First Niagara Financial (FNFG) 10-Q 2012 Q2 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 June 30, 2012

OR

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

For the transition period from             to             

Commission file number 001-35390

FIRST NIAGARA FINANCIAL GROUP, INC.

(exact name of registrant as specified in its charter)

Delaware	42-1556195
(State or other jurisdiction of incorporation or organization)	(I.R.S. Employer Identification No.)
726 Exchange Street, Suite 618, Buffalo, NY	14210
(Address of principal executive offices)	(Zip Code)

(716) 819-5500

(Registrant’s telephone number, including area code)

Indicate by check mark whether the Registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding twelve months (or for such shorter period that the Registrant was required to file such reports) and (2) has been subject to such requirements for the past 90 days.    YES  x    NO  ¨

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

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

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

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

APPLICABLE ONLY TO ISSUERS INVOLVED IN BANKRUPTCY PROCEEDINGS DURING THE PRECEDING FIVE YEARS:

Indicate by check mark whether the registrant has filed all documents and reports required to be filed by Sections 12, 13 or 15(d) of the Securities Exchange Act of 1934 subsequent to the distribution of securities under a plan confirmed by a court.    YES  ¨    NO  ¨

As of August 3, 2012, there were issued and outstanding 352,639,601 shares of the Registrant’s Common Stock, $0.01 par value.

FIRST NIAGARA FINANCIAL GROUP, INC.

FORM 10-Q

For the Quarterly Period Ended June 30, 2012

TABLE OF CONTENTS

Item Number	Page Number
PART I—FINANCIAL INFORMATION
1. Financial Statements
Consolidated Statements of Condition at June 30, 2012 (unaudited) and December 31, 2011		3
Consolidated Statements of Operations for the three and six months ended June  30, 2012 and 2011 (unaudited)		4
Consolidated Statements of Comprehensive (Loss) Income for the three and six months ended June  30, 2012 and 2011 (unaudited)		5
Consolidated Statements of Changes in Stockholders’ Equity for the six months ended June  30, 2012 and 2011 (unaudited)		6
Consolidated Statements of Cash Flows for the six months ended June 30, 2012 and 2011 (unaudited)		7
Notes to Consolidated Financial Statements (unaudited)		8
2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		41
3. Quantitative and Qualitative Disclosures About Market Risk		81
4. Controls and Procedures		81
PART II—OTHER INFORMATION
1. Legal Proceedings		81
1A. Risk Factors		81
2. Unregistered Sales of Equity Securities and Use of Proceeds		81
3. Defaults Upon Senior Securities		81
4. Mine Safety Disclosures		81
5. Other Information		81
6. Exhibits		82
Signatures		82

2

PART I. FINANCIAL INFORMATION

ITEM 1. Financial Statements

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Condition

(in thousands, except share and per share amounts)

	June 30,			December 31,
	2012			2011
	(unaudited)
ASSETS
Cash and cash equivalents	$	488,227		$	836,555
Investment securities:
Available for sale, at fair value (amortized cost of $9,720,805 and $9,178,001 in 2012 and 2011; includes pledged securities that can be sold or repledged of $52,390 and $2,344,710 in 2012 and 2011)		9,937,271			9,348,296
Held to maturity, at amortized cost (fair value of $1,533,266 and $2,752,723 in 2012 and 2011; includes pledged securities that can be sold or repledged of $43,873 and $1,210,995 in 2012 and 2011)		1,463,872			2,669,630
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost and fair value		329,555			358,159
Loans held for sale		101,596			94,484
Loans and leases (net of allowance for loan losses of $138,516 and $120,100 in 2012 and 2011)		18,625,000			16,352,483
Bank owned life insurance		397,739			392,468
Premises and equipment, net		380,611			318,101
Goodwill		2,471,749			1,708,345
Core deposit and other intangibles, net		159,856			94,895
Other assets		750,280			637,199
Total assets	$	35,105,756		$	32,810,615
LIABILITIES AND STOCKHOLDERS’ EQUITY
Liabilities:
Deposits	$	27,896,987		$	19,405,115
Short-term borrowings		958,044			2,208,845
Long-term borrowings		732,263			5,918,276
Other		700,249			480,201
Total liabilities		30,287,543			28,012,437
Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; Series B, noncumulative perpetual preferred stock, $25 liquidation preference; 14,000,000 issued in 2012 and 2011		338,002			338,002
Common stock, $0.01 par value, 500,000,000 shares authorized; 366,002,045 shares issued in 2012 and 2011		3,660			3,660
Additional paid-in capital		4,223,851			4,228,477
Retained earnings		351,015			374,840
Accumulated other comprehensive income		103,920			67,812
Common stock held by employee stock ownership plan, 2,267,527 and 2,357,257 shares in 2012 and 2011		(18,443	)		(19,070	)
Treasury stock, at cost, 13,336,999 and 14,167,733 shares in 2012 and 2011		(183,792	)		(195,543	)
Total stockholders’ equity		4,818,213			4,798,178
Total liabilities and stockholders’ equity	$	35,105,756		$	32,810,615

See accompanying notes to consolidated financial statements.

