				3.35	%				3.47	%				(0.12	)%

Net interst rate margin				3.48	%				3.61	%				(0.13	)%


	Nine months ended September 30,										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	$	5,466,402		5.39	%	$	3,845,569		5.77	%	$	1,620,833		(0.38	)%
Business		3,056,378		4.23			2,002,140		4.89			1,054,238		(0.66	)

Total commercial lending		8,522,780		4.97			5,847,709		5.47			2,675,071		(0.50	)
Residential real estate		3,268,541		4.60			1,800,487		5.14			1,468,054		(0.54	)
Home equity		1,908,365		4.56			1,182,602		4.70			725,763		(0.14	)
Other consumer		272,031		6.93			239,852		7.46			32,179		(0.53	)

Total loans		13,971,717		4.91			9,070,650		5.36			4,901,067		(0.45	)
Mortgage-backed securities⁽²⁾		8,522,213		3.58			6,037,180		3.51			2,485,033		0.07
Other investment securities⁽²⁾		1,340,957		4.11			801,429		3.68			539,528		0.43
Money market and other investments		332,652		2.81			171,813		2.29			160,839		0.52

Total interest-earning assets		24,167,539		4.37	%		16,081,072		4.55	%		8,086,467		(0.18	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		2,935,004					2,057,741					877,263


Total assets	$	27,102,543				$	18,138,813				$	8,963,730


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,174,237		0.24	%	$	1,141,338		0.15	%	$	1,032,899		0.09	%
Checking accounts		1,909,551		0.12			1,484,172		0.20			425,379		(0.08	)
Money market deposits		6,197,198		0.58			4,436,314		0.65			1,760,884		(0.07	)
Certificates of deposit		4,021,840		0.97			3,554,944		1.10			466,896		(0.13	)

Total interest-bearing deposits		14,302,826		0.58			10,616,768		0.68			3,686,058		(0.10	)
Borrowings
FHLB advances		2,713,296		1.52			1,109,337		2.42			1,603,959		(0.90	)
Repurchase agreements		3,314,420		0.91			1,571,369		1.34			1,743,051		(0.43	)
Senior notes		296,840		6.95			266,584		7.90			30,256		(0.95	)
Other borrowings		122,476		4.29			78,129		6.48			44,347		(2.19	)

Total borrowings		6,447,032		1.51			3,025,419		2.45			3,421,613		(0.94	)

Total interest-bearing liabilities		20,749,858		0.87	%		13,642,187		1.08	%		7,107,671		(0.21	)%

Noninterest-bearing deposits		2,432,602					1,598,356					834,246
Other noninterest-bearing liabilities		367,524					260,347					107,177

Total liabilities		23,549,984					15,500,890					8,049,094
Stockholders’ equity⁽³⁾		3,552,559					2,637,923					914,636

Total liabilities and stockholders’ equity	$	27,102,543				$	18,138,813				$	8,963,730


Net interest rate spread				3.50	%				3.47	%				0.03	%

Net interst rate margin				3.63	%				3.63	%				—


⁽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 allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income.

Our taxable equivalent net interest income increased $218 million, or 50%, for the first nine months of 2011 compared to the first nine months of 2010. This increase resulted from an $8.1 billion, or 50%, increase in our average interest-earning assets, and a $7.1 billion, or 52%, increase in our interest-bearing liabilities. The increase in average interest-earning assets and interest bearing liabilities was primarily due to the NewAlliance merger, which we completed in the second quarter of 2011. In addition to the results of the merger, our year over year increases are the result of our focus on organic loan growth. We increased lending across all of geographic regions and in key portfolios including commercial and home equity loans. Even in a relatively low demand environment for credit, we continue to drive commercial loan growth by focusing on our customer-relationship value proposition. To a lesser extent, a decrease in residential real estate lending occurred compared to the nine and three months ending September 30, 2010, respectively, due to ongoing consumer preference for long-term fixed rate products, which we generally do not hold in our portfolio. Excluding the impact of deposits acquired from NewAlliance, strong growth in low cost core deposits compared to the nine and three months ended September 30, 2010 was noted. The most significant growth was in money market deposit accounts. This growth is the result of the household acquisition strategy that we began early in the second quarter of 2011. Also during the third quarter, we launched a new line of checking products supported by a comprehensive advertising and marketing program. These more robust deposit products supplement low minimum balance and free, no minimum balance checking accounts that continue to be attractive to a portion of our customer base.

Provision for Credit Losses

Our provision for credit losses attributable to loans is based upon our assessment of the adequacy of our allowance for loan losses and our liability for unfunded loan commitments, with consideration given to such interrelated factors as the composition of and credit risk in our loan portfolio, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic considerations. The provision for credit losses related to loans amounted to $14 million, or 0.34% of average loans, for the quarter ended September 30, 2011, compared to $14 million and $11 million, or 0.38% and 0.43% of average loans, for the quarters ended June 30, 2011 and September 30, 2010, respectively. Excluding average acquired loans, our provision for credit losses related to loans as a percentage of average loans was 0.60% for the third quarter of 2011, 0.73% for the second quarter of 2011 and 0.60% for the third 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 losses. Criticized loans of $1.3 billion at September 30, 2011 remained consistent with the balance at June 30, 2011.

Additionally, our total provision for credit losses for the quarter ended September 30, 2011 included $1 million for unfunded loan commitments, primarily due to the increase in unfunded loan commitments to $5.0 billion at September 30, 2011, up from $4.7 billion at June 30, 2011. The liability resulting from this provision is included in Other Liabilities in our Consolidated Statement of Condition.

Noninterest Income

Comparison to Prior Quarter

The following table presents our noninterest income for the quarters ended September 30, 2011 and June 30, 2011, and includes, for the quarter ended June 30, 2011, noninterest income normalized to account for the acquisition of NewAlliance completed on April 15, 2011 as if it had been included for the entire second quarter. We believe the normalization adjustment is useful to investors because it facilitates a comparison of the results of operations for the three months ended September 30, 2011 to the three months ended June 30, 2011 without the distorting effect of lower income statement items for the three months ended June 30, 2011 arising out of the fact that the NewAlliance merger did not occur until April 15, 2011. 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.


				June 30, 2011
													Normalized
	September 30,						Estimated			Normalization			results (Non-
	2011			Actual (GAAP)			results⁽¹⁾			adjustment⁽²⁾			GAAP)
Banking services	$	26,384		$	24,613		$	5,217		$	1,030		$	25,643
Insurance commissions		16,886			17,044			—			—			17,044
Wealth management services		7,933			7,883			2,399			473			8,356
Mortgage banking		5,254			3,386			602			119			3,505
Lending and leasing		3,582			2,811			846			167			2,978
Bank owned life insurance		2,742			3,055			692			137			3,192
Other income		5,874			2,103			(628	)		(124	)		1,979


Total noninterest income	$	68,655		$	60,895		$	9,128		$	1,802		$	62,697


Noninterest income as a percentage of net revenue		22.6	%		20.9	%								20.6	%


⁽¹⁾		Estimated results based upon NewAlliance actual first quarter results prorated for number of days of First Niagara ownership of NewAlliance in second quarter.

⁽²⁾		Normalization adjustment assumes 15 days of additional ownership of NewAlliance.

The increase in GAAP noninterest income during the current quarter from the second quarter of 2011 is primarily due to the effects of a full quarter of results from our NewAlliance acquisition compared to 76 days of results from NewAlliance in the second quarter, in addition to an increase in revenues due an increase in activity in our capital markets business. This increase in capital markets revenues, which are included in other income, reflected increased derivatives sales driven by cross-selling to existing healthcare, municipal, leasing, and other commercial customers. This relatively new business for us strengthens our commercial business relationships by offering more and better solutions and also diversifies our revenue sources. The capital markets’ pipeline remains strong as customers look to lock in historically low interest rates.

The $6 million, or 10%, increase in noninterest income for the quarter ended September 30, 2011 from the quarter ended June 30, 2011, as normalized, was primarily the result of a $2 million increase in capital markets revenues and a $2 million increase in mortgage banking revenues. Mortgage banking revenues have increased due to wider sales margins and greater refinance and purchase volumes due to the current rate environment. Although the impact of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act will decrease our banking services revenues, we expect to be able to offset its impact through additional revenue generating initiatives that include bringing our deposit fee schedule in line with the market and growing our debit card penetration and usage rate. We expect the impact of Durbin, net of these revenue generating initiatives, to be a reduction of our banking services revenues by approximately $3.5 million in the fourth quarter, but expect the negative impact to be diminished subsequently as the revenue generating initiatives continue to be phased in during 2012.

