First Niagara Financial (FNFG) 10-Q 2012 Q3 Quarterly report

UNITED STATES

SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q

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

For the quarterly period ended September 30, 2012

OR

�� 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 001-35390

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.    YES  x    NO  ¨

Indicate by check mark whether the Registrant has submitted electronically and posted on its corporate website, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files).    YES  x    NO  ¨

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

Large accelerated filer	x	Accelerated filer	¨
Non-accelerated filer	¨	Smaller reporting company	¨

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

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.    YES  ¨    NO  ¨

As of November 5, 2012, there were issued and outstanding 352,624,601 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, 2012

TABLE OF CONTENTS

Item Number	Page Number
PART I—FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition	3
Consolidated Statements of Income	4
Consolidated Statements of Comprehensive Income	5
Consolidated Statements of Changes in Stockholders’ Equity	6
Consolidated Statements of Cash Flows	7
Notes to Consolidated Financial Statements (unaudited)	9
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	48
3. Quantitative and Qualitative Disclosures About Market Risk	95
4. Controls and Procedures	95
PART II—OTHER INFORMATION
1. Legal Proceedings	95
1A. Risk Factors	95
2. Unregistered Sales of Equity Securities and Use of Proceeds	96
3. Defaults Upon Senior Securities	96
4. Mine Safety Disclosures	96
5. Other Information	96
6. Exhibits	96
Signatures	97

2

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, 2012			December 31, 2011
	(unaudited)
ASSETS
Cash and cash equivalents	$	447,087		$	836,555
Investment securities:
Available for sale, at fair value (amortized cost of $10,249,418 and $9,178,001 in 2012 and 2011; includes pledged securities that can be sold or repledged of $242,335 and $2,344,710 in 2012 and 2011)	10,579,970			9,348,296
Held to maturity, at amortized cost (fair value of $1,464,519 and $2,752,723 in 2012 and 2011; includes pledged securities that can be sold or repledged of $22,138 and $1,210,995 in 2012 and 2011)	1,387,763			2,669,630
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost and fair value	373,311			358,159
Loans held for sale	117,375			94,484
Loans and leases (net of allowance for loan losses of $149,933 and $120,100 in 2012 and 2011)	18,956,593			16,352,483
Bank owned life insurance	401,211			392,468
Premises and equipment, net	396,288			318,101
Goodwill	2,478,378			1,708,345
Core deposit and other intangibles, net	148,247			94,895
Other assets	587,711			637,199
Total assets	$	35,873,934		$	32,810,615
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	27,697,696		$	19,405,115
Short-term borrowings	1,995,610			2,208,845
Long-term borrowings	732,339			5,918,276
Other	532,868			480,201
Total liabilities	30,958,513			28,012,437
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; Series B, noncumulative perpetual preferred stock, $25 liquidation preference; 14,000,000 shares issued in 2012 and 2011	338,002			338,002
Common stock, $0.01 par value, 500,000,000 shares shares authorized; 366,002,045 shares issued in 2012 and 2011	3,660			3,660
Additional paid-in capital	4,227,672			4,228,477
Retained earnings	373,604			374,840
Accumulated other comprehensive income	174,815			67,812
Common stock held by employee stock ownership plan, 2,222,662 and 2,357,257 shares in 2012 and 2011	(18,130		)	(19,070		)
Treasury stock, at cost, 13,369,627 and 14,167,733 shares in 2012 and 2011	(184,202		)	(195,543		)
Total stockholders’ equity	4,915,421			4,798,178
Total liabilities and stockholders’ equity	$	35,873,934		$	32,810,615

See accompanying notes to consolidated financial statements.

3

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Income (unaudited) (in thousands, except per share amounts)
	Three months ended September 30,				Nine months ended September 30,
	2012		2011		2012		2011
Interest income:
Loans and leases	$	211,767	$	192,772	$	601,877	$	509,230
Investment securities and other	90,101		94,375		290,612		264,171
Total interest income	301,868		287,147		892,489		773,401
Interest expense:
Deposits	18,358		24,771		49,747		61,716
Borrowings	13,905		26,947		71,753		72,951
Total interest expense	32,263		51,718		121,500		134,667
Net interest income	269,605		235,429		770,989		638,734
Provision for credit losses	22,200		14,500		70,300		44,707
Net interest income after provision for credit losses	247,405		220,929		700,689		594,027
Noninterest income:
Deposit service charges	26,422		18,413		64,892		48,095
Insurance commissions	18,764		16,886		52,669		49,685
Merchant and card fees	12,014		8,933		26,813		24,209
Wealth management services	11,069		7,933		29,315		22,550
Mortgage banking	10,974		5,254		23,797		9,903
Capital markets income	6,381		2,687		19,751		5,603
Lending and leasing	3,730		3,399		11,098		8,322
Bank owned life insurance	3,449		2,742		10,684		7,827
Gain on securities portfolio repositioning	5,337		—		21,232		—
Other	4,063		2,408		7,458		5,430
Total noninterest income	102,203		68,655		267,709		181,624
Noninterest expense:
Salaries and employee benefits	115,484		89,131		316,468		253,099
Occupancy and equipment	25,694		20,434		71,800		55,583
Technology and communications	28,110		16,634		72,257		43,434
Marketing and advertising	8,954		7,554		22,393		14,126
Professional services	11,193		9,171		29,351		24,348
Amortization of intangibles	14,506		6,896		30,811		18,958
Federal deposit insurance premiums	8,850		10,301		25,535		22,763
Merger and acquisition integration expenses	29,404		9,008		173,834		92,012
Restructuring charges	—		16,326		6,453		29,038
Other	24,347		18,416		63,457		50,801
Total noninterest expense	266,542		203,871		812,359		604,162
Income before income taxes	83,066		85,713		156,039		171,489
Income taxes	24,682		28,732		48,714		56,040
Net income	58,384		56,981		107,325		115,449
Preferred stock dividend	7,547		—		20,209		—
Net income available to common stockholders	$	50,837	$	56,981	$	87,116	$	115,449
Earnings per share:
Basic	$	0.15	$	0.19	$	0.25	$	0.44
Diluted	$	0.14	$	0.19	$	0.25	$	0.44
Weighted average common shares outstanding:
Basic	349,001		292,211		348,956		260,259
Diluted	349,371		292,503		349,248		260,689
Dividends per common share	$	0.08	$	0.16	$	0.24	$	0.48

See accompanying notes to financial statements.

4

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income(unaudited)

(in thousands)

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net income	$	58,384		$	56,981		$	107,325		$	115,449
Other comprehensive income, net of income taxes:
Securities available for sale:
Net unrealized gains arising during the period	70,917			13,912			106,371			49,932
Reclassification adjustment for realized gains included in net income	—			—			(9,798		)	—
Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity	—			—			2,498			(3,956		)
	70,917			13,912			99,071			45,976
Net unrealized holding gains on securities transferred between available for sale to held to maturity:
Net unrealized holding gains on securities transferred	—			—			(2,498		)	3,956
Less: amortization of net unrealized holding gains to income	(422		)	(355		)	(1,262		)	(762		)
	(422		)	(355		)	(3,760		)	3,194
Net unrealized gains (losses) on interest rate swaps designated as cash flow hedges arising during the period	177			(14,274		)	6,536			(18,775		)
Pension and post-retirement plans:
Pension remeasurement	—			—			4,612			—
Amortization of net loss related to pension and post-retirement plans	223			865			544			1,424
	223			865			5,156			1,424
Total other comprehensive income	70,895			148			107,003			31,819
Total comprehensive income	$	129,279		$	57,129		$	214,328		$	147,268

See accompanying notes to consolidated financial statements.

5

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity(unaudited)

(in thousands, except share and per share amounts)

	Preferred stock		Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income		Common stock held by ESOP			Treasury stock			Total
Balances at January 1, 2012	$	338,002	$	3,660	$	4,228,477		$	374,840		$	67,812	$	(19,070	)	$	(195,543	)	$	4,798,178
Net income	—		—		—			107,325			—		—			—			107,325
Total other comprehensive income, net	—		—		—			—			107,003		—			—			107,003
ESOP shares committed to be released (134,595 shares)	—		—		13			—			—		940			—			953
Stock-based compensation expense	—		—		7,407			—			—		—			—			7,407
Excess tax benefit from stock-based compensation	—		—		104			—			—		—			—			104
Restricted stock activity (798,106 shares)	—		—		(8,329		)	(4,347		)	—		—			11,341			(1,335		)
Preferred stock dividends	—		—		—			(20,209		)	—		—			—			(20,209		)
Common stock dividends of $0.24 per share	—		—		—			(84,005		)	—		—			—			(84,005		)
Balances at September 30, 2012	$	338,002	$	3,660	$	4,227,672		$	373,604		$	174,815	$	(18,130	)	$	(184,202	)	$	4,915,421
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

See accompanying notes to consolidated financial statements.

6

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) (in thousands)
	Nine months ended September 30,
	2012			2011
Cash flows from operating activities:
Net income	$	107,325		$	115,449
Adjustments to reconcile net income to net cash provided by operating activities:
(Accretion) amortization of fees and discounts, net	(4,030		)	3,479
Provision for credit losses	70,300			44,707
Depreciation of premises and equipment	30,905			24,395
Amortization of intangibles	30,811			18,958
Gain on securities portfolio repositioning	(21,232		)	—
Origination of loans held for sale	(1,053,883		)	(482,721		)
Proceeds from sales of loans held for sale	1,037,052			441,713
ESOP and stock based-compensation expense	8,360			7,706
Deferred income tax expense	18,362			364
Contributions to defined benefit pension plans	(110,575		)	—
(Increase) decrease in other assets	(40,023		)	35,614
(Decrease) increase in other liabilities	(65,877		)	27,512
Net cash provided by operating activities	7,495			237,176
Cash flows from investing activities:
Proceeds from sales of securities available for sale	3,170,966			555,078
Proceeds from maturities of securities available for sale	192,763			360,436
Principal payments received on securities available for sale	1,512,007			922,176
Purchases of securities available for sale	(5,070,424		)	(2,019,747		)
Principal payments received on securities held to maturity	400,909			266,276
Purchases of securities held to maturity	—			(87,458		)
Purchases of Federal Home Loan Bank and Federal Reserve Bank common stock	(15,152		)	(27,126		)
Purchase of bank owned life insurance	—			(35,000		)
Net increase in loans and leases	(1,183,896		)	(795,386		)
Acquisitions, net of cash and cash equivalents	7,703,349			(51,344		)
Purchases of premises and equipment	(75,555		)	(50,940		)
Other, net	39,773			4,957
Net cash provided by (used in) investing activities	6,674,740			(958,078		)
Cash flows from financing activities:
Net (decrease) increase in deposits	(1,627,490		)	1,190,524
Repayments of short-term borrowings, net	(213,235		)	(322,252		)
Proceeds from long-term borrowings	—			551,966
Repayments of long-term borrowings	(5,126,447		)	(332,585		)
Purchases of treasury stock	—			(126,876		)
Dividends paid on noncumulative preferred stock	(20,209		)	—
Dividends paid on common stock	(84,005		)	(127,850		)
Other, net	(317		)	6,592
Net cash (used in) provided by financing activities	(7,071,703		)	839,519
Net (decrease) increase in cash and cash equivalents	(389,468		)	118,617
Cash and cash equivalents at beginning of period	836,555			213,820
Cash and cash equivalents at end of period	$	447,087		$	332,437

7

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES Consolidated Statements of Cash Flows (unaudited) (in thousands) (continued)
Supplemental disclosures
Cash paid during the period for:
Income taxes	$	16,099	$	64,961
Interest expense	206,139		178,527
Acquisition of noncash assets and liabilities:
Assets acquired	2,406,277		9,074,250
Liabilities assumed	10,109,626		7,691,354
Other noncash activity:
Securities available for sale purchased not settled	93,516		60,042
Securities transferred from held to maturity to available for sale	860,674		—
Securities transferred from available for sale to held to maturity (at fair value)	—		1,994,193

See accompanying notes to consolidated financial statements.

8

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 2011 Annual Report on Form 10-K. Results for the three and nine months ended September 30, 2012 do not necessarily reflect the results that may be expected for the year ending December 31, 2012. 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

HSBC Bank Branches

On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association (“HSBC”) and its affiliates (the “HSBC Branch Acquisition”) in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets, as contemplated by the Purchase and Assumption Agreement, dated July 30, 2011, as amended and restated as of May 17, 2012 (the “Purchase Agreement”). The purchase price, net of premiums received of $122 million upon closing of the assignments from HSBC to KeyBank N.A. (“Key”), Five Star Bank (“Five Star”), and Community Bank System, Inc. (“Community Bank”), was $772 million. We also acquired certain wealth management relationships which included approximately $2.5 billion of assets under management. While the HSBC Branch Acquisition is considered a purchase of a business for accounting purposes, pro forma income statement information is not presented because the HSBC Branch Acquisition does not represent the acquisition of a business which has continuity both before and after the acquisition.

The following table summarizes the estimated fair values of the assets acquired and liabilities assumed at the date of acquisition:

Recognized amounts of identifiable assets acquired and (liabilities assumed), at fair value:
Cash and cash equivalents (1)	$	7,360,218
Loans	1,604,551
Core deposit and other intangibles	84,631
Other assets	61,610
Total assets acquired	9,111,010
Deposits(2)	(9,854,589		)
Other liabilities	(31,045		)
Total liabilities acquired	(9,885,634		)
Goodwill	$	774,624

⁽¹⁾  Amount is net of $772 million deposit premium paid to HSBC.

⁽²⁾  Deposits reported exclude $0.5 billion in municipal deposits that were subject to a price concession.

During the quarter ended September 30, 2012, we recorded additional goodwill reflecting the final closing adjustments. The above recognized amounts of loans, core deposit and other intangibles, other assets and other liabilities, at fair value, are preliminary estimates and are subject to adjustment but actual amounts are not expected to differ materially from those shown.

In connection with the regulatory process for the HSBC Branch Acquisition, we agreed with the U.S. Department of Justice (“DOJ”) to assign our purchase rights related to 26 HSBC branches in the Buffalo area. In January 2012, we entered into an agreement with Key assigning our right to purchase the 26 HSBC Buffalo branches as well as 11 additional HSBC branches in the Rochester area. On July 13, 2012, Key acquired these 37 branches with a total of $2.0 billion in deposits and approximately $256.5 million in loans, and paid us a deposit premium of $91.5 million.

9

In January 2012, we also entered into separate agreements with Five Star Bank and Community Bank for them to purchase seven First Niagara branches and 20 HSBC branches, for which we had assigned our purchase rights.

On June 22, 2012, Five Star acquired four First Niagara branches with $58.6 million in loans, assumed approximately $129.3 million in deposits, and paid us a deposit premium of $5.3 million. On August 17, 2012, Five Star acquired four of the HSBC branches, assumed approximately $18 million in loans, $157.2 million in deposits, and paid us a deposit premium of $6.5 million.

On July 20, 2012, Community Bank acquired the remaining 16 HSBC branches, with a total of $107.0 million in loans, $696.6 million in deposits, and paid us a deposit premium of $23.8 million. On September 7, 2012, Community Bank acquired three First Niagara branches, assumed approximately $55.4 million in loans, $100.8 million in deposits, and paid us a deposit premium of $3.1 million.

We estimated the fair value of loans acquired from HSBC 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 HSBC’s allowance for loan losses associated with the loans we acquired as the loans were initially recorded at fair value.

Information about the acquired HSBC loan portfolio as of May 18, 2012 is in the following table, and excludes home equity lines of credit, credit card, and any other line of credit:

Contractually required principal and interest at acquisition	$	758,449
Contractual cash flows not expected to be collected (nonaccretable discount)	(16,497		)
Expected cash flows at acquisition	741,952
Interest component of expected cash flows (accretable discount)	(90,670		)
Fair value of acquired loans (excluding lines of credit)	$	651,282

The $41 million core deposit intangible asset recognized as part of the HSBC Branch Acquisition is being amortized over its estimated useful life of approximately three years using an accelerated method and the $9 million wealth management and $34 million purchased credit card relationships intangibles are being amortized over their useful lives of ten years using an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is deductible for tax purposes.

The fair value of savings and transaction deposit accounts acquired from HSBC was 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 remaining contractual terms of the certificate of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding remaining maturity.

Direct costs related to the HSBC Branch Acquisition were expensed as incurred and amounted to $173.8 million for the nine months ended September 30, 2012. These merger and acquisition integration expenses included $65 million in prepayment penalties on borrowings and swap termination fees; redundant facilities and employee severance costs; technology costs related to system conversions; and professional fees.

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.

10

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 (liabilities 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	64,250
Core deposit intangible	23,800
Other assets	194,646
Deposits	(5,312,265		)
Borrowings	(2,299,321		)
Other liabilities	(74,629		)
Total identifiable net assets	853,506
Goodwill	$	676,727

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 in the following table, and excludes lines of credit:

Contractually required principal and interest at acquisition	$	5,810,799
Contractual cash flows not expected to be collected (nonaccretable discount)	(183,174		)
Expected cash flows at acquisition	5,627,625
Interest component of expected cash flows (accretable discount)	(1,059,207		)
Fair value of acquired loans (excluding lines of credit)	$	4,568,418

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.

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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, 2011 under the “Pro forma” column. 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. 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 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the nine months ended September 30, 2011.

	Actual from acquisition date through September 30, 2011		Pro forma nine months September 30, 2011
Net interest income	$	118,235	$	708,302
Noninterest income	23,303		194,236
Net income	37,866		189,079
Pro forma earnings per share:
Basic			$	0.66
Diluted			0.66

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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, 2012	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	611,758	$	24,028	$	(85	)	$	635,701
U.S. Treasury	19,941		864		—			20,805
U.S. government agencies	4,823		13		(3		)	4,833
U.S. government sponsored enterprises	404,666		14,850		—			419,516
Corporate	750,856		21,572		(2,966		)	769,462
Trust preferred securities	17,146		144		(1,980		)	15,310
Total debt securities	1,809,190		61,471		(5,034		)	1,865,627
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	49,934		2,564		—			52,498
Federal National Mortgage Association	438,344		24,633		(13		)	462,964
Federal Home Loan Mortgage Corporation	385,527		15,928		—			401,455
Collateralized mortgage obligations:
Government National Mortgage Association	1,256,066		49,735		—			1,305,801
Federal National Mortgage Association	1,259,136		9,440		(1,320		)	1,267,256
Federal Home Loan Mortgage Corporation	894,235		8,377		(1,705		)	900,907
Non-agency issued	68,682		1,837		(43		)	70,476
Total collateralized mortgage obligations	3,478,119		69,389		(3,068		)	3,544,440
Total residential mortgage-backed securities	4,351,924		112,514		(3,081		)	4,461,357
Commercial mortgage-backed securities:
Non-agency issued	1,962,679		120,532		(945		)	2,082,266
Total mortgage-backed securities	6,314,603		233,046		(4,026		)	6,543,623
Collateralized loan obligations:
Non-agency issued	1,239,769		31,458		(646		)	1,270,581
Asset-backed securities collateralized by:
Student loans	373,391		8,971		(1,723		)	380,639
Credit cards	34,480		702		—			35,182
Auto loans	335,432		5,039		(12		)	340,459
Other	111,729		717		(10		)	112,436
Total asset-backed securities	855,032		15,429		(1,745		)	868,716
Other	30,824		703		(104		)	31,423
Total securities available for sale	$	10,249,418	$	342,107	$	(11,555	)	$	10,579,970
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	6,060	$	359	$	(29	)	$	6,390
Federal National Mortgage Association	5,854		229		—			6,083
Federal Home Loan Mortgage Corporation	7,149		378		—			7,527
Collateralized mortgage obligations:
Government National Mortgage Association	1,083,925		51,538		—			1,135,463
Federal National Mortgage Association	21,998		670		—			22,668
Federal Home Loan Mortgage Corporation	262,777		23,611		—			286,388
Total collateralized mortgage obligations	1,368,700		75,819		—			1,444,519
Total securities held to maturity	$	1,387,763	$	76,785	$	(29	)	$	1,464,519

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	Amortized		Unrealized		Unrealized			Fair
December 31, 2011:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	681,713	$	21,564	$	(99	)	$	703,178
U.S. Treasury	19,929		714		—			20,643
U.S. government agencies	5,430		10		(3		)	5,437
U.S. government sponsored enterprises	377,468		13,332		(664		)	390,136
Corporate	349,170		779		(13,939		)	336,010
Trust preferred securities	29,791		41		(4,800		)	25,032
Total debt securities	1,463,501		36,440		(19,505		)	1,480,436
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	88,386		3,307		—			91,693
Federal National Mortgage Association	741,487		22,434		(71		)	763,850
Federal Home Loan Mortgage Corporation	644,730		14,686		(69		)	659,347
Collateralized mortgage obligations:
Government National Mortgage Association	2,329,040		63,916		(459		)	2,392,497
Federal National Mortgage Association	936,768		13,782		(1,195		)	949,355
Federal Home Loan Mortgage Corporation	1,091,128		15,163		(1,258		)	1,105,033
Non-agency issued	93,329		1,251		(786		)	93,794
Total collateralized mortgage obligations	4,450,265		94,112		(3,698		)	4,540,679
Total residential mortgage-backed securities	5,924,868		134,539		(3,838		)	6,055,569
Commercial mortgage-backed securities:
Non-agency issued	1,504,241		25,667		(598		)	1,529,310
Total mortgage-backed securities	7,429,109		160,206		(4,436		)	7,584,879
Collateralized loan obligations:
Non-agency issued	158,091		—		(92		)	157,999
Asset-backed securities collateralized by:
Student loans	43,279		—		(2,561		)	40,718
Credit cards	32,641		52		—			32,693
Auto loans	20,413		—		(120		)	20,293
Other	118		—		(9		)	109
Total asset-backed securities	96,451		52		(2,690		)	93,813
Other	30,849		446		(126		)	31,169
Total securities available for sale	$	9,178,001	$	197,144	$	(26,849	)	$	9,348,296
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	6,421	$	271	$	(14	)	$	6,678
Federal National Mortgage Association	14,926		380		—			15,306
Federal Home Loan Mortgage Corporation	11,882		439		—			12,321
Collateralized mortgage obligations:
Government National Mortgage Association	1,883,105		48,358		—			1,931,463
Federal National Mortgage Association	196,357		4,800		—			201,157
Federal Home Loan Mortgage Corporation	556,939		28,859		—			585,798
Total collateralized mortgage obligations	2,636,401		82,017		—			2,718,418
Total securities held to maturity	$	2,669,630	$	83,107	$	(14	)	$	2,752,723

