First Niagara Financial (FNFG) 10-Q 2013 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, 2013

OR

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

For the transition period from             to             

Commission file number 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.    YESx NOo

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

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

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

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

As of November 6, 2013, there were issued and outstanding 353,969,354 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, 2013

TABLE OF CONTENTS

Item Number	Page Number
PART I—FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition	58
Consolidated Statements of Income	59
Consolidated Statements of Comprehensive Income	60
Consolidated Statements of Changes in Stockholders’ Equity	61
Consolidated Statements of Cash Flows	62
Notes to Consolidated Financial Statements (unaudited)	63
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations	3
3. Quantitative and Qualitative Disclosures About Market Risk	102
4. Controls and Procedures	102
PART II—OTHER INFORMATION
1. Legal Proceedings	102
1A. Risk Factors	102
2. Unregistered Sales of Equity Securities and Use of Proceeds	102
3. Defaults Upon Senior Securities	102
4. Mine Safety Disclosures	102
5. Other Information	102
6. Exhibits	103
Signatures	104

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PART I. FINANCIAL INFORMATION

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 our Annual Report on Form 10-K for the year ended December 31, 2012. 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, 2013, we had $37 billion in assets, $27 billion in deposits, and 422 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 affiliates (the "HSBC Branch Acquisition") in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets and paid a net deposit premium of $772 million. 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 $770 million. The cash received was used to pay down wholesale borrowings, including those used to purchase securities in advance of the HSBC Branch Acquisition. 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 HSBC Branch Acquisition. The results of operations from the HSBC Branch Acquisition are included in our operations only since the date of acquisition.

In connection with the HSBC Branch Acquisition, we assigned purchase rights for 57 of the HSBC branches to other banks and sold seven First Niagara branches to these other banks.

BUSINESS AND INDUSTRY

We operate a multi-faceted regional bank 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 and services. Additionally, we offer insurance services through a wholly-owned

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subsidiary of the Bank. Our business model has and will continue to evolve from our thrift roots to a relationship based community banking model that is supported by enhanced products and services that better serve our customer needs. Among our priorities, we will continue to invest in our digital platform and treasury management capabilities, as well as make continuous improvements in our technology platform, to drive future growth in fee income.

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, the structure of the instrument, 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 actions and policies of the federal government and its regulatory agencies, including the Federal Reserve. While the prolonged low interest rate and weak economic environment has pressured our net interest income and margin in recent years, more recently, the competition from banks and non-banks has intensified both from a pricing and structural perspective. Absent an improvement in the competitive environment, net interest income will be challenged until we see an increase in short term interest rates. 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.

Since the third quarter of 2011, the Federal Reserve has taken certain actions which have resulted in lower longer-term interest rates.  Most recently, in September 2013, the Federal Reserve announced that it would continue its purchases of Treasury and agency mortgage-backed securities at its current levels of $85 million per month and not taper its purchases, as previously anticipated. The cumulative result of the Federal Reserve's actions had the impact of flattening the yield curve and reducing the yields on earning assets that are (a) adjustable rate and directly tied to longer term rates, such as certain commercial real estate loan products that we offer, and (b) fixed rate where the rate is based on longer-term rates, such as certain of our residential real estate loan products. As a consequence, the predictive ability of the 10 year Treasury rate as a proxy for mortgage rates has recently diminished. Accordingly, forward mortgage rates have become more difficult to predict, and competitive market forces have caused mortgage rates to continue to rise, which has negatively impacted mortgage origination volumes and the value of our mortgage-backed investment securities and certain loans.

MARKET AREAS AND COMPETITION

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

Our primary lending and deposit gathering areas are generally concentrated in the same areas 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, as well as additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies, as well as nontraditional competitors such as large retailers offering bank-like products. In addition to the traditional sources of competition for loans and deposits, payment processors and other companies exploring direct peer-to-peer banking provide additional competition

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for our products and services. 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. We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community.

More recently, competition for loans, particularly commercial loans, has intensified given the weak economic activity within our markets and nationally. This increased competition from banks and non-banks has resulted in accelerated loan prepayments, particularly in our investor owned commercial real estate portfolio as borrowers gravitate towards financial institutions that are more willing to compete on price, loan structures or tenure. This competition is most notable in Eastern Pennsylvania and New England.

REGULATORY REFORM

In July 2013, the Company's primary federal regulator, the Federal Reserve, and the Bank's primary federal regulator, the OCC, published final rules (the “New Capital Rules”) establishing a new comprehensive capital framework for U.S. banking organizations. The rules implement the Basel Committee's December 2010 capital framework known as “Basel III” for strengthening international capital standards as well as certain provisions of the Dodd-Frank Act. The New Capital Rules substantially revise the risk-based capital requirements applicable to bank holding companies and depository institutions, including the Company and the Bank, compared to the current U.S. risk-based capital rules. The New Capital Rules define the components of capital and address other issues affecting the numerator in banking institutions' regulatory capital ratios. The New Capital Rules also address risk weights and other issues affecting the denominator in banking institutions' regulatory capital ratios and replace the existing risk-weighting approach, which was derived from Basel I capital accords of the Basel Committee, with a more risk-sensitive approach based, in part, on the standardized approach in the Basel Committee's 2004 “Basel II” capital accords. The New Capital Rules also implement the requirements of Section 939A of the Dodd-Frank Act to remove references to credit ratings from the federal banking agencies' rules. The New Capital Rules are effective for the Company and the Bank on January 1, 2015 (subject to phase-in periods for certain of their components).

We have analyzed the impact of the finalized requirements. Based on our preliminary interpretation of the rules and our planned reduction of asset-backed securities and collateralized loan obligations that will be subject to significant risk weighting increases under Basel III, we estimated that our reported Tier 1 common ratio, on a fully phased in basis, would be five to ten basis points lower than our current level under the New Capital Rules. We are confident in our ability to meet the minimum capital ratios plus the capital conservation buffer upon implementation of the revised requirements.

The New Capital Rules are more fully described in our Quarterly Report on Form 10-Q for the quarterly period ended June 30, 2013.

In July 2013, the U.S. District Court for the District of Columbia (the "District Court") issued an order granting summary judgment to the plaintiffs in a case challenging certain provisions of the Federal Reserve's rule concerning electronic debit card transaction fees and network exclusivity arrangements (i.e., routing for PIN and signature debit card transactions) (the “Current Rule”) that were adopted to implement Section 1075 of the Dodd-Frank Act (the “Durbin Amendment”.) The District Court held that, in adopting the Current Rule, the Federal Reserve violated the Durbin Amendment's provisions concerning which costs are allowed to be taken into account for purposes of setting fees that are reasonable and proportional to the costs incurred by the issuer and therefore the Current Rule's maximum permissible fees of 21 cents per transactions were too high. In addition, the District Court held that Current Rule's network non-exclusivity provisions concerning unaffiliated payment networks for debit cards also violated the Durbin Amendment. In September 2013, the District Court agreed to stay its ruling pending the Federal Reserve's appeal to the District of Columbia Circuit Court of Appeals. We are currently evaluating the impact of the ruling on our business, and will continue to monitor future developments.  We recorded $20 million and $18 million of debit card interchange revenues for the nine months ended September 30, 2013 and 2012, respectively.

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The Consumer Financial Protection Bureau (the “CFPB”) continues to provide guidance and adopt rules relevant to our businesses. In June 2013, the CFPB released a report regarding financial institutions' provision of overdraft coverage on debit card transactions and ATM withdrawals. In March 2013, the CFPB provided guidance about compliance with the fair lending requirements of the Equal Credit Opportunity Act and its implementing regulation, Regulation B, as they pertain to indirect automobile lending. We are evaluating our policies and procedures in light of these new releases and the CFPB's issuance in the first quarter of 2013 of amendments to Regulation Z, which, among other things, requires creditors to make a reasonable, good faith determination of a consumer's ability to repay certain mortgage loans and establishes certain protections from liability under this requirement for “qualified mortgages.”

In order to address compliance with the regulatory matters noted above and our ongoing efforts to comply with other regulatory matters such as the Dodd-Frank Act, many of which have yet to be defined, we will continue to invest in technology and other business initiatives, and as a result will incur increasing levels of operating expense related to such regulatory compliance.

Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 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 those which require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the valuation of our investment securities, prepayment assumptions on our collateralized mortgage obligations and mortgage-backed securities, the accounting treatment and valuation of our acquired loans, 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 2012 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:

Investment Securities

As of September 30, 2013, our available for sale and held to maturity investment securities totaled $11.5 billion, or 31% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised almost entirely of Level 2 fair value measured securities. Fair value of our investment securities is based upon quoted market prices of identical securities, where available. If such quoted prices are not available, fair value is determined using valuation models that consider cash flow, security structure, and other observable information. 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. We did not adjust any of the prices provided to us by the independent pricing services at September 30, 2013 or December 31, 2012. 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, or based on internally developed models which consider 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.

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

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loans to determine a constant effective yield used to apply the interest method, with retroactive adjustments as warranted.

In order to compute the constant effective yield for these securities, we estimate pooled level cash flows for each security based on a variety of factors, including historical and projected prepayment speeds, current and future interest rates, yield curve assumptions, security issuer and the current political environment. These cash flows are then translated into security level cash flows based on the tranche we own and the unique structure and status of each security. At September 30, 2013, the par value of our portfolio of residential mortgage-backed securities totaled $5.3 billion, which included $4.7 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.1 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.

Acquired Loans

Loans that we acquired in acquisitions subsequent to January 1, 2009 were recorded at fair value with no carryover of the related allowance for loan losses at the time of acquisition. Determining the fair value of the loans involved 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.

Individual acquired loans determined to have evidence of deterioration in credit quality are accounted for individually in accordance with ASC 310-30. 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).

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.

Acquired loans accounted for under ASC 310-30

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

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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.

In accordance with ASC 310-30, recognition of income is dependent on having a reasonable expectation about the timing and amount of cash flows expected to be collected.  We perform such an evaluation on a quarterly basis on both our acquired loans individually accounted for under ASC 310-30 and those in pools accounted for under ASC 310-30 by analogy. 

Cash flows for acquired loans individually accounted for under ASC 310-30 are estimated on a quarterly basis.  Based on this evaluation, a determination is made as to whether or not we have a reasonable expectation about the timing and amount of cash flows.  Such an expectation includes cash flows from normal customer repayment, foreclosure or other collection efforts.  Cash flows for acquired loans accounted for on a pooled basis under ASC 310-30 by analogy are also estimated on a quarterly basis.  For residential real estate, home equity and other consumer loans, cash flow loss estimates are calculated by a vintage and FICO based model which incorporates a projected forward loss curve.  For commercial loans, lifetime loss rates are assigned to each pool with consideration given for pool make-up, including risk rating profile.  Lifetime loss rates are developed from internally generated loss data and are applied to each pool. 

To the extent that we cannot reasonably estimate cash flows, interest income recognition is discontinued.  The unit of account for loans in pools accounted for under ASC 310-30 by analogy is the pool of loans.  Accordingly, as long as we can reasonably estimate cash flows for the pool as a whole, accretable yield on the pool is recognized and all individual loans within the pool - even those more than 90 days past due - would be considered to be accruing interest in our financial statement disclosures, regardless of whether or not we expected to collect any principal or interest cash flows on an individual loan 90 days or more past due.

Allowance for Loan Losses

We determined our allowance for loan losses by portfolio segment, which consists of commercial loans and consumer loans. Our commercial loan portfolio includes both business and commercial real estate loans. Our consumer loan portfolio includes residential real estate, home equity, and other consumer loans. We further segregate these portfolios 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 included 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. The level of the allowance for loan losses is 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.

For our originated loans, our allowance for loan losses consists of the following elements: (i) 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; and (ii) specific valuation allowances based on probable losses on specifically identified impaired loans.

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

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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

We estimate the allowance for our commercial loan portfolio by applying 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

We estimate the allowance for loan losses for our consumer loan portfolio by estimating the amount of loans that will eventually default based on their current 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.

Acquired Loans

Acquired loans accounted for under ASC 310-30 (including those accounted for under ASC 310-30 by analogy)

For our acquired loans accounted for under ASC 310-30, 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 recorded the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. We do not amortize goodwill and we review it for impairment at our reporting unit level on an annual basis, as of November 1, and when events or changes in circumstances indicate that the carrying amounts may be impaired. We define a reporting unit as a distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available and reviewed regularly by that segment's management. We have two reporting units: Banking and Financial Services.

The goodwill impairment review is a multi-step process that begins with determining whether or not each reporting unit's fair value is less than its carrying amount (including goodwill). We have the option to first assess

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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 a quantitative analysis where we compare each reporting unit’s fair value to its carrying value to identify potential impairment (Step 1). If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. Determining the fair value of a reporting unit as part of the Step 1 analysis involves significant judgment. Inputs and assumptions, such as future cash flows and earnings, discount rates, the assessment of relevant market transactions for comparability and the resulting control premium assumption, and multiples of relevant financial statement metrics, such as tangible book value and estimated earnings, are all estimates involving significant judgment. We are also required to assess the reasonableness of the overall combined fair value of our reporting units by reference to our market capitalization over time.

If the carrying amount of the reporting unit were to exceed its estimated fair value, a second step (Step 2) would be performed that would compare the implied fair value of the reporting unit's 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 also involved in estimating the fair value of the assets and liabilities of the reporting units, and therefore the implied fair value of goodwill, as part of this Step 2 analysis. The most significant estimates involved related to our Banking reporting unit would be the valuation of our loans and core deposit intangible asset. We would determine fair value of our loan portfolio by reference to market observable transactions for loan portfolios with similar characteristics, while we would estimate the value of the core deposit intangible asset using a discounted cash flow approach and market comparable transactions. Both of these estimates are highly subjective and involve many estimates.

For our Banking reporting unit, we utilize both the income and market approaches to determine fair value. Our application of the income approach is based upon assumptions of both balance sheet and income statement activity. In our application of the market approach, we apply market based multiples to the tangible book value and projected earnings of our Banking reporting unit. We also utilize a control premium assumption based on our review of transactions observable in the market place that we determine are comparable.

For our Financial Services reporting unit, we utilize both the income and market approaches to determine fair value. Our application of the income approach is based upon assumptions of income statement activity. In our application of the market approach, we apply market based earnings multiples to our Financial Services reporting unit's applicable earnings metrics. We also utilize a control premium assumption based on our review of transactions observable in the market place that we determine are comparable.

The aggregate fair values of both of our reporting units (Banking and Financial Services) are compared to our market capitalization as an assessment of the appropriateness of the fair value measurements.

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SELECTED QUARTERLY FINANCIAL DATA

	2013						2012
At or for the quarter ended	September 30		June 30		March 31		December 31		September 30
Selected financial condition data: (in millions)
Total assets	$	37,341	$	37,150	$	36,845	$	36,806	$	35,874
Loans and leases, net	20,891		20,359		19,863		19,547		18,957
Investment securities:
Available for sale	7,610		7,916		7,876		10,994		10,580
Held to maturity	3,842		3,857		4,219		1,300		1,388
Goodwill and other intangibles	2,550		2,558		2,568		2,618		2,627
Deposits	26,969		27,150		27,733		27,677		27,698
Borrowings	4,902		4,431		3,661		3,716		2,728
Stockholders’ equity	$	4,938	4,903		$	4,947	$	4,927	$	4,915
Common shares outstanding	354		354		353		353		353
Selected operations data: (in thousands)
Interest income	$	306,742	$	298,080	$	295,601	$	283,599	$	301,868
Interest expense	29,202		28,637		29,471		31,313		32,263
Net interest income	277,540		269,443		266,130		252,286		269,605
Provision for credit losses	27,600		25,200		20,200		22,000		22,200
Net interest income after provision for credit losses	249,940		244,243		245,930		230,286		247,405
Noninterest income(1)	91,422		95,546		89,312		91,821		102,203
Merger and acquisition integration expenses	—		—		—		3,678		29,404
Noninterest expense	231,193		235,170		237,666		235,106		237,138
Income before income tax	110,169		104,619		97,576		83,323		83,066
Income tax expense	31,026		33,485		30,291		22,226		24,682
Net income	79,143		71,134		67,285		61,097		58,384
Preferred stock dividend	7,547		7,547		7,547		7,547		7,547
Net income available to common stockholders	$	71,596	$	63,587	$	59,738	$	53,550	$	50,837
Common stock and related per share data:
Earnings per common share:
Basic	$	0.20	$	0.18	$	0.17	$	0.15	$	0.15
Diluted	0.20		0.18		0.17		0.15		0.14
Cash dividends	0.08		0.08		0.08		0.08		0.08
Book value(2)	13.15		13.06		13.19		13.15		13.11
Tangible book value per share(2)(3)	5.86		5.74		5.84		5.65		5.59
Market Price (NASDAQ: FNFG):
High	11.02		10.17		8.94		8.52		8.50
Low	9.78		8.79		7.68		7.08		7.14
Close	10.37		10.07		8.86		7.93		8.07

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

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

⁽³⁾  Tangible common equity is used to calculate tangible book value per common share and excludes goodwill and other intangible assets of $2.5 billion as of September 30, 2013, and $2.6 billion as of June 30, 2013, March 31, 2013, December 31, 2012, and September 30, 2012. Tangible common equity also excludes preferred stock of $338 million for all periods indicated. 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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	2013									2012
At or for the quarter ended (dollars in millions)	September 30			June 30			March 31			December 31			September 30
Selected financial ratios and other data:
Performance ratios(1):
Return on average assets	0.85		%	0.77		%	0.74		%	0.67		%	0.66		%
Common equity:
Return on average common equity	6.18			5.48			5.24			4.62			4.46
Return on average tangible common equity(2)	13.92			12.21			12.05			10.72			10.60
Total equity:
Return on average equity	6.37			5.72			5.50			4.92			4.77
Return on average tangible equity(3)	13.20			11.75			11.62			10.45			10.34
Net interest rate spread	3.32			3.28			3.32			3.13			3.45
Net interest rate margin	3.40			3.36			3.39			3.22			3.54
Efficiency ratio(4)	62.7			64.4			66.9			69.4			71.7
Operating expenses as a percentage of average loans and deposits(5)	0.49			0.50			0.50			0.50			0.51
Effective tax rate	28.2			32.0			31.0			26.7			29.7
Dividend payout ratio	40.00			44.44			47.06			53.33			53.33
Capital ratios:
First Niagara Financial Group, Inc.
Total risk-based capital	11.40			11.35			11.38			11.23			11.48
Tier 1 risk-based capital	9.45			9.41			9.45			9.29			9.51
Tier 1 risk-based common capital(6)	7.72			7.65			7.64			7.45			7.59
Leverage ratio	7.14			7.01			6.92			6.75			6.83
Ratio of stockholders’ equity to total assets	13.22			13.20			13.43			13.39			13.70
Ratio of tangible common stockholders’ equity to tangible assets(7)	5.89		%	5.80		%	5.95		%	5.77		%	5.87		%
Risk-weighted assets	$	26,077		$	25,564		$	24,949		$	24,379		$	23,403
First Niagara Bank:
Total risk-based capital	10.89		%	10.85		%	10.89		%	10.66		%	10.88		%
Tier 1 risk-based capital	10.08			10.08			10.15			9.94			10.19
Leverage ratio	7.61		%	7.50		%	7.43		%	7.23		%	7.32		%
Risk-weighted assets	$	26,037		$	25,520		$	24,933		$	24,379		$	23,390
Asset quality:
Total nonaccruing loans	175			182			173			173			142
Other nonperforming assets	24			8			11			10			10
Total classified loans(8)	648			701			720			708			693
Total criticized loans(9)	978			1,012			1,045			1,003			991
Allowance for loan losses	198			184			172			163			150
Net loan charge-offs	$	13		$	13		$	10		$	9		$	10
Net charge-offs to average loans	0.25		%	0.26		%	0.21		%	0.18		%	0.21		%
Provision to average loans	0.52			0.49			0.40			0.45			0.47
Total nonaccruing loans to total loans	0.83			0.89			0.87			0.88			0.75
Total nonperforming assets to total assets	0.53			0.51			0.50			0.50			0.42
Allowance for loan losses to total loans	0.94			0.89			0.86			0.82			0.78
Allowance for loan losses to nonaccruing loans	113.0			100.8			99.2			94.1			105.3
Asset quality-originated loans(10):
Net charge-offs of originated loans to average originated loans	0.33			0.33			0.27			0.24			0.30
Provision for originated loans to average originated loans	0.65			0.65			0.55			0.67			0.72
Total nonaccruing originated loans to total originated loans	0.89			1.02			1.03			1.07			0.93
Allowance for originated loan losses to originated loans	1.20		%	1.21		%	1.21		%	1.20		%	1.20		%
Other data:
Number of full service branches	422			422			427			430			432
Full time equivalent employees	5,788			5,779			5,875			5,927			6,036

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

⁽²⁾  Average tangible common equity excludes average goodwill, other intangibles and preferred stock of $2.9 billion for the quarters ended September 30, 2013, June 30, 2013 and March 31, 2013, and $3.0 billion for the quarters ended December 31, 2012 and September 30, 2012. 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. 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⁾  Operating expenses exclude merger and acquisition expenses and restructuring charges of $3.7 million and $29.4 million for the quarters ended December 31, 2012 and September 30, 2012, 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 position.

⁽⁶⁾  Computed by subtracting the sum of preferred stock and the junior subordinated debentures associated with trust preferred securities 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.

⁽⁷⁾  Tangible common stockholders’ equity and tangible assets exclude goodwill, other intangibles, and preferred stock of $2.9 billion as of September 30, 2013, June 30, 2013, and March 31, 2013, and $3.0 billion as of December 31, 2012 and September 30, 2012. 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.

⁽⁸⁾  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 “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012.

⁽⁹⁾  Criticized loans includes consumer loans when they are 90 days or more past due. Criticized loans include special mention, substandard, doubtful, and loss.

⁽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 certain nonoperating income and expense items as detailed below. 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 and period over period analysis of our fundamental results. 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. 