Comparison to Prior Year Quarter

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


	September 30,			September 30,
	2011			2010
Banking services	$	26,384		$	21,007
Insurance commissions		16,886			13,573
Wealth management services		7,933			5,939
Mortgage banking		5,254			3,320
Lending and leasing		3,582			3,045
Bank owned life insurance		2,742			2,067
Other		5,874			554


Total noninterest income	$	68,655		$	49,505


Noninterest income as a percentage of net revenue		22.6	%		23.5	%

Noninterest income increased $19 million, or 39%, for the quarter ended September 30, 2011, compared to the third quarter of 2010. The increases in revenues from banking services, mortgage banking, and lending and leasing were primarily attributable to our April 2011 merger with NewAlliance. The increase in insurance commissions is attributable to our insurance agency acquisitions in Pennsylvania during 2010 and New England in 2011. The increase in revenues from wealth management services was primarily driven by growth in Eastern Pennsylvania due to our licensed banker program whereby certain branch employees are licensed to sell securities and insurance products and work closely with our financial consultants in selling such products to our customers. This increase in Eastern Pennsylvania was partially offset by a decrease in these revenues in our Western Pennsylvania market due to fewer opportunities to sell investment products to customers whose primary relationship with us is as a depositor. Derivatives sales to existing healthcare, municipal, leasing, and other commercial customers increased capital markets revenues, which are included in other noninterest income, during the current quarter.

Comparison to Prior Year to Date

The following table presents our noninterest income for the nine months ended September 30 (amounts in thousands):


	2011			2010
Banking services	$	70,003		$	58,543
Insurance commissions		49,685			38,504
Wealth management services		22,550			14,898
Mortgage banking		9,903			6,178
Lending and leasing		10,156			7,599
Bank owned life insurance		7,827			5,267
Other		11,500			1,514

Total noninterest income	$	181,624		$	132,503


Noninterest income as a percentage of net revenue		22.1	%		23.5	%

Noninterest income increased $49 million, or 37%, for the nine months ended September 30, 2011, compared to the nine months ended September 30, 2010. The increases in revenues from banking services, mortgage banking, lending and leasing, and other noninterest income were primarily attributable to our April 2011 merger with NewAlliance. These increases are also attributable to our April 2010 merger with Harleysville, whereby a full nine months of activity in this region are included in the results for the nine months ended September 30, 2011 and only six months are included in the results for the nine months ended September 30, 2010. The $11 million increase in insurance commissions is attributable to our insurance agency acquisitions in Pennsylvania during 2010 and New England in 2011. A portion of the increase in revenues from wealth management services was due to the NewAlliance merger but the majority of the increase is due to increased activity in Upstate New York and especially Eastern Pennsylvania, where we initiated the licensed banker program. In Western Pennsylvania, revenues from this source decreased from 2010 as there were fewer opportunities to sell investment products to customers whose primary relationship with us is as a depositor. A substantial increase in capital markets activities, primarily derivatives sales, contributed $7 million of the increase in other noninterest income.

Noninterest Expense

Comparison to Prior Quarter

The following table presents our operating noninterest expense for the quarters ended September 30, 2011 and June 30, 2011, and includes, for the quarter ended June 30, 2011 noninterest expense normalized to account for the acquisition of NewAlliance completed on April 15, 2011 as if it had been included for the entire second quarter, and, for both quarters, results adjusted to reflect an adjustment for FDIC expense. We believe the normalization adjustment is useful to investors because it facilitates a comparison of the results of operations for the three months ended September 30, 2011 to the three months ended June 30, 2011 without the distorting effect of lower income statement items for the three months ended June 30, 2011 arising out of the fact that the NewAlliance merger did not occur until April 15, 2011. We believe these non-GAAP results provide 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. In addition, we believe the exclusion of these nonoperating items enables management to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations (in thousands).


	September 30, 2011									June 30, 2011
													Estimated NewAlliance Impact
															Purchase
															accounting									Normalized
	Operating results			FDIC			Adjusted (Non-			Operating results			Estimated		accretion					Normalization		FDIC		results (Non-
	(Non-GAAP)			adjustment⁽²⁾			GAAP)			(Non-GAAP)			results⁽³⁾		(amortization)⁽⁴⁾		Other⁽⁵⁾			adjustment⁽⁶⁾		Adjustment⁽²⁾		GAAP)
Salaries and benefits	$	89,131					$	89,131		$	90,192		$	19,488			$	(6,073	)	$	2,648			$	92,840
Occupancy and equipment		20,434						20,434			18,952			4,993				(573	)		872				19,824
Technology and communications		16,634						16,634			13,929			629				911			304				14,233
Marketing and advertising		7,554						7,554			3,880			1,279				(489	)		156				4,036
Professional services		9,171						9,171			9,138			3,536				(2,330	)		238				9,376
Amortization of intangibles		6,896						6,896			6,573			1,649		1,417		(1,649	)		280				6,853
FDIC premiums		10,301			(1,574	)		8,727			6,267			1,667				(34	)		322		1,574		8,163
Other expense		18,416						18,416			17,726			2,714				618			658				18,383

Total operating noninterest expenses	$	178,537		$	(1,574	)	$	176,963		$	166,657		$	35,955	$	1,417	$	(9,619	)	$	5,477	$	1,574	$	173,708


Operating efficiency ratio⁽¹⁾		58.7	%					58.2	%		57.2	%													57.2	%


⁽¹⁾		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 operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income.

⁽²⁾		Adjustment of FDIC premium recognized in the third quarter related to the second quarter

⁽³⁾		Estimated results based upon NewAlliance actual first quarter results prorated for number of days of First Niagara ownership of NewAlliance in second quarter.

⁽⁴⁾		Actual purchase accounting accretion or amortization related to NewAlliance recognized in the second quarter.

⁽⁵⁾		Other adjustments based upon cost of funding cash consideration and planned cost synergies at time of merger.

⁽⁶⁾		Normalization adjustment assumes 15 days of additional ownership of NewAlliance.

During the quarter ended September 30, 2011, normalized operating noninterest expenses increased $3 million from the quarter ended June 30, 2011 to $177 million. The decrease in salaries and benefits was more than offset by increases in technology and communication and marketing and advertising. The increase in technology and communications expense during the quarter ended September 30, 2011, was the direct result of the expansion of our data center capacity for future growth, while the increase in marketing and advertising resulted from the launch of our new checking account products.

Comparison to Prior Year Quarter

The following table presents our noninterest expense for the three months ended September 30 (amounts in thousands):


	2011			2010
Salaries and benefits	$	89,131		$	68,603
Occupancy and equipment		20,434			15,582
Technology and communications		16,634			12,769
Marketing and advertising		7,554			5,782
Professional services		9,171			4,426
Amortization of intangibles		6,896			5,453
FDIC premiums		10,301			4,630
Merger and acquisition integration expenses		9,008			1,916
Restructuring charges		16,326			—
Other		18,416			13,448

Total noninterest expenses		203,871			132,609

Less nonoperating expenses:
Merger and acquisition integration expenses		(9,008	)		(1,916	)
Restructuring charges		(16,326	)		—
Other		—			—

Total operating noninterest expenses⁽²⁾	$	178,537		$	130,693


Efficiency ratio⁽¹⁾		67.0	%		62.9	%

Operating efficiency ratio⁽²⁾		58.7	%		62.0	%


⁽¹⁾		The efficiency ratio is computed by dividing noninterest expenses by the sum of net interest income and noninterest income.

⁽²⁾		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 operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income.

The $71 million increase in noninterest expenses during the quarter ended September 30, 2011 from the quarter ended September 30, 2010 is primarily due to merger and acquisition integration expenses, increased costs associated with the NewAlliance branches, restructuring charges, and the growth of our infrastructure.