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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, 2012	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities available for sale:
Debt securities:
States and political subdivisions	12,176		(42		)	21	4,171		(43		)	4	$	16,347	$	(85	)	25
U.S. government sponsored enterprises	—		—			—	2,314		(3		)	2	2,314		(3		)	2
Corporate	84,122		(1,109		)	39	68,515		(1,857		)	4	152,637		(2,966		)	43
Trust preferred securities	1,013		(10		)	1	12,501		(1,970		)	6	13,514		(1,980		)	7
Total debt securities	97,311		(1,161		)	61	87,501		(3,873		)	16	184,812		(5,034		)	77
Mortgage-backed securities:
Residential mortgage-backed securities:
Federal National Mortgage Association	3,351		(6		)	4	319		(7		)	2	3,670		(13		)	6
Collateralized mortgage obligations:
Federal National Mortgage Association	459,720		(1,316		)	1	1,091		(4		)	1	460,811		(1,320		)	2
Federal Home Loan Mortgage Corporation	235,164		(1,705		)	8	—		—			—	235,164		(1,705		)	8
Non-agency issued	—		—			—	7,709		(43		)	2	7,709		(43		)	2
Total collateralized mortgage obligations	694,884		(3,021		)	9	8,800		(47		)	3	703,684		(3,068		)	12
Total residential mortgage-backed securities	698,235		(3,027		)	13	9,119		(54		)	5	707,354		(3,081		)	18
Commercial mortgage-backed securities:
Non-agency issued	31,895		(631		)	4	15,761		(314		)	3	47,656		(945		)	7
Total mortgage-backed securities	730,130		(3,658		)	17	24,880		(368		)	8	755,010		(4,026		)	25
Collateralized loan obligations:
Non-agency issued	125,040		(646		)	18	—		—			—	125,040		(646		)	18
Asset-backed securities collateralized by:
Student loans	23,822		(1,723		)	1	—		—			—	23,822		(1,723		)	1
Auto loans	1,988		(12		)	1	—		—			—	1,988		(12		)	1
Other	8,017		(8		)	2	101		(2		)	1	8,118		(10		)	3
Total asset-backed securities	33,827		(1,743		)	4	101		(2		)	1	33,928		(1,745		)	5
Other	6,634		(21		)	2	1,296		(83		)	2	7,930		(104		)	4
Total securities available for sale in an unrealized loss position	$	992,942	$	(7,229	)	102	$	113,778	$	(4,326	)	27	$	1,106,720	$	(11,555	)	129
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association:	$	1,979	$	(29	)	1	—		—			—	$	1,979	$	(29	)	1

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	Less than 12 months						12 months or longer						Total
	Fair		Unrealized				Fair		Unrealized				Fair		Unrealized
December 31, 2011:	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities available for sale:
Debt securities:
States and political subdivisions	12,792		(45		)	21	6,121		(54		)	11	$	18,913	$	(99	)	32
U.S. government agencies	—		—			—	2,189		(3		)	1	2,189		(3		)	1
U.S. government sponsored enterprises	77,445		(664		)	7	—		—			—	77,445		(664		)	7
Corporate	256,316		(13,357		)	38	4,418		(582		)	1	260,734		(13,939		)	39
Trust preferred securities	23,055		(3,949		)	9	800		(851		)	2	23,855		(4,800		)	11
Total debt securities	369,608		(18,015		)	75	13,528		(1,490		)	15	383,136		(19,505		)	90
Mortgage-backed securities:
Residential mortgage-backed securities:
Federal National Mortgage Association	21,765		(71		)	13	—		—			—	21,765		(71		)	13
Federal Home Loan Mortgage Corporation	18,236		(69		)	8	—		—			—	18,236		(69		)	8
Collateralized mortgage obligations:
Government National Mortgage Association	126,027		(459		)	6	—		—			—	126,027		(459		)	6
Federal National Mortgage Association	197,810		(1,195		)	20	—		—			—	197,810		(1,195		)	20
Federal Home Loan Mortgage Corporation	219,870		(1,258		)	21	—		—			—	219,870		(1,258		)	21
Non-agency issued	25,563		(618		)	13	16,764		(168		)	3	42,327		(786		)	16
Total collateralized mortgage obligations	569,270		(3,530		)	60	16,764		(168		)	3	586,034		(3,698		)	63
Total residential mortgage-backed securities	609,271		(3,670		)	81	16,764		(168		)	3	626,035		(3,838		)	84
Commercial mortgage-backed securities:
Non-agency issued	164,409		(598		)	18	—		—			—	164,409		(598		)	18
Total mortgage-backed securities	773,680		(4,268		)	99	16,764		(168		)	3	790,444		(4,436		)	102
Collateralized loan obligations:
Non-agency issued	86,435		(92		)	6	—		—			—	86,435		(92		)	6
Asset-backed securities collateralized by:
Student loans	40,717		(2,561		)	2	—		—			—	40,717		(2,561		)	2
Auto loans	20,293		(120		)	3	—		—			—	20,293		(120		)	3
Other	—		—			—	109		(9		)	1	109		(9		)	1
Total asset-backed securities	61,010		(2,681		)	5	109		(9		)	1	61,119		(2,690		)	6
Other	9,843		(126		)	5	—		—			—	9,843		(126		)	5
Total securities available for sale in an unrealized loss position	$	1,300,576	$	(25,182	)	190	$	30,401	$	(1,667	)	19	$	1,330,977	$	(26,849	)	209
Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	2,138	$	(14	)	1	$	—	$	—		—	$	2,138	$	(14	)	1

During the quarter ended June 30, 2012 and subsequent to the HSBC Branch Acquisition, we transferred certain mortgage-backed securities with a carrying value of $861 million from our held to maturity portfolio to our available for sale portfolio. We then sold these and other mortgage-backed securities in our available for sale portfolio with a total carrying value of $3.1 billion for a total pre-tax gain of $16 million in order to manage our interest rate risk and strengthen key financial metrics. The securities sold were selected based on an assessment of their prepayment risk and did not include any that were purchased in conjunction with the HSBC Branch Acquisition. The proceeds from these sales were used to pay down short-term borrowings. During the quarter ended September 30, 2012, we recognized an additional $5 million of gains related to this sale. This is further discussed in Note 4, Derivative Financial Instruments.

We have assessed the securities in an unrealized loss position at September 30, 2012 and December 31, 2011 and determined that the declines in fair value below amortized cost were temporary. We also do not intend to sell these securities and it is not

16

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.

Scheduled contractual maturities of our investment securities at September 30, 2012 were as follows:

	Amortized cost		Fair value
Debt securities:
Within one year	$	97,076	$	97,516
After one year through five years	1,259,533		1,304,650
After five years through ten years	445,158		456,401
After ten years	7,423		7,060
Total debt securities	1,809,190		1,865,627
Mortgage-backed securities	7,702,366		8,008,142
Collateralized loan obligations	1,239,769		1,270,581
Asset-backed securities	855,032		868,716
Other	30,824		31,423
	$	11,637,181	$	12,044,489

While the contractual maturities of our mortgage-backed securities, collateralized loan obligations, 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 these securities. The duration of our investment securities portfolio decreased to 2.9 years at September 30, 2012 from 4.1 years at December 31, 2011.

Note 3. Loans and Leases

Overall Portfolio

Our loan portfolio is made up of two segments, commercial loans and consumer loans. Those segments are further segregated between our loans initially accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans). 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.

Our loans and leases receivable consisted of the following at the dates indicated:

	September 30, 2012									December 31, 2011
	Originated			Acquired			Total			Originated			Acquired			Total
Commercial:
Real estate	$	4,181,692		$	2,052,073		$	6,233,765		$	3,695,102		$	2,183,516		$	5,878,618
Construction	525,045			77,161			602,206			286,040			79,723			365,763
Business	3,881,145			801,009			4,682,154			2,951,807			819,842			3,771,649
Total commercial	8,587,882			2,930,243			11,518,125			6,932,949			3,083,081			10,016,030
Residential real estate	1,701,787			2,168,969			3,870,756			1,643,665			2,368,602			4,012,267
Home equity	1,231,556			1,429,873			2,661,429			1,132,373			1,033,615			2,165,988
Other consumer	711,343			344,873			1,056,216			167,018			111,280			278,298
Total consumer	3,644,686			3,943,715			7,588,401			2,943,056			3,513,497			6,456,553
Total loans and leases	12,232,568			6,873,958			19,106,526			9,876,005			6,596,578			16,472,583
Allowance for loan losses	(147,209		)	(2,724		)	(149,933		)	(118,192		)	(1,908		)	(120,100		)
Total loans and leases, net	$	12,085,359		$	6,871,234		$	18,956,593		$	9,757,813		$	6,594,670		$	16,352,483

As of September 30, 2012, we had a liability for unfunded loan commitments of $11 million. For the nine months ended September 30, 2012, we recognized provision for credit losses related to our unfunded loan commitments of $0.8 million. We acquired an additional $3.0 billion in unfunded loan commitments as part of our HSBC Branch Acquisition, and consequently increased our liability by $4 million to recognize probable losses inherent in the commitments assumed in the HSBC Branch Acquisition.

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Of the $2.7 billion and $2.2 billion home equity portfolio at September 30, 2012 and December 31, 2011, respectively, $0.9 billion were in a first lien position at each period end. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of September 30, 2012 and December 31, 2011. Recently issued Interagency Supervisory Guidance related to junior lien home equity loans resulted in $7 million of additional nonaccrual loans at September 30, 2012, but did not have a significant impact on our allowance for loan losses.

In the third quarter of 2012, the Office of the Comptroller of the Currency ("OCC") updated their Bank Accounting Advisory Series which states that consumer loans restructured in bankruptcy should be written down to their collateral value. This guidance also states that such restructures are also considered troubled debt restructurings ("TDRs"). This guidance resulted in $12.5 million of additional TDRs at September 30, 2012. Our preliminary analysis indicates that, as a result of stable home values in our footprint markets, only $2.3 million of these loans have collateral that has a current fair value less than the balance of the loan. As a result, this change did not have a significant impact to our allowance for loan losses or charge-offs.

Acquired Loan Portfolios

We have acquired loans in four acquisitions since January 1, 2009. All acquired loans were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification Topic (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality) or ASC 310-20 (Nonrefundable Fees and Other Costs.) The outstanding principal balance and the related carrying amount of our acquired loans included in our Consolidated Statements of Condition are as follows at the dates indicated:

	September 30, 2012		December 31, 2011
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	33,346	$	52,272
Carrying amount	26,214		45,141
Acquired loans evaluated collectively for future credit losses
Outstanding principal balance	5,067,525		5,459,446
Carrying amount	4,978,283		5,369,414
Other acquired loans
Outstanding principal balance	1,946,822		1,239,025
Carrying amount	1,869,461		1,182,023
Total acquired loans
Outstanding principal balance	7,047,693		6,750,743
Carrying amount	6,873,958		6,596,578

The following table presents changes in the accretable discount, which includes income recognized from contractual interest cash flows, for the dates indicated. Acquired lines of credit accounted for under ASC 310-20 are not included in this table.

Balance at January 1, 2011	$	(325,851	)
NewAlliance acquisition	(1,059,207		)
Net reclassifications from nonaccretable yield	(23,830		)
Accretion	221,988
Balance at December 31, 2011	(1,186,900		)
HSBC Acquisition	(90,670		)
Reclassifications from nonaccretable yield	(10,978		)
Accretion	176,967
Balance at September 30, 2012	$	(1,111,581	)

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. We determined our allowance for loan losses by portfolio segment as defined above. For our originated 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

18

similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate for qualitative risk factors specific to respective loan types.

We also maintain an allowance for loan losses on acquired loans when: (i) for loans accounted for under ASC 310-30, there is deterioration in credit quality subsequent to acquisition, and (ii) for loans accounted for under ASC 310-20, the inherent losses in the loans exceed the remaining credit discount recorded at the time of acquisition.

The following table presents the activity in our allowance for loan losses on originated loans and related recorded investment of the associated loans in our originated loan portfolio segment for the periods indicated:

	Commercial						Consumer
	Business			Real estate			Residential			Home equity			Other consumer			Total
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	57,348		$	50,007		$	4,101		$	4,374		$	2,362		$	118,192
Provision for loan losses	56,634			(8,021		)	2,409			2,604			8,669			62,295
Charge-offs	(23,131		)	(5,518		)	(1,965		)	(3,508		)	(3,035		)	(37,157		)
Recoveries	1,954			556			294			411			1,171			4,386
Allowance related to loans sold	(187		)	(88		)	(66		)	(121		)	(45		)	(507		)
Balance at end of period	$	92,618		$	36,936		$	4,773		$	3,760		$	9,122		$	147,209
Allowance for loan losses:
Individually evaluated for impairment	$	5,090		$	2,047		$	2,373		$	360		$	21		$	9,891
Collectively evaluated for impairment	87,528			34,889			2,400			3,400			9,101			137,318
Total	$	92,618		$	36,936		$	4,773		$	3,760		$	9,122		$	147,209
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	47,947		$	62,708		$	17,756		$	4,738		$	1,511		$	134,660
Collectively evaluated for impairment	3,833,198			4,644,029			1,684,031			1,226,818			709,832			12,097,908
Total	$	3,881,145		$	4,706,737		$	1,701,787		$	1,231,556		$	711,343		$	12,232,568
Nine months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	42,034		$	46,967		$	1,754		$	1,859		$	2,740		$	95,354
Provision for loan losses	25,434			8,653			2,483			3,642			91			40,303
Charge-offs	(11,737		)	(11,758		)	(1,184		)	(2,019		)	(1,955		)	(28,653		)
Recoveries	2,592			1,459			516			186			992			5,745
Balance at end of period	$	58,323		$	45,321		$	3,569		$	3,668		$	1,868		$	112,749
Allowance for loan losses:
Individually evaluated for impairment	$	3,563		$	2,774		$	1,813		$	118		$	1		$	8,269
Collectively evaluated for impairment	54,760			42,547			1,756			3,550			1,867			104,480
Total	$	58,323		$	45,321		$	3,569		$	3,668		$	1,868		$	112,749
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	27,232		$	60,839		$	11,399		$	575		$	9		$	100,054
Collectively evaluated for impairment	2,640,969			3,732,798			1,702,415			1,086,339			162,619			9,325,140
Total	$	2,668,201		$	3,793,637		$	1,713,814		$	1,086,914		$	162,628		$	9,425,194

19

	Commercial						Consumer
	Business			Real estate			Residential			Home equity			Other consumer			Total
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	75,708		$	44,927		$	5,076		$	4,971		$	4,514		$	135,196
Provision for loan losses	23,147			(6,536		)	107			(771		)	5,446			21,393
Charge-offs	(6,500		)	(1,508		)	(410		)	(545		)	(1,179		)	(10,142		)
Recoveries	424			123			14			145			368			1,074
Allowance related to loans sold	(161		)	(70		)	(14		)	(40		)	(27		)	(312		)
Balance at end of period	$	92,618		$	36,936		$	4,773		$	3,760		$	9,122		$	147,209
Three months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	56,402		$	43,502		$	2,643		$	2,661		$	1,820		$	107,028
Provision for loan losses	4,044			7,399			755			1,230			418			13,846
Charge-offs	(2,689		)	(5,641		)	(105		)	(348		)	(633		)	(9,416		)
Recoveries	566			61			276			125			263			1,291
Balance at end of period	$	58,323		$	45,321		$	3,569		$	3,668		$	1,868		$	112,749

20

The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans in our acquired loan portfolio for the periods indicated:

	Commercial						Consumer
	Business			Real estate			Residential		Home equity		Other consumer			Total
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	1,908		$	1,908
Provision for loan losses	—			5,208			—		—		2,000			7,208
Charge-offs	—			(5,467		)	—		—		(1,359		)	(6,826		)
Recoveries	—			259			—		—		175			434
Balance at end of period	$	—		$	—		$	—	$	—	$	2,724		$	2,724
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Collectively evaluated for impairment	—			—			—		—		2,724			2,724
Total	$	—		$	—		$	—	$	—	$	2,724		$	2,724
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	7,998		$	1,356		$	—	$	2,341	$	—		$	11,695
Collectively evaluated for impairment	534,204			—			—		1,072,200		252,718			1,859,122
Loans acquired with deteriorated credit quality	258,807			2,127,878			2,168,969		355,332		92,155			5,003,141
Total	$	801,009		$	2,129,234		$	2,168,969	$	1,429,873	$	344,873		$	6,873,958
Nine months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses	346			536			—		—		—			882
Charge-offs	(346		)	(536		)	—		—		—			(882		)
Recoveries	—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Collectively evaluated for impairment	—			—			—		—		—			—
Total	$	—		$	—		$	—	$	—	$	—		$	—
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Collectively evaluated for impairment	485,880			—			—		623,540		43,464			1,152,884
Loans acquired with deteriorated credit quality	434,652			2,355,351			2,457,560		467,318		72,407			5,787,288
Total	$	920,532		$	2,355,351		$	2,457,560	$	1,090,858	$	115,871		$	6,940,172

21

	Commercial					Consumer
	Business		Real estate			Residential		Home equity		Other consumer			Total
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—	$	—		$	—	$	—	$	3,320		$	3,320
Provision for loan losses	—		407			—		—		—			407
Charge-offs	—		(468		)	—		—		(658		)	(1,126		)
Recoveries	—		61			—		—		62			123
Balance at end of period	$	—	$	—		$	—	$	—	$	2,724		$	2,724
Three months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—	$	—		$	—	$	—	$	—		$	—
Provision for loan losses	—		—			—		—		—			—
Charge-offs	—		—			—		—		—			—
Recoveries	—		—			—		—		—			—
Balance at end of period	$	—	$	—		$	—	$	—	$	—		$	—

Credit Quality

We monitor credit quality as indicated by various factors and utilize such information in our evaluation of the adequacy of the allowance for loan losses. The following sections discuss the various credit quality indicators that we consider.

Nonperforming loans

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

	September 30, 2012						December 31, 2011
	Originated		Acquired		Total		Originated		Acquired		Total
Commercial:
Real estate	$	46,413	$	1,356	$	47,769	$	43,119	$	—	$	43,119
Business	37,375		11,319		48,694		20,173		—		20,173
Total commercial	83,788		12,675		96,463		63,292		—		63,292
Consumer:
Residential real estate	21,377		—		21,377		18,668		—		18,668
Home equity	8,084		14,705		22,789		6,790		—		6,790
Other consumer	938		813		1,751		1,048		—		1,048
Total consumer	30,399		15,518		45,917		26,506		—		26,506
Total	$	114,187	$	28,193	$	142,380	$	89,798	$	—	$	89,798

Beginning in the second quarter of 2012, we began reporting acquired lines of credit not subject to ASC 310-30 as acquired nonperforming loans when these loans become 90 days past due. Prior to the HSBC branch transaction, such amounts were immaterial. The remaining credit discount recorded at acquisition is adequate to cover losses inherent in these balances.

22

The table below provides information about the interest income that would have been recognized if our nonperforming loans had performed in accordance with terms for the periods indicated:

	September 30,
	2012		2011
Nine months ended
Additional interest income that would have been recorded if nonaccrual loans had performed in accordance with original terms	$	5,287	$	4,074
Three months ended
Additional interest income that would have been recorded if nonaccrual loans had performed in accordance with original terms	2,157		1,626

23

Impaired loans

The following tables provide information about our impaired loans including ending recorded investments, principal balances, and related allowance amounts at the dates indicated. 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 based on the fair value of the collateral. The carrying value of our impaired loans, less any related allowance for loan losses, was 65% and 68% of the loans’ contractual principal balance at September 30, 2012 and December 31, 2011, respectively.

	September 30, 2012						December 31, 2011
	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial:
Real estate (1)	$	51,950	$	74,003	$	—	$	39,781	$	53,103	$	—
Business (2)	40,685		71,098		—		23,143		37,080		—
Total commercial	92,635		145,101		—		62,924		90,183		—
Consumer:
Residential real estate	5,664		5,664		—		—		—		—
Home equity (3)	5,639		5,639		—		3		3		—
Other consumer	1,442		1,442		—		—		—		—
Total consumer	12,745		12,745		—		3		3		—
Total	$	105,380	$	157,846	$	—	$	62,927	$	90,186	$	—
With a related allowance recorded:
Commercial:
Real estate	$	12,114	$	19,226	$	2,047	$	20,603	$	30,794	$	2,890
Business	15,260		18,283		5,090		5,768		6,855		1,826
Total commercial	27,374		37,509		7,137		26,371		37,649		4,716
Consumer:
Residential real estate	12,092		12,592		2,373		12,911		12,911		2,151
Home equity	1,440		1,527		360		1,797		1,817		431
Other consumer	69		89		21		81		103		25
Total consumer	13,601		14,208		2,754		14,789		14,831		2,607
Total	$	40,975	$	51,717	$	9,891	$	41,160	$	52,480	$	7,323
Total
Commercial:
Real estate	$	64,064	$	93,229	$	2,047	$	60,384	$	83,897	$	2,890
Business	55,945		89,381		5,090		28,911		43,935		1,826
Total commercial	120,009		182,610		7,137		89,295		127,832		4,716
Consumer:
Residential real estate	17,756		18,256		2,373		12,911		12,911		2,151
Home equity	7,079		7,166		360		1,800		1,820		431
Other consumer	1,511		1,531		21		81		103		25
Total consumer	26,346		26,953		2,754		14,792		14,834		2,607
Total	$	146,355	$	209,563	$	9,891	$	104,087	$	142,666	$	7,323

⁽¹⁾  Includes impaired acquired loans with a recorded investment of $1.4 million and unpaid principal balance of $4.9 million at September 30, 2012. There were no impaired acquired loans at December 31, 2011.

⁽²⁾  Includes impaired acquired loans with a recorded investment of $8.0 million and unpaid principal balance of $8.7 million at September 30, 2012. There were no impaired acquired loans at December 31, 2011.

⁽³⁾  Includes impaired acquired loans with a recorded investment of $2.3 million and unpaid principal balance of $2.3 million at September 30, 2012. There were no impaired acquired loans at December 31, 2011.

24

The following tables provide information about our impaired loans including the average recorded investment and interest income recognized on impaired loans for the periods indicated:

	Nine months ended September 30,
	2012				2011
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Real estate (1)	$	69,085	$	1,112	$	62,096	$	1,012
Business (2)	57,693		597		29,414		308
Total commercial	126,778		1,709		91,510		1,320
Consumer:
Residential real estate	14,102		340		12,762		449
Home equity (3)	3,338		100		582		7
Other consumer	556		31		10		—
Total consumer	17,996		471		13,354		456
Total	$	144,774	$	2,180	$	104,864	$	1,776

	Three months ended September 30,
	2012				2011
	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Commercial:
Real estate (1)	$	64,399	$	548	$	52,571	$	822
Business (2)	48,230		315		22,671		273
Total commercial	112,629		863		75,242		1,095
Consumer:
Residential real estate	17,789		134		11,929		161
Home equity (3)	7,166		69		297		7
Other consumer	1,512		30		5		—
Total consumer	26,467		233		12,231		168
Total	$	139,096	$	1,096	$	87,473	$	1,263

⁽¹⁾  Includes impaired acquired loans with a average recorded investment of $1.6 million and $0.7 million for the nine and three months ended September 30, 2012, respectively. There were no impaired acquired loans in 2011.

⁽²⁾  Includes impaired acquired loans with a average recorded investment of $8.4 million and $5.4 million for the nine and three months ended September 30, 2012, respectively. There were no impaired acquired loans in 2011.

⁽³⁾  Includes impaired acquired loans with a average recorded investment of $0.8 million and $2.3 million for the nine and three months ended September 30, 2012, respectively. There were no impaired acquired loans in 2011.