3

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Operations(unaudited)

(in thousands, except per share amounts)

	Three months ended					Six months ended
	June 30,					June 30,
	2012			2011		2012		2011
Interest income:
Loans and leases	$	200,725		$	184,341	$	390,110	$	316,458
Investment securities and other		99,116			93,029		200,511		169,796
Total interest income		299,841			277,370		590,621		486,254
Interest expense:
Deposits		16,391			21,324		31,389		36,945
Borrowings		24,437			25,609		57,848		46,004
Total interest expense		40,828			46,933		89,237		82,949
Net interest income		259,013			230,437		501,384		403,305
Provision for credit losses		28,100			17,307		48,100		30,207
Net interest income after provision for credit losses		230,913			213,130		453,284		373,098
Noninterest income:
Banking services		27,823			24,613		49,416		43,619
Insurance commissions		17,072			17,044		33,905		32,799
Wealth management services		9,207			7,883		18,246		14,617
Mortgage banking		7,174			3,386		12,823		4,649
Lending and leasing		4,245			2,811		7,368		4,923
Bank owned life insurance		3,848			3,055		7,235		5,085
Capital markets income		6,831			655		13,370		2,916
Gain on securities portfolio repositioning		15,895			—		15,895		—
Other		3,503			1,448		7,248		4,361
Total noninterest income		95,598			60,895		165,506		112,969
Noninterest expense:
Salaries and employee benefits		104,507			90,192		200,984		163,968
Occupancy and equipment		24,089			18,952		46,106		35,149
Technology and communications		24,434			13,929		44,147		26,800
Marketing and advertising		6,676			3,880		13,439		6,572
Professional services		9,263			9,138		18,158		15,177
Amortization of intangibles		9,839			6,573		16,305		12,062
Federal deposit insurance premiums		10,552			6,267		16,685		12,462
Merger and acquisition integration expenses		131,460			76,828		144,430		83,004
Restructuring charges		3,750			11,656		6,453		12,712
Other		21,069			17,726		39,110		32,385
Total noninterest expense		345,639			255,141		545,817		400,291
(Loss) income before income taxes		(19,128	)		18,884		72,973		85,776
Income taxes		(8,204	)		5,334		24,032		27,308
Net (loss) income		(10,924	)		13,550		48,941		58,468
Preferred stock dividend		7,547			—		12,662		—
Net (loss) income available to common stockholders	$	(18,471	)	$	13,550	$	36,279	$	58,468
(Loss) earnings per share:
Basic	$	(0.05	)	$	0.05	$	0.10	$	0.24
Diluted	$	(0.05	)	$	0.05	$	0.10	$	0.24
Weighted average common shares outstanding:
Basic		348,941			281,496		348,882		244,018
Diluted		348,941			282,420		349,147		244,914
Dividends per common share	$	0.08		$	0.16	$	0.16	$	0.32

See accompanying notes to financial statements.

4

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive (Loss) Income(unaudited)

(in thousands)

	Three months ended						Six months ended
	June 30,						June 30,
	2012			2011			2012			2011
Net (loss) income	$	(10,924	)	$	13,550		$	48,941		$	58,468
Other comprehensive (loss) income, net of income taxes:
Securities available for sale:
Net unrealized (losses) gains arising during the period		(11,678	)		42,817			35,454			36,020
Reclassification adjustment for realized gains included in net income		(9,798	)		—			(9,798	)		—
Reclassification adjustment for net unrealized holding gains on securities transferred between available for sale and held to maturity		2,498			—			2,498			(3,956	)
		(18,978	)		42,817			28,154			32,064
Net unrealized holding gains on securities transferred between available for sale to held to maturity:
Net unrealized holding gains on securities transferred		(2,498	)		—			(2,498	)		3,956
Less: amortization of net unrealized holding gains to income		(391	)		(407	)		(840	)		(407	)
		(2,889	)		(407	)		(3,338	)		3,549
Net unrealized gains (losses) on interest rate swaps designated as cash flow hedges arising during the period		8,099			(6,065	)		6,359			(4,501	)
Pension and post-retirement plans:
Pension remeasurement		—			—			4,612			—
Amortization of net loss related to pension and post-retirement plans		270			356			321			559
		270			356			4,933			559
Total other comprehensive (loss) income		(13,498	)		36,701			36,108			31,671
Total comprehensive (loss) income	$	(24,422	)	$	50,251		$	85,049		$	90,139

See accompanying notes to consolidated financial statements.