	Three months ended							Nine months ended September 30,
	September 30,		June 30,		September 30,			2013		2012
(in thousands, except per share data)	2013		2013		2012
Operating results (Non-GAAP):
Net interest income	$	277,540	$	269,443	$	269,605		$	813,113	$	779,347
Provision for credit losses	27,600		25,200		22,200			73,000		70,300
Noninterest income	91,422		95,546		96,866			276,280		246,477
Noninterest expense	231,193		235,170		237,138			704,029		632,072
Income tax expense	31,026		33,485		33,106			94,802		107,184
Net operating income (Non-GAAP)	$	79,143	$	71,134	$	74,027		$	217,562	$	216,268
Operating earnings per diluted share (Non-GAAP)	$	0.20	$	0.18	$	0.19		$	0.55	$	0.56
Reconciliation of net operating income to net income	$	79,143	$	71,134	$	74,027		$	217,562	$	216,268
Nonoperating income and expenses, net of tax at effective tax rate:
Gain on securities portfolio repositioning ($5,337 pre-tax and $21,232 pre-tax for the three and nine months ended September 30, 2012, respectively)	—		—		3,469			—		13,800
Retroactive premium amortization on securities portfolio ($8,358 pre-tax)	—		—		—			—		(5,558		)
Merger and acquisition integration expenses ($29,404 pre-tax and $173,834 pre-tax for the three and nine months ended September 30, 2012, respectively)	—		—		(19,112		)	—		(112,991		)
Restructuring charges ($6,453 pre-tax)	—		—		—			—		(4,194		)
Total nonoperating expenses, net of tax	—		—		(15,643		)	—		(108,943		)
Net income (GAAP)	$	79,143	$	71,134	$	58,384		$	217,562	$	107,325
Earnings per diluted share (GAAP)	$	0.20	$	0.18	$	0.14		$	0.55	$	0.25

Despite challenges presented by the macro-economic, regulatory and competitive environment, we delivered steady earnings during the third quarter of 2013 highlighted by balance sheet growth, consistent credit quality, and positive operating leverage. Results also reflect a nonrecurring tax benefit of approximately $4.9 million (post-tax.) Net interest income benefited from the continuation of balance sheet growth and commercial real estate early payoff penalty income, as well as certain favorable adjustments in our collateralized mortgage obligation portfolio related to the rapid increase in mortgage rates which, in turn, negatively impacted mortgage banking revenues. Net interest income also benefited approximately $5.9 million from the recognition of discounts on the

14

early payoff of certain collateralized loan obligations ("CLOs") and other favorable loan adjustments, all of which are not expected to continue in the normal course of business.

In the third quarter of 2013, average loans increased an annualized 10% over the prior quarter driven primarily by seasonally strong originations in our indirect auto platform. Commercial loans, which include business and commercial real estate loans, increased 7% annualized. Despite a healthy pipeline headed into the quarter, the growth in commercial loans was tempered by an intensifying competitive landscape which continues to drive an escalating degradation of pricing and loan structures.

More recently, competition for loans, particularly commercial loans, has intensified given the weak economic activity within our markets and nationally. This increased competition from banks and non-banks has resulted in accelerated loan prepayments, particularly in our investor owned commercial real estate portfolio as borrowers gravitate towards financial institutions that are more willing to compete on price, loan structures or tenure. This competition is most notable in Eastern Pennsylvania and New England.

In the third quarter of 2013, the commercial real estate yield differential between our newly originated loans and the loans that paid down was approximately 120 basis points. While some of this decline is driven by pricing contraction, the majority of the decline was driven by the replacement of higher yielding, fixed rate, longer duration loans that prepaid or refinanced away with lower yielding, shorter duration, and variable rate products. Such yield differential has and will continue to weigh on net interest income in subsequent periods.

Our ability to gain market share and generate above-industry loan volumes in 2013 together with pricing actions on our deposits has enabled us to mitigate some of the net interest income pressures to date.

While our spreads on new loan originations have held up relatively in line with the prior quarter, there is evidence that spreads for the types of loans we originate are and will continue to be under pressure. While we will compete to an extent on price, weakly structured loans offered by some participants continue to be a concerning trend across the industry as we will not make loans with such structural concessions. As we continue to maintain our credit discipline, we may not be able to continue to grow our loan portfolio sufficiently to mitigate the impact on net interest income.

Third quarter 2013 noninterest income of $91.4 milliondecreased$4.1 million, or 4%, compared to the prior quarter, driven primarily by lower mortgage banking gain-on-sale revenues, which was partially offset by increases in most other noninterest income categories. The improvement in recent quarters in deposit service charges can be attributed to higher non-sufficient fund (NSF) incidence rates and higher collection rates. We expect deposit service charges to remain relatively flat in the near term; over the longer-term, our investments in and the delivery of Treasury Management and Digital solutions to our commercial and retail consumers will drive our fee income contribution closer to that of our peer group. Mortgage application and refinance volumes have ebbed as industry gain-on-sale margins have normalized resulting in significant contraction in mortgage banking revenues. Our focus in mortgage remains on market share gains, particularly in the purchase market. Consistent with our experience in 2013, increased competition and the impact of Dodd-Frank Act’s definition of Eligible Market Participants for derivative swap transactions has and will continue to challenge capital markets revenues. Competition in the insurance industry continues to be strong as the market remains soft, limiting the potential to raise rates. 

Total noninterest expenses for the third quarter of 2013 were approximately $231 million, down $4 million from the prior quarter. In 2013, we have been diligent about managing our cost structure by self-funding selective investments in people, infrastructure and technology.

While we expect our expense level to be $225 million in the fourth quarter of 2013, the ongoing investments required to support future revenue growth as well as higher costs of regulatory compliance will drive operating expenses greater than full year 2013 levels. While we have made good progress on anti-money laundering and compliance with the Bank Secrecy Act, costs to support the implementation of the new regulatory requirements of the Dodd Frank Act, such as the Qualifying Mortgage rules and stress testing will be higher. Over the next few years, our continued investment in revenue generating enhancements, such as our Digital and Treasury

15

Management platforms, coupled with other investments to position us competitively, will increase operating costs in the short term but drive revenue growth in the long term.

Comparison to Prior Quarter

Our third quarter 2013 GAAP net income was $79.1 million, or $0.20 per diluted share, which included a $0.01 benefit from a favorable tax item, compared to $71.1 million, or $0.18 per diluted share, for the second quarter of 2013.

Average loans increased 10% annualized compared to the prior quarter. Sequential growth in average commercial business and real estate loans moderated to 7% annualized from 10% in the prior quarter due to elevated levels of prepayment activity particularly in our commercial real estate portfolio. Average consumer loans increased 14% annualized, driven by strength in our indirect auto portfolio, which experienced the highest quarter of new origination activity since we entered the indirect auto business in early 2012. This growth was partially offset by a decline in residential mortgage loans. Average transaction deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased an annualized 2% over the prior quarter and currently represent 35% of our deposit balances.

In the third quarter of 2013, we continued to generate positive operating leverage as revenue growth outpaced expense reduction. Net interest income and noninterest income increased a total of 1% while noninterest expenses decreased 2% relative to the second quarter. Pre-tax, pre-provision income was 6% higher than the second quarter of 2013. Our net interest income increased 3% in the third quarter of 2013 compared to the prior quarter. Our tax equivalent net interest margin increasedfour basis points to 3.40% from 3.36% in the second quarter of 2013. Noninterest income decreased$4.1 million, or 4%, from the prior quarter primarily due to lower mortgage banking revenues.

The provision for loan losses on originated loans totaled $25.4 million in the third quarter of 2013, including $12.5 million to support loan growth and $12.9 million to cover net charge-offs during the quarter. At September 30, 2013, nonperforming originated loans comprised 0.89% of originated loans, a 13 basis points improvement from the prior quarter. Net charge-offs equaled 33 basis points of average originated loans, annualized, consistent with the second quarter of 2013.

The provision for losses on acquired loans totaled $1.8 million in the third quarter of 2013. Net charge-offs equaled one basis point of average acquired loans, annualized, compared to 12 basis points for the full year 2012.

Comparison to Prior Year Quarter

Our third quarter 2013 GAAP net income was $79.1 million, or $0.20 per diluted share, compared to $58.4 million, or $0.14 per diluted share, for the third quarter of 2012, which included $29.4 million in pre-tax merger and acquisition integration expenses incurred as a result of the HSBC Branch Acquisition in May 2012. Non-GAAP operating net income was $74.0 million, or $0.19 per diluted share, in the third quarter of 2012.

Average loans increased 10% for the quarter ended September 30, 2013 compared to the same quarter in 2012. Average commercial business and real estate loans increased 12% over the same quarter in 2012, with double digit increases in both portfolios. Average consumer loans increased 6% driven by growth in indirect auto loan balances, partially offset by a decline in residential mortgage loans. Average transaction deposit balances, which include interest-bearing and noninterest-bearing checking accounts, increased 9% over the prior year and currently represent 35% of our deposit balances, up from 31% a year ago.

Our tax equivalent net interest margin decreased 14 basis points to 3.40% from 3.54% in the third quarter of 2012. During the current quarter, yields on average interest-earning assets decreased 21 basis points, compared to the same quarter in 2012 driven by a 33 basis point decrease in commercial loan yields and a 29 basis point decrease in consumer loan yields. This adverse impact was partially offset by an eight basis point decrease in our cost of interest-bearing liabilities, driven by a favorable shift in our funding mix.

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The provision for loan losses on originated loans increased to $25.4 million in the third quarter of 2013 from $21.4 million in the same quarter in 2012. Nonperforming originated loans as a percentage of originated loans decreased four basis points to 0.89% at September 30, 2013 from 0.93% at September 30, 2012. Net charge-offs increased to 33 basis points of average originated loans from 30 basis points of average originated loans in the third quarter of 2012.

Excluding the gain on our securities portfolio restructuring in 2012, noninterest income decreased$5 million driven by the negative impact of higher mortgage rates on industry volumes and gain-on-sale income in our mortgage banking unit.

Third quarter 2013 noninterest expenses decreased $35 million compared to the third quarter of 2012. Excluding merger and acquisition integration expenses in the third quarter of 2012, noninterest expenses decreased $6 million as a result of lower marketing and advertising, professional services, and amortization of intangibles.

Comparison to Prior Year to Date

Our GAAP net income for the nine months ended September 30, 2013 was $218 million, or $0.55 per diluted share, compared to $107 million, or $0.25 per diluted share, for the same period in 2012. Non-GAAP operating net income was $216 million, or $0.56 per diluted share, for the nine months ended September 30, 2012.

Our tax equivalent net interest margin increasedone basis point to 3.39% for the nine months ended September 30, 2013 from 3.38% for the nine months ended September 30, 2012. During the first nine months in 2013, yields on commercial loans dropped 49 basis points, compared to the same period in 2012, reflecting the cumulative impact of replacing higher yielding, fixed rate, longer duration loans that prepaid with new originations that were lower yielding, shorter duration, variable rate products. Consumer loan yields dropped 14 basis points during the same period, driven primarily by a 69 basis points decline in indirect auto yields driven by the impact of normal amortization and prepayments of balances as well as our business decision to lend to customers with higher FICO scores. These adverse impacts were partially offset by benefits derived from the acquisition of low-cost deposits through our May 2012 HSBC branch transaction. Net interest income for the nine months ended September 30, 2013 increased $42 million, or 6%, compared to the same period in 2012.

The provision for loan losses on originated loans increased to $68 million for the first nine months of 2013 from $62 million for the first nine months of 2012. Net charge-offs decreased to 31 basis points of average originated loans from 40 basis points of average originated loans for the nine months ended September 30, 2012.

Excluding the $21 million gain on our securities portfolio restructuring in 2012, noninterest income increased$30 million, or 12%, primarily driven by the full nine month impact of our May 2012 HSBC Branch Acquisition and partially offset by declining mortgage banking and capital markets revenues.

Excluding $174 million in merger and acquisition integration expenses and $6 million in restructuring charges for 2012, noninterest expenses increased$72 million, or 11% for the nine months ended September 30, 2013, compared to the same period in 2012 as a result of the costs to operate the HSBC branches and selective investments in new products, services and people.

Net Interest Income

Third quarter 2013 net interest income increased $8 million, or 3%, from the prior quarter to $278 million and was driven by a 3% annualized increase in average earning assets together with a four basis points improvement in the tax equivalent net interest margin to 3.40%. Growth in average earning assets reflected continued positive loan growth which was moderated by lower investment securities balances. Average investment securities declined 9% annualized, or $265 million, from the prior quarter reflecting the planned rotation of such securities into more profitable loans. Additionally, net interest income benefited from an additional day in the quarter.

Our net interest income and net interest margin for the third quarter of 2013 reflected the beneficial impact of $6 million, or seven basis points, related to items not expected in the normal course of business as reflected in the

17

table below. Additionally, we recognized $1.8 million of commercial real estate prepayment penalties in the current quarter.

	Tax equivalent net interest income			Tax equivalent net interest margin
	(in millions)
Tax equivalent net interest income reported	$	281.9		3.40	%
Less items not expected in normal course of business:
Other favorable loan adjustments	(2.2		)	(0.03	)
CLO payoff discount recognition	(1.9		)	(0.02	)
CMO retroactive adjustment	(1.8		)	(0.02	)
Total	(5.9		)	(0.07	)
Tax equivalent net interest income normalized	$	276.0		3.33	%

The four basis points increase in net interest margin in the third quarter of 2013 reflected the benefits of our balance sheet rotation strategy where we reinvest cash flows from lower-yielding investment securities into higher yielding loans, as well as lower premium amortization on our residential mortgage-backed securities ("RMBS") portfolio. These benefits were partially offset by continued compression of loan yields from prepayments and reinvestments at current market rates, particularly in our commercial real estate portfolio, which had a four basis point negative impact compared to the prior quarter. 

In the third quarter, premium amortization on the RMBS portfolio was $6 million and included a $1.8 million retroactive adjustment to reflect prepayment speeds that were slower than our previous assessment. The premium amortization on the RMBS portfolio in the second quarter of 2013 was $11 million.

During 2013, the yield curve steepened appreciably driven by increased anticipation that the Federal Reserve will begin tapering its Quantitative Easing Bond-Buying program.  The steepening of the yield curve resulted from an increase in the mid-to-long end of the curve which has the positive impact of increasing reinvestment rates on certain securities purchases and mitigating premium amortization due to lower prepayment activity driven by higher mortgage rates. However, these benefits to net interest income continue to be more than offset by continued prepayments and/or refinancing of higher-yielding loans and new loan growth at lower market rates today. An intensifying competitive landscape, particularly for commercial and commercial real estate loans may drive spread compression in the future, which will likely impact net interest income. While our balance sheet remains asset-sensitive, improvement in net interest income will require increases to short-term interest rate indices such as the prime rate or 90 day LIBOR.

18

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.

	Three months ended								Increase (decrease)
	September 30, 2013				June 30, 2013
(dollars in millions)	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	$	7,551	4.16	%	$	7,376	4.22	%	$	175		(0.06	)%
Business	5,163		3.64		5,112		3.66		51			(0.02	)
Total commercial lending	12,714		3.95		12,488		3.99		226			(0.04	)
Consumer:
Residential real estate	3,538		3.91		3,570		3.94		(32		)	(0.03	)
Home equity	2,683		4.17		2,661		4.25		22			(0.08	)
Indirect auto	1,207		3.09		927		3.18		280			(0.09	)
Credit cards	309		12.02		302		10.96		7			1.06
Other consumer	313		8.48		313		8.42		—			0.06
Total consumer lending	8,050		4.35		7,773		4.41		277			(0.06	)
Total loans	20,764		4.14		20,261		4.19		503			(0.05	)
Residential mortgage-backed securities(3)	5,515		2.68		5,496		2.40		19			0.28
Commercial mortgage-backed securities(3)	1,810		3.68		1,881		3.44		(71		)	0.24
Other investment securities(3)	4,620		3.47		4,833		3.37		(213		)	0.10
Money market and other investments	157		2.27		171		1.85		(14		)	0.42
Total interest-earning assets	32,866		3.75	%	32,642		3.71	%	224			0.04	%
Noninterest-earning assets(4)(5)	4,227				4,341				(114		)
Total assets	$	37,093			$	36,983			$	110
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,793	0.09	%	$	3,897	0.11	%	$	(104	)	(0.02	)%
Checking accounts	4,483		0.04		4,504		0.04		(21		)	—
Money market deposits	9,959		0.20		10,178		0.20		(219		)	—
Certificates of deposit	3,824		0.69		3,902		0.66		(78		)	0.03
Total interest-bearing deposits	22,059		0.23		22,481		0.23		(422		)	—
Borrowings
Short-term borrowings	4,014		0.41		3,536		0.41		478			—
Long-term borrowings	733		6.55		733		6.62		—			(0.07	)
Total borrowings	4,747		1.36		4,269		1.47		478			(0.11	)
Total interest-bearing liabilities	26,806		0.43	%	26,750		0.43	%	56			—	%
Noninterest-bearing deposits	4,787				4,711				76
Other noninterest-bearing liabilities	567				533				34
Total liabilities	32,160				31,994				166
Stockholders’ equity(4)	4,933				4,989				(56		)
Total liabilities and stockholders’ equity	$	37,093			$	36,983			$	110
Net interest rate spread			3.32	%			3.28	%				0.04	%
Net interest rate margin			3.40	%			3.36	%				0.04	%

⁽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 or discounts 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.

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

Our taxable equivalent net interest income of $282 million for the quarter ended September 30, 2013 increased by $8 million from the quarter ended June 30, 2013. Overall, the yield on earning assets increasedfour basis points quarter over quarter as a result of the combined effects of lower premium amortization on our residential mortgage-backed securities and an annualized 3% increase in average earning assets, partially negated by continued yield compression on our loan portfolio.  Specifically:

• Our average balance of investment securities decreased quarter over quarter by approximately $265 million. Yields on our investment securities portfolio increased 20 basis points primarily due to lower premium amortization on residential mortgage-backed securities, which included a $1.8 million retroactive adjustment to reflect slower prepayment speeds. Cash flows from collateralized mortgage obligations ("CMOs") in the current quarter were almost $100 million lower than the approximately $400 million in cash flows received in the prior quarter. Such slower prepayments delay and elongate the period over which the premium is amortized. Also contributing to the increase in yields was the prepayment of CLOs that were purchased at a discount. We recognized $1.9 million of interest income related to these prepayments. While such income from CLO payoffs benefited the current quarter, the long-term implication is that these assets had above market interest rates that are being replaced with other lower yielding assets. The yield on new purchases of investment securities in the current quarter was approximately 2.6%, in line with the yield on the investment securities rolling off of our portfolio.

• Overall, our loan growth was 10% from the second quarter of 2013, as our average loan balances increased by $503 million. Commercial loan growth was 7% annualized over the prior quarter, or $226 million, as the strong pipeline at the end of the second quarter was partially offset by continued accelerated prepayments and paydowns. We recognized $1.8 million of commercial real estate prepayment penalties in the current quarter, down from $3.0 million in the prior quarter. Indirect auto remained a source of growth contributing over half of the average net loan growth this quarter. Our average indirect auto portfolio increased $280 million, as we originated $379 million in new loans during the third quarter of 2013, our highest level since entering the business in early 2012. These increases were partially offset by a slight decrease in our residential real estate loans. Loan yields declined five basis points as commercial loan yields decreased by four basis points and our total consumer loan portfolio yields decreased by six basis points.

• 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 their variable loan obligation to a fixed rate. These variable rate originations replaced the repayment of fixed rate loans with higher rates. Commercial real estate loan yields benefited three basis points from other favorable loan adjustments not expected to continue in the normal course of business, primarily comprised of the payoff of acquired loans that we were carrying at a discount.

• Our average balances of interest bearing deposits declined by $422 million while our average rate paid remained unchanged from the prior quarter. The decline in our average balances was driven by previous pricing actions and competitive rate pressure. Demand for longer term certificates of deposit remains weak.

• Our average borrowings increased quarter over quarter by $478 million as we continued to fund our balance sheet growth and rotation through low cost short-term borrowings. This funding strategy has also caused our cost of borrowings to decline 11 basis points from the second quarter of 2013.

• The impact of one additional day in the third quarter compared to the second quarter reduced net interest margin by four basis points.

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Comparison to Prior Year 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.

	Three months ended								Increase (decrease)
	September 30, 2013				September 30, 2012
(dollars in millions)	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	$	7,551	4.16	%	$	6,783	4.60	%	$	768		(0.44	)%
Business	5,163		3.64		4,609		3.81		554			(0.17	)
Total commercial lending	12,714		3.95		11,392		4.28		1,322			(0.33	)
Consumer:
Residential real estate	3,538		3.91		3,962		4.03		(424		)	(0.12	)
Home equity	2,683		4.17		2,672		4.42		11			(0.25	)
Indirect auto	1,207		3.09		301		3.64		906			(0.55	)
Credit cards	309		12.02		308		11.31		1			0.71
Other consumer	313		8.48		329		8.80		(16		)	(0.32	)
Total consumer lending	8,050		4.35		7,572		4.64		478			(0.29	)
Total loans	20,764		4.14		18,964		4.47		1,800			(0.33	)
Residential mortgage-backed securities(3)	5,515		2.68		5,677		2.81		(162		)	(0.13	)
Commercial mortgage-backed securities(3)	1,810		3.68		1,895		3.93		(85		)	(0.25	)
Other investment securities(3)	4,620		3.47		4,002		3.35		618			0.12
Money market and other investments	157		2.27		201		1.39		(44		)	0.88
Total interest-earning assets	32,866		3.75	%	30,739		3.96	%	2,127			(0.21	)%
Noninterest-earning assets(4)(5)	4,227				4,565				(338		)
Total assets	$	37,093			$	35,304			$	1,789
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,793	0.09	%	$	4,026	0.20	%	$	(233	)	(0.11	)%
Checking accounts	4,483		0.04		3,871		0.06		612			(0.02	)
Money market deposits	9,959		0.20		10,899		0.29		(940		)	(0.09	)
Certificates of deposit	3,824		0.69		4,083		0.75		(259		)	(0.06	)
Total interest-bearing deposits	22,059		0.23		22,879		0.32		(820		)	(0.09	)
Borrowings
Short-term borrowings	4,014		0.41		1,666		0.36		2,348			0.05
Long-term borrowings	733		6.55		732		6.74		1			(0.19	)
Total borrowings	4,747		1.36		2,398		2.31		2,349			(0.95	)
Total interest-bearing liabilities	26,806		0.43	%	25,277		0.51	%	1,529			(0.08	)%
Noninterest-bearing deposits	4,787				4,618				169
Other noninterest-bearing liabilities	567				536				31
Total liabilities	32,160				30,431				1,729
Stockholders’ equity(4)	4,933				4,873				60
Total liabilities and stockholders’ equity	$	37,093			$	35,304			$	1,789
Net interest rate spread			3.32	%			3.45	%				(0.13	)%
Net interest rate margin			3.40	%			3.54	%				(0.14	)%

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⁽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.