25

Period end nonaccrual loans differed from the amount of total impaired loans as certain TDRs, which are considered impaired loans, were accruing interest because the borrower demonstrated its ability to satisfy the terms of the restructured loan for at least six consecutive payments. 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, 2012
Nonaccrual loans	$	96,463		$	45,917		$	142,380
Plus: Accruing TDRs	36,350			19,382			55,732
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses	(12,804		)	(38,953		)	(51,757		)
Total impaired loans	$	120,009		$	26,346		$	146,355
December 31, 2011:
Nonaccrual loans	$	63,292		$	26,506		$	89,798
Plus: Accruing TDRs	32,916			10,972			43,888
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses	(6,913		)	(22,686		)	(29,599		)
Total impaired loans	$	89,295		$	14,792		$	104,087

26

Credit Quality Indicators

The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. The following tables contain an aging analysis of our loans by class at the dates indicated:

	30-59 days past due		60-89 days past due		Greater than 90 days past due		Total past due		Current		Total loans receivable		Greater than 90 days and accruing (1)
September 30, 2012
Originated loans
Commercial:
Real estate	$	8,589	$	6,934	$	33,557	$	49,080	$	4,657,657	$	4,706,737	$	3,824
Business	16,669		1,264		21,818		39,751		3,841,394		3,881,145		178
Total commercial	25,258		8,198		55,375		88,831		8,499,051		8,587,882		4,002
Consumer:
Residential real estate	7,179		2,054		16,549		25,782		1,676,005		1,701,787		—
Home equity	2,531		1,847		6,512		10,890		1,220,666		1,231,556		—
Other consumer	2,538		683		1,142		4,363		706,980		711,343		325
Total consumer	12,248		4,584		24,203		41,035		3,603,651		3,644,686		325
Total	$	37,506	$	12,782	$	79,578	$	129,866	$	12,102,702	$	12,232,568	$	4,327
Acquired loans
Commercial:
Real estate	$	19,192	$	36,520	$	57,348	$	113,060	$	2,016,174	$	2,129,234	$	55,992
Business	11,624		1,413		10,988		24,025		776,984		801,009		6,896
Total commercial	30,816		37,933		68,336		137,085		2,793,158		2,930,243		62,888
Consumer:
Residential real estate	18,562		9,919		66,024		94,505		2,074,464		2,168,969		66,024
Home equity	10,446		5,381		17,945		33,772		1,396,101		1,429,873		6,983
Other consumer	5,722		3,382		5,912		15,016		329,857		344,873		5,101
Total consumer	34,730		18,682		89,881		143,293		3,800,422		3,943,715		78,108
Total	$	65,546	$	56,615	$	158,217	$	280,378	$	6,593,580	$	6,873,958	$	140,996
December 31, 2011
Originated loans
Commercial:
Real estate	$	8,246	$	973	$	23,829	$	33,048	$	3,948,094	$	3,981,142	$	—
Business	4,906		716		10,540		16,162		2,935,645		2,951,807		—
Total commercial	13,152		1,689		34,369		49,210		6,883,739		6,932,949		—
Consumer:
Residential real estate	9,977		4,641		15,559		30,177		1,613,488		1,643,665		—
Home equity	1,976		2,707		6,284		10,967		1,121,406		1,132,373		—
Other consumer	1,454		686		814		2,954		164,064		167,018		—
Total consumer	13,407		8,034		22,657		44,098		2,898,958		2,943,056		—
Total	$	26,559	$	9,723	$	57,026	$	93,308	$	9,782,697	$	9,876,005	$	—
Acquired loans
Commercial:
Real estate	$	24,003	$	1,302	$	47,228	$	72,533	$	2,190,706	$	2,263,239	$	47,228
Business	5,076		742		9,141		14,959		804,883		819,842		9,141
Total commercial	29,079		2,044		56,369		87,492		2,995,589		3,083,081		56,369
Consumer:
Residential real estate	19,720		10,041		66,068		95,829		2,272,773		2,368,602		66,068
Home equity	7,549		3,933		18,574		30,056		1,003,559		1,033,615		18,574
Other consumer	1,799		1,162		2,226		5,187		106,093		111,280		2,226
Total consumer	29,068		15,136		86,868		131,072		3,382,425		3,513,497		86,868
Total	$	58,147	$	17,180	$	143,237	$	218,564	$	6,378,014	$	6,596,578	$	143,237

27

⁽¹⁾  Includes acquired loans that were originally recorded at fair value upon acquisition, credit card loans, or loans that have matured and are in the process of collection. Acquired 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 net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income. In connection with the HSBC Branch Acquisition, we changed our nonaccrual policy related to credit cards from 90 days to 180 days, at which time the balance is charged-off. This policy change did not have a significant impact on our interest income or allowance for credit losses.

Our internal loan risk assessment provides information about the financial health of our commercial borrowers and our risk of potential loss. The following tables present information about the credit quality of our commercial loan portfolio at the dates indicated:

	Real estate		Business		Total		Percent of Total
September 30, 2012
Originated loans:
Pass	$	4,292,651	$	3,576,334	$	7,868,985	91.6	%
Pass watch(1)	137,514		86,302		223,816		2.6
Total Pass	4,430,165		3,662,636		8,092,801		94.2	%
Criticized:(2)
Accrual	230,159		181,134		411,293		4.8	%
Nonaccrual	46,413		37,375		83,788		1.0
Total criticized	276,572		218,509		495,081		5.8
Total	$	4,706,737	$	3,881,145	$	8,587,882	100.0	%
Acquired loans:
Pass	$	1,763,349	$	652,611	$	2,415,960	82.5	%
Pass watch(1)	90,618		52,426		143,044		4.9
Total Pass	1,853,967		705,037		2,559,004		87.4	%
Criticized:(2)
Accrual	273,911		84,653		358,564		12.2	%
Nonaccrual	1,356		11,319		12,675		0.4
Total criticized	275,267		95,972		371,239		12.6
Total	$	2,129,234	$	801,009	$	2,930,243	100.0	%
December 31, 2011
Originated loans:
Pass	$	3,568,407	$	2,700,152	$	6,268,559	90.4	%
Pass watch(1)	42,896		28,663		71,559		1.0
Total Pass	3,611,303		2,728,815		6,340,118		91.4	%
Criticized:(2)
Accrual	326,720		202,819		529,539		7.7	%
Nonaccrual	43,119		20,173		63,292		0.9
Total criticized	369,839		222,992		592,831		8.6
Total	$	3,981,142	$	2,951,807	$	6,932,949	100.0	%
Acquired loans:
Pass	$	1,910,533	$	724,794	$	2,635,327	85.5	%
Pass watch(1)	9,736		—		9,736		0.3
Total Pass	1,920,269		724,794		2,645,063		85.8	%
Criticized:(2)
Accrual	342,970		95,048		438,018		14.2	%
Nonaccrual	—		—		—		—
Total criticized	342,970		95,048		438,018		14.2
Total	$	2,263,239	$	819,842	$	3,083,081	100.0	%

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⁽¹⁾  Watch-list loans are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.

⁽²⁾  Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business,” under “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2011.

Borrower FICO scores 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 and are presented in the table below at the dates indicated:

	Residential real estate		Home equity		Other consumer		Total		Percent of Total
September 30, 2012
Originated loans by refreshed FICO score:
Over 700	$	1,362,779	$	971,866	$	420,357	$	2,755,002	75.6	%
660-700	158,089		136,805		157,799		452,693		12.4
620-660	69,117		58,582		80,643		208,342		5.7
580-620	39,171		25,857		28,009		93,037		2.6
Less than 580	58,368		34,359		20,030		112,757		3.1
No score(1)	14,263		4,087		4,505		22,855		0.6
Total	$	1,701,787	$	1,231,556	$	711,343	$	3,644,686	100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	1,455,397	$	1,051,657	$	196,867	$	2,703,921	68.5	%
660-700	203,258		147,455		59,226		409,939		10.4
620-660	101,863		83,627		31,376		216,866		5.5
580-620	60,616		53,242		16,480		130,338		3.3
Less than 580	113,311		69,528		17,385		200,224		5.1
No score(1)	234,524		24,364		23,539		282,427		7.2
Total	$	2,168,969	$	1,429,873	$	344,873	$	3,943,715	100.0	%
December 31, 2011
Originated loans by refreshed FICO score:
Over 700	$	1,290,287	$	875,451	$	82,345	$	2,248,083	76.5	%
660-700	159,293		139,666		25,951		324,910		11.0
620-660	75,552		55,294		14,445		145,291		4.9
580-620	41,323		24,271		5,277		70,871		2.4
Less than 580	62,303		32,676		9,370		104,349		3.5
No score(1)	14,907		5,015		29,630		49,552		1.7
Total	$	1,643,665	$	1,132,373	$	167,018	$	2,943,056	100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	1,668,117	$	752,107	$	49,879	$	2,470,103	70.4	%
660-700	173,139		97,410		15,567		286,116		8.1
620-660	86,600		60,298		9,249		156,147		4.4
580-620	47,022		40,700		4,592		92,314		2.6
Less than 580	93,157		57,911		8,909		159,977		4.6
No score(1)	300,567		25,189		23,084		348,840		9.9
Total	$	2,368,602	$	1,033,615	$	111,280	$	3,513,497	100.0	%

⁽¹⁾  Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the date indicated.

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Troubled Debt Restructures

The following table details additional information about our TDRs from our loan portfolio at the dates indicated:

	September 30, 2012		December 31, 2011
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accruing interest	$	55,732	$	43,888
Nonaccrual	30,303		33,502
Total troubled debt restructurings (1)	$	86,035	$	77,390

⁽¹⁾  Includes 39 acquired loans that were restructured with a recorded investment of $2.3 million at September 30, 2012. There were no acquired loans that were considered TDRs at December 31, 2011.

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The modifications made to restructured loans typically consist of an extension of the payment terms, deferral of principal, or a rate reduction. Additionally, loans restructured in a Chapter 7 bankruptcy are considered TDRs. We generally do not forgive principal when restructuring loans. The financial effects of our modifications are as follows for the periods indicated:

Type of Concession	Count	Postmodification recorded investment(1)		Premodification allowance for loan losses		Postmodification allowance for loan losses
Nine months ended September 30, 2012
Commercial:
Commercial real estate
Extension of term	8	$	10,970	$	993	$	—
Deferral of principal	1	259		14		—
Commercial business
Extension of term	7	3,643		428		4
Deferral of principal	1	187		—		—
Rate reduction	1	125		—		—
Combination of concession types	1	386		6		96
Total commercial	19	15,570		1,441		100
Consumer:
Residential real estate
Extension of term	1	$	91	$	2	$	7
Deferral of principal and extension of term	1	613		1		27
Extension of term and rate reduction	7	830		1		216
Chapter 7 bankruptcy	74	5,417		—		—
Other	18	2,302		3		459
Home equity
Extension of term and rate reduction	2	124		—		25
Chapter 7 Bankruptcy	144	5,636		—		—
Other	2	69		—		12
Other consumer
Chapter 7 Bankruptcy	48	1,442		—		—
Total consumer	297	16,524		7		746
Total	316	$	32,094	$	1,448	$	846
Nine months ended September 30, 2011
Commercial:
Commercial real estate
Extension of term	19	$	10,124	$	594	$	434
Deferral of principal	3	4,735		176		1,279
Rate reduction	1	2,681		283		—
Extension of term and rate reduction	4	2,340		907		241
Other	3	6,003		355		—
Commercial business
Extension of term	13	6,299		944		110
Deferral of principal	1	1,007		177		—
Rate reduction	2	3,255		573		—
Extension of term and rate reduction	5	6,051		381		—
Total commercial	51	42,495		4,390		2,064
Consumer:
Residential real estate
Extension of term	2	$	402	$	—	$	31
Rate reduction	3	153		—		35

31

Deferral of principal and extension of term	10	1,251		—		190
Extension of term and rate reduction	12	1,231		3		124
Other	1	153		1		4
Home equity
Deferral of principal	1	37		—		2
Deferral of principal and extension of term	3	104		—		15
Extension of term and rate reduction	2	185		—		50
Other consumer
Deferral of principal and extension of term	1	10		—		1
Total consumer	35	3,526		4		452
Total	86	$	46,021	$	4,394	$	2,516

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Type of Concession	Count	Postmodification recorded investment(1)		Premodification allowance for loan losses		Postmodification allowance for loan losses
Three months ended September 30, 2012
Commercial:
Commercial real estate
Extension of term	1	$	7,497	$	812	$	—
Total commercial	1	7,497		812		—
Consumer:
Residential real estate
Chapter 7 Bankruptcy	74	5,417		—		—
Other	12	1,625		2		255
Home equity
Chapter 7 Bankruptcy	144	5,636		—		—
Other	2	69		—		12
Other consumer
Chapter 7 Bankruptcy	48	1,442		—		—
Total consumer	280	14,189		2		267
Total	281	$	21,686	$	814	$	267
Three months ended September 30, 2011
Commercial:
Commercial real estate
Extension of term	18	$	9,907	$	594	$	434
Deferral of principal	3	4,735		176		1,279
Rate reduction	1	2,681		283		—
Extension of term and rate reduction	4	2,340		908		241
Combination of concession types	2	3,206		336		—
Commercial business
Extension of term	12	6,293		944		110
Deferral of principal	1	1,007		177		—
Rate reduction	2	3,255		573		—
Extension of term and rate reduction	3	4,568		207		—
Total commercial	46	37,992		4,198		2,064
Consumer:
Residential real estate
Deferral of principal and extension of term	7	$	758	$	—	$	157
Home equity
Deferral of principal	1	37		—		2
Deferral of principal and extension of term	3	104		—		15
Other consumer
Deferral of principal and extension of term	1	10		—		1
Total consumer	12	909		—		175
Total	58	$	38,901	$	4,198	$	2,239

⁽¹⁾  Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings were not significant.

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The recorded investment in loans modified as TDRs within 12 months of the balance sheet date and for which there was a payment default during the periods indicated are shown below:

	Nine months ended September 30,
	2012		2011
Commercial:
Real estate	$	638	$	8,790
Business	1,087		1,252
Total commercial	1,725		10,042
Consumer:
Residential real estate	—		682
Home Equity	—		—
Consumer	—		—
Total consumer	—		682
Total	$	1,725	$	10,724

	Three months ended September 30,
	2012		2011
Commercial:
Real estate	$	239	$	2,249
Business	380		1,252
Total commercial	619		3,501
Consumer:
Residential real estate	—		220
Home Equity	—		—
Consumer	—		—
Total consumer	—		220
Total	$	619	$	3,721

Residential Mortgage Banking

The following table provides information about our residential mortgage banking at the dates indicated:

	September 30,
	2012		2011
Mortgages serviced for others	$	2,658,722	$	1,922,592
Mortgage servicing asset recorded for loans serviced for others	23,136		15,162

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 primarily consist of 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 netting and collateral provisions of the interest rate swap agreements.

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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 amount		Fair value  (1)		Notional amount		Fair value  (2)
September 30, 2012
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	14,779	$	2,147
Derivatives not designated as hedging instruments:
Securities sale agreement	170,468		7,977		—		—
Interest rate swap agreements	1,826,132		104,500		1,832,776		105,433
Total derivatives	$	1,996,600	$	112,477	$	1,847,555	$	107,580
December 31, 2011
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	1,315,278	$	11,998
Derivatives not designated as hedging instruments:
Interest rate swap agreements	866,661		57,868		866,661		58,346
Total derivatives	$	866,661	$	57,868	$	2,181,939	$	70,344

⁽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. The net impact of the fair value hedging relationships on net income was not significant during the three and nine months ended September 30, 2012 and 2011.

Historically, we have also entered into interest rate swaps to offset the variability in the interest cash outflows of LIBOR based borrowings. These derivative instruments have been designated as cash flow hedges. At September 30, 2012, we did not have any derivatives classified as cash flow hedges. During the second quarter of 2012, borrowings that were hedged in cash flow hedging relationships were paid off in connection with the HSBC Branch Acquisition and the related swaps that were hedging these borrowings were terminated. We had 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 have been excluded from our assessment of hedge effectiveness. Our interest rate swaps designated as cash flow hedges had maturities that corresponded to the maturity of the related hedged borrowing. Any gain or loss associated with the effective portion of our cash flow hedges was 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, including ineffectiveness, was recognized immediately in earnings.

The following table presents information about amounts recognized for our derivative financial instruments designated in cash flow hedging relationships for the periods indicated:

	Three months ended September 30,							Nine months ended September 30,
Cash Flow Hedges	2012			2011				2012				2011
Interest rate swap agreements:
Amount of gain (loss) on derivatives recognized in other comprehensive income, net of tax	$	177		$	(14,274	)		$	6,536			$	(18,775	)
Amount of (loss) on derivatives reclassified from other comprehensive income to income	(286		)	(2,241		)	(1)	(15,146		)	(2)	(4,860		)	(1)

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

⁽²⁾  Of this amount, $11.7 million was recognized in merger and acquisition integration expenses when the associated borrowings were repaid in connection with the HSBC Branch Acquisition and $3.4 million was 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 at fair value. We manage our exposure to such interest rate swaps by 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 recognized revenue for this service that we provide our customers of $18.1 million and $5.3 million for the nine months ended September 30, 2012 and 2011, respectively, included in Capital Markets income in our Consolidated Statements of Income.

In the second quarter of 2012, we sold $3.1 billion of investment securities to a third party (“purchaser”) at a certain price as of the date of the sale (“floor price”). Under the sales agreement, the purchaser will subsequently sell the investment securities over a set period of time and we will receive a portion of any additional net profits received in excess of the floor price. We will not be required to pay any amounts under this agreement under any circumstances. The agreement qualifies as a free standing derivative and is accounted for at fair value. As of September 30, 2012, the purchaser has sold substantially all of the investment securities covered by the sales agreement. The value of the derivative was $8.0 million as of September 30, 2012 compared to $2.5 million at June 30, 2012.

Note 5. Earnings Per Share

The following table is a computation of our basic and diluted earnings per share using the two-class method for the periods indicated:

	Three months ended September 30,						Nine months ended September 30,
	2012			2011			2012			2011
Net income available to common stockholders	$	50,837		$	56,981		$	87,116		$	115,449
Less income allocable to unvested restricted stock awards	200			156			283			351
Net income allocable to common stockholders	$	50,637		$	56,825		$	86,833		$	115,098
Weighted average common shares outstanding:
Total shares issued	366,002			309,090			366,002			272,942
Unallocated employee stock ownership plan shares	(2,267		)	(2,487		)	(2,289		)	(2,556		)
Unvested restricted stock awards	(1,377		)	(800		)	(1,117		)	(717		)
Treasury shares	(13,357		)	(13,592		)	(13,640		)	(9,410		)
Total basic weighted average common shares outstanding	349,001			292,211			348,956			260,259
Incremental shares from assumed exercise of stock options	—			19			—			165
Incremental shares from assumed vesting of restricted stock awards	370			273			292			265
Total diluted weighted average common shares outstanding	349,371			292,503			349,248			260,689
Basic earnings per common share	$	0.15		$	0.19		$	0.25		$	0.44
Diluted earnings per common share	$	0.14		$	0.19		$	0.25		$	0.44
Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations	12,629			11,333			11,867			9,285

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Note 6. Other Comprehensive Income

The following table presents the activity in our Other Comprehensive Income for the periods indicated:

	Three months ended September 30,									Nine months ended September 30,
	Pretax			Income taxes			Net			Pretax			Income taxes			Net
2012
Securities available for sale:
Net unrealized holding gains arising during the period	$	114,086		$	43,169		$	70,917		$	172,098		$	65,727		$	106,371
Reclassification adjustment for realized (gains) included in net income	—			—			—			(15,895		)	(6,097		)	(9,798		)
Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity	—			—			—			4,054			1,556			2,498
Net unrealized gains on securities available for sale	114,086			43,169			70,917			160,257			61,186			99,071
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
Reclassification adjustment for net unrealized holding gains on securities transferred	—			—			—			(4,054		)	(1,556		)	(2,498		)
Less: amortization of net unrealized holding gains to income	(682		)	(260		)	(422		)	(2,011		)	(749		)	(1,262		)
Net unrealized holding gains on securities transferred	(682		)	(260		)	(422		)	(6,065		)	(2,305		)	(3,760		)
Interest rate swaps designated as cash flow hedges:
Net unrealized gains arising during the period	—			—			—			(4,590		)	(1,789		)	(2,801		)
Reclassification adjustment for realized losses included in net income	286			109			177			15,146			5,809			9,337
Net unrealized losses on interest rate swaps designated as cash flow hedges	286			109			177			10,556			4,020			6,536
Pension and postretirement plans:
Pension remeasurement	—			—			—			7,461			2,849			4,612
Amortization of net loss related to pension and post-retirement plans	362			139			223			1,128			584			544
	362			139			223			8,589			3,433			5,156
Total other comprehensive income	$	114,052		$	43,157		$	70,895		$	173,337		$	66,334		$	107,003
2011
Securities available for sale:
Net unrealized holding gains arising during the period	$	22,470		$	8,558		$	13,912		$	80,782		$	30,850		$	49,932
Reclassification adjustment for net unrealized holding gains on securities transferred	—			—			—			(6,380		)	(2,424		)	(3,956		)
Net unrealized gains on securities available for sale	22,470			8,558			13,912			74,402			28,426			45,976
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
Reclassification adjustment for net unrealized holding gains on securities transferred	—			—			—			6,380			2,424			3,956
Less: amortization of net unrealized holding gains to income	(574		)	(219		)	(355		)	(1,230		)	(468		)	(762		)
	(574		)	(219		)	(355		)	5,150			1,956			3,194
Interest rate swaps designated as cash flow hedges:
Net unrealized gains arising during the period	(25,168		)	(9,505		)	(15,663		)	(35,175		)	(13,387		)	(21,788		)
Reclassification adjustment for realized losses included in net income	2,241			852			1,389			4,860			1,847			3,013
Net unrealized gains on interest rate swaps designated as cash flow hedges	(22,927		)	(8,653		)	(14,274		)	(30,315		)	(11,540		)	(18,775		)
Amortization of net loss related to pension and post-retirement plans	333			(532		)	865			999			(425		)	1,424
Total other comprehensive (loss) income	$	(698	)	$	(846	)	$	148		$	50,236		$	18,417		$	31,819

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

	Net unrealized gains on securities available for sale		Net unrealized gains (losses) on securities transferred between available for sale to held to maturity			Unrealized (losses) gains on interest rate swaps designated as cash flow hedges			Defined benefit plans			Total
Balances at January 1, 2012	$	105,276	$	2,652		$	(13,003	)	$	(27,113	)	$	67,812
Period change, net of tax	99,071		(3,760		)	6,536			5,156			107,003
Balances at September 30, 2012	$	204,347	$	(1,108	)	$	(6,467	)	$	(21,957	)	$	174,815
Balances at 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
Balances at September 30, 2011	$	116,666	$	3,194		$	(15,797	)	$	(14,373	)	$	89,690

During the next twelve months, we expect to reclassify $1.1 million of pre-tax net loss on previous cash flow hedges from accumulated other comprehensive income to earnings.

Note 7. Fair Value Measurements

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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. Due to the lack of observable market data, we have classified our trust preferred securities and collateralized loan obligations in Level 3 of the fair value hierarchy. We determined the fair value using third party pricing services, including brokers. As of September 30, 2012, $348 million of our investment securities were priced utilizing broker quotes. For details regarding our pricing process and sources, refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Income-Critical Accounting Policies and Estimates.”

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Loans held for sale

We have elected the fair value option for certain 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.

There were no loans held for sale that were nonaccrual or 90 or more days past due as of September 30, 2012 or December 31, 2011. The table below presents information about our loans held for sale for which we elected the fair value option as of the dates indicated:

	September 30, 2012		December 31, 2011
Fair value carrying amount	$	117,375	$	94,484
Aggregate unpaid principal balance	111,637		91,540
Fair value carrying amount less aggregate unpaid principal balance	$	5,738	$	2,944

Interest Rate Swaps

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

The fair value of our interest rate swaps was estimated using primarily Level 2 inputs. However, Level 3 inputs were used to determine credit valuation adjustments, such as estimates of current credit spreads to evaluate the likelihood of default. We have determined that the impact of these credit valuation adjustments was 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.