Operating noninterest expenses increased $48 million, or 37%, for the quarter ended September 30, 2011, compared to the third quarter of 2010, due to increased costs associated with the NewAlliance branches, our insurance agency acquisitions, and the growth of our infrastructure. Salaries and benefits expenses increased 30% as we experienced an increase in the number of full time equivalent employees from 3,725 at September 30, 2010 to 4,712 at September 30, 2011 due to our merger with NewAlliance and the growth of our infrastructure. The increases in occupancy and equipment and technology and communications resulted from the increase in our workforce during this time period and from the 88 branches we acquired in our merger with NewAlliance. The acquisition of NewAlliance assets and a change in regulations resulted in an increase in federal deposit insurance premiums.

Merger and acquisition integration expenses of $9 million for the three months ended September 30, 2011 were primarily attributable to our merger with NewAlliance, of which more than half were severance related. Merger and acquisition integration expenses amounted to $2 million for the three months September 30, 2010 and were primarily attributable to our merger with Harleysville.

These efforts commenced in 2011 and resulted in expenses of $16 million for the three months ended September 30, 2011. Concerning our plans to adjust our branch network, we recognized $4 million in the quarter ended September 30, 2011. For our plans to exit other acquired facilities, mostly in Eastern Pennsylvania, we recognized $5 million in the quarter ended September 30, 2011. Finally, for actions to restructure our back office services, we recognized $7 million in the quarter ended September 30, 2011. Annual cost savings of approximately $25 million are being reinvested to further improve our infrastructure and product delivery, and to generate additional revenue. We expect to recognize, evenly over the next two quarters, approximately $5 million to $10 million related to these restructuring activities resulting in lower overall restructuring expenses than originally estimated by $20 million to $25 million, due primarily to lower than expected lease exit costs. We expect that this restructuring effort will be completed by March 31, 2012.

Our efficiency ratio for the current quarter was 67.0% compared to 87.6% for the quarter June 30, 2011 and 62.9% for the same quarter in 2010, reflecting the impact of our acquisitions, restructuring charges, and growth of our infrastructure. Our operating efficiency ratio was 58.7% for the quarter ended September 30, 2011 compared to 57.2% and 62.0% for the quarters ended June 30, 2011 and September 30, 2010, respectively, reflecting our ability to grow organically and by acquisition in an efficient manner.

Comparison to Prior Year to Date

The following table presents our noninterest expense for the nine months ended September 30 (amounts in thousands):


	2011			2010
Salaries and benefits	$	253,099		$	180,921
Occupancy and equipment		55,583			38,911
Technology and communications		43,434			32,821
Marketing and advertising		14,126			15,005
Professional services		24,348			10,990
Amortization of intangibles		18,958			14,011
FDIC premiums		22,763			13,052
Merger and acquisition integration expenses		92,012			43,985
Restructuring charges		29,038			—
Other		50,801			34,298


Total noninterest expense		604,162			383,994

Less nonoperating expenses:
Merger and acquisition integration expenses		(92,012	)		(43,985	)
Restructuring charges		(29,038	)		—
Other		—			(754	)

Total operating noninterest expense⁽²⁾	$	483,112		$	339,255


Efficiency ratio⁽¹⁾		73.6	%		68.2	%

Operating efficiency ratio⁽²⁾		58.9	%		60.3	%


⁽¹⁾		The efficiency ratio is computed by dividing noninterest expenses by the sum of net interest income and noninterest income.

⁽²⁾		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 operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income.

The $220 million increase in noninterest expenses during the nine months ended September 30, 2011 from the nine months ended September 30, 2010 is primarily due to a significant increase in merger and acquisition integration expenses, increased costs associated with the NewAlliance branches, restructuring charges, and the growth of our infrastructure.

The 42% increase in operating noninterest expenses from the first nine months of 2010 to the first nine months of 2011 was due to increased expenses related to our April merger with NewAlliance and our infrastructure growth. Salaries and benefits increased $72 million, or 40%, as a result of the incremental salaries associated with the NewAlliance merger as well as the continued growth of our supporting infrastructure, reflective of the 26% increase in the number of full-time employees from September 30, 2010 to September 30, 2011.

Merger and acquisition integration expenses of $92 million for the nine months ended September 30, 2011 were primarily attributable to our merger with NewAlliance. Severance costs comprised more than half of these expenses, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses. Merger and acquisition integration expenses of $44 million for the nine months ended September 30, 2010 were primarily attributable to our merger with Harleysville.

As a result of our recent acquisitions, management has adjusted certain aspects of our delivery channels and infrastructure. Specifically, we have adjusted the branch network in Eastern Pennsylvania by closing 14 branches; consolidated certain back office facilities; and restructured our back office infrastructure and operations. The following table summarizes the cumulative restructuring expenses that have been recognized for the nine months ended September 30, 2011 (in thousands):


Severance and other employee related costs	$	2,511
Lease exit costs		10,738
Other exit costs, professional services, and other		7,900
Asset write-offs and disposals		7,889


Total restructuring expense	$	29,038

For the nine months ended September 30, 2011 and 2010, our efficiency ratio amounted to 73.6% and 68.2%, respectively. Our operating efficiency ratio improved to 58.9% for the nine months ended September 30, 2011, from 60.3% for the same period in 2010, reflecting our ability to grow organically and by acquisition in an efficient manner.

Income Tax Expense

Our effective tax rate of 33.5% for the three months ended September 30, 2011 increased from 28.2% and 32.1% for the three months ended June 30, 2011 and September 30, 2010, respectively. The increase from the three months ended June 30, 2011 and September 30, 2010 is primarily due to additional state taxes resulting from the acquisitions. The increase from the three months ended June 30, 2011 is also due to the reversal of liabilities in the second quarter of 2011 related to uncertain tax positions taken in prior years.

Our effective tax rate for the nine months ended September 30, 2011 decreased to 32.7% compared to 34.2% for the same period in the prior year. The decrease from the nine months ended September 30, 2010 is also a result of lower pre-tax income in the first half of 2011 as a result of higher expense levels attributable to our merger activity and restructuring charges coupled with reversals of liabilities related to uncertain tax positions taken in prior years.

The projected tax rate for full year 2011 is estimated to be approximately 33.0%.

ANALYSIS OF FINANCIAL CONDITION AT SEPTEMBER 30, 2011

Overview

On April 15, 2011, we completed our acquisition of NewAlliance and the results of the merger are included in our consolidated statement of financial condition at September 30, 2011. The merger significantly impacted our balance sheet as can be seen through our comparison of September 30, 2011 balances to December 31, 2010 presented below. Total assets increased $10.1 billion to $31.2 billion at September 30, 2011 from $21.1 billion at December 31, 2010, primarily attributable to our acquisition of $9.2 billion in total assets from NewAlliance in the second quarter. To provide perspective on the impact of our acquisition on our consolidated statement of financial condition, the table below details the balances at September 30, 2011 as well as the December 31, 2010 balances adjusted to include NewAlliance balances acquired on April 15, 2011 (in millions):


			December 31, 2010
					Balances					Period over
					acquired from				period change
	September 30,				New Alliance		Including		including
	2011		Consolidated		on April 15, 2011		NewAlliance		NewAlliance

Investment securities available for sale and held to maturity	$	11,180	$	8,315	$	2,759	$	11,074	$	106
Loans and leases:
Commercial:
Real estate		6,149		4,371		1,469		5,840		309
Business		3,589		2,623		433		3,056		533

Total commercial loans		9,738		6,994		1,902		8,896		842
Residential real estate		4,171		1,692		2,569		4,261		(90	)
Home equity		2,178		1,525		632		2,157		21
Other consumer		278		273		10		283		(5	)

Total loans and leases		16,365		10,484		5,113		15,597		768

Deposits:
Savings accounts		2,642		1,235		1,543		2,778		(136	)
Interest-bearing checking		2,028		1,706		421		2,127		(99	)
Money market deposits		7,507		4,919		1,132		6,051		1,456
Noninterest-bearing deposits		3,095		1,990		694		2,684		411
Certificates of deposit		4,352		3,300		1,522		4,822		(470	)

Total deposits		19,624		13,150		5,312		18,462		1,162

Short-term borrowings		1,157		1,789		478		2,267		(1,110	)
Long-term borrowings		5,928		3,104		1,821		4,925		1,003

Total borrowings	$	7,085	$	4,893	$	2,299	$	7,192	$	(107	)

Including the impact of balances acquired from NewAlliance, we noted the following trends:

•

Our ending loan balances at September 30, 2011 increased $768 million, or 7% annualized, to $16.4 billion from $15.6 billion at December 31, 2010. The increase represents organic growth driven by our focus on our commercial lending efforts as seen in the $842 million increase in total commercial loans, or 13% on an annualized basis. Offsetting this increase was a decrease of $90 million in our residential real estate loan portfolio due to net run-off as ongoing consumer preference is for long-term, fixed rate products, which we generally sell and do not hold in portfolio.