Our taxable equivalent net interest income increased $8 million for the third quarter of 2013 compared to the third quarter of 2012 reflecting an increase in net-interest earning assets of $598 million and a decrease in our net interest margin of 14 basis points. The $2.1 billion increase in interest-earning assets reflects our balance sheet rotation strategy of funding organic loan growth in our commercial and indirect auto portfolios partially with cash flows from our investment securities portfolio. Over the same period our average interest bearing liabilities increased by $1.5 billion, as we funded our balance sheet growth with low cost short-term borrowings. The 14 basis point decrease in our net interest margin resulted from the continued compression on our loan and securities portfolio brought on by prepayments and market pressures on interest rates.

The yield on our commercial business and commercial real estate loan portfolios decreased by 17 basis points and 44 basis points, respectively. Consumer loan yields dropped 29 basis points during the same period, driven primarily by a 55 basis points decline in indirect auto yields.

Our yields on interest-earning assets in the third quarter of 2013decreased21 basis points compared to the third quarter of 2012, while costs on interest-bearing liabilities decreasedeight basis points, resulting in a 13 basis point decrease in our interest rate spread.

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Comparison to Prior Year to Date

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.

	Nine months ended September 30,								Increase (decrease)
	2013				2012
(dollars in millions)	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	$	7,370	4.21	%	$	6,529	4.81	%	$	841		(0.60	)%
Business	5,092		3.68		4,274		3.96		818			(0.28	)
Total commercial lending	12,462		3.99		10,803		4.48		1,659			(0.49	)
Consumer:
Residential real estate	3,599		3.95		3,957		4.13		(358		)	(0.18	)
Home equity	2,664		4.24		2,415		4.42		249			(0.18	)
Indirect auto	950		3.17		131		3.86		819			(0.69	)
Credit cards	305		11.14		165		11.31		140			(0.17	)
Other consumer	318		8.36		285		8.07		33			0.29
Total consumer lending	7,836		4.42		6,953		4.56		883			(0.14	)
Total loans	20,298		4.19		17,756		4.56		2,542			(0.37	)
Residential mortgage-backed securities(3)	5,500		2.53		7,729		2.72		(2,229		)	(0.19	)
Commercial mortgage-backed securities(3)	1,868		3.63		1,822		3.95		46			(0.32	)
Other investment securities(3)	4,758		3.34		3,446		3.39		1,312			(0.05	)
Money market and other investments	189		1.74		274		1.05		(85		)	0.69
Total interest-earning assets	32,613		3.74	%	31,027		3.90	%	1,586			(0.16	)%
Noninterest-earning assets(4)(5)	4,349				3,950				399
Total assets	$	36,962			$	34,977			$	1,985
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,861	0.10	%	$	3,300	0.14	%	$	561		(0.04	)%
Checking accounts	4,456		0.04		3,066		0.08		1,390			(0.04	)
Money market deposits	10,257		0.21		9,071		0.28		1,186			(0.07	)
Certificates of deposit	3,935		0.67		3,977		0.85		(42		)	(0.18	)
Total interest-bearing deposits	22,509		0.24		19,414		0.34		3,095			(0.10	)
Borrowings
Short-term borrowings	3,570		0.41		3,442		0.56		128			(0.15	)
Long-term borrowings	732		6.63		2,825		2.70		(2,093		)	3.93
Total borrowings	4,302		1.46		6,267		1.53		(1,965		)	(0.07	)
Total interest-bearing liabilities	26,811		0.44	%	25,681		0.63	%	1,130			(0.19	)%
Noninterest-bearing deposits	4,657				3,838				819
Other noninterest-bearing liabilities	534				590				(56		)
Total liabilities	32,002				30,109				1,893
Stockholders’ equity(4)	4,960				4,868				92
Total liabilities and stockholders’ equity	$	36,962			$	34,977			$	1,985
Net interest rate spread			3.30	%			3.27	%				0.03	%
Net interest rate margin			3.39	%			3.38	%				0.01	%

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⁽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.

Our taxable equivalent net interest income, including the effects of the accelerated CMO premium adjustment in the prior year, increased $41 million, or 5%, for the nine months ended September 30, 2013 compared to the nine months ended September 30, 2012 reflecting an increase in net-interest earning assets of $456 million and an increase in our net interest margin of one basis point. The $1.6 billion increase in interest-earning assets reflects the organic loan growth in our commercial and indirect auto portfolios and the full year impact of the loans acquired in the HSBC Branch Acquisition, partially offset by our securities portfolio repositioning transaction from the second quarter of 2012. Over the same period our average interest bearing liabilities increased by $1.1 billion, with the impact of deposits acquired in the HSBC Branch Acquisition offset by paydowns in borrowings. The one 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 nine months ended September 30, 2013 compared to the nine months ended September 30, 2012.

The yield on our commercial business and commercial real estate loan portfolios decreased by 28 basis points and 60 basis points, respectively. Consumer loan yields dropped 14 basis points, as we experienced lower yields across most loan categories due to the lower interest rate environment.

The yield on our investment securities portfolio decreased three basis points from the prior nine months ended September 30, 2012.

The yield on our interest-earning assets in the nine months ended September 30, 2013decreased16 basis points compared to the nine months ended September 30, 2012, while costs on interest-bearing liabilities decreased19 basis points, resulting in a three 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; need for an allowance for acquired loan losses in excess of any credit discount due to deterioration in credit quality subsequent to acquisition; and probable losses associated with our unfunded loan commitments. The following table details the composition of our provision for credit losses for the periods indicated:

	Three months ended						Nine months ended September 30,
	September 30,		June 30,		September 30,		2013		2012
(in thousands)	2013		2013		2012
Provision for originated loans	$	25,432	$	23,904	$	21,393	$	68,261	$	62,295
Provision for acquired loans	1,768		896		407		3,539		7,208
Provision for unfunded commitments	400		400		400		1,200		797
Total	$	27,600	$	25,200	$	22,200	$	73,000	$	70,300

The provision for credit losses of $27.6 million in the third quarter of 2013 reflects continued growth in our commercial portfolio, partially offset by a release of provision in our residential real estate portfolio reflecting the continued decrease in the portfolio balance. This provision included $0.4 million for unfunded loan commitments in the third quarter of 2013 as a result of the growth in our unfunded commitments. Our total unfunded commitments were $9.3 billion and $8.7 billion at September 30, 2013 and December 31, 2012, respectively. The liability for unfunded commitments is included in Other Liabilities in our Consolidated Statements of Condition and amounted to $13 million and $12 million at September 30, 2013 and December 31, 2012, respectively.

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Our provision for loan 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, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic considerations. The provision for credit losses related to originated loans amounted to $25.4 million, or 0.65% of average originated loans annualized, for the quarter ended September 30, 2013, compared to $23.9 million, or 0.65% of average originated loans annualized, for the quarter ended June 30, 2013 and $21.4 million, or 0.72% of average originated loans annualized for the quarter ended September 30, 2012. The current quarter provision included $12.5 million to support sequential originated loan growth and $12.9 million to cover net charge-offs during the quarter.

Our provision for loan 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. Subsequent to acquisition, we periodically reforecast the expected cash flows for our acquired loans and compare this to our original estimates to evaluate the need for a loan loss provision. Our provision related to our acquired loans for the third quarter of 2013was $1.8 million, compared to $0.9 million for the quarter ended June 30, 2013 and $0.4 million for the third quarter of 2012.

Noninterest Income

The following table presents our noninterest income for the periods indicated:

	Three months ended									Nine months ended September 30,
(dollars in thousands)	September 30, 2013			June 30, 2013			September 30, 2012			2013			2012
Deposit service charges	$	27,115		$	26,482		$	26,422		$	78,397		$	64,892
Insurance commissions	17,854			17,692			18,764			51,901			52,669
Merchant and card fees	12,464			12,380			12,014			36,142			26,813
Wealth management services	15,189			14,945			11,069			42,979			29,315
Mortgage banking	2,268			6,882			10,974			15,574			23,797
Capital markets income	5,058			5,002			6,381			16,091			19,751
Lending and leasing	4,886			4,534			3,730			13,326			11,098
Bank owned life insurance	3,725			3,321			3,449			10,513			10,684
Gain on securities portfolio repositioning	—			—			5,337			—			21,232
Other	2,863			4,308			4,063			11,357			7,458
Total noninterest income	$	91,422		$	95,546		$	102,203		$	276,280		$	267,709
Noninterest income as a percentage of net revenue	24.8		%	26.2		%	27.5		%	25.4		%	25.8		%

Comparison to Prior Quarter

Third quarter 2013 noninterest income of $91.4 milliondecreased$4.1 million, or 4%, compared to the prior quarter, driven primarily by lower mortgage banking gain-on-sale revenues, which was partially offset by increases in most other noninterest income categories.

Deposit service charges increased 2% from the prior quarter reflecting seasonal improvement in non-sufficient funds incident rates as well as sustained higher collection rates. We expect a seasonal decline in deposit service charges in the fourth quarter of 2013.

Higher mortgage rates this quarter have impacted both our mortgage loan volumes and margins. Mortgage banking revenues declined $4.6 million, or 67%, from the second quarter of 2013 driven by decreases in locked application volumes and gain-on-sale margins. Locked volumes decreased 42% while gain-on-sale margins declined 60 basis points. While purchase volumes increased 15% from the prior quarter, application volumes

25

decreased 51% due to lower refinance volumes. Going forward, our focus will be on the purchase home market gaining market share.

Wealth management revenue increased 2% from the second quarter reflecting the continued customer demand for fixed rate annuity products which increased 75% from the prior quarter. As annuity issuers widened spreads on fixed annuities by 40 basis points relative to certificates of deposit rates, fixed annuities have become a popular product for our customers. Approximately 25% of our wealth management revenues in the current quarter were from fixed annuities.

Insurance commissions and merchant and card fees both increased modestly from the second quarter. Third quarter is typically the highest for insurance commissions.

Other noninterest income decreased $1.4 million from the second quarter due to lower overall gains from investment partnerships, low income housing tax credit investments, investment securities and other unconsolidated equity investments. The gains recognized from these investments in 2013 have been aided by the current low interest rate and recovering economic environment, and might not recur at this level in the future.

Comparison to Prior Year Quarter

Third quarter2013 noninterest income of $91.4 milliondecreased$11 million compared to the third quarter of 2012. Excluding the $5 million gain on securities portfolio repositioning in 2012, our third quarter2013 noninterest income decreased$5 million, or 6%. Our $4 million, or 37%, increase in revenues from wealth management services, driven by the acquisition of $2.5 billion in assets under management from HSBC and expansion of this business was more than offset by a $9 million, or 79%, decrease in mortgage banking revenues.

Other noninterest income decreased $1.2 million from the third quarter of 2012 due to lower overall gains from investment partnerships, low income housing tax credit investments, investment securities and other unconsolidated equity investments. The gains recognized from these investments in 2013 have been aided by the current low interest rate and recovering economic environment, and might not recur at this level in the future.

Comparison to Prior Year to Date

Noninterest income for the nine months ended September 30, 2013increased$8.6 million from the same period in 2012. Noninterest income for the nine months ended September 30, 2012 includes a $21 million gain on securities portfolio repositioning. Excluding this gain, the increase from 2012 to 2013 was $29.8 million and resulted primarily from the impact of our May 2012 HSBC Branch Acquisition. The acquisition of the credit card business in our HSBC Branch Acquisition and continued expansion of this business both contributed to the $9 million, or 35%, increase in merchant and card fees. The acquisition of $2.5 billion in assets under management from HSBC and subsequent growth in assets under management contributed to the $14 million, or 47%, increase in revenues from wealth management services. These increases were partially offset by an $8 million decrease in mortgage banking revenues and a $4 million decrease in capital markets revenues.

Other noninterest income for the nine months ended September 30, 2013 increased $3.9 million from the same period in 2012 due to higher overall gains from investment partnerships, low income housing tax credit investments, investment securities and other unconsolidated equity investments. The gains recognized from these investments in 2013 have been aided by the current low interest rate and recovering economic environment, and might not recur at this level in the future.

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Noninterest Expense

The following table presents our operating noninterest expenses for the periods indicated: 

	Three months ended									Nine months ended September 30,
(dollars in thousands)	September 30, 2013			June 30, 2013			September 30, 2012			2013			2012
Salaries and benefits	$	115,034		$	116,305		$	115,484		$	347,129		$	316,468
Occupancy and equipment	26,582			28,506			25,694			83,133			71,800
Technology and communications	28,999			29,603			28,110			85,715			72,257
Marketing and advertising	5,822			5,450			8,954			15,618			22,393
Professional services	9,820			9,782			11,193			29,205			29,351
Amortization of intangibles	7,702			10,850			14,506			32,671			30,811
FDIC premiums	9,351			9,348			8,850			27,600			25,535
Merger and acquisition integration expenses	—			—			29,404			—			173,834
Restructuring charges	—			—			—			—			6,453
Other	27,883			25,326			24,347			82,958			63,457
Total noninterest expenses	231,193			235,170			266,542			704,029			812,359
Less nonoperating expenses:
Merger and acquisition integration expenses	—			—			(29,404		)	—			(173,834		)
Restructuring charges	—			—			—			—			(6,453		)
Total operating noninterest expenses(1)	$	231,193		$	235,170		$	237,138		$	704,029		$	632,072
Efficiency ratio(2)	62.7		%	64.4		%	71.7		%	64.6		%	78.2		%
Operating efficiency ratio(1)	62.7		%	64.4		%	64.7		%	64.6		%	61.6		%

⁽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 and period over period analysis of our fundamental results. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income.

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

Comparison to Prior Quarter

Third quarter2013 GAAP noninterest expenses decreased$4 million to $231 million from the second quarter of 2013. Noninterest expenses in the third quarter of 2013 reflected lower salaries and benefits, occupancy and equipment and amortization of intangibles. Salaries and benefits decreased $1.3 million from the second quarter of 2013 driven primarily by a decrease in variable compensation tied to revenue growth as well as seasonal declines in benefits expense. Occupancy and equipment expenses declined by $1.9 million, or 7%, from the second quarter due in large part to expenses related to consolidation of branches in the prior quarter. The amortization of intangibles decreased $3.1 million from the prior quarter primarily reflecting the decline in amortization of the HSBC transaction related core deposit intangible. Other noninterest expenses for the third quarter of 2013 included a $2.6 million nonrecurring charge.

Our efficiency ratio improved to 62.7% in the third quarter of 2013 from 64.4% in the prior quarter, reflecting the positive operating leverage achieved.

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Comparison to Prior Year Quarter

Noninterest expenses decreased$35 million, for the quarter ended September 30, 2013 from the quarter ended September 30, 2012, which included $29 million in merger and acquisition integration expenses. Excluding these one-time charges, our noninterest expenses decreased$6 million primarily due to lower marketing and advertising, professional services and amortization of intangibles.

Merger and acquisition integration expenses of $29 million for the three months ended September 30, 2012 were attributable to the HSBC Branch Acquisition.

Comparison to Prior Year to Date

Noninterest expense for the nine months ended September 30, 2013decreased$108 million from the nine months ended September 30, 2012. Excluding $174 million and $6 million in merger and acquisition integration expenses and restructuring charges, respectively, in 2012, noninterest expenses increased$72 million, or 11%, in 2013 primarily as a result of operating the acquired HSBC branches.

Taxes

Our effective tax rate of 28.2% for the three months ended September 30, 2013 decreased from 32.0% for the three months ended June 30, 2013 and 29.7% for the three months ended September 30, 2012.  The decrease from the three months ended June 30, 2013 and September 30, 2012 was primarily a result of a customer related historic property equity investment.

Our effective tax rate for the nine months ended September 30, 2013 was 30.3% and 31.2% for the nine months ended September 30, 2012. The decrease in the effective tax rate was primarily due to overall tax planning.

ANALYSIS OF FINANCIAL CONDITION AT SEPTEMBER 30, 2013

Overview

We delivered steady loan growth in our commercial lending businesses, particularly commercial real estate, and also in our indirect auto business. Key to our ability to deliver this industry leading loan performance is attracting new customers while maintaining our discipline on credit. Period end balances in our commercial loan portfolio increased $856 million, or 9% annualized, to $12.9 billion at September 30, 2013. Indirect auto loans more than doubled from December 31, 2012, to an ending balance of $1.3 billion at September 30, 2013, as we originated $938 million in loans year to date. During the quarter, we originated $379 million in indirect auto loans at an average customer FICO score of 753 and yield of 3.1%, net of dealer reserve. The decrease in residential mortgage loans reflected elevated industry wide prepayment levels.

During the third quarter of 2013, we continued to focus on rotating our balance sheet from investment securities into loans at a level of approximately $200 million per quarter. The rotation is accomplished by using both cash flows received on our residential mortgage-backed investment securities portfolio and investment security sales to fund loan growth. The securities sold are based on maintaining an appropriate portfolio mix. This rotation contributed to a portion of the $825 million decrease in our investment securities portfolio ending balance from December 31, 2012. The level of continued rotation will depend, in part, on the absolute level of current and projected loan growth and could moderate from current levels in relation to future loan growth. The decrease was also the result of the increase in long-term interest rates as well as tightening credit spreads on some or our credit assets, which caused a $156 million pre-tax decline in our unrealized gains in our available for sale portfolio.

Our continued efforts to grow our customer base, reposition our account mix, and increase our lower cost deposits are reflected in the decreases in our money market deposits and certificates of deposit and the increase in our noninterest-bearing deposits. We have been successful in attracting and retaining mass affluent customers through our Pinnacle checking account products.

Short-term borrowings increased $1.2 billion from December 31, 2012 as we used short-term borrowings to fund asset growth due to the run off of our money market deposit accounts and certificates of deposit.

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Lending Activities

Our primary lending activity is the origination of commercial business and commercial real estate 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 fee-based banking services. Consistent with our long-term customer relationship focus, we retain the servicing rights on the majority of 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$1.4 billion from December 31, 2012 to September 30, 2013 stemming from the continued growth in our commercial and indirect auto portfolios. Our commercial loan portfolio increased$0.9 billion, or 9% annualized, resulting from our continued strategic focus on the portfolio. Our period over period results display the organic growth across our footprint in our commercial lending activities. Commercial loans as a percentage of our total loans of 61% remained in line with the loan type composition at December 31, 2012. During the third quarter of 2013, we originated $379 million of indirect auto loans, our highest quarterly level, and added 84 dealers to our network within our contiguous footprint. We expect indirect auto loan origination levels for the fourth quarter of 2013 to approximate second quarter 2013 levels.

Offsetting this growth was a decrease in our residential real estate loan portfolio of $242 million which reflected the elevated industry wide prepayment levels and our strategy of selling certain newly originated residential real estate loans in the secondary market.

The following table presents the composition of our loan and lease portfolios at the dates indicated: 

	September 30, 2013					December 31, 2012				Increase (decrease)
(dollars in millions)	Amount			Percent		Amount		Percent
Commercial:
Real estate	$	6,888		32.7	%	6,466		32.8	%	422
Construction	810			3.8		627		3.2		183
Business	5,205			24.7		4,953		25.1		252
Total commercial	12,902			61.2		12,047		61.1		857
Consumer:
Residential real estate	3,519			16.7		3,762		19.1		(242	)
Home equity	2,707			12.8		2,652		13.5		55
Indirect auto	1,339			6.3		601		3.0		738
Credit cards	312			1.5		315		1.6		(3	)
Other consumer	310			1.5		334		1.7		(24	)
Total consumer	8,187			38.8		7,663		38.9		523
Total loans and leases	21,089			100.0	%	19,710		100.0	%	1,381
Allowance for loan losses	(198		)			(163	)			(35	)
Total loans and leases, net	$	20,891				19,547				1,344

Included in the table above are acquired loans with a carrying value of $4.9 billion and $6.3 billion at September 30, 2013 and December 31, 2012, respectively. Such acquired loans were initially recorded at fair value with no carryover of any related allowance for loan losses.

We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on credit discipline. Our enhanced specialty offerings in equipment financing, healthcare, and syndications continue to provide additional opportunities to enhance our relationships with our existing commercial customer base, as well as attract new customers. Overall, our commercial pipelines at the end of the third quarter of 2013 continue to be robust, particularly in our newer markets.

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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 millions)	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Other(1)		Total loans and leases
September 30, 2013
Commercial:
Real estate	$	3,689	$	839	$	1,458	$	1,712	$	—	$	7,697
Business	2,283		840		811		723		547		5,205
Total commercial	5,972		1,679		2,268		2,436		547		12,902
Consumer:
Residential real estate	1,246		82		275		1,917		—		3,519
Home equity	1,364		229		572		542		—		2,707
Indirect auto	471		4		8		252		603		1,339
Credit cards	263		29		11		8		—		312
Other consumer	259		24		26		—		—		310
Total consumer	3,603		368		893		2,720		603		8,187
Total loans and leases	$	9,574	$	2,047	$	3,161	$	5,156	$	1,151	$	21,089
December 31, 2012
Commercial:
Real estate	$	3,536	$	671	$	1,336	$	1,550	$	—	$	7,093
Business	2,390		753		619		635		556		4,953
Total commercial	5,927		1,424		1,955		2,186		556		12,047
Consumer:
Residential real estate	1,321		71		271		2,099		—		3,762
Home equity	1,316		203		581		552		—		2,652
Indirect auto	169		2		—		118		313		601
Credit cards	267		30		11		6		—		315
Other consumer	270		24		33		6		—		334
Total consumer	3,343		330		897		2,780		313		7,663
Total loans and leases	$	9,270	$	1,754	$	2,852	$	4,966	$	868	$	19,710

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

Our Western and Eastern Pennsylvania markets have exhibited steady growth with an increase in their commercial loan portfolios of $255 million and $314 million, or 24% and 21% annualized, respectively, from the end of 2012. Over the same period, our Connecticut and Western Massachusetts market also contributed to the growth, with a 15% annualized increase.