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Assets and Liabilities Measured at Fair Value on a Recurring Basis

The following tables summarize 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, 2012
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	635,701	$	—	$	635,701	$	—
U.S. Treasury	20,805		20,805		—		—
U.S. government agencies	4,833		—		4,833		—
U.S. government sponsored enterprises	419,516		—		419,516		—
Corporate	769,462		—		769,462		—
Trust preferred securities	15,310		—		—		15,310
Total debt securities	1,865,627		20,805		1,829,512		15,310
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	52,498		—		52,498		—
Federal National Mortgage Association	462,964		—		462,964		—
Federal Home Loan Mortgage Corporation	401,455		—		401,455		—
Collateralized mortgage obligations:	—
Government National Mortgage Association	1,305,801		—		1,305,801		—
Federal National Mortgage Association	1,267,256		—		1,267,256		—
Federal Home Loan Mortgage Corporation	900,907		—		900,907		—
Non-agency issued	70,476		—		70,476		—
Total collateralized mortgage obligations	3,544,440		—		3,544,440		—
Total residential mortgage-backed securities	4,461,357		—		4,461,357		—
Commercial mortgage-backed securities:
Non-agency issued	2,082,266		—		2,082,266		—
Total mortgage-backed securities	6,543,623		—		6,543,623		—
Collateralized loan obligations:
Non-agency issued	1,270,581		—		—		1,270,581
Asset-backed securities collateralized by:
Student loans	380,639		—		380,639		—
Credit cards	35,182		—		35,182		—
Auto loans	340,459		—		340,459		—
Other	112,436		—		112,436		—
Total asset-backed securities	868,716		—		868,716		—
Other	31,423		23,311		8,112		—
Total securities available for sale	10,579,970		44,116		9,249,963		1,285,891
Loans held for sale (1)	117,375		—		117,375		—
Derivatives	112,477		—		112,477		—
Total assets	$	10,809,822	$	44,116	$	9,479,815	$	1,285,891
Liabilities:
Derivatives	$	107,580	$	—	$	107,580	$	—

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

During the first quarter of 2012, we transferred $158 million of collateralized loan obligations (“CLOs”) from level 2 to level 3 of the fair value hierarchy. We began purchasing the investments in the fourth quarter of 2011 and while our purchase price provided observable data regarding the fair value of the securities in the fourth quarter of 2011, observable market data has not

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been available to incorporate into the pricing during 2012 and our purchase price becomes less relevant as time elapses from the purchase date. As a result, the fair values utilized significant unobservable inputs and warranted classification as level 3 fair value measurements. 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.

	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
December 31, 2011
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	703,178	$	—	$	703,178	$	—
U.S. Treasury	20,643		20,643		—		—
U.S. government agencies	5,437		—		5,437		—
U.S. government sponsored enterprises	390,136		—		390,136		—
Corporate	336,010		—		336,010		—
Trust preferred securities	25,032		—		—		25,032
Total debt securities	1,480,436		20,643		1,434,761		25,032
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	91,693		—		91,693		—
Federal National Mortgage Association	763,850		—		763,850		—
Federal Home Loan Mortgage Corporation	659,347		—		659,347		—
Collateralized mortgage obligations:
Government National Mortgage Association	2,392,497		—		2,392,497		—
Federal National Mortgage Association	949,355		—		949,355		—
Federal Home Loan Mortgage Corporation	1,105,033		—		1,105,033		—
Non-agency issued	93,794		—		93,794		—
Total collateralized mortgage obligations	4,540,679		—		4,540,679		—
Total residential mortgage-backed securities	6,055,569		—		6,055,569		—
Commercial mortgage-backed securities:
Non-agency issued	1,529,310		—		1,529,310		—
Total mortgage-backed securities	7,584,879		—		7,584,879		—
Collateralized loan obligations:
Non-agency issued	157,999		—		157,999		—
Asset-backed securities collateralized by:
Student loans	40,718		—		40,718		—
Credit cards	32,693		—		32,693		—
Auto loans	20,293		—		20,293		—
Other	109		—		109		—
Total asset-backed securities	93,813		—		93,813		—
Other	31,169		23,028		8,141		—
Total securities available for sale	9,348,296		43,671		9,279,593		25,032
Loans held for sale (1)	94,484		—		94,484		—
Derivatives	57,868		—		57,868		—
Total assets	$	9,500,648	$	43,671	$	9,431,945	$	25,032
Liabilities:
Derivatives	$	70,344	$	—	$	70,344	$	—

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

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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 periods indicated:

	Fair Value Measurements								Total gains
	Total		Level 1		Level 2		Level 3		(losses)
Nine months ended September 30, 2012
Collateral dependent impaired loans	$	35,651	$	—	$	20,490	$	15,161	$	(2,889	)
Nine months ended September 30, 2011
Collateral dependent impaired loans	$	20,289	$	—	$	8,750	$	11,539	$	(9,117	)

Collateral Dependent Impaired Loans

We record nonrecurring fair value 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 or charge off is recorded 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 appraised 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, in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are usually completed within 90 days of the downgrade. An appraisal may be obtained more frequently 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, 2012, we recorded an increase of $2.9 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $36 million at September 30, 2012. 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 million at September 30, 2011.

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 periods indicated:

	Nine months ended September 30,
	2012								2011
	Trust preferred securities			Collateralized loan obligations		Total			Trust preferred securities
Balance at beginning of period	$	25,032		$	—	$	25,032		$	919
NewAlliance acquisition	—			—		—			27,924
Transfers from level 2(1)	—			157,999		157,999			—
Purchases	—			1,081,678		1,081,678			—
Settlements	(12,199		)	—		(12,199		)	—
Gains (losses) included in other comprehensive income	2,923			30,904		33,827			(3,691		)
Losses included in earnings	(446		)	—		(446		)	—
Balance at end of period	$	15,310		$	1,270,581	$	1,285,891		$	25,152

⁽¹⁾  Our policy is to recognize the transfer at the beginning of the period.

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Our level 3 fair value measurements include trust preferred securities and CLOs, on a recurring basis, as well as collateral dependent loans, on a nonrecurring basis. We engage a third party specialist with direct industry experience in trust preferred securities valuations to provide pricing. We did not make any adjustments to the pricing of our trust preferred securities received as of September 30, 2012.

Our CLOs are securitized products where payments from multiple middle sized and large business loans are pooled together and passed on to different classes of owners in various tranches. The markets for such securities are generally characterized by low trading volumes and wider bid-ask spreads, all driven by more limited market participants. Although estimated prices are generally obtained for such securities, the level of market observable assumptions used is limited in the valuation. Specifically, market assumptions regarding credit adjusted cash flows and liquidity influences on discount rates were difficult to observe at the individual bond level. Accordingly, the securities are valued by a third party specialist using a discounted cash flow approach and proprietary pricing model. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market prices for similar securities and collateral structure types.

The table below provides a summary of our level 3 fair value measurements, valuation techniques, and the significant unobservable inputs at the date indicated:

	Fair Value		Valuation technique	Unobservable input	Quantitative Measures
September 30, 2012
Collateralized loan obligations	$	1,270,581	Third party pricing adjusted for credit quality and spread changes	Market spreads	150 - 550 bps
Collateral dependent impaired loans	15,161		Appraisals adjusted for market and saleability conditions	Discount due to lack of market data or saleability conditions	10-70%

Note: The fair values of our trust preferred securities are based upon third party pricing without adjustment and as a result the assets are not included in this table.

Significant changes in any of the unobservable inputs would result in changes in fair value of the related assets. The fair value of our CLOs is inversely related to the market spreads. Increases in market spreads would decrease the fair value of our CLOs while decreases in the market spreads would increase our fair value. For our collateral dependent impaired loans, the fair value is negatively impacted by discounts taken due to market or saleability conditions. As the discount increases, our fair value of the collateral decreases.

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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, 2012						December 31, 2011
	Carrying value		Estimated fair value		Fair value level		Carrying value		Estimated fair value
Financial assets:
Cash and cash equivalents	$	447,087	$	447,087	1		$	836,555	$	836,555
Investment securities available for sale	10,579,970		10,579,970		1,2,3	(1)	9,348,296		9,348,296
Investment securities held to maturity	1,387,763		1,464,519		2		2,669,630		2,752,723
Federal Home Loan Bank and Federal Reserve Bank common stock	373,311		373,311		2		358,159		358,159
Loans held for sale	117,375		117,375		2		94,484		94,484
Loans and leases, net	18,956,593		19,545,546		2,3	(2)	16,352,483		16,991,059
Derivatives	112,477		112,477		2		57,868		57,868
Accrued interest receivable	113,835		113,835		2		103,543		103,543
Financial liabilities:
Deposits	$	27,697,696	27,797,793		2		$	19,405,115	$	19,460,668
Borrowings	2,727,949		2,805,373		2		8,127,121		8,328,797
Interest rate swap agreements	107,580		107,580		2		70,344		70,344
Accrued interest payable	10,566		10,566		2		21,127		21,127

⁽¹⁾  For a detailed breakout of our investment securities available for sale, refer to our table of recurring fair value measurements.

⁽²⁾  Loans and leases classified as level 2 are made up of $20 million of collateral dependent impaired loans without significant adjustments made to appraised values. All other loans and leases are classified as level 3.

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 ramifications 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 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.

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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, which are non-marketable equity investments, approximates fair value.

Loans and Leases

Our variable rate loans reprice as the associated rate index changes. The calculation of fair value for our variable rate loans is driven by the comparison between the loan’s margin and the prevailing margin observed in the market at the time of the valuation. Any caps and floors embedded in the loan’s pricing structure are also incorporated into the 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.

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Note 8. Segment Information

We have two business segments: banking and financial services. The banking segment includes all of our retail and commercial banking operations. The financial services segment includes our insurance 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:

	Banking		Financial services			Consolidated total
Three months ended September 30, 2012
Net interest income	$	269,610	$	(5	)	$	269,605
Provision for credit losses	22,200		—			22,200
Net interest income after provision for credit losses	247,410		(5		)	247,405
Noninterest income	83,472		18,731			102,203
Amortization of core deposit and other intangibles	13,468		1,038			14,506
Other noninterest expense	239,007		13,029			252,036
Income before income taxes	78,407		4,659			83,066
Income tax expense	22,895		1,787			24,682
Net income	$	55,512	$	2,872		$	58,384
Three months ended 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
Nine months ended September 30, 2012
Net interest income	$	771,012	$	(23	)	$	770,989
Provision for credit losses	70,300		—			70,300
Net interest income after provision for credit losses	700,712		(23		)	700,689
Noninterest income	215,305		52,404			267,709
Amortization of core deposit and other intangibles	27,551		3,260			30,811
Other noninterest expense	743,072		38,476			781,548
Income before income taxes	145,394		10,645			156,039
Income tax expense	44,631		4,083			48,714
Net income	$	100,763	$	6,562		$	107,325
Nine months ended 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

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Note 9. New Accounting Standards

In April 2011, the Financial Accounting Standards Board (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 repurchase agreement or other similar agreement is no longer relevant in determining if a transfer should be accounted for as a sale. This guidance became effective for us in the first quarter of 2012 and is being applied prospectively. It did not have a material 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 became effective for us on January 1, 2012. See our Consolidated Statements of Comprehensive Income. Guidance related to the presentation requirements for reclassification adjustments has been deferred pending further deliberation by the FASB. We do not expect the remaining guidance will have a significant impact on our financial statements.

In May 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 became effective for us on January 1, 2012. The amendments related to fair value measurements did not have a significant impact on our financial statements and the additional disclosure requirements have been incorporated into Note 7, Fair Value Measurements.

In September 2011, 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 GAAP. The amendments became effective on January 1, 2012.

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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 Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011. 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. (the “Company”) is a Delaware corporation and a bank holding 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, 2012, we had $36 billion in assets, $28 billion in deposits, and 432 full-service branch locations across New York, Pennsylvania, Connecticut, and Western Massachusetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association (“HSBC”) and its affiliates (the “HSBC Branch Acquisition”) in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets, as contemplated by the Purchase and Assumption Agreement, dated July 30, 2011, as amended and restated as of May 17, 2012 (the “Purchase Agreement”) and paid a net deposit premium of $772 million. In accordance with the Purchase Agreement, the Bank acquired cash of $7.4 billion, performing loans with a fair value of approximately $1.6 billion, core deposit and other intangibles of $85 million, and deposits with a fair value of approximately $9.9 billion (shortly after acquisition, we allowed $0.5 billion in municipal deposits to one large customer run-off), resulting in goodwill of $775 million. The cash received was used to pay down wholesale borrowings, including those used to purchase securities in advance of the HSBC Branch Acquisition. The goodwill is tax deductible. In addition, we acquired certain wealth management relationships and approximately $2.5 billion of assets under management of such relationships. At closing, the Bank did not receive any loans greater than 60 days delinquent. Concurrent with the HSBC Branch Acquisition, we consolidated 15 existing First Niagara branches into acquired HSBC branches and in the third quarter of 2012, we consolidated 19 of the HSBC branches into First Niagara branches, resulting in 103 net new full-service branches from the Branch Acquisition.

In connection with the regulatory process for the HSBC Branch Acquisition, we agreed with the U.S. Department of Justice (“DOJ”) to assign our purchase rights related to 26 HSBC branches in the Buffalo area. In January 2012, we entered into an agreement with Key assigning our right to purchase the 26 HSBC Buffalo branches as well as 11 additional HSBC branches in the Rochester area. On July 13, 2012, Key acquired these 37 branches with a total of $2.0 billion in deposits and approximately $256.5 million in loans, and paid us a deposit premium of $91.5 million.

In January 2012, we also entered into separate agreements with Financial Institutions, Inc. subsidiary Five Star Bank (“Five Star”) and Community Bank System, Inc. (“Community Bank”) for them to purchase seven First Niagara branches and 20 HSBC branches, for which we had assigned our purchase rights.

On June 22, 2012, Five Star acquired four First Niagara branches with $58.6 million in loans, assumed approximately $129.3 million in deposits, and paid us a deposit premium of $5.3 million. On August 17, 2012, Five Star acquired four of the HSBC branches, assumed approximately $18 million in loans, $157.2 million in deposits, and paid us a deposit premium of $6.5 million.

On July 20, 2012, Community Bank acquired the remaining 16 HSBC branches, with a total of $107.0 million in loans, $696.6 million in deposits, and paid us a deposit premium of $23.8 million. On September 7, 2012, Community Bank acquired three First Niagara branches, assumed approximately $55.4 million in loans, $100.8 million in deposits, and paid us a deposit premium of $3.1 million.

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We have incurred $179 million in pre-tax merger and acquisition expenses related to the HSBC Branch Acquisition since we entered into the Purchase and Assumption Agreement on July 30, 2011. These expenses include $65 million in prepayment penalties on borrowings and swap termination fees; redundant facilities and employee severance costs; technology costs related to system conversions; and professional fees.

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.

BUSINESS AND INDUSTRY

We operate a multi-faceted regional bank with a community banking model that provides our 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 insurance 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. These rates are also highly 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, including the Federal Reserve. 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, by varying the target federal funds and discount rates and by varying the supply of money. The actions of the Federal Reserve in these areas influence the growth of our loans, investments, and deposits, and also affect interest rates that we earn on interest-earning assets and that we pay on interest-bearing liabilities.

In September 2012, the Federal Open Market Committee (“FOMC”) stated they intend to maintain the exceptionally low levels for federal funds rate at least through mid-2015. Such an accommodative stance of monetary policy was designed to continue support to the labor markets and overall economy. The FOMC also announced additional purchases of long-dated agency mortgage-backed securities at the pace of $40 billion each month for an indefinite period which was designed to move longer-term interest rates lower. Additionally, the FOMC decided to continue its program known as “Operation Twist” through the end of the year. These actions will further exacerbate longer-term pressures on the industry net interest margin by; (i) continuing to reduce the yields on earning assets relative to the cost of funding; (ii), causing borrowers to repay their higher-yielding fixed rate loans at a faster rate; and (iii), reducing the rates at which cash flows from these repayments could be reinvested.

MARKET AREAS AND COMPETITION

Our business operations are concentrated in our primary market areas of 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 counties as our branches. We face significant competition in both making loans and attracting deposits in our markets as they have a high density of financial institutions, some of which are significantly larger than we are and have greater financial resources. Our competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions. We face additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies. 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 ("Dodd-Frank"), and the revised capital and liquidity frameworks published by the Basel

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Committee on Banking Supervision in December 2010, known as “Basel III.”

On June 7, 2012, the Federal Reserve published three notices of proposed rulemaking that will impact most financial institutions, two of which are most relevant to us: “Regulatory Capital, Implementation of Basel III, Minimum Regulatory Capital Ratios, Capital Adequacy, and Transition Provisions” (“Regulatory Capital”) and “Regulatory Capital Rules: Standardized Approach for Risk-Weighted Assets; Market Discipline and Disclosure Requirements” (“Risk-Weighted Assets”). These proposed rules are extensive and are subject to further regulatory action and interpretation as well as a comment period that ended October 22, 2012.

While uncertainty exists in the final form of the U.S. rules implementing the Basel III framework, based on preliminary assessments of the proposed framework we believe we will continue to exceed all estimated well-capitalized regulatory requirements over the course of the proposed phase-in period, and on a fully phased-in basis.

On October 9, 2012, the Federal Reserve and OCC announced publication of their final rules regarding company-run stress testing as required by Dodd-Frank.  The rules will require covered institutions with average total consolidated assets greater than $10 billion to conduct an annual company-run stress test of capital, consolidated earnings and losses under one base and at least two stress scenarios provided by the agencies. The rules delay implementation for covered institutions with total consolidated assets between $10 billion and $50 billion. Institutions with total consolidated assets between $10 billion and $50 billion, such as us, will use data as of September 30, 2013 to conduct the stress test, using scenarios that are released by the agencies in November 2013.  Stress test results must be reported to the agencies in March 2014.

Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 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 investment securities accounting, the accounting treatment and valuation of our acquired loans, the adequacy of our allowance for loan losses, 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 2011 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:

Investment Securities

As of September 30, 2012, our available for sale and held to maturity investment securities totaled $12.0 billion, or 34% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised predominantly 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. For the vast majority of the portfolio, we validate the prices received from these third parties, on a quarterly basis, by comparing them to prices provided by a different independent pricing service. For the remaining securities that are priced by these third parties where we are unable to obtain a secondary independent price, we review material price changes for reasonableness based upon changes in interest rates, credit outlook based upon spreads for similar securities, and the weighted average life of the debt securities. We have also reviewed detailed valuation methodologies provided to us by our pricing services. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on broker quotes, which are reviewed using the same process that is applied to our securities priced by pricing services where we are unable to obtain a secondary independent price.

We conduct a quarterly review and evaluation of our investment securities portfolio to determine if any declines in fair value below amortized cost are other than temporary. In making this determination, we consider some or all of the following factors: the period of time the securities have been 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. 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. For debt securities that we do not intend to sell or it is more likely than not that we will not be required to sell before recovery, we would record an other than temporary impairment charge through current period earnings for the amount of the valuation decline below amortized cost that is attributable to credit losses. The

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remaining difference between the debt security’s fair value and amortized cost (i.e. decline in fair value not attributable to credit losses) is recognized in other comprehensive income.

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, with retroactive adjustments made as warranted.

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.

We have acquired loans in four separate acquisitions after January 1, 2009. For each acquisition, we reviewed all loans greater than $1 million and considered the following factors as indicators that such an acquired loan had evidence of deterioration in credit quality and was therefore in the scope of Accounting Standards Codification (“ASC”) 310-30 (Loans and Debt Securities Acquired with Deteriorated Credit Quality):

• Loans that were 90 days or more past due;

• Loans that had an internal risk rating of substandard or worse. Substandard is consistent with regulatory definitions and is defined as having a well defined weakness that jeopardizes liquidation of the loan;

• Loans that were classified as nonaccrual by the acquired bank at the time of acquisition; or

• Loans that had been previously modified in a troubled debt restructuring.

Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy or (ii) accounted for under ASC 310-20 (Nonrefundable fees and other costs.)

Acquired loans accounted for under ASC 310-30 by analogy

We performed a fair valuation of each of the pools and each pool was recorded at a discount. We determined that at least part of the discount on the acquired pools of loans was attributable to credit quality by reference to the valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the amounts of contractually required principal and interest that we did not expect to collect as of the acquisition date. Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, we have made an accounting policy election to apply ASC 310-30 by analogy to qualifying acquired pools of loans that (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value.

The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. 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 takes into account actual credit performance of the acquired loans to date and our best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. To the extent that we experience a deterioration in credit quality in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

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,

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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 expect to fully collect the carrying value of the loans net of the allowance for acquired loan losses.

Allowance for Loan Losses

We determined our allowance for loan losses by portfolio segment, which consist of commercial loans and consumer loans. 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. We further segregate these segments between loans which are accounted for under the amortized cost method (referred to as “originated” loans) and loans acquired (referred to as “acquired” loans), as acquired loans were originally recorded at fair value, which includes an estimate of lifetime credit losses, resulting in no carryover of the related allowance for loan losses.

Originated loans

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.

For our originated 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 inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types.

For our originated 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. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. 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.

Commercial loan portfolio segment

We estimate the allowance for our commercial loan portfolio segment by considering their type and loan grade. We first apply a historic loss rate to loans based on their type and loan grade. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions, or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. Our loan grading system is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Credit Risk.”

Consumer loan portfolio segment

We estimate the allowance for loan losses for our consumer loan portfolio segment by first estimating the amount of loans that will eventually default based on delinquency severity. We then apply a loss rate to the amount of loans that we predict will default based on our historical net loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. We obtain and review refreshed FICO scores on a quarterly basis, and trends are evaluated for consideration as a qualitative adjustment to the allowance. Other qualitative considerations include, but are not limited to, the evaluation of trends in property values, building permits and unemployment.

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Acquired Loans

Acquired loans accounted for under ASC 310-30 by analogy

For our acquired loans accounted for under ASC 310-30 by analogy, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

Acquired loans accounted for under ASC 310-20

We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. 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, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

Goodwill

We test goodwill for impairment annually, as of November 1. 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.

Beginning with our impairment test for 2012, we will have the option to first assess qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value of the reporting unit is less than its carrying amount (Step 0). If it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we proceed to compare each reporting unit’s fair value to carrying value to identify potential impairment (Step 1). 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.