	•		The growth in deposits from NewAlliance was complemented by an increase of $1.5 billion in money market deposits across our northeastern footprint. Our certificates of deposit decreased $470 million, reflecting our strategy not to renew maturing certificates.

	•		Total borrowings remained relatively flat with a decrease of $107 million during the nine month period.

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 loan portfolios provide opportunities to cross sell other banking services. Consistent with our long-term customer relationship focus, we retain the servicing rights on 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):


	September 30, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	5,666,028			34.6	%	$	3,964,106			37.8	%
Construction		482,960			3.0			406,751			3.9
Business		3,588,733			21.9			2,623,079			25.0

Total commercial		9,737,721			59.5			6,993,936			66.7


Residential real estate		4,171,374			25.5			1,692,198			16.1
Home equity		2,177,772			13.3			1,524,570			14.6
Other consumer		278,499			1.7			272,710			2.6

Total loans and leases		16,365,366			100.0	%		10,483,414			100.0	%

Allowance for loan losses		(112,749	)					(95,354	)

Total loans and leases, net	$	16,252,617					$	10,388,060

Included in the table above are acquired loans with a carrying value of $6.9 billion and $2.6 billion at September 30, 2011 and December 31, 2010, respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at fair value with no carryover of any related allowance for loan losses. At September 30, 2011 and December 31, 2010 there was no allowance for loan 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 and
	York		Pennsylvania		Pennsylvania		New England		Capital markets⁽¹⁾		leases

September 30, 2011:
Commercial:
Real estate	$	2,846,876	$	477,478	$	1,001,703	$	1,339,971	$	—	$	5,666,028
Construction		288,862		46,375		25,556		122,167		—		482,960
Business		1,723,757		654,440		425,210		486,155		299,171		3,588,733

Total commercial		4,859,495		1,178,293		1,452,469		1,948,293		299,171		9,737,721
Residential real estate		1,278,994		54,807		296,167		2,541,406		—		4,171,374
Home equity		805,066		156,089		611,014		605,603		—		2,177,772
Other consumer		164,414		56,157		46,949		10,979		—		278,499

Total loans and leases	$	7,107,969	$	1,445,346	$	2,406,599	$	5,106,281	$	299,171	$	16,365,366


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		572,870		383,658		—		181,581		2,623,079

Total commercial		4,458,799		981,618		1,371,938		—		181,581		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	$	1,184,719	$	2,330,482	$	—	$	181,581	$	10,483,414


⁽¹⁾		Our capital markets portfolio includes participations in syndicated loans that have been underwritten and purchased by us where we are not the lead bank. Nearly all of these loans are to companies in our footprint states or in states that border our footprint states.

Our period over period results in our Upstate New York, Western Pennsylvania and Eastern Pennsylvania markets display the strong organic growth in our commercial lending activities. Our commercial loan portfolio increased $401 million, or 12% annualized, in Upstate New York, $197 million, or 27% annualized, in Western Pennsylvania, $81 million, or 8% annualized, in Eastern Pennsylvania, and $118 million, or 87% annualized, in our Capital Markets business during the first nine months of 2011, as a result of our continued strategic focus on the portfolio. This increase was concentrated in both commercial real estate loans and business loans. New commercial loans, including line of credit advances, increased to $2.7 billion in Upstate New York during the nine months ended September 30, 2011, from $2.1 billion during the same period in 2010. New commercial loans, including line of credit advances, totaled $1.5 billion in Western Pennsylvania for the nine months ended September 30, 2011 compared to $1.0 billion for the nine months ended September 30, 2010. For the nine months ended September 30, 2011, new loans, including line advances, from our Capital Markets business totaled $384 million. New commercial loans, including line of credit advances, totaled $753 million in Eastern Pennsylvania for the nine months ended September 30, 2011 and $307 million in New England.

We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on our sound credit fundamentals. The table below presents a breakout of the unpaid principal balance of our commercial real estate and commercial business loan portfolios by loan size as of the period indicated (in millions):


	September 30, 2011				December 31, 2010
	Amount		Count		Amount		Count
Commercial real estate loans by balance size⁽¹⁾
Greater or equal to $20 million	$	228		8	$	86		3
Between $10 million and $20 million		905		65		487		36
Between $5 million and $10 million		1,007		144		820		120
Between $1 million and $5 million		2,336		1,095		1,673		820
Less than $1 million⁽²⁾		1,673		7,244		1,305		6,276

Total commercial real estate loans	$	6,149		8,556	$	4,371		7,255


Commercial business loans by size⁽¹⁾
Greater or equal to $20 million	$	218		7	$	122		5
Between $10 million and $20 million		428		29		195		14
Between $5 million and $10 million		655		86		474		65
Between $1 million and $5 million		1,088		480		847		375
Less than $1 million⁽²⁾		1,200		16,569		985		13,212

Total commercial business loans	$	3,589		17,171	$	2,623		13,671


⁽¹⁾		Multiple loans to one borrower have not been aggregated for purposes of this table

⁽²⁾		Includes net deferred fees and costs and other adjustments

While we originated $946 million in new residential real estate loans during the first nine months of 2011, our residential real estate loan portfolio decreased $90 million excluding the loans acquired from NewAlliance reflecting the net run-off in the portfolio as ongoing consumer preference is for long-term fixed rate products, which we generally sell and do not hold in our portfolio.

Excluding the loans acquired from NewAlliance, our home equity and other consumer loan portfolios remained relatively flat during the first nine months of the year with a combined increase of $16 million.

Investment Securities Portfolio

In the discussion of our investment portfolio below, we have included certain credit rating information because the information indicates an assessment of 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.

Our investment securities portfolio amounted to $11.2 billion at September 30, 2011. As of September 30, 2011, 99% of the fair value of our investment securities portfolio 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 consisted of residential mortgage-backed securities and collateralized mortgage obligations (“CMOs”), 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. At September 30, 2011, the unamortized unrealized gains on these transferred securities, net of tax, amounted to $3 million.

Our available for sale securities portfolio is primarily invested in residential mortgage-backed securities, which comprised 70% and 85% of our total available for sale portfolio at September 30, 2011 and December 31, 2010, respectively. At both September 30, 2011 and December 31, 2010, 98% of our residential mortgage-backed securities were issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“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 portfolio of residential mortgage-backed securities is directly impacted by the interest rate environment and yield curve. Recent developments, including the announcement by the Federal Reserve of its actions designed to lower longer term interest rates, have directly affected the interest income earned on our residential mortgage backed securities by accelerating prepayments and, consequently, the rate at which we recognize premium amortization expense on our securities acquired at above market rates. In addition to the negative impact of the increased premium amortization, such developments also decrease the yield earned upon reinvestment of the repayment proceeds. Subsequent changes to the interest rate environment will continue to impact our yield earned on these securities.

Our investment securities available for sale portfolio remains well positioned to provide a stable source of cash flow. The duration of our securities available for sale increased to 4.16 years at September 30, 2011 from 3.73 years at December 31, 2010 as a result an increase in the weighted average life of our portfolio caused by slowing prepayments in our mortgage-backed securities portfolio, which, in turn, extends the life of the bonds.

At September 30, 2011, the pre-tax net unrealized gains on our available for sale investment securities increased to $188 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 decreased during the quarter ended September 30, 2011, thereby causing the fair values of our fixed rate securities to increase.

Our investment in FHLB stock consists of $76 million, $25 million, and $121 million of FHLB of New York common stock, FHLB of Pittsburgh common stock, and FHLB of Boston common stock, respectively, at September 30, 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 $110 million and $68 million at September 30, 2011 and December 31, 2010, respectively.