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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 individual loan size as of the dates indicated: 

	September 30, 2013			December 31, 2012
(dollars in millions)	Amount		Count	Amount		Count
Commercial real estate loans by balance size:(1)
Greater than or equal to $20 million	$	520	21	$	384	15
$10 million to $20 million	1,347		98	1,178		85
$5 million to $10 million	1,377		197	1,189		170
$1 million to $5 million	2,725		1,253	2,592		1,194
Less than $1 million(2)	1,728		7,040	1,750		7,423
Total commercial real estate loans	$	7,697	8,609	$	7,093	8,887
Commercial business loans by size:(1)
Greater than or equal to $20 million	$	257	11	$	259	10
$10 million to $20 million	879		64	830		65
$5 million to $10 million	987		136	1,013		145
$1 million to $5 million	1,603		709	1,450		647
Less than $1 million(2)	1,479		25,196	1,401		23,840
Total commercial business loans	$	5,205	26,116	$	4,953	24,707

⁽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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At September 30, 2013 and December 31, 2012, non-owner occupied commercial real estate represented 68% and 70%, respectively of the total commercial real estate balance. 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 millions)	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Other(1)		Total
September 30, 2013:
Non-owner occupied commercial real estate loans:
Construction, acquisition and development	$	309	$	84	$	52	$	128	$	124	$	697
Multifamily and apartments	1,077		64		196		190		129		1,656
Office and professional space	503		74		75		365		105		1,122
Retail	373		49		111		236		110		879
Warehouse and industrial	127		28		61		96		25		337
Other	247		18		129		81		68		543
Total non-owner occupied commercial real estate loans	2,636		317		624		1,095		562		5,234
Owner occupied commercial real estate loans	1,036		312		481		361		274		2,464
Total commercial real estate loans	$	3,671	$	629	$	1,105	$	1,456	$	837	$	7,697
December 31, 2012:
Non-owner occupied commercial real estate loans:
Construction, acquisition and development	$	370	$	52	$	104	$	110	$	95	$	732
Multifamily and apartments	950		56		151		219		87		1,462
Office and professional space	517		72		91		314		106		1,100
Retail	365		42		135		222		95		858
Warehouse and industrial	129		24		55		90		18		316
Other	263		22		130		73		23		511
Total non-owner occupied commercial real estate loans	2,594		268		665		1,028		423		4,979
Owner occupied commercial real estate loans	922		265		468		319		140		2,114
Total commercial real estate loans	$	3,516	$	533	$	1,133	$	1,348	$	564	$	7,093

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

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Investment Securities Portfolio

The fair value of our total investment securities portfolio was comprised of the following at the dates indicated: 

	September 30, 2013				December 31, 2012
(dollars in millions)	Fair value		% of total portfolio		Fair value		% of total portfolio
Collateralized mortgage obligations	$	4,789	41.7	%	$	5,029	40.7	%
Commercial mortgage-backed securities	1,863		16.3		2,060		16.7
Collateralized loan obligations	1,466		12.8		1,545		12.5
Asset-backed securities	914		8.0		956		7.7
Corporate debt and trust preferred securities	870		7.6		851		6.9
Other residential mortgage-backed securities	620		5.4		858		6.9
States and political subdivisions	545		4.8		608		4.9
U.S. government agencies and enterprises	330		2.9		409		3.3
Other	32		0.3		31		0.2
U.S. Treasury	21		0.2		21		0.2
Total investment securities	$	11,450	100.0	%	$	12,368	100.0	%

Since the third quarter of 2011, the Federal Reserve has taken certain actions which have resulted in lower short-term and long-term interest rates.  These actions had the impact of flattening the yield curve and reducing the yields on our investment securities portfolio. Additionally, the predictive ability of the 10 year Treasury rate as a proxy for mortgage rates has diminished. Accordingly, forward mortgage rates have become more volatile and difficult to predict, and competitive market forces caused mortgage rates to continue to rise, which negatively impacted the value of our mortgage-backed investment securities and certain loans.

At the end of the first quarter of 2013, we designated $3 billion of available for sale residential mortgage-backed securities as held to maturity. The net pre-tax unrealized gain on these securities at the time of transfer was $55 million. The securities were transferred at fair value, and the net unrealized pre-tax gain on these securities became part of the new amortized cost basis of the securities and will be amortized into interest income over the life of the securities. The amortization of this net pre-tax unrealized gain will be offset by the amortization of the related pre-tax amount recorded in other accumulated comprehensive income over the remaining life of the securities, resulting in no current or future impact to our net interest income as a result of the transfer.

The net unamortized purchase premiums on our CMO portfolio decreased to $41 million, or 0.9% of the portfolio, at September 30, 2013, from $74 million, or 1.6% of the portfolio, at December 31, 2012. For the nine months ended September 30, 2013, our actual cash flows from our December 31, 2012 CMO portfolio were $1.1 billion, which was $368 million lower than the $1.5 billion we estimated at December 31, 2012.

The net unamortized purchase premiums on our other residential mortgage-backed securities decreased to $11 million, or 1.8% of the portfolio, at September 30, 2013, from $22 million, or 2.7% of the portfolio, at December 31, 2012.

Mortgage rates have rebounded since the lows seen in the fourth quarter of 2012 and actual cash flows on our CMO portfolio were lower than expected. Additionally, we believe that future prepayment speeds will be slower than previously estimated. As a result, we recorded a $1.8 million, or two basis points, retroactive adjustment to our residential mortgage-backed securities portfolio related to changes in prepayment speed estimates during the quarter ended September 30, 2013.

During the quarter ended September 30, 2013, our tax equivalent net interest income included a $1.9 million benefit not expected to reoccur related to the payoff of certain CLOs that were purchased at a discount. The recognition of this discount into interest income added two basis points to our tax equivalent net interest margin.

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Changes in our expectations regarding the 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 accounting adjustment that would be required to maintain a constant effective yield, and in subsequent periods attributable to changes to the prospective yields on our investment securities.

Our holdings in residential mortgage-backed securities were 47% and 48% of our total investment securities portfolio at September 30, 2013 and December 31, 2012, respectively. At each of September 30, 2013 and December 31, 2012, 99% 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.

Deposits

Our total deposits decreased$708 million, or 9.3% annualized, from December 31, 2012 to $27.0 billion at September 30, 2013, and core deposits increased to 86% of total deposits from 85% at December 31, 2012. We continued to focus our efforts on growing our customer base, re-positioning our account mix and lowering deposit costs. Transaction deposits, which include interest-bearing and noninterest bearing checking balances, increased $512 million, or 8% annualized, from December 31, 2012 and currently represent 36% of our deposit base, up from 32% a year ago. Seasonal strength in commercial checking accounts in the current quarter was offset by a decline in consumer accounts.

The average cost of interest-bearing deposits declined 10 basis points for the nine months ended September 30, 2013 from the same period in 2012 and was unchanged from the second quarter of 2013 to the third quarter of 2013. Continued pricing actions on non-transactional deposit accounts together with a favorable shift in the mix of deposits drove the decline in overall cost of interest-bearing deposits.

Noninterest bearing accounts increased $325 million, or 9% annualized, from December 31, 2012 resulting from the continued acquisition of new checking accounts and seasonal strength in commercial account balances.

In response to changing consumer banking behaviors, we continue to invest in enhancing our online, mobile and telephonic banking capabilities for retail and small business customers, while continuing to optimize our branch network and in-branch experience. Over 120,000 customers have enrolled in mobile banking since its launch in early 2013. Additionally, we will launch remote deposit capture capabilities for our mobile banking customers. We have consolidated over 60 branches since 2011, including nine in 2013 and we expect to consolidate an additional 10 branches in early 2014.

The following table illustrates the composition of our deposits at the dates indicated:

	September 30, 2013				December 31, 2012				Increase (decrease)
(dollars in millions)	Amount		Percent		Amount		Percent
Core deposits:
Savings	$	3,695	13.7	%	$	3,888	14.0	%	$	(193	)
Interest-bearing checking	4,638		17.2		4,451		16.1		187
Money market deposits	9,905		36.7		10,581		38.2		(676		)
Noninterest-bearing	4,969		18.4		4,644		16.8		325
Total core deposits	23,207		86.0		23,564		85.1		(357		)
Certificates	3,762		14.0		4,113		14.9		(351		)
Total deposits	$	26,969	100.0	%	$	27,677	100.0	%	$	(708	)

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

(n millions)	Upstate New York(1)		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Total deposits
September 30, 2013
Core deposits:
Savings	$	2,342	$	162	$	222	$	969	$	3,695
Interest-bearing checking	2,755		604		677		602		4,638
Money market deposits	6,414		1,170		921		1,400		9,905
Noninterest-bearing	3,054		713		544		658		4,969
Total core deposits	14,565		2,649		2,364		3,629		23,207
Certificates	2,072		506		368		816		3,762
Total deposits	$	16,637	$	3,155	$	2,732	$	4,445	$	26,969
December 31, 2012
Core deposits:
Savings	$	2,393	$	166	$	230	$	1,099	$	3,888
Interest-bearing checking	2,625		589		622		615		4,451
Money market deposits	6,976		1,199		1,003		1,403		10,581
Noninterest-bearing	2,804		711		536		593		4,644
Total core deposits	14,798		2,665		2,391		3,710		23,564
Certificates	2,114		570		462		967		4,113
Total deposits	$	16,912	$	3,235	$	2,853	$	4,677	$	27,677

⁽¹⁾ Includes brokered money market deposits of $326 million and $278 million at September 30, 2013 and December 31, 2012, respectively, andbrokered certificates of deposit of $727 million and $635 million at September 30, 2013 and December 31, 2012, respectively.

Capital

During the first nine months of 2013, our stockholders’ equity increased$12 million as our net income of $218 million was offset by $96 million of unrealized losses on our available for sale investment securities, $84 million, or $0.24 per share, in common stock dividends and $23 million in preferred stock dividends. Our tangible common equity ratio was 5.89% at September 30, 2013 and 5.77% at December 31, 2012. During the same nine month period, our Tier 1 risk-based regulatory capital ratio increased by 16 basis points to 9.45% and our Total risk-based regulatory capital ratio increased by 17 basis points to 11.40%. These increases reflect the favorable impacts of both our retained earnings and adjustments, totaling 77 and 91 basis points to our Tier 1 and Total risk-based regulatory capital ratios, respectively. The increases in capital were offset by a $1.7 billion increase in risk-weighted assets due to balance sheet growth and our balance sheet rotation strategy, whereby we are rotating investment security proceeds into loans.

At March 31, 2013, we designated $3.0 billion of available for sale CMO and MBS investment securities as held to maturity. The transfer from available for sale to held to maturity was at fair value. This designation partially protected tangible equity in the event of a rise in interest rates, as such a rise in interest rates would extend the duration and adversely impact the fair value of the investment securities.

During the quarter ended March 31, 2013, we recorded a $36 million reduction to our goodwill balance related to the establishment of deferred tax assets in connection with the HSBC Branch acquisition and our National City Bank branch acquisition.

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 result in regulators initiating certain mandatory and possibly additional discretionary actions that could have a direct material effect on our financial statements.

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The capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. at September 30, 2013 are presented in the following table: 

	Actual				Minimum amount to be well-capitalized
(dollars in millions)	Amount		Ratio		Amount		Ratio
First Niagara Financial Group, Inc.:
Leverage ratio	$	2,465	7.14	%	$	1,726	5.00	%
Tier 1 risk-based capital	2,465		9.45		1,565		6.00
Total risk-based capital	2,974		11.40		2,609		10.00
First Niagara Bank, N.A.:
Leverage ratio	$	2,624	7.61	%	$	1,724	5.00	%
Tier 1 risk-based capital	2,624		10.08		1,562		6.00
Total risk-based capital	2,835		10.89		2,604		10.00

As of September 30, 2013, 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, 2013, the capital ratios reflect $125 million in dividends the Bank made to the Company during the first nine months of 2013.

In preparation for the implementation of the proposed regulatory capital rule revisions issued by the Federal Reserve pursuant to the Basel III framework, which was approved July 2013, we have analyzed the impact of the finalized requirements. Based on our preliminary interpretation of the rules and our planned reduction of asset-backed securities and collateralized loan obligations that will be subject to significant risk weighting increases under Basel III, we estimated that our reported Tier 1 common ratio, on a fully phased in basis, would be five to ten basis points lower than our current level under the New Capital Rules. We are confident in our ability to meet the minimum capital ratios plus the capital conservation buffer upon implementation of the revised requirements.

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.

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RISK MANAGEMENT

As with all companies, we face uncertainty and the management of risk is an important component of driving shareholder value and financial returns. We do this through robust governance processes and appropriate risk and control framework. We have an Enterprise Risk Management (“ERM”) framework which includes methods and processes to identify and manage risk. Successful management of risk allows us to identify situations that may significantly or materially interfere with the achievement of desired goals, or an event or activity which may cause a significant opportunity to be missed.

We employ three lines of defense as our primary means to ensure roles, responsibilities and accountabilities are defined and to allow for quick identification and response to risk events. The first line of defense is the businesses that are responsible for their risks and ensuring the continuous monitoring of their control environment. The second line of defense is the oversight areas residing primarily in the risk departments reporting to the Chief Risk Officer. These areas set policy, monitor to ensure compliance and report on the results of oversight. The third line of defense is Internal Audit which provides independent objective assurance services which audit and report on the design and operating effectiveness of internal controls, risk management framework and governance processes. The results of internal audit reviews are reported to the Audit Committee of the Board of Directors.

The Board of Directors has the fundamental responsibility of directing the management of the Bank's business and affairs, and establishing a corporate culture that prevents the circumvention of safe and sound policies and procedures. Our Board of Directors and Executive Management utilize various committees' in the management of risk. The main risk governance committees are the Audit Committee and Risk Committee of the Board and the Enterprise Risk Management Committee of Management ("ERMC"). The purpose of the Risk Committee of the Board of Directors is to assist the Board in fulfilling its oversight responsibilities of the Company with respect to understanding inherent risks impacting the Company and related control activities; and, assessing the risks of the Company. Sub-Committees of the ERMC, which support the core risk areas, are the Operational Risk Committee, Allowance for Loan and Lease Losses Committee, Credit Risk Committee, Credit Policy Committee, Consumer Finance Risk Committee, Asset/Liability Committee, Management Compliance Committee, and the Information Security & Privacy Committee. These sub-committees are supported by various working groups.

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.

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

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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 no less frequently than annually for those greater than $3 million, every 18 months for those greater than $1 million but less than $3 million and every 36 months for those greater than $500 thousand and less than $1 million.

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.

Quarterly Criticized Asset Reports ("QCARs") are prepared every quarter for all special mention exposures greater than $300 thousand and substandard or doubtful exposures greater than $200 thousand. The purpose of the QCAR is to document 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.

QCARs for substandard loans are reviewed on a quarterly basis by either management's Criticized 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). QCARs for all special mention loans greater than $300 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 $300 thousand and $2 million). Special mention and substandard loans below $300 thousand and $200 thousand, respectively, are reviewed by a loan officer on a quarterly basis ensuring that loan grade and accrual status 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. 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

38

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 a loan is impaired, the related allowance for loan losses.

The following table details our allocation of our allowance for loan losses by loan category at the dates indicated:

	September 30, 2013					December 31, 2012
(dollars in thousands)	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	$	40,987		36.5	%	$	37,550		36.0	%
Business	119,314			24.7		99,188			25.1
Total commercial	160,301			61.2		136,738			61.1
Consumer:
Residential real estate	3,027			16.7		4,575			19.1
Home equity	7,847			12.8		5,006			13.5
Other consumer	26,778			9.3		16,203			6.3
Total consumer	37,652			38.8		25,784			38.9
Total	$	197,953		100.0	%	$	162,522		100.0	%
Allowance for loan losses to total loans	0.94		%			0.82		%

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The following table presents the activity in our allowance for originated loan losses by portfolio segment for the periods indicated: 

	Commercial						Consumer
Originated loans (in thousands)	Real estate			Business			Residential			Home equity			Other consumer			Total
Nine months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	37,550		$	99,188		$	4,515		$	4,716		$	14,989		$	160,958
Provision for loan losses	5,637			41,897			(1,552		)	2,981			19,298			68,261
Charge-offs	(6,103		)	(23,477		)	(1,256		)	(2,072		)	(10,010		)	(42,918		)
Recoveries	3,851			1,706			401			232			2,501			8,691
Balance at end of period	$	40,935		$	119,314		$	2,108		$	5,857		$	26,778		$	194,992
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	50,007		$	57,348		$	4,101		$	4,374		$	2,362		$	118,192
Provision for loan losses	(8,021		)	56,634			2,409			2,604			8,669			62,295
Charge-offs	(5,518		)	(23,131		)	(1,965		)	(3,508		)	(3,035		)	(37,157		)
Recoveries	556			1,954			294			411			1,171			4,386
Allowance related to loans sold	(88		)	(187		)	(66		)	(121		)	(45		)	(507		)
Balance at end of period	$	36,936		$	92,618		$	4,773		$	3,760		$	9,122		$	147,209
Three months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	43,258		$	106,597		$	2,630		$	5,505		$	24,460		$	182,450
Provision for loan losses	(3,327		)	22,411			(385		)	674			6,059			25,432
Charge-offs	(2,312		)	(10,163		)	(161		)	(395		)	(4,799		)	(17,830		)
Recoveries	3,316			469			24			73			1,058			4,940
Balance at end of period	$	40,935		$	119,314		$	2,108		$	5,857		$	26,778		$	194,992
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	44,927		$	75,708		$	5,076		$	4,971		$	4,514		$	135,196
Provision for loan losses	(6,536		)	23,147			107			(771		)	5,446			21,393
Charge-offs	(1,508		)	(6,500		)	(410		)	(545		)	(1,179		)	(10,142		)
Recoveries	123			424			14			145			368			1,074
Allowance related to loans sold	$	(70	)	$	(161	)	$	(14	)	$	(40	)	$	(27	)	$	(312	)
Balance at end of period	$	36,936		$	92,618		$	4,773		$	3,760		$	9,122		$	147,209

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The following table presents the activity in our allowance for loan losses for our acquired loan portfolio for the periods indicated: 

	Commercial					Consumer
Acquired loans (in thousands)	Business			Real estate		Residential		Home equity		Other consumer			Total
Nine months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	60	$	290	$	1,214		$	1,564
Provision for loan losses	1,724			—		859		1,700		(744		)	3,539
Charge-offs	(1,772		)	—		—		—		(547		)	(2,319		)
Recoveries	100			—		—		—		77			177
Balance at end of period	$	52		$	—	$	919	$	1,990	$	—		$	2,961
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	60	$	50	$	1,798		$	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	$	—		$	—	$	60	$	50	$	2,614		$	2,724
Three months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	42		$	—	$	60	$	290	$	866		$	1,258
Provision for loan losses	—			—		859		1,700		(791		)	1,768
Charge-offs	—			—		—		—		(106		)	(106		)
Recoveries	10			—		—		—		31			41
Balance at end of period	$	52		$	—	$	919	$	1,990	$	—		$	2,961
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	60	$	50	$	3,210		$	3,320
Provision for loan losses	407			—		—		—		—			407
Charge-offs	(468		)	—		—		—		(658		)	(1,126		)
Recoveries	61			—		—		—		62			123
Balance at end of period	$	—		$	—	$	60	$	50	$	2,614		$	2,724

As of September 30, 2013, we had a liability for unfunded commitments of $13 million. For the nine months ended September 30, 2013, we recognized a provision for credit loss related to our unfunded loan commitments of $1.2 million. Our total unfunded commitments amounted to $9.3 billion at September 30, 2013.

Our net charge-offs of $36 million for the nine months ended September 30, 2013 were $3 millionlower than our net charge-offs of $39 million for the nine months ended September 30, 2012. The period over period decrease was driven primarily by $4 million of charge-offs on two commercial loans acquired in the Harleysville acquisition in the prior year. Also contributing to the period over period change was a $3 million recovery related to a commercial real estate loan that was refinanced away. This was offset by an increase in charge offs in the indirect auto and credit card portfolios that continue to season. Total net charge-offs for the third quarter of 2013 represented 0.25% of average total loans compared with 0.26% of average total loans in the second quarter of 2013. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.33% for both the third quarter of 2013 and the second quarter of 2013 and 0.35% for the year ended December 31, 2012.

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The following table details our net charge-offs by loan category for the periods indicated: 

	Nine months ended September 30,
	2013				2012
(dollars in thousands)	Net charge-offs		Percent of average loans		Net charge-offs		Percent of average loans
Commercial:
Real estate	$	3,925	0.07	%	$	10,169	0.21	%
Business	21,771		0.57		21,178		0.66
Total commercial	25,696		0.27		31,347		0.39
Consumer:
Residential real estate	855		0.03		1,671		0.06
Home equity	1,840		0.09		3,098		0.17
Other consumer	7,978		0.68		3,047		0.70
Total consumer	10,673		0.18		7,816		0.15
Total	$	36,369	0.24	%	$	39,163	0.29	%

Our nonperforming loans increased to $175 million from $173 million at December 31, 2012, and decreased $7 million from $182 million at June 30, 2013. The decrease in nonperforming loans from June 30, 2013 was largely due to paydowns since the prior quarter. New nonperforming loans during the third quarter of 2013 were $38 million, compared to $37 million in the prior quarter. Nonperforming loans comprised 0.83% of total loans at September 30, 2013 compared to 0.88% at December 31, 2012. Excluding our acquired loans, our nonperforming loans were 0.89% of originated loans at September 30, 2013 compared to 1.07% of originated loans at December 31, 2012.