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SELECTED FINANCIAL DATA

	2012							2011
	September 30		June 30			March 31		December 31		September 30
	(In thousands, except per share amounts)
Selected financial condition data:
Total assets	$	35,873,934	$	35,105,756		$	35,517,805	$	32,810,615	$	31,209,507
Loans and leases, net	18,956,593		18,625,000			16,664,173		16,352,483		16,252,617
Investment securities:
Available for sale	10,579,970		9,937,271			12,248,058		9,348,296		8,349,237
Held to maturity	1,387,763		1,463,872			2,503,156		2,669,630		2,830,744
Goodwill and other intangibles	2,626,625		2,631,605			1,796,394		1,803,240		1,812,628
Deposits	27,697,696		27,896,987			19,029,387		19,405,115		19,624,177
Borrowings	2,727,949		1,690,307			11,041,440		8,127,121		7,085,343
Stockholders’ equity	$	4,915,421	$	4,818,213		$	4,875,446	$	4,798,178	$	4,000,675
Common shares outstanding	352,632		352,665			351,936		351,834		294,898
Selected operations data:
Interest income	$	301,868	$	299,841		$	290,780	$	291,906	$	287,147
Interest expense	32,263		40,828			48,409		49,393		51,718
Net interest income	269,605		259,013			242,371		242,513		235,429
Provision for credit losses	22,200		28,100			20,000		13,400		14,500
Net interest income after provision for credit losses	247,405		230,913			222,371		229,113		220,929
Noninterest income (1)	102,203		95,598			69,908		63,685		68,655
Merger and acquisition integration expenses	29,404		131,460			12,970		6,149		9,008
Restructuring charges	—		3,750			2,703		13,496		16,326
Noninterest expense	237,138		210,429			184,505		182,526		178,537
Income (loss) before income tax	83,066		(19,128		)	92,101		90,627		85,713
Income tax expense (benefit)	24,682		(8,204		)	32,236		32,166		28,732
Net income (loss)	58,384		(10,924		)	59,865		58,461		56,981
Preferred stock dividend	7,547		7,547			5,115		—		—
Net income (loss) available to common stockholders	$	50,837	$	(18,471	)	$	54,750	$	58,461	$	56,981
Stock and related per share data:
Earnings (loss) per common share:
Basic	$	0.15	$	(0.05	)	$	0.16	$	0.19	$	0.19
Diluted	0.14		(0.05		)	0.16		0.19		0.19
Cash dividends	0.08		0.08			0.08		0.16		0.16
Book value (2)	13.11		12.84			13.00		12.79		13.72
Tangible book value per share(2)(3)	5.59		5.30			7.86		7.62		7.50
Market Price (NASDAQ: FNFG):
High	8.50		9.87			10.35		9.99		13.59
Low	7.14		7.49			8.71		8.22		9.15
Close	8.07		7.65			9.84		8.63		9.15

⁽¹⁾  Includes $5 million and $16 million gain on sale of mortgage-backed securities from securities portfolio repositioning for quarter ended September 30, 2012 and June 30, 2012, respectively.

⁽²⁾  Excludes unallocated employee stock ownership plan shares and unvested restricted stock shares.

⁽³⁾  Tangible book value per share excludes goodwill and other intangible assets of $2.6 billion as of September 30, 2012, June 30, 2012, and $1.8 billion as of March 31, 2012, December 31, 2011, and September 30, 2011, as well as unallocated ESOP shares and unvested restricted stock shares. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

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	2012									2011
At or for the quarter ended	September 30			June 30			March 31			December 31			September 30
	(Dollars in thousands)
Selected financial ratios and other data:
Performance ratios(1):
Return on average assets	0.66		%	(0.12		)%	0.73		%	0.73		%	0.73		%
Common equity:
Return on average common equity	4.46			(1.64		)	4.88			5.63			5.61
Return on average tangible common equity(2)	10.60			(3.18		)	8.12			10.03			10.28
Total equity:
Return on average equity	4.77			(0.90		)	4.96			5.54			5.61
Return on average tangible equity(3)	10.34			(1.64		)	7.90			9.75			10.28
Net interest rate spread	3.45			3.16			3.20			3.35			3.35
Net interest rate margin	3.54			3.26			3.34			3.48			3.48
Efficiency ratio (4)	71.7			97.5			64.1			66.0			67.0
Dividend payout ratio	53.33			N/M			50.00			84.21			84.21
Capital ratios:
First Niagara Financial Group, Inc.
Total risk-based capital	11.48			11.37			16.75			17.84			12.56
Tier 1 risk-based capital	9.51			9.40			14.66			15.60			11.90
Tier 1 risk-based common capital(5)	7.59			7.41			12.47			13.23			11.29
Leverage ratio	6.83			6.32			9.67			9.97			7.42
Ratio of stockholders’ equity to total assets	13.70			13.72			13.73			14.62			12.82
Ratio of tangible common stockholders’ equity to tangible assets(6)	5.87			5.69			8.13			8.57			7.44
First Niagara Bank:
Total risk-based capital	10.88			10.57			15.66			16.47			12.17
Tier 1 risk-based capital	10.19			9.63			14.69			14.66			11.51
Leverage ratio	7.32		%	6.48		%	9.69		%	9.38		%	7.17		%
Asset quality:
Total nonaccruing loans	$	142,380		$	129,072		$	133,261		$	89,798		$	81,886
Other nonperforming assets	9,669			10,632			7,202			4,482			9,392
Total classified loans(7)	693,006			732,762			753,536			748,375			692,961
Total criticized loans(8)	990,670			1,030,471			1,044,731			1,144,222			1,268,879
Allowance for credit losses	149,933			138,516			126,746			120,100			112,749
Net loan charge-offs	$	10,071		$	15,838		$	13,254		$	5,835		$	8,125
Net charge-offs to average loans	0.21		%	0.36		%	0.32		%	0.14		%	0.20		%
Provision to average loans	0.47			0.63			0.48			0.32			0.34
Total nonaccruing loans to total loans	0.75			0.69			0.79			0.55			0.50
Total nonperforming assets to total assets	0.42			0.40			0.40			0.29			0.29
Allowance for loan losses to total loans	0.78			0.74			0.75			0.73			0.69
Allowance for loan losses to nonaccruing loans	105.3			107.3			95.1			133.7			137.7
Texas ratio(9)	14.16			13.35			8.97			8.55			10.19
Asset quality-originated loans(10):
Net charge-offs of originated loans to average originated loans	0.30		%	0.55		%	0.34		%	0.22		%	0.35		%
Provision for originated loans to average originated loans	0.72			0.93			0.61			0.45			0.60
Total nonaccruing originated loans to total originated loans	0.93			0.96			1.09			0.91			0.87
Allowance for originated loan losses to originated loans	1.20			1.19			1.19			1.20			1.20
Other data:
Number of full service branches	432			452			334			333			332
Full time equivalent employees	6,036			6,103			4,753			4,827			4,712
Effective tax rate	29.7		%	42.9		%	35.0		%	35.5		%	33.5		%

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N/M Not meaningful

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

⁽²⁾  Average tangible common equity excludes average goodwill, other intangibles and preferred stock of $3.0 billion, $2.5 billion, $2.1 billion, $1.9 billion, and $1.8 billion for the quarters ended September 30, 2012, June 30, 2012, March 31, 2012, December 31, 2011, and September 30, 2011, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽³⁾  Average tangible equity excludes average goodwill and other intangibles of $2.6 billion for the quarter ended September 30, 2012, $2.2 billion for the quarter ended June 30, 2012, and $1.8 billion for the quarters ended March 31, 2012, December 31, 2011, and September 30, 2011. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽⁴⁾  Computed by dividing noninterest expense by the sum of net interest income and noninterest income.

⁽⁵⁾  Tier 1 risk-based common capital is computed by subtracting the subordinated debentures associated with trust preferred securities and preferred stock from Tier I capital, divided by risk weighted assets. Tier 1 risk-based 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 management and investors with information that is useful in understanding our financial performance and position.

⁽⁶⁾  Tangible common stockholders’ equity and tangible assets exclude goodwill, other intangibles, and preferred stock of $3.0 billion as of September 30, 2012 and June 30, 2012, $2.1 billion as of March 31, 2012 and December 31, 2011 and $1.8 billion as of September 30, 2011. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽⁷⁾  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, 2011.

⁽⁸⁾  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 included consumer loans when they were 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.

⁽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 management and investors with information that is useful in understanding our financial performance and position.

⁽¹⁰⁾  Originated loans represent total loans excluding acquired loans.

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RESULTS OF OPERATIONS

Overview

The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. Our operating results exclude the gain on securities portfolio restructuring, merger and acquisition integration expenses, and restructuring charges. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry. In addition, we believe the exclusion of the nonoperating items from our performance enables management and investors 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,			June 30,			September 30,			September 30,
	2012			2012			2011			2012			2011
Operating results (Non-GAAP):
Net interest income	$	269,605		$	259,013		$	235,429		$	770,989		$	638,734
Provision for credit losses	22,200			28,100			14,500			70,300			44,707
Noninterest income	96,866			79,703			68,655			246,477			181,624
Noninterest expense	237,138			210,429			178,537			632,072			483,112
Income tax expense	33,106			33,557			37,402			104,384			97,878
Net operating income (Non-GAAP)	$	74,027		$	66,630		$	73,645		$	210,710		$	194,661
Operating earnings per diluted share (Non-GAAP)	$	0.19		$	0.17		$	0.25		$	0.55		$	0.75
Reconciliation of net operating income to net income (loss)	$	74,027		$	66,630		$	73,645		$	210,710		$	194,661
Nonoperating income and expenses, net of tax at effective tax rate:
Gain on securities portfolio repositioning	3,469			10,331			—			13,800			—
Merger and acquisition integration expenses	(19,112		)	(85,448		)	(5,925		)	(112,991		)	(60,164		)
Restructuring charges	—			(2,437		)	(10,739		)	(4,194		)	(19,048		)
Total nonoperating income and expenses, net of tax	(15,643		)	(77,554		)	(16,664		)	(103,385		)	(79,212		)
Net income (loss) (GAAP)	$	58,384		$	(10,924	)	$	56,981		$	107,325		$	115,449
Earnings (loss) per diluted share (GAAP)	$	0.14		$	(0.05	)	$	0.19		$	0.25		$	0.44

In the second quarter of 2012, we sold mortgage-backed securities in our available for sale portfolio with a total carrying value of $3.1 billion and recognized a $16 million pre-tax gain. In the third quarter of 2012, we recognized an additional $5 million gain as the sale was structured so that we shared in the potential upside of rising security prices subsequent to sale. The securities sold were selected based on an assessment of their potential prepayment risk and the proceeds were used to pay down short-term borrowings. The sale of the securities will serve to reduce future volatility in our net interest margin by reducing the impact of prepayments on the mortgage-backed securities portfolio yield. In addition, the sale of these securities with the greatest levels of prepayment risk coupled with the pay down of short-term borrowings improves our asset sensitivity, allowing us to be better positioned to benefit when interest rates rise while at the same time managing the near term volatility created by the current sustained low interest rate environment.

Comparison to Prior Quarter

Our third quarter2012 GAAP results, including our earnings per diluted share, as compared to our second quarter2012 GAAP results were most significantly impacted by:

• The full quarter impact of the HSBC Branch Acquisition.

57

• A 22% annualized decrease in average earning assets for the third quarter of 2012 primarily attributable to our sale of $3.1 billion of investment securities near the end of the second quarter of 2012. This sale resulted in lower interest income during the third quarter on the sold securities. We recognized a $16 million gain in the second quarter of 2012, and an additional $5 million gain in the third quarter.

• A 19 basis point increase in yields on our total average interest earning assets due to lower premium amortization on mortgage-backed securities.

• The benefits of our eleventh consecutive quarter of double digit average commercial loan growth across our footprint partially offset by a 26 basis point decline in commercial loan yields.

• $247 million of indirect auto originations in the third quarter of 2012 with an average net yield of approximately 3.5%.

• Strong mortgage banking revenues driven by higher gain on sale margins and sustained origination volumes.

• A $102 million decrease in merger and acquisition integration expenses related to the HSBC Branch Acquisition.

Comparison to Prior Year Quarter

Our third quarter2012 GAAP results as compared to our third quarter2011 GAAP results, including our diluted earnings per share, were primarily impacted by:

• The HSBC Branch Acquisition reflected in the merger and acquisition integration expenses and higher average net interest earning assets and interest bearing liabilities.

• Loss of interest income from investment securities resulting from the sale of $3.1 billion in mortgage-backed securities at the second quarter of 2012.

• Lower yields on loans and securities due to the current interest rate environment resulting from the actions taken by the FOMC.

• The $5 million gain resulting from the second quarter sale of investment securities.

• A 36% increase in the number of new checking accounts.

• Our December 2011 issuance of 57 million common shares.

• $8 million in dividends on the 14 million shares of preferred stock we issued in December 2011.

Comparison to Prior Year to Date

Our GAAP results, including earnings per share, for the nine months ended September 30, 2012 as compared to our GAAP results for the same period in 2011, were primarily impacted by:

• The HSBC Branch Acquisition as reflected in the merger and acquisition integration expenses and higher average net interest earning assets and interest bearing liabilities.

• Our April 2011 merger with NewAlliance.

• The $21 million gain resulting from the sale of investment securities and gain on derivative resulting from the sale.

• Double digit commercial loan growth that was realized across our entire footprint.

• Lower yields on loans and securities due to the current interest rate environment resulting from the actions taken by the FOMC.

• Our December 2011 issuance of 57 million common shares.

• $20 million in dividends on the 14 million shares of preferred stock we issued in December 2011.

58

Net Interest Income

Net interest income of $270 million increased 4% from the prior quarter, as the favorable impacts of debt repayments using low cost deposits acquired through the HSBC Branch Acquisition as well as lower premium amortization expense on mortgage backed securities were partially offset by lower net interest income resulting from our mortgage-backed securities sale at the end of the second quarter of 2012. Tax equivalent net interest margin in the third quarter of 2012 was 3.54%, an increase of 28 basis points due to our securities portfolio repositioning discussed below and the benefit of using low cost deposits from the HSBC Branch Acquisition to pay down higher cost borrowings.

Average earning assets decreased 22% annualized compared to the prior quarter, reflecting the sale of $3.1 billion of mortgage- backed securities at the end of the second quarter of 2012 and the full quarter impact of $1.6 billion in loans acquired from HSBC. Investment securities averaged $11.2 billion, a $2.8 billiondecrease from the prior quarter.

59

Comparison to Prior Quarter

The following table presents our condensed average balance sheet and taxable equivalent yields for the periods indicated. 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, 2012				Three months ended June 30, 2012				Increase (decrease)
	Average outstanding balance		Taxable equivalent yield/rate (1)		Average outstanding balance		Taxable equivalent yield/rate (1)		Average outstanding balance			Taxable equivalent yield/rate (1)
Interest-earning assets:
Loans and leases(2)
Commercial:
Real estate	$	6,783,060	4.60	%	$	6,500,678	4.88	%	$	282,382		(0.28	)%
Business	4,608,739		3.81		4,293,186		4.03		315,553			(0.22	)
Total commercial lending	11,391,799		4.28		10,793,864		4.54		597,935			(0.26	)
Residential real estate	3,962,365		4.03		3,964,214		4.07		(1,849		)	(0.04	)
Home equity	2,672,367		4.42		2,411,901		4.42		260,466			—
Other consumer	937,263		7.97		526,981		8.54		410,282			(0.57	)
Total loans	18,963,794		4.47		17,696,960		4.59		1,266,834			(0.12	)
Residential mortgage-backed securities(3)	5,677,131		2.81		8,981,663		2.35		(3,304,532		)	0.46
Commercial mortgage-backed securities(3)	1,895,237		3.93		1,866,691		3.94		28,546			(0.01	)
Other investment securities(3)	3,644,638		3.21		3,184,359		3.43		460,279			(0.22	)
Money market and other investments	558,057		3.56		817,696		2.20		(259,639		)	1.36
Total interest-earning assets	30,738,857		3.96	%	32,547,369		3.77	%	(1,808,512		)	0.19	%
Noninterest-earning assets(4)(5)	4,565,022				3,952,377				612,645
Total assets	$	35,303,879			$	36,499,746			$	(1,195,867	)
Interest-bearing liabilities:
Deposits
Savings deposits	$	4,025,786	0.20	%	$	3,302,080	0.14	%	$	723,706		0.06	%
Checking accounts	3,870,906		0.06		3,095,152		0.08		775,754			(0.02	)
Money market deposits	10,898,931		0.29		9,124,749		0.28		1,774,182			0.01
Certificates of deposit	4,082,987		0.75		4,018,527		0.83		64,460			(0.08	)
Total interest-bearing deposits	22,878,610		0.32		19,540,508		0.34		3,338,102			(0.02	)
Borrowings
Short-term borrowings	1,666,484		0.36		5,045,973		0.55		(3,379,489		)	(0.19	)
Long-term borrowings	732,224		6.74		2,432,985		2.91		(1,700,761		)	3.83
Total borrowings	2,398,708		2.31		7,478,958		1.31		(5,080,250		)	1.00
Total interest-bearing liabilities	25,277,318		0.51	%	27,019,466		0.61	%	(1,742,148		)	(0.10	)%
Noninterest-bearing deposits	4,618,284				3,835,130				783,154
Other noninterest-bearing liabilities	535,672				765,359				(229,687		)
Total liabilities	30,431,274				31,619,955				(1,188,681		)
Stockholders’ equity(4)	4,872,605				4,879,791				(7,186		)
Total liabilities and stockholders’ equity	$	35,303,879			$	36,499,746			$	(1,195,867	)
Net interest rate spread			3.45	%			3.16	%				0.29	%
Net interest rate margin			3.54	%			3.26	%				0.28	%

⁽¹⁾  We use a taxable equivalent basis based upon a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets.

⁽²⁾  Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans.

⁽³⁾  Average outstanding balances are at amortized cost.

⁽⁴⁾  Average outstanding balances include unrealized gains/losses on securities available for sale.

⁽⁵⁾  Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income.

60

Our taxable equivalent net interest income of $274 million for the quarter ended September 30, 2012 increased by $10 million from the quarter ended June 30, 2012. Overall, the yield on earning assets increased19 basis points quarter over quarter. The combined effects of a full quarter's impact of the loans acquired in the HSBC Branch Acquisition, lower interest expense from replacing higher cost borrowings with deposits acquired from HSBC, and lower premium amortization on our residential mortgage-backed securities were negated by the loss of interest income from the securities portfolio repositioning transaction. Specifically:

• Our average balance of investment securities decreased quarter over quarter by approximately $2.8 billion due to the securities portfolio repositioning that was executed at the end of the second quarter of 2012. The decrease in average balance was offset by an increase in yield of 32 basis points during the third quarter of 2012. The increase in yield was primarily due to a $20 million decrease in premium amortization on residential mortgage-backed securities as a result of the securities portfolio repositioning.

• Our average balance of loans increased by $1.3 billion, of which $727 million was attributable to the full quarter impact of loans acquired from HSBC. The remaining increase was attributable to growth of $463 million in our commercial loans and $218 million in our indirect auto portfolio, offset by a decrease in our residential loan category. Loan yields declined 12 basis points as commercial loan yields decreased by 26 basis points, offset by a higher yield on our total consumer loan portfolio.

• The spread between our commercial loan yields and the cost of funds (which is a function of the loan's duration) remained in line with our expectations.  Overall, the gross commercial loan yields declined as a result of (i) new loan production being booked in a lower interest rate environment, and (ii) a shorter duration of our commercial loan portfolio.  The shorter duration resulted as a higher percentage of our new originations were variable rate, which was partially attributable to our customer derivatives capacity, which permits us to offer our customers seeking a longer term rate the flexibility to swap a portion of their variable loan to a fixed rate.

• Excluding the HSBC Branch Acquisition impact, our average balances of interest bearing deposits declined by $838 million and our average rate paid declined by two basis points due to our deposit pricing actions. The decline in our average balances was driven by our interest rate and treasury management strategies as we continue to move down deposit pricing and reduce wholesale funding.

• Our average borrowings decreased quarter over quarter by approximately $5.1 billion as a result of the full quarter impact of paying down borrowings upon closing of the HSBC Branch Acquisition. This also increased the rate paid on borrowings by 100 basis points as the pay down of shorter-term borrowings resulted in a higher concentration of our borrowings in longer term corporate debt.

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Comparison to Prior Year to Date

The following tables present our condensed average balance sheet and taxable equivalent yields for the periods indicated. Yields earned on interest-earning assets, rates paid on interest-bearing liabilities and average balances are based on average daily balances (amounts in thousands):

	Nine months ended September 30,								Increase (decrease)
	2012				2011
	Average outstanding balance		Taxable equivalent yield/rate(1)		Average outstanding balance		Taxable equivalent yield/rate(1)		Average outstanding balance			Taxable equivalent yield/rate(1)
Interest-earning assets:
Loans and leases(2)
Commercial:
Real estate	$	6,528,844	4.81	%	$	5,466,402	5.39	%	$	1,062,442		(0.58	)%
Business	4,273,696		3.96		3,056,378		4.23		1,217,318			(0.27	)
Total commercial lending	10,802,540		4.48		8,522,780		4.97		2,279,760			(0.49	)
Residential real estate	3,957,293		4.13		3,268,541		4.60		688,752			(0.47	)
Home equity	2,414,590		4.42		1,908,365		4.56		506,225			(0.14	)
Other consumer	582,017		8.04		272,031		6.93		309,986			1.11
Total loans	17,756,440		4.56		13,971,717		4.91		3,784,723			(0.35	)
Residential mortgage-backed securities(3)	7,728,656		2.72		8,111,062		3.57		(382,406		)	(0.85	)
Commercial mortgage-backed securities(3)	1,822,262		3.95		411,151		3.90		1,411,111			0.05
Other investment securities(3)	3,037,555		3.35		1,340,957		4.11		1,696,598			(0.76	)
Money market and other investments	682,343		2.60		332,652		2.81		349,691			(0.21	)
Total interest-earning assets	31,027,256		3.90	%	24,167,539		4.37	%	6,859,717			(0.47	)%
Noninterest-earning assets(4)(5)	3,949,845				2,935,004				1,014,841
Total assets	$	34,977,101			$	27,102,543			$	7,874,558
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,300,492	0.14	%	$	2,174,237	0.24	%	$	1,126,255		(0.10	)%
Checking accounts	3,066,257		0.08		1,909,551		0.12		1,156,706			(0.04	)
Money market deposits	9,070,317		0.28		6,197,198		0.58		2,873,119			(0.30	)
Certificates of deposit	3,976,683		0.85		4,021,840		0.97		(45,157		)	(0.12	)
Total interest-bearing deposits	19,413,749		0.34		14,302,826		0.58		5,110,923			(0.24	)
Borrowings
Short-term borrowings	3,441,691		0.56		1,549,841		0.38		1,891,850			0.18
Long-term borrowings	2,825,468		2.70		4,897,191		1.87		(2,071,723		)	0.83
Total borrowings	6,267,159		1.53		6,447,032		1.51		(179,873		)	0.02
Total interest-bearing liabilities	25,680,908		0.63	%	20,749,858		0.87	%	4,931,050			(0.24	)%
Noninterest-bearing deposits	3,838,217				2,432,602				1,405,615
Other noninterest-bearing liabilities	590,400				367,524				222,876
Total liabilities	30,109,525				23,549,984				6,559,541
Stockholders’ equity(4)	4,867,576				3,552,559				1,315,017
Total liabilities and stockholders’ equity	$	34,977,101			$	27,102,543			$	7,874,558
Net interest rate spread			3.27	%			3.50	%				(0.23	)%
Net interest rate margin			3.38	%			3.63	%				(0.25	)%

⁽¹⁾  We use a taxable equivalent basis based on a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets.

⁽²⁾  Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans.

⁽³⁾  Average outstanding balances are at amortized cost.

⁽⁴⁾  Average outstanding balances include unrealized gains/losses on securities available for sale.

⁽⁵⁾  Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income.

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Our taxable equivalent net interest income for the nine months ended September 30, 2012 increased $129 million, or 20%, compared to the same period in 2011, reflecting an increase in net interest earning assets of $1.9 billion offset by a decrease in our net interest margin of 25 basis points. The increase in net interest earning assets reflects the $6.9 billion increase in interest earning assets primarily due to our HSBC Branch Acquisition, securities that were purchased in anticipation of the HSBC Branch Acquisition, the full year impact of the NewAlliance Acquisition completed in the second quarter of 2011, and continued organic loan growth in our Upstate New York and Pennsylvania markets. Over the same period our interest bearing liabilities increased by $4.9 billion. Offsetting the growth in the average interest earning assets were lower yields on our loans and securities in the first nine months of 2012 compared to the first nine months of 2011 brought on by the market pressures on interest rates. Our yields on interest earning assets in the first nine months of 2012decreased47 basis points compared to the first nine months of 2011 while costs on interest bearing liabilities decreased only 24 basis points, for a net compression in the interest rate spread of 23 basis points.