Deposits

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


	September 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent			Increase
Core deposits:
Savings	$	2,641,723		13.5	%	$	1,235,004		9.4	%	$	1,406,719
Interest-bearing checking		2,028,052		10.3			1,705,537		13.0			322,515
Money market deposits		7,507,189		38.2			4,919,014		37.4			2,588,175
Noninterest-bearing		3,095,283		15.8			1,989,505		15.1			1,105,778

Total core deposits		15,272,247		77.8			9,849,060		74.9			5,423,187
Certificates		4,351,930		22.2			3,299,784		25.1			1,052,146

Total deposits	$	19,624,177		100.0	%	$	13,148,844		100.0	%	$	6,475,333

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


	Upstate New		Western		Eastern
	York		Pennsylvania		Pennsylvania		New England		Total deposits

September 30, 2011
Core deposits:
Savings	$	852,082	$	131,804	$	237,791	$	1,420,046	$	2,641,723
Interest-bearing checking		659,032		394,833		577,737		396,450		2,028,052
Money market deposits		3,665,171		1,256,805		1,184,598		1,400,615		7,507,189
Noninterest-bearing		1,277,485		674,699		488,230		654,869		3,095,283

Total core deposits		6,453,770		2,458,141		2,488,356		3,871,980		15,272,247
Certificates		1,175,817		938,043		837,486		1,400,584		4,351,930

Total deposits	$	7,629,587	$	3,396,184	$	3,325,842	$	5,272,564	$	19,624,177


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 September 30, 2011, our total deposits increased $6.5 billion from December 31, 2010, and core deposits increased to 78% of total deposits from 75% at December 31, 2010. While the balance increases are largely a factor of our NewAlliance merger in the second quarter, each of our other markets have also contributed to the growth. We continue to focus on reducing our weighted average rate paid on deposits by increasing our noninterest bearing accounts and converting higher priced certificates of deposit to money market accounts. Excluding the deposits acquired from NewAlliance, money market deposit accounts across our footprint increased $1.5 billion, or 40% annualized, and noninterest bearing accounts increased $411 million, or 28%, annualized, during the first nine months of 2011. The growth in money market accounts was partially driven by nearly $800 million in additional money market deposits resulting from our successful promotional campaign in the third quarter. Approximately two thirds of the balances generated by the campaign were new balances and the remaining balances resulted from our continued strategy to attract higher priced certificates of deposit into money market accounts. In addition to the results of the promotional campaign in the third quarter, our participation in a program whereby we receive money market deposits through a financial intermediary also drove the increase in money market balances. In line with our broader initiative to allow higher cost certificates of deposit to runoff, certificate of deposits in the New England region have declined by $121 million since the time of acquisition. Overall, core deposits in the New England region have increased $82 million in that region since acquisition. Municipal deposits, predominantly consisting of money market deposits, increased $495 million from $1.4 billion at December 31, 2010 to $1.9 billion at September 30, 2011.

Borrowings

Borrowings increased to $7.1 billion at September 30, 2011, including $2.3 billion assumed from our NewAlliance merger in the second quarter, from $4.9 billion at December 31, 2010. Short-term borrowings decreased by $632 million from December 31, 2010 to $1.2 billion, and long-term borrowings increased by $2.8 billion during that same period to $5.9 billion as we worked to extend the duration of our funding. 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 nine months of 2011, our stockholders’ equity increased $1.2 billion to $4.0 billion at September 30, 2011 from $2.8 billion at December 31, 2010 as a result of our merger with NewAlliance, whereby we issued 94 million common shares with a value of $1.3 billion. Other contributing factors included net income of $115 million and $50 million in net unrealized gains, net of taxes, on our securities available for sale arising during the nine months ended September 30, 2011. These amounts were offset by $127 million in treasury stock purchases, common stock dividends of $128 million, or $0.48 per share, and $19 million in unrealized losses, net of tax, on interest rate swaps designated as cash flow hedges.

At September 30, 2011, we held over 14 million shares of our common stock as treasury shares. During the first nine months of 2011, we repurchased 9.1 million shares of our common stock at an average price of $13.93 per share and we currently have authorization from our Board of Directors to repurchase an additional 12 million shares as part of our capital management initiatives. We issued 0.9 million shares from treasury stock in connection with the exercise of stock options and grants of restricted stock awards during the first nine 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 September 30, 2011 are presented in the following table (amounts in thousands):


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

First Niagara Financial Group, Inc.:
Leverage ratio	$	2,151,953		7.42	%		N/A		N/A
Tier 1 risk-based capital		2,151,953		11.90		$	1,086,845		6.00	%
Total risk-based capital		2,271,227		12.56			1,811,186		10.00

First Niagara Bank, N.A.:
Leverage ratio	$	2,074,628		7.17	%	$	1,446,742		5.00	%
Tier 1 risk-based capital		2,074,628		11.51			1,083,357		6.00
Total risk-based capital		2,193,902		12.17			1,805,681		10.00

As of September 30, 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 Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.).

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. During the quarter ended September 30, 2011 and the year ended December 31, 2010, First Niagara Bank, N.A. paid dividends of $75 and $60 million to the Company, respectively. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, First Niagara Bank, N.A. could pay additional dividends of approximately $250 million to the Company without obtaining regulatory approvals.

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 Loan 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 current 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 loan losses is based on a continuous review of our loan portfolio. The methodology that we use for determining the amount of the allowance for loan 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 management’s 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.

Updated appraisals are obtained at least every 18 to 24 months. 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, an appraisal may be obtained more frequently than 18 to 24 months when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral. 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 loan 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 loan losses.

The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans by portfolio segment for the nine months ended September 30 (in thousands):


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for loan losses:
Balance at beginning of period	$	89,001		$	6,353		$	—		$	—	$	95,354
Provision for loan losses		34,087			6,216			882			—		41,185
Charge-offs		(23,495	)		(5,158	)		(882	)		—		(29,535	)
Recoveries		4,051			1,694			—			—		5,745


Balance at end of period	$	103,644		$	9,105		$	—		$	—	$	112,749


Allowance for loan losses:
Individually evaluated for impairment	$	6,337		$	1,932		$	—		$	—	$	8,269
Collectively evaluated for impairment		97,307			7,173			—			—		104,480

Total	$	103,644		$	9,105		$	—		$	—	$	112,749


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	88,071		$	11,983		$	—		$	—	$	100,054
Collectively evaluated for impairment		6,373,767			2,951,373			—			—		9,325,140
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			3,275,883			3,664,289		6,940,172

Total	$	6,461,838		$	2,963,356		$	3,275,883		$	3,664,289	$	16,365,366

*2010*
Allowance for loan losses:
Balance at beginning of period	$	82,813		$	5,490		$	—		$	—	$	88,303
Provision for loan losses		31,949			3,182			—			—		35,131
Charge-offs		(28,638	)		(2,874	)		—			—		(31,512	)
Recoveries		1,456			1,154			—			—		2,610

Balance at end of period	$	87,580		$	6,952		$	—		$	—	$	94,532


Allowance for loan losses:
Individually evaluated for impairment	$	9,480		$	1,514		$	—		$	—	$	10,994
Collectively evaluated for impairment		78,100			5,438			—			—		83,538

Total	$	87,580		$	6,952		$	—		$	—	$	94,532


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	64,183		$	10,251		$	—		$	—	$	74,434
Collectively evaluated for impairment		4,725,479			2,440,026			—			—		7,165,505
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			1,767,123			1,066,422		2,833,545

Total	$	4,789,662		$	2,450,277		$	1,767,123		$	1,066,422	$	10,073,484


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

The following table presents the activity in our allowance for loan losses for the three months ended September 30 (in thousands):


	Legacy						Acquired
	Commercial			Consumer			Commercial		Consumer		Total

*2011*
Allowance for loan losses:
Balance at beginning of period	$	99,904		$	7,124		$	—	$	—	$	107,028
Provision for loan losses		11,443			2,403			—		—		13,846
Charge-offs		(8,330	)		(1,086	)		—		—		(9,416	)
Recoveries		627			664			—		—		1,291


Balance at end of period	$	103,644		$	9,105		$	—	$	—	$	112,749


*2010*
Allowance for loan losses:
Balance at beginning of period	$	83,379		$	7,030		$	—	$	—	$	90,409
Provision for loan losses		10,466			534			—		—		11,000
Charge-offs		(6,630	)		(950	)		—		—		(7,580	)
Recoveries		365			338			—		—		703


Balance at end of period	$	87,580		$	6,952		$	—	$	—	$	94,532

As of September 30, 2011, we had a liability for unfunded commitments of $6 million, which included $3 million in purchase accounting adjustments related to our acquired unfunded commitments. For the three and nine months ending September 30, 2011, we recognized a provision for credit loss related to our unfunded commitments of $0.7 million and $4 million, respectively. Our total unfunded commitments were $5.0 billion as of September 30, 2011 compared to $4.7 billion as of June 30, 2011.