Nonperforming assets to total assets were 0.53%, up only modestly from the prior quarter. A decrease in nonperforming originated loans was offset by the transfer of three acquired loans that were previously designated as loans 90 days past due but accruing to other real estate owned. The composition of our nonperforming loans and total nonperforming assets consisted of the following at the dates indicated: 

	September 30,			December 31,
(dollars in thousands)	2013(1)			2012(1)
Nonperforming loans:
Commercial:
Real estate	$	52,300		$	51,968
Business	47,026			55,998
Total commercial	99,326			107,966
Consumer:
Residential real estate	31,312			27,192
Home equity	33,610			33,438
Other consumer	10,984			4,128
Total consumer	75,906			64,758
Total nonperforming loans	175,232			172,724
Real estate owned	24,262			10,114
Total nonperforming assets (2)	$	199,494		$	182,838
Loans 90 days past due and still accruing interest (3)	$	136,248		$	171,568
Total nonperforming assets as a percentage of total assets	0.53		%	0.50		%
Total nonaccruing loans as a percentage of total loans	0.83		%	0.88		%
Total nonaccruing originated loans as a percentage of total originated loans	0.89		%	1.07		%
Allowance for loan losses to nonaccruing loans	113.0		%	94.1		%

⁽¹⁾  Includes $30 million of nonperforming acquired lines of credit, primarily in home equity at both September 30, 2013 and December 31, 2012.

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⁽²⁾  Nonperforming assets do not include $70 million and $46 million of performing renegotiated loans that are accruing interest at September 30, 2013 and December 31, 2012, respectively.

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

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. Despite the increase in balance, as a percentage of total loans, our early stage delinquencies decreased. Early stage delinquencies (loans that are 30 to 89 days past due) of $49 million at September 30, 2013 in our originated loan portfolio increased from $39 million at December 31, 2012. Our acquired loans that were 30 to 89 days past due decreased$35 million from $95 million as of December 31, 2012 to $61 million as of September 30, 2013.

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, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012		September 30, 2013		December 31, 2012
Originated loans
Commercial:
Real estate	0.1	%	0.1	%	—	%	0.1	%	0.6	%	0.8	%	0.7	%	0.9	%
Business	0.2		0.1		0.1		0.1		0.5		0.4		0.8		0.7
Total commercial	0.1		0.1		0.1		0.1		0.5		0.6		0.7		0.8
Consumer:
Residential real estate	0.4		0.4		0.1		0.1		1.1		1.1		1.6		1.7
Home equity	0.2		0.2		0.1		0.1		0.7		0.7		1.0		1.0
Other consumer	0.6		0.6		0.2		0.1		0.4		0.2		1.2		0.9
Total consumer	0.4		0.4		0.1		0.1		0.7		0.7		1.3		1.3
Total	0.2	%	0.2	%	0.1	%	0.1	%	0.6	%	0.7	%	0.9	%	1.0	%
Acquired loans
Commercial:
Real estate	0.5	%	0.5	%	0.3	%	0.9	%	3.6	%	3.9	%	4.5	%	5.3	%
Business	1.2		0.8		0.1		0.3		2.3		1.9		3.6		3.1
Total commercial	0.7		0.6		0.3		0.7		3.3		3.4		4.3		4.8
Consumer:
Residential real estate	1.2		1.2		0.6		0.6		4.0		3.4		5.9		5.2
Home equity	0.6		0.7		0.2		0.4		1.6		1.5		2.5		2.7
Other consumer	11.3		2.1		3.8		1.4		8.2		2.7		23.3		6.1
Total consumer	1.0		1.1		0.5		0.6		3.0		2.6		4.5		4.3
Total	0.9	%	0.9	%	0.4	%	0.6	%	3.2	%	3.0	%	4.4	%	4.5	%

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Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. The following table presents a breakout of our commercial loans by loan grade at the dates indicated: 

	Percent of total
	September 30, 2013		December 31, 2012
Originated loans:
Pass	94.7	%	94.5	%
Criticized:(1)
Accrual	4.5		4.5
Nonaccrual	0.8		1.0
Total criticized	5.3		5.5
Total	100.0	%	100.0	%
Acquired loans:
Pass	87.7	%	87.4	%
Criticized:(1)
Accrual	11.7		12.2
Nonaccrual	0.6		0.4
Total criticized	12.3		12.6
Total	100.0	%	100.0	%

⁽¹⁾  Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012.

44

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

	Percent of total
	September 30, 2013		December 31, 2012
Originated loans by refreshed FICO score:
Over 700	76.5	%	73.7	%
660-700	12.4		13.6
620-660	5.7		6.2
580-620	2.4		2.8
Less than 580	2.3		3.2
No score(1)	0.7		0.5
Total	100.0	%	100.0	%
Acquired loans by refreshed FICO score:
Over 700	72.4	%	68.3	%
660-700	8.2		9.6
620-660	5.1		5.7
580-620	3.3		3.8
Less than 580	4.0		5.3
No score(1)	7.0		7.3
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 peer averages.

As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for 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 $129 million and $176 million as of September 30, 2013 and December 31, 2012, respectively. In addition, we maintain an allowance for loan losses on our acquired loans, if necessary, for losses in excess of any remaining credit discount.

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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: 

(dollars in thousands)	HSBC			NewAlliance			Harleysville			National City			Total
September 30, 2013
Provision for loan losses	$	(19	)	$	—		$	1,787		$	—		1,768
Net charge-offs	81			—			(16		)	—			65
Net charge-offs to average loans	0.03		%	—		%	(0.01		)%	—		%	0.01		%
Nonperforming loans	$	5,567		$	7,931		$	13,790		$	3,100		$	30,388
Total loans (1)	911,391			2,811,281			1,040,380			243,701			5,006,753
Allowance for acquired loan losses	—			—			2,961			—			2,961
Credit related discount (2)	23,974			69,812			25,563			9,838			129,187
Credit related discount as percentage of loans	2.63		%	2.48		%	2.46		%	4.04		%	2.58		%
Criticized loans (3)	$	33,832		$	149,706		$	125,286		$	34,744		$	343,568
Classified loans (4)	26,060			98,215			105,064			23,036			252,375
Greater than 90 days past due and accruing (5)	11,485			57,513			55,168			9,648			133,814
December 31, 2012
Provision for loan losses	$	—		$	(129	)	$	1,002		$	(714	)	$	159
Net charge-offs	—			3			1,118			198			1,319
Net charge-offs to average loans	—		%	—		%	0.33		%	0.22		%	0.08		%
Nonperforming loans	$	5,037		$	8,702		$	13,484		$	2,425		$	29,648
Total loans (1)	1,314,538			3,473,659			1,379,035			346,404			6,513,636
Allowance for acquired loan losses	100			—			1,464			—			1,564
Credit related discount (2)	$	40,956		$	84,031		$	38,204		$	12,790		$	175,981
Credit related discount as percentage of loans	3.12		%	2.42		%	2.77		%	3.69		%	2.70		%
Criticized loans (3)	$	39,530		$	186,266		$	174,403		$	41,881		$	442,080
Classified loans (4)	30,044			134,932			144,708			22,524			332,208
Greater than 90 days past due and accruing	10,142			71,050			82,823			3,045			167,060

⁽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⁾  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, 2012.

⁽⁴⁾  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 “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012.

⁽⁵⁾  Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. 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.

46

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, 2013			December 31, 2012
Provision for loan losses	$	25,432		$	21,366
Net charge-offs	12,890			7,617
Net charge-offs to average loans	0.33		%	0.24		%
Nonperforming loans	$	144,844		$	143,076
Nonperforming loans to total loans	0.89		%	1.07		%
Total loans	$	16,211,505		$	13,372,357
Allowance for originated loan losses	194,992			160,958
Allowance for originated loan losses to total originated loans	1.20		%	1.20		%
Criticized loans	$	634,230		$	560,590
Classified loans(1)	395,860			376,271
Greater than 90 days past due and accruing (2)	2,434			4,508

⁽¹⁾  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 “Asset Quality Review” in our Annual Report on 10-K for the year ended December 31, 2012.

⁽²⁾  Includes credit card loans and loans that have matured and are in the process of collection.

Our total allowance for loan losses related to both our originated and acquired loans increased$35 million from December 31, 2012 to $198 million at September 30, 2013 as our total provision for loan losses of $72 million exceeded our total net charge-offs of $36 million. The ratio of our total allowance for loan losses to total loans of 0.94% at September 30, 2013 compared to 0.82% as of December 31, 2012. Excluding acquired loans, the ratio of our allowance for originated loan losses to total originated loans was 1.20% at September 30, 2013 and remained consistent with the measure at December 31, 2012.

Of the $2.7 billion home equity portfolio at both September 30, 2013 and December 31, 2012, approximately $1.0 billion and $0.9 billion were in a first lien position at the respective period ends. 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, 2013 and December 31, 2012. 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 December 31, 2012, but did 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 $123 million at September 30, 2013 from $89 million at December 31, 2012 and $122 million at June 30, 2013. 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, rate reduction, or loans restructured in a Chapter 7 bankruptcy. 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 for six consecutive payments. TDRs accruing interest totaled $70 million and $46 million at September 30, 2013 and December 31, 2012, respectively.

Certain pass-graded commercial loans may have repayment dates extended at or near original maturity dates in the normal course of business. When such extensions are considered to be concessions and provided as a result of the financial distress of the borrower, these loans are classified as TDRs and considered to be impaired. However, if such extensions or other modifications at or near the original maturity date or at any time during the life of a loan are not made as a result of financial distress related to the borrower, such a loan would not be classified as a TDR or as an impaired loan. Repayment extensions typically provided in a TDR are for periods of greater than six

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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 for accounting measurement purposes.

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 (including loans sold with servicing released) 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.

Our portfolio of mortgages serviced for others amounted to $3.6 billion and $2.9 billion at September 30, 2013 and December 31, 2012, respectively. Our liability for estimated repurchase obligations on loans sold, which is included in other liabilities in our Consolidated Statements of Condition, was $9 million at both September 30, 2013 and December 31, 2012.

The delinquencies as a percentage of loans serviced were as follows at the dates indicated: 

	September 30, 2013		December 31, 2012
30 to 59 days past due	0.28	%	0.38	%
60 to 89 days past due	0.13		0.16
Greater than 90 days past due	0.72		0.77
Total past due loans	1.13	%	1.31	%

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Investments    

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

					Average credit rating of fair value amount
(in millions)	Amortized cost		Fair value		AA or better		A		BBB		BB or less		Not rated
September 30, 2013
Securities backed by U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises:
Collateralized mortgage obligations	$	4,804	$	4,773	$	4,773	$	—	$	—	$	—	$	—
Residential mortgage-backed securities	615		620		620		—		—		—		—
Debt securities	342		350		319		11		—		—		20
Total	5,761		5,743		5,712		11		—		—		20
Commercial mortgage-backed securities	1,785		1,863		1,039		553		271		—		—
Collateralized loan obligations	1,424		1,466		1,049		370		47		—		—
Asset-backed securities	905		914		673		165		—		—		76
Corporate debt and trust preferred	873		870		11		187		119		552		1
States and political subdivisions	531		545		277		215		35		—		18
Other	48		49		3		15		5		—		26
Total investment securities	$	11,327	$	11,450	$	8,764	$	1,516	$	477	$	552	$	141
December 31, 2012
Securities backed by U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises:
Collateralized mortgage obligations	$	4,839	$	4,968	$	4,965	$	—	$	—	$	—	$	3
Residential mortgage-backed securities	823		858		858		—		—		—		—
Debt securities	415		429		424		—		—		—		5
Total	6,077		6,255		6,247		—		—		—		8
Commercial mortgage-backed securities	1,930		2,060		1,213		583		264		—		—
Collateralized loan obligations	1,510		1,545		1,143		352		40		—		10
Asset-backed securities	936		956		633		323		—		—		—
Corporate debt and trust preferred	827		851		—		229		155		459		8
States and political subdivisions	587		608		460		123		17		—		8
Other	90		93		6		19		14		14		40
Total investment securities	$	11,958	$	12,368	$	9,702	$	1,629	$	490	$	473	$	74

The weighted average credit rating of our portfolio was AA at September 30, 2013 and December 31, 2012.

Subsequent to our HSBC Branch Acquisition we started purchasing assets with credit risk, such as commercial mortgage-backed securities ("CMBS") and CLOs. As a result, our risk profile changed which warranted the formation of an oversight committee to keep risk at an acceptable level. The Credit Portfolio Oversight Committee (the "Committee") meets monthly to analyze and monitor the securities portfolio from a credit perspective. In addition to reviewing security ratings, which are one measure of risk, the Committee reviews various credit metrics for each of the portfolios including these metrics under stressed environments. For structured securities, the Committee generally reviews changes in the underlying collateral and changes in credit enhancement. In the discussion of our investment portfolio above, 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.

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Our CMBS portfolio had an amortized cost of $1.8 billion at September 30, 2013. Gross unrealized losses on our CMBS portfolio amounted to $1.9 million and $1.3 million at September 30, 2013 and December 31, 2012, respectively. While market spreads on CMBS tightened in the second half of 2012, the fair value of our securities benefited from having completed 92% of our purchases before spreads tightened. Additionally, the structure of our CMBS and the underlying mortgage prepayment penalties limit unscheduled principal prepayments.

Securities in our CMBS portfolio have significant credit enhancement that provides us protection from default, and 85% of this portfolio was rated investment grade or higher at September 30, 2013. Our entire CMBS portfolio has either credit enhancement greater than 25% or underlying loans which collateralize our securities with loan to values of less than 100%.

The following table provides information on the credit enhancements of securities in our CMBS portfolio at the dates indicated:

	September 30, 2013				December 31, 2012
Credit enhancement	Amortized cost		% of total CMBS portfolio		Amortized cost		% of total CMBS portfolio
	(dollars in millions)
18 - 20%	$	21	1	%	$	41	2	%
20 - 25%	134		8		159		8
25 - 30%	311		17		285		15
30+%	1,319		74		1,444		75
Total	$	1,785	100	%	$	1,930	100	%

Our collateralized loan obligation ("CLO") portfolio had an amortized cost of $1.4 billion at September 30, 2013. Gross unrealized losses on our CLO portfolio amounted to $1.6 million and $0.9 million at September 30, 2013 and December 31, 2012, respectively. Our CLO portfolio is predominantly variable rate and returns a 3% yield at a credit quality level we believe superior to middle market lending. The collateral underlying our CLOs consists of approximately 90% senior secured loans, and over 90% of the obligors are domiciled in the United States. Half of the portfolio is comprised of CLOs originated in 2011 or later, and no CLO investments were made by us until the fourth quarter of 2011. As shown in the table above, of the underlying investment ratings of our portfolio, 97% of our CLO portfolio was rated investment grade or higher at September 30, 2013 and significant credit enhancements for our securities provide us protection from default.

The following table provides information on the credit enhancements for our securities in our CLO portfolio at the dates indicated (amounts in millions):

	September 30, 2013				December 31, 2012
Credit Enhancement	Amortized cost		% of total CLO portfolio		Amortized cost		% of total CLO portfolio
	(dollars in millions)
10 - 15%	$	43	3	%	$	66	4	%
15 - 20%	335		23		312		21
20 - 25%	167		12		238		16
25 - 30%	366		26		364		24
30 - 35%	226		16		233		15
35 - 40%	212		15		225		15
40+%	75		5		73		5
Total	$	1,424	100	%	$	1,510	100	%

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We have assessed our securities that were in an unrealized loss position at September 30, 2013 and December 31, 2012 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, 2013, we have no direct exposure to the debt of European countries.

Liquidity Risk

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

Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. Our Asset and Liability Committee ("ALCO") 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 national markets.

As part of our liquidity risk management framework, we have a contingency funding plan (“CFP”) that is designed to address temporary and long-term liquidity disruptions.  The CFP assesses liquidity needs under normal and various stress scenarios, encompassing both idiosyncratic and systemic conditions.  The plan provides for on-going monitoring of the liquidity environment by using numerous indicators and metrics that are regularly reviewed by ALCO.  Furthermore, the CFP provides for the ongoing monitoring of the unused borrowing capacity and available sources of contingent liquidity to address unexpected liquidity needs under adverse conditions.

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 is FHLB advances, of which we had $3.7 billion outstanding at September 30, 2013.

We have a total borrowing capacity of up to $8.5 billion from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $4.8 billion was available as of September 30, 2013.

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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. We had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $9.3 billion and $8.7 billion at September 30, 2013 and December 31, 2012, respectively.

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 commercial lending and relationship based home equity lending, our unused commercial lines of credit amounted to $3.3 billion and $3.2 billion at September 30, 2013 and December 31, 2012, respectively, and our unused home equity and other consumer lines of credit increased to $4.8 billion at September 30, 2013 from $4.4 billion at December 31, 2012. 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 $313 million and $352 million at September 30, 2013 and December 31, 2012, 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 $183 million and $474 million at September 30, 2013 and December 31, 2012, respectively.

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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 $381 million at September 30, 2013. As of September 30, 2013, 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. The Bank paid dividends of $125 million to the Company during the nine months ended September 30, 2013. Under the foregoing dividend restrictions, the Bank could pay additional dividends of approximately $425 million to the Company without obtaining regulatory approvals, however, this amount would be limited to $190 million to maintain its “well-capitalized” status.

Loan Maturity and Repricing Schedule

The following table sets forth certain information at September 30, 2013 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 millions)	Within one year		One through five years		After five years		Total
Commercial:
Real estate	$	4,267	$	2,367	$	343	$	6,977
Construction	666		21		34		720
Business	4,038		856		311		5,205
Total commercial	8,971		3,244		688		12,902
Consumer:
Residential real estate	1,067		1,756		696		3,519
Home equity	2,127		422		158		2,707
Indirect auto	456		861		22		1,339
Credit cards	312		—		—		312
Other consumer	174		90		46		310
Total consumer	4,136		3,129		922		8,187
Total loans and leases	$	13,107	$	6,373	$	1,610	$	21,089

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For the loans reported in the preceding table, the following sets forth at September 30, 2013, the dollar amount of all of our fixed-rate and adjustable-rate loans due after September 30,2014: 

(in millions)	Fixed		Adjustable		Total
Commercial:
Real estate	$	1,244	$	1,466	$	2,710
Construction	51		4		55
Business	1,102		65		1,167
Total commercial	2,397		1,535		3,932
Consumer:
Residential real estate	1,340		1,112		2,452
Home equity	579		1		580
Indirect auto	883		—		883
Other consumer	135		1		136
Total consumer	2,937		1,114		4,051
Total loans and leases	$	5,334	$	2,649	$	7,983

The following table sets forth at September 30, 2013, the dollar amount of all of our fixed-rate loans due after September 30,2014 by the period in which the loans mature: 

Maturity	Commercial		Residential real estate		Home equity		Indirect auto		Other consumer		Total
	(in millions)
1 to 2 years	$	634	$	290	$	159	$	336	$	30	$	1,449
2 to 3 years	529		231		115		258		25		1,158
3 to 5 years	636		312		148		267		34		1,397
Total 1 to 5 years	1,799		833		422		861		89		4,004
5 to 10 years	408		338		135		22		27		930
More than 10 years	190		169		22		—		19		400
Total	$	2,397	$	1,340	$	579	$	883	$	135	$	5,334

The following table sets forth at September 30, 2013, the dollar amount of all of our adjustable-rate loans due after September 30,2014 by the period in which the loans reprice: 

Maturity	Commercial		Residential real estate		Home equity and other consumer		Total
	(in millions)
1 to 2 years	$	481	$	391	$	2	$	874
2 to 3 years	429		241		—		670
3 to 5 years	536		292		—		828
Total 1 to 5 years	1,446		924		2		2,372
5 to 10 years	89		188		—		277
More than 10 years	—		—		—		—
Total	$	1,535	$	1,112	$	2	$	2,649

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

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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 (prepayment risk), 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 model 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) 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; (ii) selling the majority of 30 year fixed-rate, conforming residential mortgage loans into the secondary market without recourse; (iii) investing in securities with predictable cash flows; (iv) growing core deposits; (v) utilizing wholesale borrowings to support cash flow needs and help match asset repricing; and (vi) employing interest rate swaps.

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.

Our balance sheet is naturally asset-sensitive due to our large portfolio of rate sensitive commercial loans. As a result, changes in shorter-term rates impact our net interest income more than longer-term 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 and no growth in the balance sheet. These estimates require us to make certain assumptions including loan and mortgage-related investment prepayment speeds, reinvestment rates, and deposit maturities and decay rates. Typically model assumptions are based on historical data and subjected to periodic review, such as prepayments and deposit maturities and decay rates. Assumptions are subject to management judgment, such as reinvestment rates of securities and new loan volumes. These assumptions are inherently uncertain, particularly due to the impact of the prolonged nature of the current low interest rate environment for which historical data for similar periods is limited 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. 

	Calculated increase (decrease)
	September 30, 2013					December 31, 2012
Changes in interest rates	Net interest income			% change		Net interest income			% change
	(dollars in thousands)
+ 200 basis points (1) (2)	$	45,257		4.3	%	$	29,511		2.8	%
+ 100 basis points	22,038			2.1		11,188			1.1
- 50 basis points	(5,880		)	(0.6	)	(2,388		)	(0.2	)

⁽¹⁾  Our Board of Directors has established a policy limiting the adverse change to net interest income to less than 5% under this scenario.

⁽²⁾  Under a shock scenario where interest rates increase 200 basis points immediately, net interest income is estimated to increase by approximately 7% at September 30, 2013.

Operational Risk

Like all companies, we are subject to Operational Risk. We define Operational Risk as the risk to current or anticipated earnings or capital arising from inadequate or failed internal processes or systems, the misconduct or errors of people, and adverse external events. These events may include, but are not limited to, third party attempts to disrupt or penetrate our critical systems (i.e., hacking, cyber attacks or denial-of-service attacks), inadequate vendor management or oversight, clerical errors, theft and other criminal conduct.

We manage Operational Risk through our risk management framework and internal control processes. Within this framework, our business lines have direct and primary responsibility and accountability for identifying, controlling, and monitoring operational risks embedded in their business activities. In addition, we are continuing to invest in risk management systems and technology to support our businesses. The Operational Risk Committee, a senior management committee, provides oversight and assesses the most significant operational risks we face. In addition, risk management is responsible for establishing compliance program standards and policies, performing risk assessments on the business lines' adherence to laws, regulations and internal policies and procedures, and the regular monitoring of significant operating risks.

The ERMC periodically assesses the overall effectiveness of the Operational Risk Committee, our risk management program and our system of internal controls. ERMC reports the results of its review on internal controls and systems to the executive team as well as the Risk Committee and Audit Committee of our Board of Directors.