5

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity(unaudited)

(in thousands, except share and per share amounts)

	Preferred stock		Common stock		Additional paid-in capital			Retained earnings			Accumulated other comprehensive income		Common stock held by ESOP			Treasury stock			Total
Balances at January 1, 2012	$	338,002	$	3,660	$	4,228,477		$	374,840		$	67,812	$	(19,070	)	$	(195,543	)	$	4,798,178
Net income		—		—		—			48,941			—		—			—			48,941
Total other comprehensive income, net		—		—		—			—			36,108		—			—			36,108
ESOP shares committed to be released (89,730 shares)		—		—		13			—			—		627			—			640
Stock-based compensation expense		—		—		4,054			—			—		—			—			4,054
Excess tax benefit from stock-based compensation		—		—		155			—			—		—			—			155
Restricted stock activity (830,734 shares)		—		—		(8,848	)		(4,121	)		—		—			11,751			(1,218	)
Preferred stock dividends		—		—		—			(12,662	)		—		—			—			(12,662	)
Common stock dividends of $0.16 per share		—		—		—			(55,983	)		—		—			—			(55,983	)
Balances at June 30, 2012	$	338,002	$	3,660	$	4,223,851		$	351,015		$	103,920	$	(18,443	)	$	(183,792	)	$	4,818,213
Balances at January 1, 2011	$	—	$	2,151	$	2,430,571		$	376,670		$	57,871	$	(20,758	)	$	(81,435	)	$	2,765,070
Net income		—		—		—			58,468			—		—			—			58,468
Total other comprehensive income, net		—		—		—			—			31,671		—			—			31,671
Purchases of treasury stock (8,666,000 shares)		—		—		—			—			—		—			(121,137	)		(121,137	)
Common stock issued for the acquisition of NewAlliance Bancshares, Inc. (93,984,715 shares)		—		940		1,330,612			—			—		—			—			1,331,552
ESOP shares committed to be released (133,701 shares)		—		—		630			—			—		851			—			1,481
Stock-based compensation expense		—		—		3,760			—			—		—			—			3,760
Excess tax benefit from stock-based compensation		—		—		490			—			—		—			—			490
Exercise of stock options and restricted stock activity (815,009 shares)		—		—		(7,848	)		(660	)		—		—			11,079			2,571
Common stock dividends of $0.32 per share		—		—		—			(81,091	)		—		—			—			(81,091	)
Balances at June 30, 2011	$	—	$	3,091	$	3,758,215		$	353,387		$	89,542	$	(19,907	)	$	(191,493	)	$	3,992,835

See accompanying notes to consolidated financial statements.

6

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Cash Flows(unaudited)

(in thousands)

	Six months ended June 30,
	2012			2011
Cash flows from operating activities:
Net income	$	48,941		$	58,468
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of fees and discounts, net		(7,280	)		(1,101	)
Provision for credit losses		48,100			30,207
Depreciation of premises and equipment		19,945			15,555
Amortization of intangibles		16,305			12,062
Gain on securities portfolio repositioning		(15,895	)		—
Origination of loans held for sale		(687,271	)		(260,700	)
Proceeds from sales of loans held for sale		684,515			247,839
ESOP and stock based-compensation expense		4,702			5,241
Deferred income tax expense		18,200			10,790
Contributions to defined benefit pension plans		(110,575	)		—
Other, net		(7,082	)		23,684
Net cash provided by operating activities		12,605			142,045
Cash flows from investing activities:
Proceeds from sales of securities available for sale		3,143,638			493,738
Proceeds from maturities of securities available for sale		135,397			134,506
Principal payments received on securities available for sale		1,031,348			598,301
Purchases of securities available for sale		(3,993,510	)		(1,322,486	)
Principal payments received on securities held to maturity		327,587			161,565
Purchases of securities held to maturity		—			(93,082	)
Proceeds from sales (purchases) of Federal Home Loan Bank and Federal Reserve Bank common stock		28,604			(620	)
Net increase in loans and leases		(782,931	)		(582,008	)
Acquisitions, net of cash and cash equivalents		7,298,182			(51,344	)
Purchases of premises and equipment		(46,812	)		(28,390	)
Other, net		26,184			(8,636	)
Net cash provided by (used in) investing activities		7,167,687			(698,456	)
Cash flows from financing activities:
Net (decrease) increase in deposits		(1,082,726	)		455,262
Repayments of short-term borrowings, net		(1,250,793	)		(12,379	)
Proceeds from long-term borrowings		—			550,943
Repayments of long-term borrowings		(5,126,190	)		(135,832	)
Purchases of treasury stock		—			(121,137	)
Dividends paid on noncumulative preferred stock		(12,662	)		—
Dividends paid on common stock		(55,983	)		(81,076	)
Other, net		(266	)		5,630
Net cash (used in) provided by financing activities		(7,528,620	)		661,411
Net (decrease) increase in cash and cash equivalents		(348,328	)		105,000
Cash and cash equivalents at beginning of period		836,555			213,820
Cash and cash equivalents at end of period	$	488,227		$	318,820
Supplemental disclosures
Cash paid during the period for:
Income taxes	$	12,460		$	57,737
Interest expense		171,075			101,314
Acquisition of noncash assets and liabilities:
Assets acquired		2,570,284			9,062,211
Liabilities assumed		9,868,466			7,679,315
Other noncash activity:
Securities available for sale purchased not settled		49,388			25,737
Securities transferred from held to maturity to available for sale		860,674			—
Securities transferred from available for sale to held to maturity (at fair value)		—			1,994,193