63

Comparison to Prior Year Quarter

The following tables present our condensed average balance sheet and taxable equivalent yields for the periods indicated. 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, 2012				Three months ended September 30, 2011				Increase (decrease)
	Average outstanding balance		Taxable equivalent yield/rate(1)		Average outstanding balance		Taxable equivalent yield/rate(1)		Average outstanding balance			Taxable equivalent yield/rate(1)
Interest-earning assets:
Loans and leases(2)
Commercial:
Real estate	$	6,783,060	4.60	%	$	6,143,211	5.23	%	$	639,849		(0.63	)%
Business	4,608,739		3.81		3,424,191		3.95		1,184,548			(0.14	)
Total commercial lending	11,391,799		4.28		9,567,402		4.78		1,824,397			(0.50	)
Residential real estate	3,962,365		4.03		4,226,732		4.49		(264,367		)	(0.46	)
Home equity	2,672,367		4.42		2,166,657		4.55		505,710			(0.13	)
Other consumer	937,263		7.97		276,939		6.81		660,324			1.16
Total loans	18,963,794		4.47		16,237,730		4.73		2,726,064			(0.26	)
Residential mortgage-backed securities(3)	5,677,131		2.81		8,748,334		3.40		(3,071,203		)	(0.59	)
Commercial mortgage-backed securities(3)	1,895,237		3.93		597,640		3.60		1,297,597			0.33
Other investment securities(3)	3,644,638		3.21		1,594,238		4.44		2,050,400			(1.23	)
Money market and other investments	558,057		3.56		411,461		2.34		146,596			1.22
Total interest-earning assets	30,738,857		3.96	%	27,589,403		4.22	%	3,149,454			(0.26	)%
Noninterest-earning assets(4)(5)	4,565,022				3,393,307				1,171,715
Total assets	$	35,303,879			$	30,982,710			$	4,321,169
Interest-bearing liabilities:
Deposits
Savings deposits	$	4,025,786	0.20	%	$	2,699,164	0.25	%	$	1,326,622		(0.05	)%
Checking accounts	3,870,906		0.06		2,024,752		0.13		1,846,154			(0.07	)
Money market deposits	10,898,931		0.29		7,148,913		0.65		3,750,018			(0.36	)
Certificates of deposit	4,082,987		0.75		4,443,668		0.96		(360,681		)	(0.21	)
Total interest-bearing deposits	22,878,610		0.32		16,316,497		0.60		6,562,113			(0.28	)
Borrowings
Short-term borrowings	1,666,484		0.36		1,302,726		0.46		363,758			(0.10	)
Long-term borrowings	732,224		6.74		6,048,272		1.67		(5,316,048		)	5.07
Total borrowings	2,398,708		2.31		7,350,998		1.45		(4,952,290		)	0.86
Total interest-bearing liabilities	25,277,318		0.51	%	23,667,495		0.87	%	1,609,823			(0.36	)%
Noninterest-bearing deposits	4,618,284				2,856,425				1,761,859
Other noninterest-bearing liabilities	535,672				431,218				104,454
Total liabilities	30,431,274				26,955,138				3,476,136
Stockholders’ equity(4)	4,872,605				4,027,572				845,033
Total liabilities and stockholders’ equity	$	35,303,879			$	30,982,710			$	4,321,169
Net interest rate spread			3.45	%			3.35	%				0.10	%
Net interest rate margin			3.54	%			3.48	%				0.06	%

⁽¹⁾  We use a taxable equivalent basis based on a 35% tax rate in order to provide the most comparative yields among all types of interest-earning assets.

⁽²⁾  Average outstanding balances are net of deferred costs and net premiums and include nonperforming loans.

⁽³⁾  Average outstanding balances are at amortized cost.

⁽⁴⁾  Average outstanding balances include unrealized gains/losses on securities available for sale.

⁽⁵⁾  Average outstanding balances include allowances for loan losses and bank owned life insurance, earnings from which are reflected in noninterest income.

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Our taxable equivalent net interest income increased $36 million, or 15%, for the third quarter of 2012 compared to the third quarter of 2011 reflecting an increase in net-interest earning assets of $1.5 billion and an increase in our net interest margin of six basis points. The increase in net interest-earning assets reflects the $3.1 billionincrease in interest earning assets due to our HSBC Branch Acquisition and continued organic loan growth in our Upstate New York and Pennsylvania markets. Over the same period our interest bearing liabilities increased by $1.6 billion, with the full quarter impact of deposits acquired in the HSBC Branch Acquisition offset by pay downs in borrowings. The six basis point increase in our net interest margin resulted from the favorable impact of replacing the majority of our borrowings with lower costing deposits, offset by lower yields on our loans and securities in the third quarter of 2012 compared to the third quarter of 2011 brought on by the market pressures on interest rates. Our yields on interest-earning assets in the third quarter of 2012decreased25 basis points compared to the third quarter of 2011 while costs on interest-bearing liabilities decreased36 basis points, resulting in a 10 basis point increase in our interest rate spread.

Provision for Credit Losses

Our provision for credit losses is comprised of three components: consideration of the adequacy of our allowance for originated loan losses; needs for allowance for acquired loan losses due to deterioration in credit quality subsequent to acquisition; and probable losses associated with our unfunded loan commitments. Our provision for credit losses related to our originated loans is based upon the inherent risk of our loans and considers such interrelated factors as the composition and other credit risk factors of our loan portfolio, growth 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. Our provision for credit losses related to our acquired loans is based upon a deterioration in expected cash flows subsequent to the acquisition of the loans. These acquired loans were originally recorded at fair value on the date of acquisition. As the fair value at time of acquisition incorporated lifetime expected credit losses, there was no carryover of the related allowance for loan losses.

The following table details the composition of our provision for credit losses for the periods indicated (in thousands):

	Three months ended						Nine months ended
	September 30,		June 30,		September 30,		September 30,
	2012		2012		2011		2012		2011
Provision for originated loans	$	21,393	$	25,375	$	13,846	$	62,295	$	40,303
Provision for acquired loans	407		2,428		—		7,208		882
Provision for unfunded commitments	400		297		654		797		3,522
Total	$	22,200	$	28,100	$	14,500	$	70,300	$	44,707

The provision for loan losses was $22.2 million in the third quarter of 2012, reflecting continued growth in our commercial lending portfolios, offset by credit quality improvements in our commercial real estate portfolio and, to a lesser extent, in our home equity portfolio. We also recorded a $0.4 million provision for unfunded loan commitments in the third quarter of 2012 as a result of the organic growth in our unfunded commitments and the associated reserve. Our total unfunded commitments at September 30, 2012 were $8.9 billion, which included $3.0 billion of unfunded commitments acquired in the HSBC Branch Acquisition. The liability for unfunded commitments is included in Other Liabilities in our Consolidated Statements of Condition and amounted to $11 million and $7 million at September 30, 2012 and December 31, 2011, respectively. The remaining increase of $4 million was established to recognize probable losses inherent in the commitments assumed in the HSBC Branch Acquisition.

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Noninterest Income

The following table presents our noninterest income for the periods indicated (amounts in thousands).

	Three months ended
	September 30, 2012			June 30, 2012			September 30, 2011
Deposit service charges	$	26,422		$	21,433		$	18,413
Insurance commissions	18,764			17,072			16,886
Merchant and card fees	12,014			9,271			8,933
Wealth management services	11,069			9,207			7,933
Mortgage banking	10,974			7,174			5,254
Capital markets income	6,381			6,831			2,687
Lending and leasing	3,730			4,245			3,399
Bank owned life insurance	3,449			3,848			2,742
Gain on securities portfolio repositioning	5,337			15,895			—
Other	4,063			622			2,408
Total noninterest income	$	102,203		$	95,598		$	68,655
Noninterest income as a percentage of net revenue	27.5		%	27.0		%	22.6		%

Comparison to Prior Quarter

Noninterest income increased$7 million, for the quarter ended September 30, 2012, compared to the second quarter of 2012, reflecting the full quarter benefit from the HSBC Branch Acquisition in the third quarter of 2012 partially offset by the gain on securities portfolio repositioning in the second quarter of 2012. We have leveraged the scale that the HSBC Branch Acquisition provided in our financial services businesses, including wealth management and insurance, to increase assets under management and fee generation, and provide cross-solutions to deepen our customer relationships. Changes in certain components of noninterest income are described below:

• Revenues from deposit service charges increased $5 million, reflecting fees related to deposit balances acquired from HSBC.

• The $3 million increase in merchant and card fees resulted from the credit card accounts acquired from HSBC.

• Mortgage banking revenues benefited from higher margins on sold loans and sustained strength in volumes.

• During the quarter ended September 30, 2012, we recorded a $5 million gain on the second quarter sale of $3.1 billion in mortgage-backed securities. The gain represents the increase in our share of the expected sale proceeds in excess of the floor price set on the date of original sale to a third party purchaser.

• Other noninterest income for the second quarter of 2012 reflects a write down on an equity investment.

Excluding the gains on securities portfolio repositioning, noninterest income increased to 26.4% of net revenue for the third quarter of 2012 from 23.5% for the second quarter of 2012.

Comparison to Prior Year Quarter

Noninterest income increased$34 million, for the quarter ended September 30, 2012, compared to the third quarter of 2011 and was primarily attributable to the HSBC Branch Acquisition completed in May 2012. However, other factors contributing to changes in noninterest income are described below:

• The increase in deposit service charges reflects an increase due to the HSBC Branch Acquisition, new checking account openings, and ongoing fee income initiatives.

• The increase in merchant card fees is reflective of the credit card business we acquired from HSBC.

• The increase in wealth management services revenues resulted from both the assets under management acquired in the HSBC Branch Acquisition and the expansion of 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, and the growth strategy of our Private Client Services group as we opened offices in Buffalo,

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Rochester and Pittsburgh in 2011 to add to offices we acquired in Philadelphia and Connecticut.

• Mortgage banking revenues benefited from higher purchase and refinance volumes as well as higher margins on sold loans.

• The increase in capital markets revenue reflects growth in derivatives sales to commercial loan customers.

• During the quarter ended September 30, 2012, we recorded a $5 million gain on the second quarter sale of $3.1 billion in mortgage-backed securities.

Comparison to Prior Year to Date

The following table presents our noninterest income for the periods indicated (amounts in thousands):

	Nine months ended September 30,
	2012			2011
Deposit service charges	$	64,892		$	48,095
Insurance commissions	52,669			49,685
Merchant and card fees	26,813			24,209
Wealth management services	29,315			22,550
Mortgage banking	23,797			9,903
Capital markets income	19,751			5,603
Lending and leasing	11,098			8,322
Bank owned life insurance	10,684			7,827
Gain on securities portfolio repositioning	21,232			—
Other	7,458			5,430
Total noninterest income	$	267,709		$	181,624
Noninterest income as a percentage of net revenue	25.8		%	22.1		%

Noninterest income increased $86 million, for the nine months ended September 30, 2012, compared to the nine months ended September 30, 2011. The increase is primarily attributable to the HSBC Branch Acquisition, gain on securities portfolio repositioning, and the full period impact of our April 2011 merger with NewAlliance. However, other factors contributing to changes in noninterest income are described below:

• Revenues from deposit service charges benefited not only from the HSBC Branch Acquisition but also from an increase in checking account openings and our ongoing fee income initiatives.

• Insurance commissions increased as a result of our insurance agency acquisition in Connecticut in the second quarter of 2011.

• Wealth management services revenues increased reflecting greater cross-selling of securities and insurance products through our branch network and the growth strategy of our Private Client Services group as we opened offices in Buffalo, Rochester and Pittsburgh in 2011 to add to offices we acquired in Philadelphia and Connecticut. The increase also reflects the impact of acquiring wealth management relationships from HSBC. In addition, alternative investment products have become more marketable in the current low rate environment.

• Mortgage banking revenues reflect higher purchase and refinance volumes as well as higher margins on sold loans.

• The increase in capital markets revenue reflects growth in derivatives sales to commercial customers.

Excluding the gains on the investment securities portfolio sale, noninterest income as a percentage of net revenue increased from 22.1% for the nine months ended September 30, 2011 to 24.2% for the nine months ended September 30, 2012 reflecting the benefits of our acquisitions, low mortgage rates, and our capital markets business.

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Noninterest Expense

The following table presents our operating noninterest expense for the periods indicated (amounts in thousands):

	Three months ended
	September 30, 2012			June 30, 2012			September 30, 2011
Salaries and benefits	$	115,484		$	104,507		$	89,131
Occupancy and equipment	25,694			24,089			20,434
Technology and communications	28,110			24,434			16,634
Marketing and advertising	8,954			6,676			7,554
Professional services	11,193			9,263			9,171
Amortization of intangibles	14,506			9,839			6,896
FDIC premiums	8,850			10,552			10,301
Merger and acquisition integration expenses	29,404			131,460			9,008
Restructuring charges	—			3,750			16,326
Other	24,347			21,069			18,416
Total noninterest expenses	266,542			345,639			203,871
Less nonoperating expenses:
Merger and acquisition integration expenses	(29,404		)	(131,460		)	(9,008		)
Restructuring charges	—			(3,750		)	(16,326		)
Total operating noninterest expenses(1)	$	237,138		$	210,429		$	178,537
Efficiency ratio(2)	71.7		%	97.5		%	67.0		%
Operating efficiency ratio(1)	64.7		%	62.1		%	58.7		%

⁽¹⁾  We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and 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 less the gain on investment securities portfolio repositioning.

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

Comparison to Prior Quarter

Noninterest expenses decreased$79 million, during the quarter ended September 30, 2012 from the quarter ended June 30, 2012 primarily due to lower merger and acquisition integration expenses offset by the full quarter cost of operating the acquired HSBC branches. Changes in certain other components of noninterest expense are described below:

• Salaries and benefits increased $11 million as a result of a full quarter impact of the HSBC Branch Acquisition and included a $2.5 million increase in incentive compensation due to higher production volumes.

• Amortization of intangibles increased $5 million as a result of the full quarter of amortization of core deposit, purchased credit card relationship, and wealth management intangibles acquired in the HSBC Branch Acquisition.

Comparison to Prior Year Quarter

Noninterest expenses increased$63 million, for the quarter ended September 30, 2012 from the quarter ended September 30, 2011 primarily due to costs incurred as a result of the HSBC Branch Acquisition as well as additional expense resulting from operating these branches. However, other factors contributing to changes in certain components of noninterest expense are described below:

• Salaries and benefits increased $26 million, reflective of the increase in our full time equivalent employees, resulting from the HSBC Branch Acquisition and the growth of our infrastructure.

• The increases in occupancy and equipment and technology and communications reflect targeted investments in an effort to enhance the sophistication and efficiency of our back office processes to support the NewAlliance merger, HSBC Branch Acquisition, and future growth opportunities. Additionally, we outsourced our data center late in 2011 which also contributed to higher technology and communications expenses in the third quarter of 2012 as compared to

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the third quarter of 2011.

• FDIC expense decreased as we were able to mitigate the impact of the NewAlliance and HSBC acquired assets with our capital management strategies. The Company made capital contributions to the Bank of $150 million and $65 million in the first and third quarters of 2012, respectively, and $645 million in the fourth quarter of 2011.

• Restructuring charges decreased $16 million.

Merger and acquisition integration expenses of $29 million and $131 million for the three months ended September 30, 2012 and June 30, 2012, respectively, were attributable to the HSBC Branch Acquisition. Of the $9 million of merger and acquisition integration expenses for the three months ended September 30, 2011, $7 million was attributable to our merger with NewAlliance and $2 million was attributable to the HSBC Branch Acquisition.

Comparison to Prior Year to Date

The following table presents our operating noninterest expense for the periods indicated (amounts in thousands):

	Nine months ended September 30,
	2012			2011
Salaries and benefits	$	316,468		$	253,099
Occupancy and equipment	71,800			55,583
Technology and communications	72,257			43,434
Marketing and advertising	22,393			14,126
Professional services	29,351			24,348
Amortization of intangibles	30,811			18,958
FDIC premiums	25,535			22,763
Merger and acquisition integration expenses	173,834			92,012
Restructuring charges	6,453			29,038
Other	63,457			50,801
Total noninterest expense	812,359			604,162
Less nonoperating expenses:
Merger and acquisition integration expenses	(173,834		)	(92,012		)
Restructuring charges	(6,453		)	(29,038		)
Total operating noninterest expense(1)	$	632,072		$	483,112
Efficiency ratio(2)	78.2		%	73.6		%
Operating efficiency ratio(1)	62.1		%	58.9		%

⁽¹⁾  We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and 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 less the gain on investment securities portfolio repositioning.

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

Noninterest expense increased$208 million, for the nine months ended September 30, 2012, compared to the same period in 2011, primarily due to the merger and acquisition integration expenses incurred as a result of the HSBC Branch Acquisition, the additional expenses resulting from operating the HSBC branches, and the growth of our infrastructure. FDIC premiums increased not only due to the growth of our balance sheet but also due to growth in certain components of our assessment rate. However, we were able to partially mitigate the impact of these factors through our capital management strategies. The Company made capital contributions to the Bank of $150 million and $65 million in the first and third quarters of 2012, respectively, and $645 million in the fourth quarter of 2011.

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Income Taxes

Our effective tax rate of 29.7% for the three months ended September 30, 2012 decreased from 42.9% for the three months ended June 30, 2012 and decreased from 33.5% for the three months ended September 30, 2011. The decrease from the three months ended June 30, 2012 is primarily due to a pre-tax loss for the second quarter of 2012 resulting from higher expense levels attributable to the HSBC Branch Acquisition coupled with the reversal of tax reserves in the third quarter of 2012.  The decrease from the three months ended September 30, 2011 is primarily due to the reversal of tax reserves in the third quarter of 2012. We expect our effective tax rate for the quarter ended December 31, 2012 to be 32%.

Our effective tax rate was 31.2% for the nine months ended September 30, 2012 and 32.7% for the nine months ended September 30, 2011. The decrease in the effective tax rate is primarily due to the reversal of uncertain tax positions in the third quarter of 2012 in addition to lower pre-tax income in 2012 as compared to the same period in 2013.

ANALYSIS OF FINANCIAL CONDITION AT SEPTEMBER 30, 2012

Overview

On May 18, 2012, we completed the HSBC Branch Acquisition and the results are included in our consolidated statement of financial condition at September 30, 2012. The acquisition significantly impacted our balance sheet as can be seen through our comparison of September 30, 2012 balances to December 31, 2011 presented below. The table below details the balances at September 30, 2012, as well as the December 31, 2011 balances adjusted to include HSBC balances acquired on May 18, 2012 (in thousands):

			December 31, 2011
	September 30, 2012 consolidated		Consolidated		Balances acquired  from HSBC (1)		Proforma HSBC		Comparison to proforma HSBC
Investment securities	$	12,341,044	$	12,376,085	$	—	$	12,376,085	$	(35,041	)
Loans and leases:
Commercial:
Real estate	6,835,971		6,244,381		146,796		6,391,177		444,794
Business	4,682,154		3,771,649		180,873		3,952,522		729,632
Total commercial loans	11,518,125		10,016,030		327,669		10,343,699		1,174,426
Residential real estate	3,870,756		4,012,267		324,253		4,336,520		(465,764		)
Home equity	2,661,429		2,165,988		563,599		2,729,587		(68,158		)
Other consumer	1,056,216		278,298		389,030		667,328		388,888
Total loans and leases	19,106,526		16,472,583		1,604,551		18,077,134		1,029,392
Deposits:									—
Savings accounts	$	3,941,528	$	2,621,016	$	1,644,020	$	4,265,036	$	(323,508	)
Interest-bearing checking	4,090,322		2,259,576		1,449,352		3,708,928		381,394
Money market deposits	10,801,280		7,220,902		4,478,240		11,699,142		(897,862		)
Noninterest-bearing deposits	4,658,374		3,335,356		1,469,309		4,804,665		(146,291		)
Certificates of deposit	4,206,192		3,968,265		813,668		4,781,933		(575,741		)
Total deposits	27,697,696		19,405,115		9,854,589		29,259,704		(1,562,008		)
Total borrowings	2,727,949		8,127,121		—		8,127,121		(5,399,172		)

⁽¹⁾ Represents opening balance sheet balances at May 18, 2012 closing.

We noted the following balance trends during 2012, exclusive of the impact of the HSBC Branch Acquisition:

• Our available for sale investment securities portfolio decreased $35 million over the balance at December 31, 2011 due to the securities portfolio repositioning in the second quarter of 2012, the proceeds of which were used to pay down short-term borrowings. This was partially offset by our strategy to purchase securities in anticipation of receiving cash proceeds from the pending HSBC Branch Acquisition.

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• Our ending loan balances increased to $19.1 billion at September 30, 2012 from $18.1 billion on a proforma basis . The increase was driven by continued organic growth in our commercial loan portfolio of $1.2 billion, or 15% annualized.

• Core deposits decreased by $986 million, primarily in money market deposit accounts, or 5% on an annualized basis, due to our interest rate and treasury management strategies as we continue to move down deposit pricing. We continue to focus on core customer acquisition reflected in the 33% increase in the number of new personal checking account openings from December 31, 2011.

• Total borrowings decreased by $5.4 billion, as cash proceeds received from the HSBC Branch Acquisition and securities portfolio repositioning were used to pay down borrowings.

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.

Our total loans and leases outstanding increased $2.6 billion from December 31, 2011 to September 30, 2012, which included $1.6 billion in loans from the HSBC Branch Acquisition. Our commercial loan portfolio increased $1.5 billion, or 20% annualized, resulting from our continued strategic focus on the portfolio. Our period over period results display the strong organic growth across our footprint in our commercial lending activities. Our Upstate New York market continues to perform well as the commercial loan portfolio increased $734 million, or 19% annualized. Excluding the HSBC Branch Acquisition, the commercial loan portfolio increased $406 million, or 11% annualized over the fourth quarter of 2011. In addition to the continued growth trends in Upstate New York, our Eastern and Western Pennsylvania markets have exhibited strong growth with an increase in their commercial loan portfolios of $314 million, or 28% annualized and $116 million, or 13% annualized, respectively, from the end of fourth quarter of 2011. Commercial loans as a percentage of our total loans of approximately 60% remained in line with the loan type composition at December 31, 2011.

We experienced a net decrease of $142 million in our residential real estate portfolio. The net decrease reflects the addition of $324 million of loans acquired from HSBC, offset by 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. Our home equity and other consumer loan portfolios increased as a result of the HSBC Branch Acquisition. Other consumer loans also increased due to significant growth in our indirect auto portfolio, including $247 million of loan originations in the quarter ended September 30, 2012.