Impact of New Accounting Standards

In July 2013, the Financial Accounting Standards Board ("FASB") issued guidance to reduce diversity in practice related to the financial statement presentation of an unrecognized tax benefit when a net operating loss carryforward, a similar tax loss, or a tax credit carryforward exists.  Some entities present the unrecognized tax benefit as a liability and other entities present the unrecognized tax benefit as a reduction to a deferred tax asset.  The guidance requires an unrecognized tax benefit to be presented in the financial statements as a reduction to a

56

deferred tax asset, and becomes effective for us on January 1, 2014. We do not expect this to have a significant impact on our financial statements. 

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ITEM 1. Financial Statements

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Condition (unaudited)

(in thousands, except share and per share amounts)

	September 30, 2013			December 31, 2012
ASSETS
Cash and cash equivalents	$	558,086		$	430,862
Investment securities:
Available for sale, at fair value (amortized cost of $7,485,106 and $10,658,220 in 2013 and 2012; includes pledged securities that can be sold or repledged of $299,854 and $585,967 in 2013 and 2012)	7,609,676			10,993,605
Held to maturity, at amortized cost (fair value of $3,839,863 and $1,373,971 in 2013 and 2012; includes pledged securities that can be sold or repledged of $405,150 and $31,139 in 2013 and 2012)	3,841,700			1,299,806
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost	437,534			420,277
Loans held for sale	80,468			154,745
Loans and leases (net of allowance for loan losses of $197,953 and $162,522 in 2013 and 2012)	20,891,118			19,547,490
Bank owned life insurance	413,555			404,321
Premises and equipment, net	417,878			410,561
Goodwill	2,448,506			2,483,787
Core deposit and other intangibles, net	101,425			134,023
Other assets	540,595			526,755
Total assets	$	37,340,541		$	36,806,232
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	26,969,002		$	27,676,531
Short-term borrowings	4,169,416			2,983,718
Long-term borrowings	732,547			732,425
Other	531,379			487,000
Total liabilities	32,402,344			31,879,674
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 2013 and 2012	338,002			338,002
Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2013 and 2012	3,660			3,660
Additional paid-in capital	4,231,720			4,230,574
Retained earnings	494,160			398,711
Accumulated other comprehensive income	52,085			157,303
Common stock held by employee stock ownership plan, 2,045,860 and 2,179,315 shares in 2013 and 2012	(16,892		)	(17,825		)
Treasury stock, at cost, 12,028,768 and 13,381,063 shares in 2013 and 2012	(164,538		)	(183,867		)
Total stockholders’ equity	4,938,197			4,926,558
Total liabilities and stockholders’ equity	$	37,340,541		$	36,806,232

See accompanying notes to consolidated financial statements.

58

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES    

Consolidated Statements of Income(unaudited)

(in thousands, except share and per share amounts)

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Interest income:
Loans and leases	$	214,746	$	211,767	$	631,356	$	601,877
Investment securities and other	91,996		90,101		269,067		290,612
Total interest income	306,742		301,868		900,423		892,489
Interest expense:
Deposits	12,931		18,358		40,175		49,747
Borrowings	16,271		13,905		47,135		71,753
Total interest expense	29,202		32,263		87,310		121,500
Net interest income	277,540		269,605		813,113		770,989
Provision for credit losses	27,600		22,200		73,000		70,300
Net interest income after provision for credit losses	249,940		247,405		740,113		700,689
Noninterest income:
Deposit service charges	27,115		26,422		78,397		64,892
Insurance commissions	17,854		18,764		51,901		52,669
Merchant and card fees	12,464		12,014		36,142		26,813
Wealth management services	15,189		11,069		42,979		29,315
Mortgage banking	2,268		10,974		15,574		23,797
Capital markets income	5,058		6,381		16,091		19,751
Lending and leasing	4,886		3,730		13,326		11,098
Bank owned life insurance	3,725		3,449		10,513		10,684
Gain on securities portfolio repositioning	—		5,337		—		21,232
Other	2,863		4,063		11,357		7,458
Total noninterest income	91,422		102,203		276,280		267,709
Noninterest expense:
Salaries and employee benefits	115,034		115,484		347,129		316,468
Occupancy and equipment	26,582		25,694		83,133		71,800
Technology and communications	28,999		28,110		85,715		72,257
Marketing and advertising	5,822		8,954		15,618		22,393
Professional services	9,820		11,193		29,205		29,351
Amortization of intangibles	7,702		14,506		32,671		30,811
Federal deposit insurance premiums	9,351		8,850		27,600		25,535
Merger and acquisition integration expenses	—		29,404		—		173,834
Restructuring charges	—		—		—		6,453
Other	27,883		24,347		82,958		63,457
Total noninterest expense	231,193		266,542		704,029		812,359
Income before income taxes	110,169		83,066		312,364		156,039
Income taxes	31,026		24,682		94,802		48,714
Net income	79,143		58,384		217,562		107,325
Preferred stock dividend	7,547		7,547		22,641		20,209
Net income available to common stockholders	$	71,596	$	50,837	$	194,921	$	87,116
Earnings per share:
Basic	$	0.20	$	0.15	$	0.55	$	0.25
Diluted	$	0.20	$	0.14	$	0.55	$	0.25
Weighted average common shares outstanding:
Basic	349,653		349,001		349,492		348,956
Diluted	350,896		349,371		350,368		349,248
Dividends per common share	$	0.08	$	0.08	$	0.24	$	0.24

See accompanying notes to financial statements.

59

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,
	2013			2012			2013			2012
Net income	$	79,143		$	58,384		$	217,562		$	107,325
Other comprehensive income, net of income taxes:
Securities available for sale:
Net unrealized (losses) gains arising during the period	(7,212		)	70,917			(96,224		)	106,371
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 during the period	—			—			(33,823		)	2,498
Net unrealized (losses) gains on securities available for sale	(7,212		)	70,917			(130,047		)	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	—			—			33,823			(2,498		)
Amortization of net unrealized holding gains to income during the period	(3,899		)	(422		)	(9,667		)	(1,262		)
Net unrealized holding (losses) gains on securities transferred during the period	(3,899		)	(422		)	24,156			(3,760		)
Net unrealized gains on interest rate swaps designated as cash flow hedges arising during the period	184			177			530			6,536
Pension and post-retirement plans:
Pension remeasurement	—			—			—			4,612
Amortization of net loss related to pension and post-retirement plans	48			223			143			544
Total pension and post-retirement plans	48			223			143			5,156
Total other comprehensive (loss) income	(10,879		)	70,895			(105,218		)	107,003
Total comprehensive income	$	68,264		$	129,279		$	112,344		$	214,328

See accompanying notes to consolidated financial statements.

60

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, 2013	$	338,002	$	3,660	$	4,230,574		$	398,711		$	157,303		$	(17,825	)	$	(183,867	)	$	4,926,558
Net income	—		—		—			217,562			—			—			—			217,562
Total other comprehensive loss, net	—		—		—			—			(105,218		)	—			—			(105,218		)
ESOP shares committed to be released (133,455 shares)	—		—		—			(20		)	—			933			—			913
Stock-based compensation expense	—		—		7,382			—			—			—			—			7,382
Net tax expense from stock-based compensation	—		—		(779		)	—			—			—			—			(779		)
Restricted stock activity (1,352,295 shares)	—		—		(5,457		)	(15,161		)	—			—			19,329			(1,289		)
Preferred stock dividends	—		—		—			(22,641		)	—			—			—			(22,641		)
Common stock dividends of $0.24 per share	—		—		—			(84,291		)	—			—			—			(84,291		)
Balances at September 30, 2013	$	338,002	$	3,660	$	4,231,720		$	494,160		$	52,085		$	(16,892	)	$	(164,538	)	$	4,938,197
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

See accompanying notes to consolidated financial statements.

61

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES        

Consolidated Statements of Changes in Cash Flows(unaudited)

(in thousands)

	Nine months ended September 30,
	2013			2012
Cash flows from operating activities:
Net income	$	217,562		$	107,325
Adjustments to reconcile net income to net cash provided by operating activities:
Amortization (accretion) of fees and discounts, net	41,034			(4,030		)
Provision for credit losses	73,000			70,300
Depreciation of premises and equipment	40,030			30,905
Amortization of intangibles	32,671			30,811
Gain on securities portfolio repositioning	—			(21,232		)
Origination of loans held for sale	(1,113,338		)	(1,053,883		)
Proceeds from sales of loans held for sale	1,199,506			1,037,052
ESOP and stock based-compensation expense	8,295			8,360
Deferred income tax (benefit) expense	(3,348		)	18,362
Contributions to defined benefit pension plans	—			(110,575		)
Decrease (increase) in other assets	16,961			(40,023		)
Increase (decrease) in other liabilities	87,332			(65,877		)
Net cash provided by operating activities	599,705			7,495
Cash flows from investing activities:
Proceeds from sales of securities available for sale	478,352			3,170,966
Proceeds from maturities of securities available for sale	147,223			192,763
Principal payments received on securities available for sale	1,006,392			1,512,007
Purchases of securities available for sale	(1,460,637		)	(5,070,424		)
Principal payments received on securities held to maturity	697,058			400,909
Purchases of securities held to maturity	(225,426		)	—
Purchases of Federal Home Loan Bank and Federal Reserve Bank common stock	(17,257		)	(15,152		)
Net increase in loans and leases	(1,403,470		)	(1,183,896		)
Acquisitions, net of cash and cash equivalents	—			7,703,349
Purchases of premises and equipment	(51,411		)	(75,555		)
Other, net	(19,452		)	39,773
Net cash (used in) provided by investing activities	(848,628		)	6,674,740
Cash flows from financing activities:
Net decrease in deposits	(700,861		)	(1,627,490		)
Proceeds from (repayments of) short-term borrowings, net	1,185,698			(213,235		)
Repayments of long-term borrowings	(977		)	(5,126,447		)
Dividends paid on noncumulative preferred stock	(22,641		)	(20,209		)
Dividends paid on common stock	(84,291		)	(84,005		)
Other, net	(781		)	(317		)
Net cash provided by (used in) financing activities	376,147			(7,071,703		)
Net increase (decrease) in cash and cash equivalents	127,224			(389,468		)
Cash and cash equivalents at beginning of period	430,862			836,555
Cash and cash equivalents at end of period	$	558,086		$	447,087
Supplemental disclosures
Cash paid during the period for:
Income taxes	$	25,379		$	16,099
Interest expense	92,144			206,139
Acquisition of noncash assets and liabilities:
Assets acquired	—			2,406,277
Liabilities assumed	—			10,109,626
Other noncash activity:
Securities transferred from available for sale to held to maturity (at fair value)	3,001,330			—
Securities available for sale purchased not settled	35,390			93,516
Securities held to maturity purchased not settled	16,385			—
Securities transferred from held to maturity to available for sale	—			860,674

See accompanying notes to consolidated financial statements.

62

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 2012 Annual Report on Form 10-K. Results for the nine months ended September 30, 2013 do not necessarily reflect the results that may be expected for the year ending December 31, 2013. 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 price, net of deposit 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	1,599,712
Core deposit and other intangibles	84,631
Other assets	72,323
Total assets acquired	9,116,884
Deposits(2)	(9,854,589		)
Other liabilities	(32,792		)
Total liabilities assumed	(9,887,381		)
Goodwill	$	770,497

⁽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.

In connection with the regulatory process for the HSBC Branch Acquisition, we agreed with the U.S. Department of Justice 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.

63

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.

During the quarter ended March 31, 2013, we recorded a $36 million reduction to our goodwill balance related to the establishment of deferred tax assets in connection with the HSBC Branch Acquisition and our National City Bank branch acquisition.

Direct costs related to the HSBC Branch Acquisition were expensed as incurred and amounted to $174 million for the nine months ended September 30, 2012. There were no such costs during the nine months ended September 30, 2013.

64

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, 2013	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	531,258	$	13,606	$	(320	)	$	544,544
U.S. Treasury	19,956		555		—			20,511
U.S. government agencies	4,181		7		(14		)	4,174
U.S. government sponsored enterprises	317,836		8,229		(678		)	325,387
Corporate	867,106		14,508		(16,726		)	864,888
Trust preferred securities	5,966		—		(626		)	5,340
Total debt securities	1,746,303		36,905		(18,364		)	1,764,844
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	43,352		777		(1,681		)	42,448
Federal National Mortgage Association	145,427		4,845		(10		)	150,262
Federal Home Loan Mortgage Corporation	167,114		4,502		—			171,616
Collateralized mortgage obligations:
Federal National Mortgage Association	817,057		552		(22,805		)	794,804
Federal Home Loan Mortgage Corporation	403,730		777		(10,824		)	393,683
Non-agency issued	15,513		728		(8		)	16,233
Total collateralized mortgage obligations	1,236,300		2,057		(33,637		)	1,204,720
Total residential mortgage-backed securities	1,592,193		12,181		(35,328		)	1,569,046
Commercial mortgage-backed securities, non-agency issued	1,784,661		80,322		(1,867		)	1,863,116
Total mortgage-backed securities	3,376,854		92,503		(37,195		)	3,432,162
Collateralized loan obligations, non-agency issued	1,424,309		43,410		(1,594		)	1,466,125
Asset-backed securities collateralized by:
Student loans	311,532		6,363		(382		)	317,513
Credit cards	73,051		380		(408		)	73,023
Auto loans	333,248		3,812		(508		)	336,552
Other	187,306		917		(1,067		)	187,156
Total asset-backed securities	905,137		11,472		(2,365		)	914,244
Other	32,503		57		(259		)	32,301
Total securities available for sale	$	7,485,106	$	184,347	$	(59,777	)	$	7,609,676
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	18,333	$	222	$	(106	)	$	18,449
Federal National Mortgage Association	154,141		180		(2,545		)	151,776
Federal Home Loan Mortgage Corporation	85,975		203		(580		)	85,598
Collateralized mortgage obligations:
Government National Mortgage Association	1,459,691		34,950		(1,433		)	1,493,208
Federal National Mortgage Association	1,105,058		1,116		(31,712		)	1,074,462
Federal Home Loan Mortgage Corporation	1,018,502		18,753		(20,885		)	1,016,370
Total collateralized mortgage obligations	3,583,251		54,819		(54,030		)	3,584,040
Total securities held to maturity	$	3,841,700	$	55,424	$	(57,261	)	$	3,839,863

65

	Amortized		Unrealized		Unrealized			Fair
December 31, 2012	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	587,482	$	20,723	$	(144	)	$	608,061
U.S. Treasury	19,944		763		—			20,707
U.S. government agencies	4,641		13		(3		)	4,651
U.S. government sponsored enterprises	390,421		13,471		—			403,892
Corporate	811,720		28,390		(3,083		)	837,027
Trust preferred securities	15,524		—		(1,329		)	14,195
Total debt securities	1,829,732		63,360		(4,559		)	1,888,533
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	67,700		2,123		(197		)	69,626
Federal National Mortgage Association	394,274		20,218		(30		)	414,462
Federal Home Loan Mortgage Corporation	342,906		11,987		—			354,893
Collateralized mortgage obligations:
Government National Mortgage Association	1,060,415		30,742		—			1,091,157
Federal National Mortgage Association	1,460,400		14,968		(940		)	1,474,428
Federal Home Loan Mortgage Corporation	1,036,308		11,204		(295		)	1,047,217
Non-agency issued	59,604		1,544		(25		)	61,123
Total collateralized mortgage obligations	3,616,727		58,458		(1,260		)	3,673,925
Total residential mortgage-backed securities	4,421,607		92,786		(1,487		)	4,512,906
Commercial mortgage-backed securities, non-agency issued	1,929,727		131,785		(1,291		)	2,060,221
Total mortgage-backed securities	6,351,334		224,571		(2,778		)	6,573,127
Collateralized loan obligations, non-agency issued	1,510,253		35,466		(854		)	1,544,865
Asset-backed securities collateralized by:
Student loans	377,923		11,952		(134		)	389,741
Credit cards	73,768		1,319		(12		)	75,075
Auto loans	366,501		5,708		(43		)	372,166
Other	117,885		781		(7		)	118,659
Total asset-backed securities	936,077		19,760		(196		)	955,641
Other	30,824		707		(92		)	31,439
Total securities available for sale	$	10,658,220	$	343,864	$	(8,479	)	$	10,993,605
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	5,988	$	340	$	(28	)	$	6,300
Federal National Mortgage Association	5,223		168		—			5,391
Federal Home Loan Mortgage Corporation	6,753		326		—			7,079
Collateralized mortgage obligations:
Government National Mortgage Association	1,006,238		48,748		(91		)	1,054,895
Federal National Mortgage Association	18,463		657		—			19,120
Federal Home Loan Mortgage Corporation	257,141		24,045		—			281,186
Total collateralized mortgage obligations	1,281,842		73,450		(91		)	1,355,201
Total securities held to maturity	$	1,299,806	$	74,284	$	(119	)	$	1,373,971

66

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, 2013	value		losses			Count	value		losses			Count	value		losses			Count
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	27,131	$	(313	)	46	$	274	$	(7	)	1	$	27,405	$	(320	)	47
U.S. government agencies	—		—			—	2,136		(14		)	3	2,136		(14		)	3
U.S. government sponsored enterprises	69,974		(678		)	6	—		—			—	69,974		(678		)	6
Corporate	354,076		(15,403		)	242	39,430		(1,323		)	11	393,506		(16,726		)	253
Trust preferred securities	—		—			—	5,340		(626		)	3	5,340		(626		)	3
Total debt securities	451,181		(16,394		)	294	47,180		(1,970		)	18	498,361		(18,364		)	312
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	19,648		(1,681		)	6	—		—			—	19,648		(1,681		)	6
Federal National Mortgage Association	707		(10		)	7	—		—			—	707		(10		)	7
Collateralized mortgage obligations:
Federal National Mortgage Association	683,277		(22,805		)	37	—		—			—	683,277		(22,805		)	37
Federal Home Loan Mortgage Corporation	373,987		(10,824		)	18	—		—			—	373,987		(10,824		)	18
Non-agency issued	1,138		(8		)	4	—		—			—	1,138		(8		)	4
Total collateralized mortgage obligations	1,058,402		(33,637		)	59	—		—			—	1,058,402		(33,637		)	59
Total residential mortgage-backed securities	1,078,757		(35,328		)	72	—		—			—	1,078,757		(35,328		)	72
Commercial mortgage-backed securities, non-agency issued	144,576		(1,852		)	18	1,868		(15		)	1	146,444		(1,867		)	19
Total mortgage-backed securities	1,223,333		(37,180		)	90	1,868		(15		)	1	1,225,201		(37,195		)	91
Collateralized loan obligations, non-agency issued	177,557		(1,594		)	21	—		—			—	177,557		(1,594		)	21
Asset-backed securities collateralized by:
Student loans	65,470		(382		)	9	—		—			—	65,470		(382		)	9
Credit card	36,079		(408		)	4	—		—			—	36,079		(408		)	4
Auto loans	37,187		(508		)	9	—		—			—	37,187		(508		)	9
Other	73,477		(1,066		)	12	87		(1		)	1	73,564		(1,067		)	13
Total asset-backed securities	212,213		(2,364		)	34	87		(1		)	1	212,300		(2,365		)	35
Other	22,181		(259		)	5	—		—			—	22,181		(259		)	5
Total securities available for sale in an unrealized loss position	$	2,086,465	$	(57,791	)	444	$	49,135	$	(1,986	)	20	$	2,135,600	$	(59,777	)	464

67

	Less than 12 months						12 months or longer					Total
	Fair		Unrealized				Fair		Unrealized			Fair		Unrealized
September 30, 2013	value		losses			Count	value		losses		Count	value		losses			Count
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	11,287	$	(106	)	4	$	—	$	—	—	$	11,287	$	(106	)	4
Federal National Mortgage Association	138,981		(2,545		)	39	—		—		—	138,981		(2,545		)	39
Federal Home Loan Mortgage Corporation	68,468		(580		)	18	—		—		—	68,468		(580		)	18
Collateralized mortgage obligation:
Government National Mortgage Association	104,281		(1,433		)	14	—		—		—	104,281		(1,433		)	14
Federal National Mortgage Association	913,806		(31,712		)	50	—		—		—	913,806		(31,712		)	50
Federal Home Loan Mortgage Corporation	609,355		(20,885		)	41	—		—		—	609,355		(20,885		)	41
Total collateralized mortgage obligations	1,627,442		(54,030		)	105	—		—		—	1,627,442		(54,030		)	105
Total securities held to maturity in an unrealized loss position	$	1,846,178	$	(57,261	)	166	$	—	$	—	—	$	1,846,178	$	(57,261	)	166

68

	Less than 12 months						12 months or longer							Total
	Fair		Unrealized				Fair		Unrealized					Fair		Unrealized
December 31, 2012	value		losses			Count	value		losses			Count		value		losses			Count
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	21,373	$	(98	)	42	$	4,311	$	(46	)	5		$	25,684	$	(144	)	47
U.S. government agencies	—		—			—	2,237		(3		)	2		2,237		(3		)	2
Corporate	92,190		(2,168		)	27	44,085		(915		)	2		136,275		(3,083		)	29
Trust preferred securities	1,005		(13		)	1	13,190		(1,316		)	6		14,195		(1,329		)	7
Total debt securities	114,568		(2,279		)	70	63,823		(2,280		)	15		178,391		(4,559		)	85
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	22,604		(197		)	6	—		—			—		22,604		(197		)	6
Federal National Mortgage Association	1,244		(22		)	7	315		(8		)	2	��	1,559		(30		)	9
Collateralized mortgage obligations:
Federal National Mortgage Association	232,290		(940		)	12	—		—			—		232,290		(940		)	12
Federal Home Loan Mortgage Corporation	118,020		(295		)	6	—		—			—		118,020		(295		)	6
Non-agency issued	—		—			—	4,123		(25		)	1		4,123		(25		)	1
Total collateralized mortgage obligations	350,310		(1,235		)	18	4,123		(25		)	1		354,433		(1,260		)	19
Total residential mortgage-backed securities	374,158		(1,454		)	31	4,438		(33		)	3		378,596		(1,487		)	34
Commercial mortgage-backed securities, non-agency issued	29,660		(613		)	5	31,567		(678		)	4		61,227		(1,291		)	9
Total mortgage-backed securities	403,818		(2,067		)	36	36,005		(711		)	7		439,823		(2,778		)	43
Collateralized loan obligations, non-agency issued	167,997		(854		)	25	—		—			—		167,997		(854		)	25
Asset-backed securities collateralized by:
Student loans	2,055		(53		)	1	25,641		(81		)	1		27,696		(134		)	2
Credit cards	5,987		(12		)	2	—		—			—		5,987		(12		)	2
Auto loans	41,605		(43		)	7	—		—			—		41,605		(43		)	7
Other	4,500		(3		)	2	97		(4		)	1		4,597		(7		)	3
Total asset-backed securities	54,147		(111		)	12	25,738		(85		)	2		79,885		(196		)	14
Other	—		—			—	7,936		(92		)	3		7,936		(92		)	3
Total securities available for sale in an unrealized loss position	$	740,530	$	(5,311	)	143	$	133,502	$	(3,168	)	27		$	874,032	$	(8,479	)	170
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	1,959	$	(28	)	1	$	—	$	—		—		$	1,959	$	(28	)	1
Collateralized mortgage obligations:
Government National Mortgage Association	23,485		(91		)	2	—		—			—		23,485		(91		)	2
Total securities held to maturity in an unrealized loss position	$	25,444	$	(119	)	3	$	—	$	—		—		$	25,444	$	(119	)	3

69

We have assessed the securities in an unrealized loss position at September 30, 2013 and December 31, 2012 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 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, 2013 were as follows:

	Amortized cost		Fair value
Debt securities:
Within one year	$	224,911	$	227,171
After one year through five years	899,393		925,249
After five years through ten years	601,962		593,531
After ten years	20,037		18,893
Total debt securities	1,746,303		1,764,844
Mortgage-backed securities	7,218,554		7,272,025
Collateralized loan obligations	1,424,309		1,466,125
Asset-backed securities	905,137		914,244
Other	32,503		32,301
	$	11,326,806	$	11,449,539

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 increased to 3.2 years at September 30, 2013 from 2.4 years at December 31, 2012.