Our net charge-offs of $8 million in the current quarter were consistent with our net charge-offs in the second quarter of 2011 and were slightly higher than the $7 million in net charge-offs recorded in the third quarter of 2010; however, total net charge-offs for the nine months ended September 30, 2011 declined $5 million to $24 million compared to $29 million for the same period in 2010. The following table details our net charge-offs by loan category for the nine months ended September 30 (in thousands):


	2011					2010
	Net		Percent of			Net		Percent of
	charge-offs		average loans			charge-offs		average loans
Commercial:
Real estate	$	10,373		0.25	%	$	16,202		0.56	%
Business		9,953		0.43	%		10,980		0.73	%

Total commercial		20,326		0.32	%		27,182		0.62	%

Residential real estate		668		0.03	%		275		0.02	%
Home equity		1,833		0.13	%		716		0.08	%
Other consumer		963		0.47	%		729		0.41	%


	$	23,790		0.23	%	$	28,902		0.42	%

As of September 30, 2011, we expect to fully collect the carrying value of our acquired loans and have determined that we can reasonably estimate their future cash flows including those loans that are 90 days or more past due. As a result, we do not consider our acquired loans that are 90 days or more past due to be nonaccrual or nonperforming and continue to recognize interest income on these loans, including the impact of the loans’ accretable discount. Our nonaccruing loans decreased to $82 million at September 30, 2011 compared to $83 million and $89 million at June 30, 2011 and December 31, 2010, respectively. The decrease in nonaccruing loans from June 30, 2011 to September 30, 2011 reflected the net impact of approximately $17 million in new nonaccruals added during the quarter offset by $18 million removed due to charge-offs, transfers to real estate owned, paydowns, and return to accruing status. On a year to date basis, the decrease of $7 million from December 31, 2010 to September 30, 2011 reflected the net impact of $35 million in additional new nonaccruals offset by the removal of $42 million due to charge-offs, transfers to real estate owned, paydowns, or return to accrual status. The composition of our nonaccruing loans from our legacy portfolio segment and total nonperforming assets consisted of the following at the dates indicated (amounts in thousands):


	September 30,			December 31,
	2011			2010
Nonaccruing loans:
Commercial:
Commercial real estate:
Acquisition and development	$	6,615		$	1,870
Multifamily		366			3,075
Investment real estate		19,751			24,536
Owner occupied		14,563			14,584

Total commercial real estate		41,295			44,065
Business		18,839			25,819

Total commercial		60,134			69,884
Consumer:
Residential real estate		15,555			14,461
Home equity		5,428			4,605
Other consumer		769			373

Total consumer		21,752			19,439

Total		81,886			89,323
Real estate owned		9,392			8,647

Total nonperforming assets⁽¹⁾	$	91,278		$	97,970

Loans 90 days past due and still accruing interest⁽²⁾	$	143,270		$	58,097

Total nonperforming assets as a percentage of total assets		0.29	%		0.46	%

Total nonaccruing loans as a percentage of total loans		0.50	%		0.85	%

Allowance for loan losses to nonaccruing loans		137.7	%		106.8	%


⁽¹⁾		Nonperforming assets do not include $45 million and $22 million of performing renegotiated loans that are accruing interest at September 30, 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 into interest income.

The following table contains a percentage breakout of the delinquency composition of our loan portfolio segments as of the dates indicated:


	Percent of loans past due						Percent of loans current
	September			December			September			December
	30, 2011			31, 2010			30, 2011			31, 2010
Legacy loans
Commercial:
Commercial real estate:
Acquisition and development		0.8	%		1.5	%		99.2	%		98.5	%
Multifamily		—			0.1	%		100.0	%		99.9	%
Investment real estate		1.2	%		1.3	%		98.8	%		98.7	%
Owner occupied		1.3	%		1.4	%		98.7	%		98.6	%

Total commercial real estate		0.9	%		1.0	%		99.1	%		99.0	%
Business		0.6	%		0.5	%		99.4	%		99.5	%

Total commercial		0.8	%		0.8	%		99.2	%		99.2	%


Consumer:
Residential real estate		1.6	%		1.6	%		98.4	%		98.4	%
Home equity		0.9	%		0.9	%		99.1	%		99.1	%
Other consumer		1.5	%		1.3	%		98.5	%		98.7	%

Total consumer		1.3	%		1.3	%		98.7	%		98.7	%

Total		0.9	%		1.0	%		99.1	%		99.0	%


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development		8.5	%		30.7	%		91.5	%		69.3	%
Multifamily		0.5	%		0.1	%		99.5	%		99.9	%
Investment real estate		4.7	%		8.0	%		95.3	%		92.0	%
Owner occupied		2.3	%		1.8	%		97.7	%		98.2	%

Total commercial real estate		3.5	%		4.2	%		96.5	%		95.8	%
Business		1.9	%		1.4	%		98.1	%		98.6	%

Total commercial		3.1	%		3.1	%		96.9	%		96.9	%


Consumer:
Residential real estate		3.8	%		3.8	%		96.2	%		96.2	%
Home equity		2.8	%		3.7	%		97.2	%		96.3	%
Other consumer		4.7	%		3.8	%		95.3	%		96.2	%

Total consumer		3.5	%		3.7	%		96.5	%		96.3	%

Total		3.3	%		3.3	%		96.7	%		96.7	%

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


	Percent of Total
				December 31,
	2011			2010
Legacy loans:
Pass		89.4	%		88.9	%
Criticized:⁽¹⁾
Accrual		9.6	%		9.8	%
Nonaccrual		1.0	%		1.3	%

Total criticized		10.6	%		11.1	%

Total		100.0	%		100.0	%


Acquired loans:
Pass		85.0	%		81.9	%
Criticized:⁽¹⁾
Accrual		15.0	%		18.1	%
Nonaccrual⁽²⁾		—			—

Total criticized		15.0	%		18.1	%

Total		100.0	%		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 into interest income.

Borrower FICO scores are a credit quality indicator that provides 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 the percentage make-up of our consumer portfolio segment is presented in the table below at the dates indicated:


	Percent of Total
	September			December
	30, 2011			31, 2010

*September 30, 2011*
Legacy loans by refreshed FICO score:
Over 700		77.4	%		74.8	%
660-700		10.6	%		10.9	%
620-660		4.7	%		5.3	%
580-620		2.4	%		2.7	%
Less than 580		3.5	%		4.5	%
No score		1.4	%		1.8	%

Total		100.0	%		100.0	%


Acquired loans by refreshed FICO score:
Over 700		71.4	%		60.0	%
660-700		8.6	%		11.4	%
620-660		4.4	%		5.9	%
580-620		8.2	%		5.0	%
Less than 580		4.9	%		8.2	%
No score		2.5	%		9.5	%

Total		100.0	%		100.0	%

As part of our evaluation of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for losses in our acquired loan portfolio. To the extent that credit quality deteriorates subsequent to acquisition, such deterioration would result in the establishment of an allowance for loan losses. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, was $255 million and $122 million as of September 30, 2011 and December 31, 2010, respectively. These loans continue to perform in line with our expectations at acquisition and as a result there was no allowance for loan losses associated with our acquired loan portfolio at September 30, 2011 or December 31, 2010. We maintain an allowance for loan losses for our legacy portfolio segment, which is heavily concentrated in the Upstate New York region. Although the economy in Upstate New York weathered the deteriorating credit conditions 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. During the third quarter, our credit quality remained largely the same as that of the first half of the year with slight increases in our net charge-offs as well as slight decreases in our nonaccruing loans. Our allowance for loan losses increased $17 million from December 31, 2010 to $113 million at September 30, 2011 as our provision for loan losses of $14 million exceeded our net charge-offs of $8 million. The ratio of our allowance for loan losses to total loans of 0.69% at September 30, 2011 decreased compared to 0.91% at December 31, 2010, primarily due to the acquisition of loans from our NewAlliance merger in the second quarter which were recorded at fair value and do not have a carryover allowance. Excluding acquired loans, our ratio of our allowance for loan losses to loans was 1.20% at September 30, 2011 and 1.22% at December 31, 2010.