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

	September 30, 2012					December 31, 2011
	Amount			Percent		Amount			Percent
Commercial:
Real estate	$	6,233,765		32.6	%	$	5,878,618		35.7	%
Construction	602,206			3.2		365,763			2.2
Business	4,682,154			24.5		3,771,649			22.9
Total commercial	11,518,125			60.3		10,016,030			60.8
Consumer:
Residential real estate	3,870,756			20.3		4,012,267			24.4
Home equity	2,661,429			13.9		2,165,988			13.1
Other consumer	1,056,216			5.5		278,298			1.7
Total loans and leases	19,106,526			100.0	%	16,472,583			100.0	%
Allowance for loan losses	(149,933		)			(120,100		)
Total loans and leases, net	$	18,956,593				$	16,352,483

Included in the table above are acquired loans with a carrying value of $6.9 billion and $6.6 billion at September 30, 2012 and December 31, 2011, respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at

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fair value with no carryover of any related allowance for loan losses. To the extent that the credit quality of loans deteriorates subsequent to acquisition, an allowance for loan loss is established through a charge to the provision for credit losses. Our allowance for loan loss on our acquired loans recognized subsequent to acquisition was $2.7 million and $1.9 million at September 30, 2012 and December 31, 2011, respectively.

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 York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Capital markets(1)		Total loans and leases
September 30, 2012
Commercial:
Real estate	$	3,491,605	$	635,347	$	1,253,092	$	1,455,927	$	—	$	6,835,971
Business	2,272,732		708,910		542,588		636,484		521,440		4,682,154
Total commercial	5,764,337		1,344,257		1,795,680		2,092,411		521,440		11,518,125
Consumer:
Residential real estate	1,346,549		69,856		275,504		2,178,847		—		3,870,756
Home equity	1,319,205		193,999		587,334		560,891		—		2,661,429
Other consumer	862,256		56,731		43,505		93,724		—		1,056,216
Total loans and leases	$	9,292,347	$	1,664,843	$	2,702,023	$	4,925,873	$	521,440	$	19,106,526
December 31, 2011
Commercial:
Real estate	$	3,204,416	$	544,326	$	1,066,456	$	1,429,183	$	—	$	6,244,381
Business	1,826,347		684,291		414,829		464,607		381,575		3,771,649
Total commercial	5,030,763		1,228,617		1,481,285		1,893,790		381,575		10,016,030
Consumer:
Residential real estate	1,225,529		55,410		292,573		2,438,755		—		4,012,267
Home equity	807,898		162,925		608,670		586,495		—		2,165,988
Other consumer	164,602		56,015		45,627		12,054		—		278,298
Total loans and leases	$	7,228,792	$	1,502,967	$	2,428,155	$	4,931,094	$	381,575	$	16,472,583

⁽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.

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. Our enhanced specialty offerings in equipment financing, healthcare, and syndications continue to provide additional opportunities to enhance our relationships with our commercial customer base. Overall, our commercial pipelines at the end of the third quarter of 2012 continue to be robust, particularly in our newer markets.

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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 periods indicated (amounts in millions):

	September 30, 2012			December 31, 2011
	Amount		Count	Amount		Count
Commercial real estate loans by balance size(1)
Greater than or equal to $20 million	$	385	15	$	248	9
$10 million to $20 million	1,088		79	933		67
$5 million to $10 million	1,131		161	1,025		147
$1 million to $5 million	2,477		1,157	2,364		1,105
Less than $1 million(2)	1,755		7,567	1,674		7,137
Total commercial real estate loans	$	6,836	8,979	$	6,244	8,465
Commercial business loans by size(1)
Greater than or equal to $20 million	$	273	10	$	224	8
$10 million to $20 million	771		61	462		34
$5 million to $10 million	861		123	743		105
$1 million to $5 million	1,379		615	1,151		518
Less than $1 million(2)	1,398		23,566	1,192		19,969
Total commercial business loans	$	4,682	24,375	$	3,772	20,634

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

⁽²⁾  Caption includes net deferred fees and costs and other adjustments

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In line with our commercial real estate portfolio composition at December 31, 2011, 70% of our commercial real estate loans are non owner occupied at September 30, 2012. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type at the date indicated (in thousands):

	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Other(1)		Total
September 30, 2012
Non owner occupied commercial real estate loans:
Construction, acquisition and development	$	367,664	$	38,211	$	99,348	$	92,072	$	92,890	$	690,185
Multifamily and apartments	944,021		58,169		140,378		215,469		72,731		1,430,768
Office and professional space	496,589		63,528		83,321		291,388		76,000		1,010,826
Retail	331,134		35,396		123,347		222,496		95,460		807,833
Warehouse and industrial	130,942		25,246		47,575		90,680		18,138		312,581
Other	265,351		21,205		133,624		74,738		24,430		519,348
Total non owner occupied commercial real estate loans	$	2,535,701	$	241,755	$	627,593	$	986,843	$	379,649	$	4,771,541
December 31, 2011
Non owner occupied commercial real estate loans:
Construction, acquisition and development	$	341,176	$	36,326	$	59,691	$	61,674	$	61,595	$	560,462
Multifamily and apartments	868,076		64,095		160,276		177,320		40,800		1,310,567
Office and professional space	487,517		48,562		84,320		320,638		78,084		1,019,121
Retail	325,909		41,613		120,088		221,610		86,080		795,300
Warehouse and industrial	138,940		40,413		43,249		110,067		19,955		352,624
Other	211,734		18,035		69,490		69,250		23,595		392,104
Total non owner occupied commercial real estate loans	$	2,373,352	$	249,044	$	537,114	$	960,559	$	310,109	$	4,430,178

⁽¹⁾  Primarily consists of loans located in states bordering our footprint.

Investment Securities Portfolio

In anticipation of receiving cash from the HSBC Branch Acquisition, we purchased approximately $2.3 billion of securities during 2012, in addition to the $1.2 billion of securities we purchased during 2011. The purchases comprised of commercial mortgage-backed securities, agency residential mortgage-backed securities, asset-backed securities, collateralized loan obligations, corporate bonds, and U.S. Treasury bonds. The average yield of the $3.5 billion in purchases was approximately 3.35%. The purchases were temporarily funded with a combination of short-term FHLB advances, repurchase agreements, and brokered certificates of deposit.

Interest rates, after ending the second quarter of 2012 at near historical lows, remained volatile during the third quarter. After a brief rise during the middle of the quarter, rates trended downward by the end of the third quarter of 2012. In September 2012, the FOMC stated they intend to maintain the exceptionally low levels for federal funds rate at least through mid-2015. Such an accommodative stance of monetary policy was designed to continue support to the labor markets and overall economy. The FOMC also announced additional purchases of long-dated agency mortgage-backed securities at the pace of $40 billion each month for an indefinite period which was designed to move longer-term interest rates lower. Additionally, the FOMC decided to continue its program known as “Operation Twist” through the end of the year. Our September 30, 2012 expectations of future prepayment speeds in our collateralized mortgage obligation and mortgage-backed securities portfolios reflected the expectation of the prolonged lower interest rate environment and that the pace of the mortgage prepayment cycle will likely persist for a longer period, and therefore will impact premium amortization on our collateralized mortgage obligation and mortgage-backed securities portfolios in the future.

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With the goal of de-levering and de-risking our balance sheet, and subsequent to the HSBC Branch Acquisition, during the second quarter of 2012 we transferred certain mortgage-backed securities with a carrying value of $861 million from our held to maturity portfolio to our available for sale portfolio. We then sold these and other mortgage-backed securities in our available for sale portfolio with a total carrying value of $3.1 billion for a total pre-tax gain of $16 million. The securities sold were selected based on an assessment of their potential prepayment risk and did not include any that were purchased in conjunction with the HSBC Branch Acquisition. The proceeds from these sales were used to pay down short-term borrowings.

The sale of the securities reduces volatility in our net interest margin by reducing the impact of prepayments on the mortgage-backed securities portfolio yield. In addition, the sale of these securities with the greatest levels of prepayment risk coupled with the pay down of short-term borrowings improved our asset sensitivity by 200 to 300 basis points, allowing us to be better positioned to benefit when interest rates rise while at the same time managing the near term volatility created by the current sustained low interest rate environment. The lower remaining premiums, which decreased to $122 million, or 2.3% of the mortgage-backed securities portfolio at September 30, 2012, from $232 million, or 2.8% of the portfolio at December 31, 2011, and collateral characteristics of our residual mortgage-backed securities portfolio reduce yield volatility. In addition, the remaining investment securities portfolio remains highly liquid, highly rated and well diversified.

A change in our expectations regarding the expected magnitude and duration of a lower interest rate environment could have a material impact on our net interest income in both the period of change, attributable to any retroactive adjustment that would be required to maintain a constant effective yield, and in subsequent periods attributable to lower prospective yields on our investment securities. Additionally, principal repayments on our securities would be reinvested at lower rates.

Our residential mortgage-backed securities portfolio offers some protection from higher prepayment rates and lower cash flow volatility in this low interest rate environment. Within our CMOs, we own a combination of first pay and second pay sequential securities as well as planned amortization class (“PAC”) securities. These types of bonds provide us with more stable and consistent cash flows in various interest rate environments. Second pay sequential securities are protected from prepayments by the first pay tranche. A PAC security is also protected with a principal payment rate that is stabilized by support tranches in the structure. These support tranches, which we do not own, absorb excess prepayments when rates fall, and receive fewer prepayments to prevent extension of average life as rates rise. However, as prepayments reduce the principal of the support security, the PAC security is less protected from prepayment fluctuations.

The sale of the residential mortgage-backed investment securities reduced our holdings in such mortgage-backed securities to 49% at September 30, 2012 from 73% at December 31, 2011. At each of September 30, 2012 and December 31, 2011, 98% of our residential mortgage-backed securities in our available for sale portfolio 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 currently 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.

As a result of the sale of residential mortgage-backed securities and purchases of new investment securities associated with the HSBC Branch Acquisition, our investment portfolio is now more diversified with a higher percentage of product types such as commercial mortgage-backed securities, asset-backed securities, collateralized loan obligations, and corporate bonds. In addition to the purchases made in these security types, we also plan to grow our positions in these security types throughout 2012.

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The fair value of our total investment securities portfolio was comprised of the following at the dates indicated (amounts in thousands):

	Fair value		% of total portfolio
September 30, 2012
States and political subdivisions	$	635,701	5.3	%
U.S. Treasury	20,805		0.2
U.S. government agencies and enterprises	424,349		3.5
Corporate debt and trust preferred securities	784,772		6.5
Residential mortgage-backed securities	5,925,876		49.2
Commercial mortgage-backed securities	2,082,266		17.3
Collateralized loan obligations	1,270,581		10.5
Asset-backed securities	868,716		7.2
Other	31,423		0.3
Total investment securities	$	12,044,489	100.0	%
December 31, 2011
States and political subdivisions	$	703,178	5.8	%
U.S. Treasury	20,643		0.2
U.S. government agencies and enterprises	395,573		3.3
Corporate debt and trust preferred securities	361,042		3.0
Residential mortgage-backed securities	8,808,292		72.8
Commercial mortgage-backed securities	1,529,310		12.6
Collateralized loan obligations	157,999		1.3
Asset-backed securities	93,813		0.8
Other	31,169		0.2
Total investment securities	$	12,101,019	100.0	%

The duration of our investment securities portfolio decreased to 2.9 years at September 30, 2012 from 4.1 years at December 31, 2011. At September 30, 2012, the pre-tax net unrealized gains on our available for sale investment securities increased to $331 million from $170 million at December 31, 2011. The net unrealized gain represents the difference between the 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.

Our investment in FHLB stock consists of $95 million, $24 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, 2012 and of $101 million, $27 million, and $121 million of FHLB of New York common stock, FHLB of Pittsburgh common stock, and FHLB of Boston, respectively, at December 31, 2011. Our investment in FRB stock amounted to $134 million and $109 million at September 30, 2012 and December 31, 2011, respectively.

Deposits

Excluding the $9.9 billion in deposits (at fair value) acquired in the HSBC Branch Acquisition, our total deposits decreased$1.6 billion from December 31, 2011. At September 30, 2012, core deposits increased to 85% of total deposits from 80% at December 31, 2011, reflecting the composition of the deposits we acquired from HSBC. The decrease in balances, especially money market deposit accounts, was primarily driven by our interest rate and treasury management strategies as we continue to move down deposit pricing and reduce excess liquidity. Our strategic focus on customer acquisition and increasing consumer and business checking deposit balances resulted in higher interest-bearing checking account balances. During this quarter, the number of new checking account openings increased 10% from the second quarter of 2012 and was up 36% over the prior year. Growth was strong in all markets but was most notable in New York where the increased branch density and positive brand positioning continued to drive new customer acquisitions.

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

	September 30, 2012				December 31, 2011
	Amount		Percent		Amount		Percent		Deposits acquired (1)		Increase (decrease) excluding HSBC acquired deposits
Core deposits:
Savings	$	3,941,528	14.2	%	$	2,621,016	13.5	%	$	1,644,020	$	(323,508	)
Interest-bearing checking	4,090,322		14.8		2,259,576		11.6		1,449,352		381,394
Money market deposits	10,801,280		39.0		7,220,902		37.3		4,478,240		(897,862		)
Noninterest-bearing	4,658,374		16.8		3,335,356		17.2		1,469,309		(146,291		)
Total core deposits	23,491,504		84.8		15,436,850		79.6		9,040,921		(986,267		)
Certificates	4,206,192		15.2		3,968,265		20.4		813,668		(575,741		)
Total deposits	$	27,697,696	100.0	%	$	19,405,115	100.0	%	$	9,854,589	$	(1,562,008	)

⁽¹⁾  Excludes $0.5 billion municipal money market deposits that were subject to a price concession.

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

	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Total deposits
September 30, 2012
Core deposits:
Savings	$	2,400,076	$	164,181	$	226,996	$	1,150,275	$	3,941,528
Interest-bearing checking	2,459,064		530,954		615,042		485,262		4,090,322
Money market deposits	7,141,264		1,213,324		1,039,642		1,407,050		10,801,280
Noninterest-bearing	2,753,450		702,387		531,083		671,454		4,658,374
Total core deposits	14,753,854		2,610,846		2,412,763		3,714,041		23,491,504
Certificates	2,063,455		594,901		520,735		1,027,101		4,206,192
Total deposits	$	16,817,309	$	3,205,747	$	2,933,498	$	4,741,142	$	27,697,696
December 31, 2011
Core deposits:
Savings	$	862,354	$	136,984	$	238,766	$	1,382,912	$	2,621,016
Interest-bearing checking	743,536		486,150		565,212		464,678		2,259,576
Money market deposits	3,372,154		1,295,675		1,158,837		1,394,236		7,220,902
Noninterest-bearing	1,417,374		699,234		523,656		695,092		3,335,356
Total core deposits	6,395,418		2,618,043		2,486,471		3,936,918		15,436,850
Certificates	1,105,717		839,983		709,810		1,312,755		3,968,265
Total deposits	$	7,501,135	$	3,458,026	$	3,196,281	$	5,249,673	$	19,405,115

Borrowings

Borrowings decreased to $2.7 billion at September 30, 2012 from $8.1 billion at December 31, 2011. Short-term borrowings decreased by $213 million from December 31, 2011 to $2.0 billion, and long-term borrowings decreased by $5.2 billion during that same period to $732 million. As noted above under Investment Securities, during the quarter ended June 30, 2012, we sold certain mortgage-backed securities and used the $3.1 billion in proceeds to repay short-term borrowings. This action improves our funding profile and our capital ratios. In addition, upon completion of the HSBC Branch Acquisition, we paid down wholesale borrowings, including those used to purchase investment securities in advance of this transaction. At September 30, 2012, wholesale borrowings totaled $1.4 billion.

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Capital

During the first nine months of 2012, our stockholders’ equity increased to $4.9 billion at September 30, 2012, compared to $4.8 billion at December 31, 2011. Increases to stockholders' equity resulting from our net income of $107 million and $99 million of unrealized gains, net of taxes, on our investment securities available for sale, were partially offset by $84 million, or $0.24 per share, in common stock dividends and $20 million in preferred stock dividends.

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, 2012 are presented in the following table (amounts in thousands):

	Actual				Minimum amount to be well-capitalized
	Amount		Ratio		Amount		Ratio
First Niagara Financial Group, Inc.:
Leverage ratio	$	2,225,121	6.83	%	$	1,628,932	5.00	%
Tier 1 risk-based capital	2,225,121		9.51		1,403,862		6.00
Total risk-based capital	2,684,432		11.48		2,338,355		10.00
First Niagara Bank, N.A.:
Leverage ratio	$	2,383,316	7.32	%	$	1,627,948	5.00	%
Tier 1 risk-based capital	2,383,316		10.19		1,403,326		6.00
Total risk-based capital	2,544,847		10.88		2,339,014		10.00

As of September 30, 2012, 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.). At September 30, 2012, the capital ratios reflect a $65 million capital contribution the Company made to the Bank as well as the impact of the HSBC Branch Acquisition offset by the benefits of our investment securities portfolio repositioning whereby we sold mortgage-backed securities with a carrying value of $3.1 billion and used the proceeds to pay down short-term borrowings.

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 some of our borrowers to repay their loans according to their contractual terms. This inability to repay could result in higher levels of nonperforming assets and credit losses, which could potentially reduce our earnings.

A detailed description of our methodology for calculating our allowance for loan losses is included in “Critical Accounting Policies and Estimates.”

Allowance for Loan Losses

The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. We place non-credit card originated 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. Credit cards are not placed on nonaccrual status until 180 days past due, at which time they are charged-off.

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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 nine 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 5, special mention loans are graded 6, substandard loans are graded 7, doubtful loans are graded 8 and loss loans (which are fully charged off) are graded 9. 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 $2 million) or by a Senior Credit Manager (for such loans between $200 thousand and $2 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 between $300 thousand and $2 million by a Senior Credit Manager and by the Classified Loan Review Committee for such loans greater than $2 million. Loans below these thresholds are reviewed by a loan officer on a quarterly basis ensuring that loan gradings are appropriate.

Updated valuations are obtained periodically in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are completed within 90 days of the downgrade. On an ongoing basis, real estate collateral supporting substandard loans with an outstanding balance greater than $500 thousand is required to have an appraisal or evaluation performed at least every 18 months for general commercial properties and at least every 12 months for land and acquisition and development loans. Real estate collateral supporting substandard loans with an outstanding balance equal to or less than $500 thousand is required to have an appraisal or evaluation performed at least every 24 months for general commercial properties and at least every 18 months for land and acquisition and development loans. However, an appraisal or evaluation 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 an Appraisal Institute designated MAI appraiser on staff available 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 in-house MAI appraiser is available for consultation regarding the need for new valuations.

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

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impaired, related allowance for loan losses.

The following table details our allocation of our allowance for loan losses by loan category at the dates indicated (amounts in thousands):

	September 30, 2012					December 31, 2011
	Amount of allowance for loan losses			Percent of loans to total loans		Amount of allowance for loan losses			Percent of loans to total loans
Commercial:
Real estate and construction	$	92,618		35.8	%	$	50,007		37.9	%
Business	36,936			24.5		57,348			22.9
Total commercial	129,554			60.3		107,355			60.8
Consumer:
Residential real estate	4,773			20.3		4,101			24.4
Home equity	3,760			13.9		4,374			13.1
Other consumer	11,846			5.5		4,270			1.7
Total	$	149,933		100.0	%	$	120,100		100.0	%
Allowance for loan losses to total loans	0.78		%			0.73		%

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The following table presents the activity in our allowance for originated loan losses and related recorded investment of the associated loans by portfolio segment for the periods indicated (in thousands):

	Commercial						Consumer
	Business			Real estate			Residential			Home equity			Other consumer			Total
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	57,348		$	50,007		$	4,101		$	4,374		$	2,362		$	118,192
Provision for loan losses	56,634			(8,021		)	2,409			2,604			8,669			62,295
Charge-offs	(23,131		)	(5,518		)	(1,965		)	(3,508		)	(3,035		)	(37,157		)
Recoveries	1,954			556			294			411			1,171			4,386
Allowance related to loans sold	(187		)	(88		)	(66		)	(121		)	(45		)	(507		)
Balance at end of period	$	92,618		$	36,936		$	4,773		$	3,760		$	9,122		$	147,209
Nine months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	42,034		$	46,967		$	1,754		$	1,859		$	2,740		$	95,354
Provision for loan losses	25,434			8,653			2,483			3,642			91			40,303
Charge-offs	(11,737		)	(11,758		)	(1,184		)	(2,019		)	(1,955		)	(28,653		)
Recoveries	2,592			1,459			516			186			992			5,745
Balance at end of period	$	58,323		$	45,321		$	3,569		$	3,668		$	1,868		$	112,749
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	75,708		$	44,927		$	5,076		$	4,971		$	4,514		$	135,196
Provision for loan losses	23,147			(6,536		)	107			(771		)	5,446			21,393
Charge-offs	(6,500		)	(1,508		)	(410		)	(545		)	(1,179		)	(10,142		)
Recoveries	424			123			14			145			368			1,074
Allowance related to loans sold	(161		)	(70		)	(14		)	(40		)	(27		)	(312		)
Balance at end of period	$	92,618		$	36,936		$	4,773		$	3,760		$	9,122		$	147,209
Three months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	56,402		$	43,502		$	2,643		$	2,661		$	1,820		$	107,028
Provision for loan losses	4,044			7,399			755			1,230			418			13,846
Charge-offs	(2,689		)	(5,641		)	(105		)	(348		)	(633		)	(9,416		)
Recoveries	566			61			276			125			263			1,291
Balance at end of period	$	58,323		$	45,321		$	3,569		$	3,668		$	1,868		$	112,749

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The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans of our acquired loan portfolio for the periods indicated (in thousands):

	Commercial						Consumer
	Business			Real estate			Residential		Home equity		Other consumer			Total
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	1,908		$	1,908
Provision for loan losses	—			5,208			—		—		2,000			7,208
Charge-offs	—			(5,467		)	—		—		(1,359		)	(6,826		)
Recoveries	—			259			—		—		175			434
Balance at end of period	$	—		$	—		$	—	$	—	$	2,724		$	2,724
Nine months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses	346			536			—		—		—			882
Charge-offs	(346		)	(536		)	—		—		—			(882		)
Recoveries	—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	3,320		$	3,320
Provision for loan losses	—			407			—		—		—			407
Charge-offs	—			(468		)	—		—		(658		)	(1,126		)
Recoveries	—			61			—		—		62			123
Balance at end of period	$	—		$	—		$	—	$	—	$	2,724		$	2,724
Three months ended September 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses	—			—			—		—		—			—
Charge-offs	—			—			—		—		—			—
Recoveries	—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—

As of September 30, 2012, we had a liability for unfunded loan commitments of $11 million. For the nine months ended September 30, 2012, we recognized a provision for credit loss related to our unfunded loan commitments of $0.8 million. We acquired an additional $3.0 billion in unfunded loan commitments as part of our HSBC Branch Acquisition, and consequently increased our liability by $4 million to recognize probable losses inherent in the commitments assumed in the HSBC Branch Acquisition. Our total unfunded commitments amounted to $8.9 billion at September 30, 2012.

Our net charge-offs of $39 million in 2012 were $15 millionhigher than our net charge-offs of $24 million in 2011. The period over period increases were driven primarily by an $8 million charge-off of one large commercial loan based in Upstate New York and $4 million of charge-offs on two commercial loans acquired in the Harleysville acquisition. Total net charge-offs for the third quarter of 2012 represented 0.21% of average total loans compared with 0.36% of average total loans in the second quarter of 2012. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.30% for the third quarter of 2012 compared to 0.55% for second quarter of 2012.