On March 29, 2013, we transferred $3 billion of residential mortgage-backed securities from available for sale to held to maturity. The amortized cost, unrealized gains and losses, and fair value of these transferred investment securities immediately prior to the transfer are as follows:

	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Residential mortgage-backed securities:
Government National Mortgage Association	$	14,615	$	748	$	—		$	15,363
Federal National Mortgage Association	173,196		11,716		(15		)	184,897
Federal Home Loan Mortgage Corporation	96,468		5,224		—			101,692
Collateralized mortgage obligations:
Government National Mortgage Association	884,677		25,759		—			910,436
Federal National Mortgage Association	1,019,254		9,244		(2,703		)	1,025,795
Federal Home Loan Mortgage Corporation	758,248		6,664		(1,765		)	763,147
Total collateralized mortgage obligations	2,662,179		41,667		(4,468		)	2,699,378
Total residential mortgage-backed securities	$	2,946,458	$	59,355	$	(4,483	)	$	3,001,330

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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, 2013									December 31, 2012
	Originated			Acquired			Total			Originated			Acquired			Total
Commercial:
Real estate	$	5,321,251		$	1,566,576		$	6,887,827		$	4,491,440		$	1,974,607		$	6,466,047
Construction	772,362			37,218			809,580			552,265			74,881			627,146
Business	4,741,050			463,622			5,204,672			4,286,331			666,992			4,953,323
Total commercial	10,834,663			2,067,416			12,902,079			9,330,036			2,716,480			12,046,516
Consumer:
Residential real estate	1,882,628			1,636,605			3,519,233			1,724,134			2,037,433			3,761,567
Home equity	1,536,935			1,169,668			2,706,603			1,286,243			1,365,648			2,651,891
Indirect auto	1,339,449			—			1,339,449			601,456			—			601,456
Credit cards	311,600			—			311,600			215,001			99,972			314,973
Other consumer	306,230			3,877			310,107			215,487			118,122			333,609
Total consumer	5,376,842			2,810,150			8,186,992			4,042,321			3,621,175			7,663,496
Total loans and leases	16,211,505			4,877,566			21,089,071			13,372,357			6,337,655			19,710,012
Allowance for loan losses	(194,992		)	(2,961		)	(197,953		)	(160,958		)	(1,564		)	(162,522		)
Total loans and leases, net	$	16,016,513		$	4,874,605		$	20,891,118		$	13,211,399		$	6,336,091		$	19,547,490

As of September 30, 2013, we had a liability for unfunded loan commitments of $13 million. For the nine months ended September 30, 2013, we recognized provision for credit losses related to our unfunded loan commitments of $1.2 million.

Of the $2.7 billion home equity portfolio at both September 30, 2013 and December 31, 2012, $1.0 billion and $0.9 billion were in a first lien position at the respective period ends. 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, 2013 and December 31, 2012.

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.)

71

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, 2013		December 31, 2012
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	20,286	$	31,032
Carrying amount	13,800		24,157
Acquired loans evaluated collectively for future credit losses
Outstanding principal balance	3,602,822		4,773,965
Carrying amount	3,533,103		4,690,143
Other acquired loans
Outstanding principal balance	1,381,794		1,695,979
Carrying amount	1,330,663		1,623,355
Total acquired loans
Outstanding principal balance	5,004,902		6,500,976
Carrying amount	4,877,566		6,337,655

The following table presents changes in the accretable yield, 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, 2012	$	(1,186,900	)
HSBC acquisition	(90,670		)
Net reclassifications from nonaccretable yield	(28,095		)
Accretion	248,533
Balance at December 31, 2012	(1,057,132		)
Reclassifications from nonaccretable yield	(14,362		)
Accretion	156,497
Other (1)	21,722
Balance at September 30, 2013	$	(893,275	)

⁽¹⁾  Includes changes in expected cash flows from changes in interest rate and prepayment assumptions.

During the first quarter of 2013, we reduced our estimate of future cash flows on acquired loans to reflect our current outlook for prepayment speeds on these balances.  The increase in prepayment speed assumptions reduced our accretable discount by $21.7 million.  This change did not materially impact our interest income or net interest margin in 2013. 

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

72

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
Originated loans	Real estate			Business			Residential			Home equity			Other consumer			Total
Nine months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	37,550		$	99,188		$	4,515		$	4,716		$	14,989		$	160,958
Provision for loan losses	5,637			41,897			(1,552		)	2,981			19,298			68,261
Charge-offs	(6,103		)	(23,477		)	(1,256		)	(2,072		)	(10,010		)	(42,918		)
Recoveries	3,851			1,706			401			232			2,501			8,691
Balance at end of period	$	40,935		$	119,314		$	2,108		$	5,857		$	26,778		$	194,992
Allowance for loan losses:
Individually evaluated for impairment	$	1,744		$	4,587		$	1,084		$	2,439		$	68		$	9,922
Collectively evaluated for impairment	39,191			114,727			1,024			3,418			26,710			185,070
Total	$	40,935		$	119,314		$	2,108		$	5,857		$	26,778		$	194,992
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	81,934		$	57,916		$	20,483		$	6,007		$	3,627		$	169,967
Collectively evaluated for impairment	6,011,679			4,683,134			1,862,145			1,530,928			1,953,652			16,041,538
Total	$	6,093,613		$	4,741,050		$	1,882,628		$	1,536,935		$	1,957,279		$	16,211,505
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	50,007		$	57,348		$	4,101		$	4,374		$	2,362		$	118,192
Provision for loan losses	(8,021		)	56,634			2,409			2,604			8,669			62,295
Charge-offs	(5,518		)	(23,131		)	(1,965		)	(3,508		)	(3,035		)	(37,157		)
Recoveries	556			1,954			294			411			1,171			4,386
Allowance related to loans sold	(88		)	(187		)	(66		)	(121		)	(45		)	(507		)
Balance at end of period	$	36,936		$	92,618		$	4,773		$	3,760		$	9,122		$	147,209
Allowance for loan losses:
Individually evaluated for impairment	$	2,047		$	5,090		$	2,373		$	360		$	21		$	9,891
Collectively evaluated for impairment	34,889			87,528			2,400			3,400			9,101			137,318
Total	$	36,936		$	92,618		$	4,773		$	3,760		$	9,122		$	147,209
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	62,708		$	47,947		$	17,756		$	4,738		$	1,511		$	134,660
Collectively evaluated for impairment	4,644,029			3,833,198			1,684,031			1,226,818			709,832			12,097,908
Total	$	4,706,737		$	3,881,145		$	1,701,787		$	1,231,556		$	711,343		$	12,232,568

73

	Commercial						Consumer
Originated loans	Real estate			Business			Residential			Home equity			Other consumer			Total
Three months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	43,258		$	106,597		$	2,630		$	5,505		$	24,460		$	182,450
Provision for loan losses	(3,327		)	22,411			(385		)	674			6,059			25,432
Charge-offs	(2,312		)	(10,163		)	(161		)	(395		)	(4,799		)	(17,830		)
Recoveries	3,316			469			24			73			1,058			4,940
Balance at end of period	$	40,935		$	119,314		$	2,108		$	5,857		$	26,778		$	194,992
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	44,927		$	75,708		$	5,076		$	4,971		$	4,514		$	135,196
Provision for loan losses	(6,536		)	23,147			107			(771		)	5,446			21,393
Charge-offs	(1,508		)	(6,500		)	(410		)	(545		)	(1,179		)	(10,142		)
Recoveries	123			424			14			145			368			1,074
Allowance related to loans sold	(70		)	(161		)	(14		)	(40		)	(27		)	(312		)
Balance at end of period	$	36,936		$	92,618		$	4,773		$	3,760		$	9,122		$	147,209

74

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
Acquired loans	Real estate			Business		Residential		Home equity		Other consumer			Total
Nine months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	60	$	290	$	1,214		$	1,564
Provision for loan losses	1,724			—		859		1,700		(744		)	3,539
Charge-offs	(1,772		)	—		—		—		(547		)	(2,319		)
Recoveries	100			—		—		—		77			177
Balance at end of period	$	52		$	—	$	919	$	1,990	$	—		$	2,961
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—	$	—	$	—	$	—		$	—
Collectively evaluated for impairment	52			—		919		1,990		—			2,961
Total	$	52		$	—	$	919	$	1,990	$	—		$	2,961
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	999		$	9,430	$	—	$	3,324	$	—		$	13,753
Collectively evaluated for impairment	—			338,788		—		975,244		3,877			1,317,909
Loans acquired with deteriorated credit quality	1,602,795			115,404		1,636,605		191,100		—			3,545,904
Total	$	1,603,794		$	463,622	$	1,636,605	$	1,169,668	$	3,877		$	4,877,566
Nine months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	60	$	50	$	1,798		$	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	$	—		$	—	$	60	$	50	$	2,614		$	2,724
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—	$	—	$	—	$	—		$	—
Collectively evaluated for impairment	—			—		60		50		2,614			2,724
Total	$	—		$	—	$	60	$	50	$	2,614		$	2,724
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	1,356		$	7,998	$	—	$	2,341	$	—		$	11,695
Collectively evaluated for impairment	—			534,204		—		1,072,200		252,718			1,859,122
Loans acquired with deteriorated credit quality	2,127,878			258,807		2,168,969		355,332		92,155			5,003,141
Total	$	2,129,234		$	801,009	$	2,168,969	$	1,429,873	$	344,873		$	6,873,958

75

	Commercial					Consumer
Acquired loans	Real estate			Business		Residential		Home equity		Other consumer			Total
Three months ended September 30, 2013
Allowance for loan losses:
Balance at beginning of period	$	42		$	—	$	60	$	290	$	866		$	1,258
Provision for loan losses	—			—		859		1,700		(791		)	1,768
Charge-offs	—			—		—		—		(106		)	(106		)
Recoveries	10			—		—		—		31			41
Balance at end of period	$	52		$	—	$	919	$	1,990	$	—		$	2,961
Three months ended September 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—	$	60	$	50	$	3,210		$	3,320
Provision for loan losses	407			—		—		—		—			407
Charge-offs	(468		)	—		—		—		(658		)	(1,126		)
Recoveries	61			—		—		—		62			123
Balance at end of period	$	—		$	—	$	60	$	50	$	2,614		$	2,724

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 nonperforming loans consisted of the following at the dates indicated: 

	September 30, 2013						December 31, 2012
	Originated		Acquired		Total		Originated		Acquired		Total
Commercial:
Real estate	$	51,302	$	998	$	52,300	$	50,848	$	1,120	$	51,968
Business	35,854		11,172		47,026		47,066		8,932		55,998
Total commercial	87,156		12,170		99,326		97,914		10,052		107,966
Consumer:
Residential real estate	31,312		—		31,312		27,192		—		27,192
Home equity	15,709		17,901		33,610		14,233		19,205		33,438
Other consumer	10,667		317		10,984		3,737		391		4,128
Total consumer	57,688		18,218		75,906		45,162		19,596		64,758
Total	$	144,844	$	30,388	$	175,232	$	143,076	$	29,648	$	172,724

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: 

	Three months ended				Nine months ended
	September 30,				September 30,
	2013		2012		2013		2012
Additional interest income that would have been recorded if nonperforming loans had performed in accordance with original terms	$	1,860	$	2,157	$	5,398	$	5,287

76

Impaired loans

The following table provides information about our impaired originated loans including ending recorded investment, principal balance, and related allowance amount 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 68% and 67% of the loans’ contractual principal balance at September 30, 2013 and December 31, 2012, respectively. 

	September 30, 2013						December 31, 2012
Originated loans	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
With no related allowance recorded:
Commercial:
Real estate	$	62,495	$	84,613	$	—	$	41,964	$	54,926	$	—
Business	47,215		71,313		—		34,336		57,442		—
Total commercial	109,710		155,926		—		76,300		112,368		—
Consumer:
Residential real estate	15,573		18,762		—		6,315		6,473		—
Home equity	1,102		1,328		—		2,992		3,406		—
Other consumer	1,844		2,190		—		1,830		1,924		—
Total consumer	18,519		22,280		—		11,137		11,803		—
Total	$	128,229	$	178,206	$	—	$	87,437	$	124,171	$	—
With a related allowance recorded
Commercial:
Real estate	$	19,439	$	24,379	$	1,744	$	24,550	$	37,037	$	2,640
Business	10,701		20,190		4,587		23,873		31,271		4,755
Total commercial	30,140		44,569		6,331		48,423		68,308		7,395
Consumer:
Residential real estate	4,910		5,651		1,084		13,191		13,918		3,074
Home equity	4,905		5,664		2,439		2,406		2,583		801
Other consumer	1,783		1,963		68		79		99		10
Total consumer	11,598		13,278		3,591		15,676		16,600		3,885
Total	$	41,738	$	57,847	$	9,922	$	64,099	$	84,908	$	11,280
Total
Commercial:
Real estate	$	81,934	$	108,992	$	1,744	$	66,514	$	91,963	$	2,640
Business	57,916		91,503		4,587		58,209		88,713		4,755
Total commercial	139,850		200,495		6,331		124,723		180,676		7,395
Consumer:
Residential real estate	20,483		24,413		1,084		19,506		20,391		3,074
Home equity	6,007		6,992		2,439		5,398		5,989		801
Other consumer	3,627		4,153		68		1,909		2,023		10
Total consumer	30,117		35,558		3,591		26,813		28,403		3,885
Total	$	169,967	$	236,053	$	9,922	$	151,536	$	209,079	$	11,280

77

The following table provides information about our impaired acquired loans with no related allowance at the dates indicated. The remaining credit mark is considered adequate to cover any loss on these balances.

	September 30, 2013						December 31, 2012
Acquired loans	Recorded investment		Unpaid principal balance		Related allowance		Recorded investment		Unpaid principal balance		Related allowance
Commercial:
Real estate	$	999	$	4,447	$	—	$	1,130	$	4,652	$	—
Business	9,430		10,293		—		6,656		7,436		—
Total commercial	10,429		14,740		—		7,786		12,088		—
Consumer:
Residential real estate	—		—		—		—		—		—
Home equity	3,324		4,413		—		2,345		3,470		—
Other consumer	—		—		—		17		17		—
Total consumer	3,324		4,413		—		2,362		3,487		—
Total(1)	$	13,753	$	19,153	$	—	$	10,148	$	15,575	$	—

(1)Includes nonaccrual purchased credit impaired loans.

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

	September 30,
	2013				2012
Originated loans	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Nine months ended
Commercial:
Real estate	$	88,046	$	1,213	$	67,480	$	1,112
Business	59,391		689		49,318		597
Total commercial	147,437		1,902		116,798		1,709
Consumer:
Residential real estate	23,421		352		14,102		340
Home equity	6,096		47		2,558		74
Other consumer	3,836		33		556		31
Total consumer	33,353		432		17,216		445
Total	$	180,790	$	2,334	$	134,014	$	2,154
Three months ended
Commercial:
Real estate	$	87,903	$	410	$	63,721	$	548
Business	60,077		293		42,807		315
Total commercial	147,980		703		106,528		863
Consumer:
Residential real estate	20,755		182		17,789		134
Home equity	6,091		18		4,825		43
Other consumer	3,072		24		1,512		30
Total consumer	29,918		224		24,126		207
Total	$	177,898	$	927	$	130,654	$	1,070

78

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

	September 30,
	2013				2012
Acquired loans	Average recorded investment		Interest income recognized		Average recorded investment		Interest income recognized
Nine months ended
Commercial:
Real estate	$	1,139	$	—	$	1,605	$	—
Business	9,532		—		8,375		—
Total commercial	10,671		—		9,980		—
Consumer:
Residential real estate	—		—		—		—
Home equity	3,336		3		780		26
Other consumer	—		—		—		—
Total consumer	3,336		3		780		26
Total(1)	$	14,007	$	3	$	10,760	$	26
Three months ended
Commercial:
Real estate	$	1,065	$	—	$	678	$	—
Business	8,020		—		5,423		—
Total commercial	9,085		—		6,101		—
Consumer:
Residential real estate	—		—		—		—
Home equity	3,265		1		2,341		26
Other consumer	—		—		—		—
Total consumer	3,265		1		2,341		26
Total(1)	$	12,350	$	1	$	8,442	$	26

⁽¹⁾ Included nonaccrual purchased credit impaired loans.

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.

79

The following table is a reconciliation between nonaccrual loans and impaired loans at the dates indicated: 

	Commercial			Consumer			Total
September 30, 2013
Nonaccrual loans	$	99,326		$	75,906		$	175,232
Plus: Accruing TDRs	61,893			7,984			69,877
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses	(10,940		)	(50,449		)	(61,389		)
Total impaired loans(1)	$	150,279		$	33,441		$	183,720
December 31, 2012:
Nonaccrual loans	$	107,966		$	64,758		$	172,724
Plus: Accruing TDRs	36,380			9,900			46,280
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses	(11,837		)	(45,483		)	(57,320		)
Total impaired loans(1)	$	132,509		$	29,175		$	161,684

⁽¹⁾  Includes nonaccrual purchased credit impaired loans.

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.

80

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, 2013
Originated loans
Commercial:
Real estate	$	5,590	$	878	$	33,865	$	40,333	$	6,053,280	$	6,093,613	$	—
Business	8,094		5,135		23,232		36,461		4,704,589		4,741,050		27
Total commercial	13,684		6,013		57,097		76,794		10,757,869		10,834,663		27
Consumer:
Residential real estate	6,597		1,732		21,584		29,913		1,852,715		1,882,628		—
Home equity	3,413		1,688		10,685		15,786		1,521,149		1,536,935		—
Other consumer	11,827		4,021		7,513		23,361		1,933,918		1,957,279		2,407
Total consumer	21,837		7,441		39,782		69,060		5,307,782		5,376,842		2,407
Total	$	35,521	$	13,454	$	96,879	$	145,854	$	16,065,651	$	16,211,505	$	2,434
Acquired loans
Commercial:
Real estate	$	8,523	$	5,249	$	58,229	$	72,001	$	1,531,793	$	1,603,794	$	57,231
Business	5,575		418		10,638		16,631		446,991		463,622		5,165
Total commercial	14,098		5,667		68,867		88,632		1,978,784		2,067,416		62,396
Consumer:
Residential real estate	19,876		10,261		65,985		96,122		1,540,483		1,636,605		65,985
Home equity	7,459		2,761		18,507		28,727		1,140,941		1,169,668		5,433
Other consumer	439		146		317		902		2,975		3,877		—
Total consumer	27,774		13,168		84,809		125,751		2,684,399		2,810,150		71,418
Total	$	41,872	$	18,835	$	153,676	$	214,383	$	4,663,183	$	4,877,566	$	133,814
December 31, 2012
Originated loans
Commercial:
Real estate	$	4,346	$	2,584	$	40,454	$	47,384	$	4,996,321	$	5,043,705	$	3,791
Business	5,398		4,698		19,237		29,333		4,256,998		4,286,331		315
Total commercial	9,744		7,282		59,691		76,717		9,253,319		9,330,036		4,106
Consumer:
Residential real estate	7,590		2,414		19,241		29,245		1,694,889		1,724,134		—
Home equity	2,754		1,662		8,991		13,407		1,272,836		1,286,243		—
Other consumer	6,214		1,230		2,020		9,464		1,022,480		1,031,944		402
Total consumer	16,558		5,306		30,252		52,116		3,990,205		4,042,321		402
Total	$	26,302	$	12,588	$	89,943	$	128,833	$	13,243,524	$	13,372,357	$	4,508
Acquired loans
Commercial:
Real estate	$	10,651	$	18,066	$	80,374	$	109,091	$	1,940,397	$	2,049,488	$	79,255
Business	5,661		1,864		12,864		20,389		646,603		666,992		5,963
Total commercial	16,312		19,930		93,238		129,480		2,587,000		2,716,480		85,218
Consumer:
Residential real estate	24,104		11,917		69,106		105,127		1,932,306		2,037,433		69,106
Home equity	10,241		5,437		20,705		36,383		1,329,265		1,365,648		7,268
Other consumer	4,506		2,968		5,859		13,333		204,761		218,094		5,468
Total consumer	38,851		20,322		95,670		154,843		3,466,332		3,621,175		81,842
Total	$	55,163	$	40,252	$	188,908	$	284,323	$	6,053,332	$	6,337,655	$	167,060

81

⁽¹⁾  Includes credit card loans, loans that have matured and are in the process of collection, and acquired loans that were originally recorded at fair value upon acquisition. 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.