Challenges remain in the credit environment but third quarter results remain in line with the improvement seen in the first half of 2011. Excluding our acquired loans, our annualized net charge-off ratio was 0.36% for the third quarter of 2011 compared to 0.31% and 0.67% for the quarters ending June 30, 2011 and December 31, 2010, respectively. Our nonaccruing loans were 0.50% of total loans at September 30, 2011 compared to 0.51% at June 30, 2011 and 0.85% at December 31, 2010, primarily due to the increase in total loans from the NewAlliance merger. Excluding our acquired loans, our nonaccruing loans were 0.87% at September 30, 2011 compared to 0.93% and 1.14% at June 30, 2011 and December 31, 2010, respectively.

Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) increased to $78 million at September 30, 2011 from $55 million at December 31, 2010. As discussed in Note 3, Loans and Leases, the recorded investment in TDRs as of September 30, 2011 included $18 million of recorded investment associated with newly identified TDRs pursuant to the revised guidance that were previously included in the population of loans collectively evaluated for impairment. 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. We generally do not forgive principal when restructuring loans. 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, either immediately before or after the restructuring, for six consecutive payments. TDRs accruing interest totaled $45 million and $22 million September 30, 2011 and December 31, 2010, respectively.

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, or banks we have acquired, 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 September 30, 2011, our liability for repuchase obligations on our serviced loan portfolio was $9 million compared to $4 million at December 31, 2010 and is included in other liabilities in our Consolidated Statements of Condition.

The delinquencies in our serviced loan portfolio were as follows at the dates indicated:


	September 30, 2011			December 31, 2010
30 to 59 days past due		1.04	%		0.66	%
60 to 89 days past due		0.35	%		0.26	%
Greater than 90 days past due		0.95	%		0.48	%

Total past due loans		2.34	%		1.40	%

Investments

We have assessed our securities that were in an unrealized loss position at September 30, 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.

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.

•

To fulfill contract obligations.

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. See Part II, Item 1A, for a discussion of risk factors surrounding our need to raise additional debt and equity capital to consummate the HSBC Acquisition. 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 $2.8 billion and $3.1 billion outstanding at September 30, 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 $10.4 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 $4.4 billion was available as of September 30, 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 September 30, 2011, we had outstanding unfunded commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $5.0 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 $2.6 billion at September 30, 2011 and generally have an expiration period of less than one year. Home equity and other consumer unused lines of credit totaled $1.5 billion at September 30, 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 $257 million at September 30, 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 $281 million in residential mortgages at September 30, 2011.

Loan Maturity and Repricing Schedule

The following table sets forth certain information at September 30, 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	$	2,234,394	$	2,771,817	$	659,817	$	5,666,028
Construction		319,315		121,729		41,916		482,960
Business		2,760,762		670,124		157,847		3,588,733

Total commercial		5,314,471		3,563,670		859,580		9,737,721
Residential real estate		1,166,683		2,221,254		783,437		4,171,374
Home equity		1,452,239		370,548		354,985		2,177,772
Other consumer		139,027		67,454		72,018		278,499

Total loans and leases	$	8,072,420	$	6,222,926	$	2,070,020	$	16,365,366

For the loans reported in the preceding table, the following sets forth at September 30, 2011, the dollar amount of all of our fixed-rate and adjustable-rate loans due after September 30, 2012 (in thousands):


	Fixed		Adjustable		Total
Commercial:
Real estate	$	1,702,165	$	1,729,469	$	3,431,634
Construction		107,967		55,678		163,645
Business		808,416		19,555		827,971

Total commercial		2,618,548		1,804,702		4,423,250
Residential real estate		1,059,163		1,945,528		3,004,691
Home equity		725,533		—		725,533
Other consumer		139,472		—		139,472

Total loans and leases	$	4,542,716	$	3,750,230	$	8,292,946

The following table sets forth at September 30, 2011, the dollar amount of all of our fixed-rate loans due after September 30, 2012 by the period in which the loans mature (in thousands):


			Residential		Home equity
Maturity	Commercial		real estate		and consumer		Total
1 to 2 years	$	509,839	$	353,168	$	175,233	$	1,038,240
2 to 3 years		515,379		249,847		117,707		882,933
3 to 5 years		735,106		251,349		145,062		1,131,517

Total 1 to 5 Years		1,760,324		854,364		438,002		3,052,690

5 to 10 years		646,588		160,857		221,132		1,028,577
More than 10 years		211,636		43,942		205,871		461,449


Total	$	2,618,548	$	1,059,163	$	865,005	$	4,542,716

The following table sets forth at September 30, 2011, the dollar amount of all of our variable rate loans due after September 30, 2012 by the period in which the loans reprice (in thousands):


			Residential		Home equity
Maturity	Commercial		real estate		and consumer		Total
1 to 2 years	$	455,140	$	285,783	$	—	$	740,923
2 to 3 years		413,249		212,067		—		625,316
3 to 5 years		934,958		869,040		—		1,803,998

Total 1 to 5 Years		1,803,347		1,366,890		—		3,170,237

5 to 10 years		1,355		578,638		—		579,993


Total	$	1,804,702	$	1,945,528	$	—	$	3,750,230

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 in market interest rates and the magnitude of the change at varying points along the yield curve. Changes in market interest rates, whether they are increases or decreases, can trigger repricings and changes in the pace of payments for both assets and liabilities, 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 adjustable-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.

For example, as part of our normal commercial lending activities, a portion of our commercial and commercial real estate loans have adjustable interest rates that are based on longer-term rates. The yield on these loans could fluctuate to a greater degree than loans that are based on relatively short-term rates. Accordingly, during the third quarter, as a result of actions taken by the Federal Reserve, the yield on our commercial loans was negatively impacted by lower long-term interest rates. Conversely, our cost of funding was not significantly affected by this change in interest rates because the pricing of these instruments is related to a shorter-term part of the interest rate curve.

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
	September 30, 2011					June 30, 2011
	Net interest					Net interest
Changes in interest rates⁽¹⁾	income		% Change			income			% Change
+200 basis points⁽²⁾	$	3,526		0.4	%	$	(2,960	)		(0.3	)%
+100 basis points		3,369		0.4	%		(546	)		(0.1	)


⁽¹⁾		The Federal Reserve benchmark overnight federal funds rate was 0.25% at both September 30, 2011 and June 30, 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 September 2011, the Financial Accounting Standards Board (the “FASB”) released new guidance on the testing of goodwill for impairment. The update permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test required by U.S. generally accepted accounting principles (“GAAP”). The amendments will become effective for us on January 1, 2012 with early adoption permitted. We do not expect this update to have a significant impact on our financial statements.

In June 2011, the FASB released new guidance to converge the fair value measurement guidance in GAAP with that of International Financial Reporting Standards (“IFRS”). The amendment provides both clarifying guidance regarding the FASB’s intent about the application of existing requirements as well as changes in certain principles or requirements. This guidance will become effective for us on January 1, 2012. While the amendments will expand our disclosures regarding our fair value measurements, we do not expect it to have a significant impact on our financial statements.

In May 2011, the FASB released an amendment to change the format in which entities report comprehensive income in their financial statements. Under the new guidance, entities have the option to present total comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This guidance will become effective for us on January 1, 2012. We do not expect it to have a significant impact on our financial statements.

In April 2011, 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 became effective for us in the third quarter and was applied retrospectively to the beginning of 2011.

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 September 30, 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 September 30, 2011.

During the quarter ended September 30, 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 allege, among other things, that NewAlliance’s directors breached their fiduciary duties to NewAlliance’s 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 allege 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 setting forth settlement terms that, subject to approval by the Connecticut Superior Court, would resolve the actions. In the memorandum of understanding, 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 Connecticut Superior Court approved the settlement at a hearing on August 22, 2011, dismissing the Connecticut actions with prejudice. The Delaware Court of Chancery likewise dismissed the Delaware actions with prejudice on September 30, 2011.

ITEM 1A. Risk Factors

In addition to the other information contained in this Quarterly Report on Form 10-Q, the following risk factors represent material updates and additions to the risk factors previously disclosed in our Annual Report on Form 10-K for the year ended December 31, 2010, as filed with the Securities and Exchange Commission. Additional risks not presently known to us, or that we currently deem immaterial, may also adversely affect our business, financial condition or results of operations. Further, to the extent that any of the information contained in this Quarterly Report on Form 10-Q constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause our actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of us.