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The following table details our net charge-offs by loan category for the periods indicated (amounts in thousands):

	Nine months ended
	September 30, 2012				September 30, 2011
	Net charge-offs		Percent of average loans		Net charge-offs		Percent of average loans
Commercial:
Real estate	$	10,169	0.21	%	$	10,373	0.25	%
Business	21,178		0.66		9,953		0.43
Total commercial	31,347		0.39		20,326		0.32
Consumer:
Residential real estate	1,671		0.06		668		0.03
Home equity	3,098		0.17		1,833		0.13
Other consumer	3,047		0.70		963		0.47
Total	$	39,163	0.29	%	$	23,790	0.23	%

Our nonaccruing loans were $142 million at September 30, 2012 compared to $129 million at June 30, 2012 and $90 million at December 31, 2011. The increase from December 31, 2011 was largely due to several large commercial business loans in our Upstate New York footprint. These relationships have been adequately reserved for at quarter end. Additionally, the Interagency Supervisory Guidance related to junior lien home equity loans resulted in $7 million of additional nonaccrual loans. Also contributing to the increase is $28 million of acquired lines of credit. These increases were offset by the removal of $33 million due to charge-offs, $20 million returned to accrual status, and $28 million due to transfers to real estate owned or paydowns. Nonperforming loans comprised 0.75% of total loans at September 30, 2012 compared to 0.55% at December 31, 2011. Excluding our acquired loans, our nonaccruing loans were 0.93% of originated loans at September 30, 2012 compared to 0.91% of originated loans at December 31, 2011.

The composition of our nonaccruing loans and total nonperforming assets consisted of the following at the dates indicated (amounts in thousands):

	September 30,			December 31,
	2012(1)			2011
Nonaccruing loans:
Commercial:
Real estate	$	47,769		$	43,119
Business	48,694			20,173
Total commercial	96,463			63,292
Consumer:
Residential real estate	21,377			18,668
Home equity	22,789			6,790
Other consumer	1,751			1,048
Total nonaccruing loans	142,380			89,798
Real estate owned	9,669			4,482
Total nonperforming assets (2)	$	152,049		$	94,280
Loans 90 days past due and still accruing interest (3)	$	145,323		$	143,237
Total nonperforming assets as a percentage of total assets	0.42		%	0.29		%
Total nonaccruing loans as a percentage of total loans	0.75		%	0.55		%
Total nonaccruing originated loans as a percentage of total originated loans	0.93		%	0.91		%
Allowance for loan losses to nonaccruing loans	105.3		%	133.7		%

⁽¹⁾  Includes $28 million of nonperforming acquired lines of credit, primarily in home equity. The remaining credit discount, recorded at acquisition is adequate to cover losses on these balances.

⁽²⁾  Nonperforming assets do not include $56 million and $44 million of performing renegotiated loans that are accruing interest at September 30, 2012 and December 31, 2011, respectively.

⁽³⁾  Includes acquired loans that were originally recorded at fair value upon acquisition, credit card loans, or loans that have matured and are in the process of collection.

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The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. Early stage delinquencies of $50 million at September 30, 2012 in our originated loan portfolio increased from $36 million at December 31, 2011 of loans that are 30 to 89 days past due. Our acquired loans that were 30 to 89 days past due increased $47 million from $75 million as of December 31, 2011 to $122 million as of September 30, 2012, reflective of loans acquired from the HSBC Branch Acquisition.

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

	Percent of loans 30-59 days past due				Percent of loans 60-89 days past due				Percent of loans 90 or more days past due				Percent of loans past due
	September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011		September 30, 2012		December 31, 2011
Originated loans
Commercial:
Real estate	0.2	%	0.2	%	0.1	%	—	%	0.7	%	0.6	%	1.0	%	0.8	%
Business	0.4		0.2		—		—		0.6		0.4		1.0		0.5
Total commercial	0.3		0.2		0.1		—		0.6		0.5		1.0		0.7
Consumer:
Residential real estate	0.4		0.6		0.1		0.3		1.0		0.9		1.5		1.8
Home equity	0.2		0.2		0.1		0.2		0.5		0.6		0.9		1.0
Other consumer	0.4		0.9		0.1		0.4		0.2		0.5		0.6		1.8
Total consumer	0.3		0.5		0.1		0.3		0.7		0.8		1.1		1.5
Total	0.3	%	0.3	%	0.1	%	0.1	%	0.7	%	0.6	%	1.1	%	0.9	%
Acquired loans
Commercial:
Real estate	0.9	%	1.1	%	1.7	%	0.1	%	2.7	%	2.1	%	5.3	%	3.2	%
Business	1.5		0.6		0.2		0.1		1.4		1.1		3.0		1.8
Total commercial	1.1		0.9		1.3		0.1		2.3		1.8		4.7		2.8
Consumer:
Residential real estate	0.9		0.8		0.5		0.4		3.0		2.8		4.4		4.0
Home equity	0.7		0.7		0.4		0.4		1.3		1.8		2.4		2.9
Other consumer	1.7		1.6		1.0		1.0		1.7		2.0		4.4		4.7
Total consumer	0.9		0.8		0.5		0.4		2.3		2.5		3.6		3.7
Total	1.0	%	0.9	%	0.8	%	0.3	%	2.3	%	2.2	%	4.1	%	3.3	%

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Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. Overall levels of classified and criticized loans including our pass watch category increased slightly over the prior quarter.

The following table presents a breakout of our commercial loans by loan grade at the dates indicated:

	Percent of Total
	September 30, 2012		December 31, 2011
Originated loans:
Pass	91.6	%	90.4	%
Pass watch(1)	2.6		1.0
Total pass	94.2	%	91.4	%
Criticized:(2)
Accrual	4.8	%	7.7	%
Nonaccrual	1.0		0.9
Total criticized	5.8		8.6
Total	100.0	%	100.0	%
Acquired loans:
Pass	82.5	%	85.5	%
Pass watch(1)	4.9		0.3
Total pass	87.4	%	85.8	%
Criticized:(2)
Accrual	12.2	%	14.2	%
Nonaccrual	0.4		—
Total criticized	12.6		14.2
Total	100.0	%	100.0	%

⁽¹⁾  Watch-list loans are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.

⁽²⁾  Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2011.

Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that debtors will repay their debts. We obtain the scores from a nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance.

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The composition of our consumer portfolio segment is presented in the table below at the dates indicated:

	Percent of Total
	September 30, 2012		December 31, 2011
Originated loans by refreshed FICO score:
Over 700	75.6	%	76.5	%
660-700	12.4		11.0
620-660	5.7		4.9
580-620	2.6		2.4
Less than 580	3.1		3.5
No score(1)	0.6		1.7
Total	100.0	%	100.0	%
Acquired loans by refreshed FICO score:
Over 700	68.5	%	70.4	%
660-700	10.4		8.1
620-660	5.5		4.4
580-620	3.3		2.6
Less than 580	5.1		4.6
No score(1)	7.2		9.9
Total	100.0	%	100.0	%

⁽¹⁾  Primarily includes loans that are serviced by others for which refreshed FICO scores were not available as of the indicated date.

We maintain an allowance for loan losses for our originated portfolio segment, which is concentrated in the Upstate New York region and includes to a lesser degree, loan balances from organic growth in our acquired markets of Eastern Pennsylvania, Western Pennsylvania, Connecticut and Western Massachusetts. Despite the challenging market conditions, our asset quality continues to perform well when compared to industry averages.

As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark that represented expected future losses in our acquired loan portfolio. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, was $212 million and $205 million as of September 30, 2012 and December 31, 2011, respectively.

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The following table provides information about our acquired loan portfolio by acquisition as of the dates indicated or for the related quarters (amounts in thousands):

	HSBC			NewAlliance			Harleysville			National City			Total
September 30, 2012
Provision for loan losses	$	—		$	—		$	407		$	—		407
Net charge-offs	—			68			607			328			1,003
Net charge-offs to average loans	—		%	—		%	0.04		%	0.08		%	0.01		%
Nonperforming loans	$	1,606		$	8,490		$	15,330		$	2,767		$	28,193
Total loans (1)	1,448,713			3,775,613			1,454,361			407,152			7,085,839
Allowance for acquired loan losses	100			132			1,580			912			2,724
Credit related discount (2)	43,779			113,369			41,548			13,185			211,881
Credit related discount as percentage of loans	3.02		%	3.00		%	2.86		%	3.24		%	2.99		%
Pass watch (3)	$	30,824		$	84,004		$	24,334		$	3,882		$	143,044
Criticized loans (4)	40,816			204,700			183,736			35,613			464,865
Classified loans (5)	28,182			141,849			151,973			22,040			344,044
Greater than 90 days past due and accruing (6)	8,568			70,885			58,397			3,146			140,996
December 31, 2011
Provision for loan losses	$	—		$	—		$	2,347		$	—		$	2,347
Net charge-offs	—			—			439			—			439
Net charge-offs to average loans	—		%	—		%	0.10		%	—		%	0.04		%
Nonperforming loans	$	—		$	—		$	—		$	—		$	—
Total loans (1)	—			4,579,585			1,712,147			509,957			6,801,689
Allowance for acquired loan losses	—			—			1,908			—			1,908
Credit related discount (2)	$	—		$	142,601		$	44,829		$	17,681		$	205,111
Credit related discount as percentage of loans	—		%	3.11		%	2.62		%	3.47		%	3.02		%
Pass watch (3)	$	—		$	—		$	9,736		$	—		$	9,736
Criticized loans (4)	—			251,647			222,978			51,050			525,675
Classified loans (5)	—			184,674			163,604			28,666			376,944
Greater than 90 days past due and accruing	—			77,814			57,582			7,841			143,237

⁽¹⁾  Represents carrying value of acquired loans plus the principal not expected to be collected.

⁽²⁾  Represents principal on acquired loans not expected to be collected.

⁽³⁾  Watch-list loans are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.

⁽⁴⁾  Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2011.

⁽⁵⁾  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, 2011.

⁽⁶⁾  Includes acquired loans that were originally recorded at fair value upon acquisition, credit card loans, or loans that have matured and are in the process of collection. Acquired 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 net of the allowance for acquired loan losses. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income. In connection with the HSBC Branch Acquisition, we changed our nonaccrual policy related to credit cards from 90 days to 180 days past due, at which time the balance is charged-off. This policy change did not have a significant impact on our interest income or allowance for credit losses.

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The following table provides information about our originated loan portfolio as of the dates indicated or for the related quarters (dollars in thousands):

	September 30, 2012			December 31, 2011
Provision for loan losses	$	21,393		$	10,839
Net charge-offs	$	9,068		$	5,396
Net charge-offs to average loans	0.30		%	0.22		%
Nonperforming loans	$	114,187		$	89,798
Nonperforming loans to total loans	0.93		%	0.91		%
Total loans	$	12,232,568		$	9,876,005
Allowance for originated loan losses	$	147,209		$	118,192
Allowance for originated loan losses to total originated loans	1.20		%	1.20		%
Pass watch(1)	$	223,815		$	71,559
Criticized loans(2)	525,805			618,547
Classified loans(3)	348,961			371,431
Greater than 90 days past due and accruing (4)	4,327			—

⁽¹⁾  Watch-list loans are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.

⁽²⁾  Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2011.

⁽³⁾  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, 2011.

⁽⁴⁾  Includes credit card loans and loans that have matured and are in the process of collection. In connection with the HSBC Branch Acquisition, we changed our nonaccrual policy related to credit cards from 90 days to 180 days past due, at which time the balance is charged-off. This policy change did not have a significant impact on our interest income or allowance for credit losses.

Our total allowance for loan losses related to both our originated and acquired loans increased$30 million from December 31, 2011 to $150 million at September 30, 2012 as our total provision for credit losses of $70 million exceeded our total net charge-offs of $39 million. The ratio of our total allowance for loan losses to total loans of 0.78% at September 30, 2012 compared to 0.73% as of December 31, 2011. Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.20% September 30, 2012 and remained consistent with the measure at December 31, 2011.

Of the $2.7 billion and $2.2 billion home equity portfolio at September 30, 2012 and December 31, 2011, respectively, $0.9 billion were in a first lien position at each period end. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that was in a second lien position as of September 30, 2012 and December 31, 2011. The Interagency Supervisory Guidance issued during the first quarter of 2012 related to junior lien home equity loans resulted in $7 million of additional nonaccrual loans at September 30, 2012, but does not have a significant impact on our allowance for loan losses.

As part of our credit risk management, we enter into modification agreements with troubled borrowers in order to mitigate our credit losses. Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) increased to $86 million at September 30, 2012 from $77 million at December 31, 2011. The modifications made to these restructured loans typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, or a rate reduction. 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. Our aggregate recorded investment in TDRs does not include modifications to acquired loans that are accounted for as part of a pool under ASC 310-30. 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 $56 million and $44 million at September 30, 2012 and December 31, 2011, 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

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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, 2012, our liability for estimated repurchase obligations on our serviced loan portfolio was $9 million compared to $8 million at December 31, 2011 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, 2012		December 31, 2011
30 to 59 days past due	0.34	%	0.42	%
60 to 89 days past due	0.15		0.17
Greater than 90 days past due	0.74		0.81
	1.23	%	1.40	%

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Investment Securities Credit Risk

In the discussion of our investment portfolio, we have included certain credit rating information because the information is one indication 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.

The following table presents the latest available underlying investment ratings of the fair value of our investment securities portfolio at the dates indicated (in thousands):

	Amortized		Fair		Average credit rating of fair value amount
	cost		value		AA or better		A		BBB		BB or less		Not rated
September 30, 2012
Securities backed by U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises	$	6,100,435	$	6,300,554	$	6,295,721	$	—	$	—	$	—	$	4,833
Commercial mortgage-backed securities	1,962,679		2,082,266		1,431,005		502,916		148,345		—		—
Collateralized loan obligations	1,239,769		1,270,581		958,589		273,570		38,422		—		—
States and political subdivisions	611,758		635,701		473,572		130,261		23,759		295		7,814
Asset-backed securities	855,032		868,716		601,000		267,616		100		—		—
Corporate debt and trust preferred	768,002		784,772		—		238,783		146,222		399,767		—
Other	99,506		101,899		21,757		13,098		6,854		25,437		34,753
Total investment securities	$	11,637,181	$	12,044,489	$	9,781,644	$	1,426,244	$	363,702	$	425,499	$	47,400
December 31, 2011
Securities backed by U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises	$	8,903,996	$	9,130,714	$	9,120,953	$	—	$	—	$	—	$	9,761
Commercial mortgage-backed securities	1,504,241		1,529,310		845,058		575,948		108,304		—		—
Collateralized loan obligations	158,091		157,999		118,584		33,495		5,920		—		—
States and political subdivisions	681,713		703,178		507,496		130,464		55,010		591		9,617
Asset-backed securities	96,451		93,813		71,157		22,547		109		—		—
Corporate debt and trust preferred	378,961		361,042		37,813		256,383		55,918		9,928		1,000
Other	124,178		124,963		44,276		6,945		9,227		29,352		35,163
Total investment securities	$	11,847,631	$	12,101,019	$	10,745,337	$	1,025,782	$	234,488	$	39,871	$	55,541

The weighted average credit rating of our portfolio was AA at each of September 30, 2012 and December 31, 2011.

We have assessed our securities that were in an unrealized loss position at September 30, 2012 and December 31, 2011 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, projected collateral losses, projected cash flows and credit enhancement. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings. We do not intend to sell these securities in an unrealized loss position 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.

As of September 30, 2012, the unrealized losses on our corporate debt securities were due to a general widening of credit spreads for the types of these securities, causing their fair values to decrease. As of September 30, 2012, the unrealized losses on our collateralized loan obligations were caused by increasing volatility resulting from the European debt crisis, proposed financial regulation, political tensions, and weak market data leading to wider spreads. We have assessed all securities in an unrealized loss position at September 30, 2012 and December 31, 2011 and determined that the declines in fair value below amortized cost were temporary.

As of September 30, 2012, we have no direct exposure to the debt of troubled European countries.

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Liquidity Risk

Liquidity risk is the risk to earnings or capital arising from our inability to fund 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 under both normal and stressed operating conditions 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,

• Provide for repayments of deposits and borrowings, and

• To fulfill contract obligations.

Factors or conditions that could affect our liquidity management objectives include profitability 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.

Consolidated liquidity

Sources of liquidity

We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest repayments on our investment and loan portfolios, short and long-term borrowings, as well as short-term federal funds, internally generated capital, and other credit facilities. The primary source of our non-deposit borrowings are FHLB advances, of which we had $1.4 billion outstanding at September 30, 2012.

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

We have a total borrowing capacity of up to $7.8 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 $6.4 billion was available as of September 30, 2012.

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 consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. 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. Our outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans increased to approximately $8.9 billion at September 30, 2012 from $4.9 billion at December 31, 2011, primarily due to lines of credit acquired in the HSBC Branch Acquisition.

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. Indicative of our strategic focus on

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commercial lending and relationship based home equity lending, at September 30, 2012 and December 31, 2011 our unused commercial lines of credit amounted to $3.3 billion and $2.8 billion, respectively, and our unused home equity and other consumer lines of credit increased to $4.3 billion at September 30, 2012 from $1.5 billion at December 31, 2011, due primarily to consumer credit cards acquired in the HSBC Branch Acquisition. Our commercial business lines of credit generally possess an expiration period of less than one year and our home equity and other consumer lines of credit 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. Our standby letters of credit, which generally have an expiration period of less than two years, amounted to $292 million and $278 million at September 30, 2012 and December 31, 2011, respectively. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements may 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 our 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 rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell select loans with servicing released on a nonrecourse basis. Our commitments to sell residential mortgages amounted to $517 million and $275 million at September 30, 2012 and December 31, 2011, respectively.

Parent Company liquidity

The Company obtains its liquidity from multiple sources, including dividends from the Bank, principal repayments on investment securities, interest received from the Bank, a line of credit facility with a bank, and the issuance of debt and equity securities. The primary uses of the Company’s liquidity are dividends to stockholders, capital contributions to the Bank, debt service, operating expenses, repurchases of our common stock, and acquisitions. The Company’s most liquid assets are cash, interest-bearing demand accounts at correspondent banks, and federal funds sold, all of which totaled $400 million at September 30, 2012. As of September 30, 2012, the Company has in excess of eight quarters of cash liquidity without reliance on dividends from the Bank.

The Company’s ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank 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 year ended December 31, 2011, the Bank paid dividends of $75 million to the Company. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, the Bank could pay additional dividends of approximately $456 million to the Company without obtaining regulatory approvals. However, no dividends have been paid in 2012.

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Loan Maturity and Repricing Schedule

The following table sets forth certain information at September 30, 2012 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 year		One through five years		After five years		Total
Commercial:
Real estate	$	2,884,082	$	2,615,934	$	733,749	$	6,233,765
Construction	515,506		50,416		36,284		602,206
Business	3,398,542		1,067,252		216,360		4,682,154
Total commercial	6,798,130		3,733,602		986,393		11,518,125
Residential real estate	1,411,887		2,045,928		412,941		3,870,756
Home equity	2,103,625		467,530		90,274		2,661,429
Other consumer	646,386		352,765		57,065		1,056,216
Total loans and leases	$	10,960,028	$	6,599,825	$	1,546,673	$	19,106,526

For the loans reported in the preceding table, the following sets forth at September 30, 2012, the dollar amount of all of our fixed-rate and adjustable-rate loans due after September 30,2013 (in thousands):

	Fixed		Adjustable		Total
Commercial:
Real estate	$	1,527,220	$	1,822,463	$	3,349,683
Construction	65,699		21,001		86,700
Business	944,642		338,970		1,283,612
Total commercial	2,537,561		2,182,434		4,719,995
Residential real estate	1,245,987		1,212,882		2,458,869
Home equity	557,804		—		557,804
Other consumer	408,128		1,702		409,830
Total loans and leases	$	4,749,480	$	3,397,018	$	8,146,498

The following table sets forth at September 30, 2012, the dollar amount of all of our fixed-rate loans due after September 30,2013 by the period in which the loans mature (in thousands):

Maturity	Commercial		Residential real estate		Home equity and consumer		Total
1 to 2 years	$	519,627	$	372,420	$	361,502	$	1,253,549
2 to 3 years	450,438		267,871		226,618		944,927
3 to 5 years	833,360		305,984		230,472		1,369,816
Total 1 to 5 Years	1,803,425		946,275		818,592		3,568,292
5 to 10 years	597,111		243,266		109,111		949,488
More than 10 years	137,025		56,446		38,229		231,700
Total	$	2,537,561	$	1,245,987	$	965,932	$	4,749,480

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The following table sets forth at September 30, 2012, the dollar amount of all of our adjustable-rate loans due after September 30,2013 by the period in which the loans reprice (in thousands):

Maturity	Commercial		Residential real estate		Home equity and consumer		Total
1 to 2 years	$	456,595	$	495,924	$	1,566	$	954,085
2 to 3 years	565,600		284,554		108		850,262
3 to 5 years	907,982		319,176		28		1,227,186
Total 1 to 5 Years	1,930,177		1,099,654		1,702		3,031,533
5 to 10 years	250,331		113,196		—		363,527
More than 10 years	1,926		32		—		1,958
Total	$	2,182,434	$	1,212,882	$	1,702	$	3,397,018

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 business 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, 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: (i) employing interest rate swaps; (ii) 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; (iii) selling the majority of 30 year fixed-rate, conforming residential mortgage loans into the secondary market without recourse; (iv) investing in securities with predictable cash flows; (v) growing core deposits; and (vi) 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.

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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 increase
		September 30, 2012				December 31, 2011
Changes in interest rates(1)		Net interest income		% change		Net interest income		% change
+	200 basis points(2)	$	27,276	2.7	%	$	29,669	3.2	%
+	100 basis points	8,550		0.8		17,020		1.8

⁽¹⁾  The Federal Reserve benchmark overnight federal funds rate was 0.25% at both September 30, 2012 and December 31, 2011, therefore, the calculation of the effect of a decrease in interest rates is not measurable.

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

Impact of New Accounting Standards

In December 2011, the FASB announced new disclosure requirements for offsetting arrangements. The new rules seek to enhance the comparability of financial statements for users by providing information about offsetting and related arrangements. The rules require entities to disclose gross amounts subject to right of set-off, amounts set-off, net amounts presented in the balance sheet, amounts subject to master netting agreements that have not been offset including related amounts of financial collateral. The requirements will become effective for us beginning January 1, 2013 and we do not expect they will have a significant impact on our 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, 2012 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, 2012.

During the quarter ended September 30, 2012, 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.

ITEM 1A.    Risk Factors

Hurricane Sandy and recent storm related events may have a negative impact on future earnings

We are in the process of assessing the impact of the recent East coast storm known as Hurricane Sandy.  Although the extent of the damage and its impact on us cannot be determined at this time, the storm, which occurred in late October, resulted in

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considerable damage in markets in which we operate and may have adversely affected the collateral of some of our borrowers or their ability to repay their obligations to us.  As a result, we may experience increased levels of nonperforming loans and credit losses which may negatively impact future earnings.

There are no additional material changes to the risk factors as previously discussed in Item 1A to Part I of our 2011 Annual Report on Form 10-K.

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

a) Not applicable.

b) Not applicable.

c) We did not repurchase any shares of our common stock during the third quarter of 2012.

ITEM 3.    Defaults Upon Senior Securities

Not applicable.

ITEM 4.    Mine Safety Disclosures

Not applicable.

ITEM 5.    Other Information

(a)Not applicable.

(b)Not applicable.

ITEM 6.    Exhibits

The following exhibits are filed herewith:

Exhibits
12	Ratio of Earnings to Fixed Charges
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Income, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail

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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 8, 2012	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 8, 2012	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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