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, 2013
Originated loans:
Pass	$	5,778,744	$	4,481,784	$	10,260,528	94.7	%
Criticized:(1)
Accrual	263,567		223,412		486,979		4.5
Nonaccrual	51,302		35,854		87,156		0.8
Total criticized	314,869		259,266		574,135		5.3
Total	$	6,093,613	$	4,741,050	$	10,834,663	100.0	%
Acquired loans:
Pass	$	1,413,615	$	399,869	$	1,813,484	87.7	%
Criticized:(1)
Accrual	189,181		52,581		241,762		11.7
Nonaccrual	998		11,172		12,170		0.6
Total criticized	190,179		63,753		253,932		12.3
Total	$	1,603,794	$	463,622	$	2,067,416	100.0	%
December 31, 2012
Originated loans:
Pass	$	4,745,600	$	4,069,410	$	8,815,010	94.5	%
Criticized:(1)
Accrual	247,257		169,855		417,112		4.5
Nonaccrual	50,848		47,066		97,914		1.0
Total criticized	298,105		216,921		515,026		5.5
Total	$	5,043,705	$	4,286,331	$	9,330,036	100.0	%
Acquired loans:
Pass	$	1,794,282	$	581,555	$	2,375,837	87.4	%
Criticized:(1)
Accrual	254,086		76,505		330,591		12.2
Nonaccrual	1,120		8,932		10,052		0.4
Total criticized	255,206		85,437		340,643		12.6
Total	$	2,049,488	$	666,992	$	2,716,480	100.0	%

⁽¹⁾  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, 2012.

82

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, 2013
Originated loans by refreshed FICO score:
Over 700	$	1,607,573	$	1,266,686	$	1,236,344	$	4,110,603	76.5	%
660-700	136,743		150,454		379,540		666,737		12.4
620-660	56,261		61,125		190,880		308,266		5.7
580-620	33,621		26,741		70,612		130,974		2.4
Less than 580	38,037		28,327		55,138		121,502		2.3
No score(1)	10,393		3,602		24,765		38,760		0.7
Total	$	1,882,628	$	1,536,935	$	1,957,279	$	5,376,842	100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	1,130,390	$	901,936	$	2,055	$	2,034,381	72.4	%
660-700	125,434		103,897		886		230,217		8.2
620-660	77,683		63,922		495		142,100		5.1
580-620	53,207		39,547		243		92,997		3.3
Less than 580	73,729		38,971		198		112,898		4.0
No score(1)	176,162		21,395		—		197,557		7.0
Total	$	1,636,605	$	1,169,668	$	3,877	$	2,810,150	100.0	%
December 31, 2012
Originated loans by refreshed FICO score:
Over 700	$	1,381,565	$	1,009,913	$	589,804	$	2,981,282	73.7	%
660-700	167,046		148,692		232,474		548,212		13.6
620-660	67,520		59,085		122,656		249,261		6.2
580-620	38,570		28,487		45,545		112,602		2.8
Less than 580	57,794		36,152		36,866		130,812		3.2
No score(1)	11,639		3,914		4,599		20,152		0.5
Total	$	1,724,134	$	1,286,243	$	1,031,944	$	4,042,321	100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	1,353,416	$	998,443	$	120,305	$	2,472,164	68.3	%
660-700	176,620		136,160		35,255		348,035		9.6
620-660	103,628		83,857		19,380		206,865		5.7
580-620	72,627		53,708		9,967		136,302		3.8
Less than 580	109,337		69,664		13,594		192,595		5.3
No score(1)	221,805		23,816		19,593		265,214		7.3
Total	$	2,037,433	$	1,365,648	$	218,094	$	3,621,175	100.0	%

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

83

Troubled Debt Restructures

The following table details additional information on our TDRs at the dates indicated: 

	September 30, 2013		December 31, 2012
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accruing interest	$	69,877	$	46,280
Nonaccrual	53,405		42,244
Total troubled debt restructurings (1)	$	123,282	$	88,524

⁽¹⁾  Includes 63 and 44 acquired loans that were restructured with a recorded investment of $3.3 million and $2.9 million at September 30, 2013 and December 31, 2012, respectively.

The modifications made to loans classified as TDRs typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, rate reduction, or loans restructured in a Chapter 7 bankruptcy. 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, 2013
Commercial:
Commercial real estate
Extension of term	5	$	9,354	$	634	$	510
Extension of term and rate reduction	6	15,910		740		438
Deferral of principal	1	7,782		429		—
Commercial business
Extension of term	9	10,237		1,576		185
Extension of term and rate reduction	7	974		139		232
Total commercial	28	44,257		3,518		1,365
Consumer:
Residential real estate
Extension of term	2	$	291	$	—	$	23
Rate reduction	3	109		—		3
Deferral of principal and extension of term	4	151		—		7
Extension of term and rate reduction	10	1,930		1		78
Chapter 7 bankruptcy	12	760		—		11
Home equity
Rate reduction	2	126		—		11
Deferral of principal and extension of term	1	111		—		1
Extension of term and rate reduction	2	40		—		—
Chapter 7 Bankruptcy	50	1,866		5		22
Other consumer
Rate reduction	1	25		1		1
Extension of term and rate reduction	1	46		1		—
Chapter 7 Bankruptcy	112	2,008		31		1
Total consumer	200	7,463		39		158
Total	228	$	51,720	$	3,557	$	1,523

84

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

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

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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, 2013
Commercial:
Commercial real estate
Extension of term	1	$	3,104	$	252	$	—
Commercial business
Extension of term	5	2,998		429		15
Extension of term and rate reduction	6	862		123		223
Total commercial	12	6,964		804		238
Consumer:
Residential real estate
Extension of term	1	173		—		12
Deferral of principal and extension of term	2	102		—		7
Extension of term and rate reduction	4	401		—		34
Chapter 7 Bankruptcy	4	324		—		—
Home equity
Rate reduction	1	37		—		1
Deferral of principal and extension of term	1	111		—		1
Extension of term and rate reduction	1	18		—		—
Chapter 7 Bankruptcy	17	545		2		—
Other consumer
Rate reduction	1	25		1		1
Extension of term and rate reduction	1	46		1		—
Chapter 7 Bankruptcy	40	637		16		—
Total consumer	73	2,419		20		56
Total	85	$	9,383	$	824	$	294
Three months ended September 30, 2012
Commercial:
Commercial real estate
Extension of term	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

⁽¹⁾  Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings was 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: 

	Three months ended September 30,				Nine months ended September 30,
	2013		2012		2013		2012
Commercial:
Real estate	$	—	$	239	$	—	$	638
Business	—		380		—		1,087
Total commercial	—		619		—		1,725
Consumer:
Residential real estate	—		—		—		—
Home equity	—		—		76		—
Other consumer	—		—		—		—
Total consumer	—		—		76		—
Total	$	—	$	619	$	76	$	1,725

Residential Mortgage Banking

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

	September 30,
	2013		2012
Mortgages serviced for others	$	3,574,124	$	2,658,722
Mortgage servicing asset recorded for loans serviced for others, net	33,571		23,136

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Note 4. Derivative Financial Instruments

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

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

	Asset derivatives				Liability derivatives
	Notional amount		Fair value  (1)		Notional amount		Fair value  (2)
September 30, 2013
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	6,776	$	172	$	26,379	$	1,225
Derivatives not designated as hedging instruments:
Interest rate swap agreements	2,925,073		72,173		2,915,576		71,810
Total derivatives	$	2,931,849	$	72,345	$	2,941,955	$	73,035
December 31, 2012
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	14,607	$	1,983
Derivatives not designated as hedging instruments:
Interest rate swap agreements	2,195,025		102,069		2,195,025		102,714
Total derivatives	$	2,195,025	$	102,069	$	2,209,632	$	104,697

⁽¹⁾  Represents gross amounts, included in Other Assets in our Consolidated Statements of Condition.

⁽²⁾  Represents gross amounts, included in Other Liabilities in our Consolidated Statements of Condition.

At September 30, 2013, some of our interest rate swaps for which we had master netting arrangements with the counterparty were in a net liability position of $49 million. We offset $72 million of liabilities with $23 million of assets in our Consolidated Statements of Financial Condition at September 30, 2013 related to these interest rate swaps and we did not include any cash collateral in the netting. We posted collateral for liability positions with a fair value of $7 million at September 30, 2013.

At December 31, 2012, all of our interest rate swaps for which we had master netting arrangements with the counterparty were in a liability position. Accordingly, there was no offsetting in our Consolidated Statements of Financial Condition at December 31, 2012 related to these interest rate swaps. We posted collateral for these liability positions with a fair value of $125 million at December 31, 2012.

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 for the three and nine months ended September 30, 2013 and 2012.

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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, 2013, we did not have any derivatives classified as cash flow hedges. At September 30, 2013, there was a $5.7 millionloss recognized in accumulated other comprehensive income related to borrowings that were previously hedged using interest rate swaps that were classified as cash flow hedges. This amount will be reclassified out of accumulated other comprehensive income and into earnings over the remaining life of the hedged borrowings as an adjustment of yield.

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	2013				2012				2013				2012
Interest rate swap agreements:
Amount of gain on derivatives recognized in other comprehensive income, net of tax	$	184			$	177			$	530			$	6,536
Amount of (loss) on derivatives reclassified from other comprehensive income to income	(286		)	(1)	(286		)	(1)	(848		)	(1)	(15,146		)	(2)

⁽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 $13.5 million and $18.1 million for the nine months ended September 30, 2013 and 2012, respectively, included in Capital Markets income in our Consolidated Statements of Income.

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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,
	2013			2012			2013			2012
Net income available to common stockholders	$	71,596		$	50,837		$	194,921		$	87,116
Less income allocable to unvested restricted stock awards	453			200			1,030			283
Net income allocable to common stockholders	$	71,143		$	50,637		$	193,891		$	86,833
Weighted average common shares outstanding:
Total shares issued	366,002			366,002			366,002			366,002
Unallocated employee stock ownership plan shares	(2,090		)	(2,267		)	(2,134		)	(2,289		)
Unvested restricted stock awards	(2,224		)	(1,377		)	(1,818		)	(1,117		)
Treasury shares	(12,035		)	(13,357		)	(12,558		)	(13,640		)
Total basic weighted average common shares outstanding	349,653			349,001			349,492			348,956
Incremental shares from assumed exercise of stock options	14			—			—			—
Incremental shares from assumed vesting of restricted stock awards	1,229			370			876			292
Total diluted weighted average common shares outstanding	350,896			349,371			350,368			349,248
Basic earnings per common share	$	0.20		$	0.15		$	0.55		$	0.25
Diluted earnings per common share	$	0.20		$	0.14		$	0.55		$	0.25
Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations	11,099			12,629			11,396			11,867

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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
2013
Securities available for sale:
Net unrealized holding losses arising during the period	$	(11,514	)	$	(4,302	)	$	(7,212	)		$	(155,943	)	$	(59,719	)	$	(96,224	)
Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity	—			—			—				(54,872		)	(21,049		)	(33,823		)
Net unrealized losses on securities available for sale	(11,514		)	(4,302		)	(7,212		)		(210,815		)	(80,768		)	(130,047		)
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
Net unrealized holding gains transferred during the period	—			—			—				54,872			21,049			33,823
Amortization of net unrealized holding gains to income during the period	(6,325		)	(2,426		)	(3,899		)	(1)	(15,673		)	(6,006		)	(9,667		)	(1)
Net unrealized holding (losses) gains on securities transferred during the period	(6,325		)	(2,426		)	(3,899		)		39,199			15,043			24,156
Interest rate swaps designated as cash flow hedges:
Reclassification adjustment for realized losses included in net income	286			102			184			(2)	848			318			530			(2)
Pension and post-retirement plans:
Amortization of net loss related to pension and post-retirement plans	48			—			48				143			—			143
Total other comprehensive loss	$	(17,505	)	$	(6,626	)	$	(10,879	)		$	(170,625	)	$	(65,407	)	$	(105,218	)

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	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		)
Amortization of net unrealized holding gains to income during the period	(682		)	(260		)	(422		)	(1)	(2,011		)	(749		)	(1,262		)	(1)
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			(2)	15,146			5,809			9,337			(2)
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
Total pension and post-retirement plans	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

⁽¹⁾ Included in Interest income on investment securities and other in our Consolidated Statement of Income.

⁽²⁾ Included in Interest expense on borrowings in our Consolidated Statement of Income.

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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 (losses) gains on securities transferred from available for sale to held to maturity			Unrealized (losses) gains on interest rate swaps designated as cash flow hedges			Pension and postretirement plans			Total
Balance, January 1, 2013	$	206,733		$	(1,691	)	$	(6,262	)	$	(41,477	)	$	157,303
Period change, net of tax	(130,047		)	24,156			530			143			(105,218		)
Balance, September 30, 2013	$	76,686		$	22,465		$	(5,732	)	$	(41,334	)	$	52,085
Balance, 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
Balance, September 30, 2012	$	204,347		$	(1,108	)	$	(6,467	)	$	(21,957	)	$	174,815

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. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair

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value based on either broker quotes or internally developed models. 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, 2013, $1.6 billion of our investment securities were priced utilizing broker quotes and none were internally priced. 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.”

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, on a loan by loan basis, 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, 2013 or December 31, 2012. The table below presents information about our loans held for sale for which we elected the fair value option at the dates indicated: 

	September 30, 2013		December 31, 2012
Fair value carrying amount	$	80,468	$	154,745
Aggregate unpaid principal balance	77,427		149,412
Fair value carrying amount less aggregate unpaid principal balance	$	3,041	$	5,333

Derivatives

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, 2013
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	544,544	$	—	$	544,544	$	—
U.S. Treasury	20,511		20,511		—		—
U.S. government agencies	4,174		—		4,174		—
U.S. government sponsored enterprises	325,387		—		325,387		—
Corporate	864,888		—		864,888		—
Trust preferred securities	5,340		—		—		5,340
Total debt securities	1,764,844		20,511		1,738,993		5,340
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	42,448		—		42,448		—
Federal National Mortgage Association	150,262		—		150,262		—
Federal Home Loan Mortgage Corporation	171,616		—		171,616		—
Collateralized mortgage obligations:
Federal National Mortgage Association	794,804		—		794,804		—
Federal Home Loan Mortgage Corporation	393,683		—		393,683		—
Non-agency issued	16,233		—		16,233		—
Total collateralized mortgage obligations	1,204,720		—		1,204,720		—
Total residential mortgage-backed securities	1,569,046		—		1,569,046		—
Commercial mortgage-backed securities, non-agency issued	1,863,116		—		1,863,116		—
Total mortgage-backed securities	3,432,162		—		3,432,162		—
Collateralized loan obligations, non-agency issued	1,466,125		—		—		1,466,125
Asset-backed securities collateralized by:
Student loans	317,513		—		317,513		—
Credit cards	73,023		—		73,023		—
Auto loans	336,552		—		336,552		—
Other	187,156		—		187,156		—
Total asset-backed securities	914,244		—		914,244		—
Other	32,301		22,476		9,825		—
Total securities available for sale	7,609,676		42,987		6,095,224		1,471,465
Loans held for sale (1)	80,468		—		80,468		—
Derivatives	49,259		—		49,259		—
Total assets	$	7,739,403	$	42,987	$	6,224,951	$	1,471,465
Liabilities:
Derivatives	$	49,949	$	—	$	49,949	$	—

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

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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, 2013. 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 was not available to incorporate into the pricing during 2012 and our purchase price became less relevant as time elapsed from the purchase date. As a result, the fair values utilized significant unobservable inputs and warranted classification as level 3 fair value measurements.

	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
December 31, 2012
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	608,061	$	—	$	608,061	$	—
U.S. Treasury	20,707		20,707		—		—
U.S. government agencies	4,651		—		4,651		—
U.S. government sponsored enterprises	403,892		—		403,892		—
Corporate	837,027		—		837,027		—
Trust preferred securities	14,195		—		—		14,195
Total debt securities	1,888,533		20,707		1,853,631		14,195
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association	69,626		—		69,626		—
Federal National Mortgage Association	414,462		—		414,462		—
Federal Home Loan Mortgage Corporation	354,893		—		354,893		—
Collateralized mortgage obligations:
Government National Mortgage Association	1,091,157		—		1,091,157		—
Federal National Mortgage Association	1,474,428		—		1,474,428		—
Federal Home Loan Mortgage Corporation	1,047,217		—		1,047,217		—
Non-agency issued	61,123		—		61,123		—
Total collateralized mortgage obligations	3,673,925		—		3,673,925		—
Total residential mortgage-backed securities	4,512,906		—		4,512,906		—
Commercial mortgage-backed securities, non-agency issued	2,060,221		—		2,060,221		—
Total mortgage-backed securities	6,573,127		—		6,573,127		—
Collateralized loan obligations, non-agency issued	1,544,865		—		—		1,544,865
Asset-backed securities collateralized by:
Student loans	389,741		—		389,741		—
Credit cards	75,075		—		75,075		—
Auto loans	372,166		—		372,166		—
Other	118,659		—		118,659		—
Total asset-backed securities	955,641		—		955,641		—
Other	31,439		23,311		8,128		—
Total securities available for sale	10,993,605		44,018		9,390,527		1,559,060
Loans held for sale (1)	154,745		—		154,745		—
Derivatives	102,069		—		102,069		—
Total assets	$	11,250,419	$	44,018	$	9,647,341	$	1,559,060
Liabilities:
Derivatives	$	104,697	$	—	$	104,697	$	—

⁽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, 2013
Collateral dependent impaired loans	$	23,694	$	—	$	13,708	$	9,986	$	(423	)
Nine months ended September 30, 2012
Collateral dependent impaired loans	$	35,651	$	—	$	20,490	$	15,161	$	(2,889	)

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, 2013, we recorded an increase of $0.4 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $24 million at September 30, 2013, which is included in our provision for credit losses. 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, which is included in our provision for credit losses.

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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,
	2013									2012
	Trust preferred securities			Collateralized loan obligations			Total			Trust preferred securities			Collateralized loan obligations		Total
Balance at beginning of period	$	14,195		$	1,544,865		$	1,559,060		$	25,032		$	—	$	25,032
Transfers from level 2(1)	—			—			—			—			157,999		157,999
Purchases	—			73,392			73,392			—			1,081,678		1,081,678
Settlements	(8,854		)	(159,295		)	(168,149		)	(12,199		)	—		(12,199		)
Gains included in other comprehensive income	703			7,204			7,907			2,923			30,904		33,827
Losses included in earnings	(704		)	(41		)	(745		)	(446		)	—		(446		)
Balance at end of period	$	5,340		$1,466,125			$	1,471,465		$	15,310		$	1,270,581	$	1,285,891

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

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 wide 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 either by a third party specialist using a discounted cash flow approach and proprietary pricing model or internally using similarly developed models. The models consider 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	Range (weighted average)
December 31, 2012
Collateralized loan obligations	$	1,544,865	Internally modeled	Market spreads	150 - 550 bps (213 bps)

As of September 30, 2013, the fair values of our trust preferred securities and CLOs are all based upon third party pricing without adjustment and as a result, the assets are not included in the above table. As of December 31, 2012, the fair values of our trust preferred securities were based upon third party pricing without adjustment and as a result the assets are not included in the above 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.

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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, 2013						December 31, 2012
	Carrying value		Estimated fair value		Fair value level		Carrying value		Estimated fair value		Fair value level
Financial assets:
Cash and cash equivalents	$	558,086	$	558,086	1		$	430,862	$	430,862	1
Investment securities available for sale	7,609,676		7,609,676		1,2,3	(1)	10,993,605		10,993,605		1,2,3	(1)
Investment securities held to maturity	3,841,700		3,839,863		2		1,299,806		1,373,971		2
Federal Home Loan Bank and Federal Reserve Bank common stock	437,534		437,534		2		420,277		420,277		2
Loans held for sale	80,468		80,468		2		154,745		154,745		2
Loans and leases, net	20,891,118		21,307,115		2,3	(2)	19,547,490		20,213,465		2,3	(2)
Derivatives	49,259		49,259		2		102,069		102,069		2
Accrued interest receivable	108,345		108,345		2		107,757		107,757		2
Financial liabilities:
Deposits	$	26,969,002	27,121,761		2		$	27,676,531	$	27,852,175	2
Borrowings	4,901,963		4,860,013		2		3,716,143		3,773,787		2
Derivatives	49,949		49,949		2		104,697		104,697		2
Accrued interest payable	10,925		10,925		2		9,695		9,695		2

⁽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 $14 million and $31 million of collateral dependent impaired loans without significant adjustments made to appraised values at September 30, 2013 and December 31, 2012, respectively. 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.

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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.

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, 2013
Net interest income	$	277,540	$	—		$	277,540
Provision for credit losses	27,600		—			27,600
Net interest income after provision for credit losses	249,940		—			249,940
Noninterest income	73,511		17,911			91,422
Amortization of intangibles	6,856		846			7,702
Other noninterest expense	210,256		13,235			223,491
Income before income taxes	106,339		3,830			110,169
Income tax expense	29,549		1,477			31,026
Net income	$	76,790	$	2,353		$	79,143
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
Nine months ended September 30, 2013
Net interest income	$	813,113	$	—		$	813,113
Provision for credit losses	73,000		—			73,000
Net interest income after provision for credit losses	740,113		—			740,113
Noninterest income	224,309		51,971			276,280
Amortization of intangibles	30,058		2,613			32,671
Other noninterest expense	632,268		39,090			671,358
Income before income taxes	302,096		10,268			312,364
Income tax expense	90,855		3,947			94,802
Net income	$	211,241	$	6,321		$	217,562
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

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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 Part I, 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, 2013 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, 2013.

During the quarter ended September 30, 2013, 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 position or liquidity.

ITEM 1A. Risk Factors

There are no material changes to the risk factors as previously discussed in Item 1A to Part I of our 2012 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 2013.

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.

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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 7, 2013	By:	/s/ Gary M. Crosby
		Gary M. Crosby
		Interim President and Chief Executive Officer
		(Principal Executive Officer)
Date: November 7, 2013	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Senior Executive Vice President and Chief Financial Officer
		(Principal Financial Officer/Principal Accounting Officer)

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