Impact of the macro-economic environment on the HSBC Acquisition
The macroeconomic environment has changed significantly since the announcement of the HSBC Acquisition in ways that will currently preclude achieving certain original acquisition assumptions. Interest rates have fallen to historical lows, and capital markets, particularly in the banking sector, have been depressed and unusually volatile. We are currently assessing all our options including but not limited to offering a mix of types of capital, as described below, reducing the size of our balance sheet and the timing and price expected for both the DOJ divestitures and the divestiture of certain branches in select locations that are outside of our strategic focus. However, we continue to intend to use the cash received in the HSBC Acquisition to pay down borrowings as well as purchase investment securities. When we announced the transaction on July 31, 2011, we anticipated investment yields for securities we would purchase to be approximately 4.25%; however, due to current market conditions, we currently expect these investment yields to be approximately 3.5%.

We will need to raise additional debt and equity capital to consummate the HSBC Acquisition.
Our obligation to consummate the HSBC Acquisition is not subject to a financing condition. Therefore, we will need to raise additional capital in order to receive regulatory approval to consummate the transaction. We are considering a variety of types of capital, which may include common stock, preferred stock, convertible securities, and senior and subordinated debt. Our ability to raise additional capital on acceptable terms will depend on our financial performance and, among other things, conditions in the capital markets at that time, which are outside of our control. Issuances of additional capital could dilute our existing common stockholders. Issuances of capital with a dividend or liquidation preference over our common stock would affect the rights of our common stock. Issuances of preferred stock and debt, by increasing interest expenses, could negatively affect earnings per share of our common stock. Each of those potential outcomes could lower the market price of our common stock.

The success of the HSBC Acquisition will depend on a number of uncertain factors.
Consummation of the HSBC Acquisition is subject to receipt of required regulatory approvals, including the submission of a capital plan to the OCC, as well as antitrust approvals (or expirations of waiting periods), and the satisfaction of other closing conditions. In addition, the success of the HSBC Acquisition will depend on a number of factors, including, without limitation:

•

the necessary regulatory approvals to consummate the HSBC Acquisition not containing terms, conditions or restrictions that will be detrimental to, or have a material adverse effect on, the Bank;

•

our ability to successfully integrate the branches acquired as part of the HSBC Acquisition (the “HSBC Branches”) into the current operations of the Bank;

•

our ability to limit the outflow of deposits held by our new customers in the HSBC Branches and to retain interest earning assets (i.e., loans) acquired in the HSBC Acquisition;

•

the credit quality of loans acquired as part of the HSBC Acquisition;

•

our ability to attract new deposits and to generate new interest earning assets;

•

our success in deploying the cash received in the HSBC Acquisition on a timely basis, into assets, including investment securities, bearing sufficiently high yields without incurring unacceptable credit or interest rate risk;

•

our ability to control the incremental noninterest expense from the HSBC Branches in a manner that enables us to maintain a favorable overall efficiency ratio;

•

our ability to find third party purchasers for required divestitures of branches on suitable terms and conditions;

•

our ability to retain and attract appropriate personnel to staff the HSBC Branches;

•

our ability to earn acceptable levels of noninterest income, including fee income, from the HSBC Branches; and

•

our ability to retain the relationship managers and district sales executives we expect to hire in connection with the HSBC Acquisition.

No assurance can be given that the HSBC Acquisition will not expose us to unknown material liabilities, that the operation of the HSBC Branches will not adversely affect our existing profitability, that we will be able to achieve results in the future similar to those achieved by our existing banking business, that we will be able to compete effectively in new market areas, or that we will be able to manage growth resulting from the HSBC Acquisition effectively. The difficulties or costs we may encounter in the integration could materially and adversely affect our earnings and financial condition.

The success of the HSBC Acquisition will depend on a number of uncertain factors.

Consummation of the HSBC Acquisition is subject to receipt of required regulatory approvals, including the approval of the OCC, and antitrust approvals (or expirations of waiting periods), and the satisfaction of other closing conditions, including the submission of a capital plan to the OCC. The success of the HSBC Acquisition will depend on a number of factors, including, without limitation:

•

the necessary regulatory approvals to consummate the HSBC Acquisition not containing terms, conditions or restrictions that will be detrimental to, or have a material adverse effect on, the Bank;

•

our ability to access necessary capital on a timely basis;

•

our ability to successfully integrate the branches acquired as part of the HSBC Acquisition (the “HSBC Branches”) into the current operations of the Bank;

•

our ability to limit the outflow of deposits held by our new customers in the HSBC Branches and to retain interest earning assets (i.e., loans) acquired in the HSBC Acquisition;

•

the credit quality of loans acquired as part of the HSBC Acquisition;

•

our ability to attract new deposits and to generate new interest earning assets;

•

our ability to control the incremental noninterest expense from the HSBC Branches in a manner that enables us to maintain a favorable overall efficiency ratio;

•

the extent of branch divestitures required by regulators as a result of a competition review in connection with the regulatory approval process for the HSBC Acquisition;

•

our ability to find third party purchasers for required divestitures of branches on suitable terms and conditions;

•

our ability to retain and attract appropriate personnel to staff the HSBC Branches;

•

our ability to earn acceptable levels of noninterest income, including fee income, from the HSBC Branches; and

•

our ability to retain the relationship managers and district sales executives we expect to hire in connection with the HSBC Acquisition.

No assurance can be given that the Bank will be able to integrate the HSBC Branches successfully, that the HSBC Acquisition will not expose us to unknown material liabilities, that the operation of the HSBC Branches will not adversely affect our existing profitability, that we will be able to achieve results in the future similar to those achieved by our existing banking business, that we will be able to compete effectively in new market areas, or that we will be able to manage growth resulting from the HSBC Acquisition effectively. The difficulties or costs we may encounter in the integration could materially and adversely affect our earnings and financial condition.

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

a)		Not applicable.

b)		Not applicable.

c)		The following table discloses information regarding the repurchases of our common stock made during the third quarter of 2011:


					Total number of shares		Maximium number of
					purchased as part of		shares yet to be
	Number of shares		Average price		publicly announced		purchased under the
Month	purchased		paid per share		repurchase plans		plans
July		440,000	$	13.04		440,000		11,894,000
August		—		—		—		11,894,000
September		—		—		—		11,894,000


Total		440,000	$	13.04

On July 27, 2010, our Board of Directors approved a stock repurchase plan which authorizes management, at its discretion, to repurchase up to 21 million shares of our common stock. This plan rescinded all prior plans and does not have an expiration date.

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 5. Other Information

(a) Not applicable.

(b) Not applicable.

In May 2011, KPMG LLP (“KPMG”), the Company’s independent registered public accounting firm, notified the Company that a recently hired officer of the Company who is a former KPMG partner was a participant in a KPMG retirement plan that was structured in a manner that could raise independence concerns for KPMG under SEC auditor independence rules. KPMG promptly established a rabbi trust to fully fund future payments due to the Company’s officer in order to comply with SEC auditor independence rules. However, during the period following the officer’s hiring by the Company but prior to the restructuring of the retirement plan, a single monthly payment for $680 was made to the officer under the plan. KPMG advised the Company and the Company’s Audit Committee that, based on its review of all relevant facts, and particularly in light of the small amount involved and the prompt corrective action taken, this matter did not impact KPMG’s application of objective and impartial judgment on all issues encompassed within the interim review and audit engagements. After discussion with KPMG, the Company’s Audit Committee agreed with the conclusion. KPMG has reported their conclusion to the SEC staff.

ITEM 6. Exhibits

The following exhibits are filed herewith:


Exhibits

	2.1	Purchase and Assumption Agreement, dated July 30, 2011, by and among HSBC Bank USA, National Association, HSBC Securities (USA) Inc., HSBC Technology & Services (USA) Inc. and First Niagara Bank, N.A.⁽¹⁾

	12	Ratio of Earnings to Fixed Charges

	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⁽²⁾


⁽¹⁾		Incorporated by reference to the Current Report on 8-K filed with the Securities and Exchange Commission on August 1, 2011.

⁽²⁾		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: November 9, 2011	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer (Principal Executive Officer)

Date: November 9, 2011	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

Positive
Negative
Uncertain
Constraining
Legalese
Litigous
Readability	H.S. sophomore Avg

First Niagara Financial (FNFG) Inactive 10-Q2011 Q3 Quarterly report

Content analysis