See accompanying notes to consolidated financial statements.

7

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements(unaudited)

(in thousands, except as noted and per share amounts)

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

These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2011 Annual Report on Form 10-K. Results for the three and six months ended June 30, 2012 do not necessarily reflect the results that may be expected for the year ending December 31, 2012. We reviewed subsequent events and determined that no further disclosures or adjustments were required. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current period presentation. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

Note 1. Acquisitions

HSBC Bank Branches

On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association (“HSBC”) and its affiliates (the “HSBC Branch Acquisition”) in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets, as contemplated by the Purchase and Assumption Agreement, dated July 30, 2011, as amended and restated as of May 17, 2012 (the “Purchase Agreement”). The preliminary purchase price, net of estimated premiums receivable of $130 million by the Bank 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 $764 million, subject to final closing adjustments. We also acquired certain wealth management relationships which include 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 (liablities assumed), at fair value:
Cash and cash equivalents(1)	$	7,390,566
Loans		1,592,579
Core deposit and other intangibles		81,683
Other assets		53,953
Total assets acquired		9,118,781
Deposits(2)		(9,854,589	)
Other liabilities		(30,462	)
Total liabilities acquired		(9,885,051	)
Goodwill	$	766,270

⁽¹⁾ Amount is net of $764 million deposit premium paid to HSBC.

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

The above recognized amounts of loans, core deposit and other intangibles, other assets and other liabilities, at fair value, are preliminary estimates and are subject to adjustment but actual amounts are not expected to differ materially from those shown.

In connection with the regulatory process for the HSBC Branch Acquisition, we agreed with the U.S. Department of Justice (“DOJ”) to assign our purchase rights related to 26 HSBC branches in the Buffalo area. In January 2012, we entered into an agreement with KeyBank, N.A. (“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 $2.1 billion in deposits and approximately $260 million in loans, and paid us a deposit premium of $95 million.

8

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. Five Star will acquire four of the HSBC branches in the third quarter of 2012 and will pay us a deposit premium of 4.0% on the deposits assumed.

On July 20, 2012, Community Bank acquired the remaining 16 HSBC branches, with a total of $107.3 million in loans, $696.6 million in deposits, and paid us a deposit premium of $23 million. Community Bank will acquire three First Niagara branches in the third quarter of 2012, assume approximately $70 million in loans, $130 million in deposits, and pay us a deposit premium of 3.22%.

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 lines 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 $6 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 contractual terms of the certificate of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding remaining maturity.

Direct costs related to the HSBC Branch Acquisition were expensed as incurred and amounted to $144.4 million for the six months ended June 30, 2012. These merger and acquisition integration expenses included $65 million in prepayment penalties on borrowings and swap termination fees; redundant facilities and employee severance costs; technology costs related to system conversions; and professional fees.

NewAlliance Bancshares, Inc.

On April 15, 2011, the Company acquired all of the outstanding common shares of NewAlliance Bancshares, Inc. (“NewAlliance”), the parent company of NewAlliance Bank, for total consideration of $1.5 billion, and thereby acquired NewAlliance Bank’s 88 branch locations across eight counties from Greenwich, Connecticut to Springfield, Massachusetts. The merger with NewAlliance enabled us to expand into the New England market, improve our core deposit base, and add additional scale in our banking operations. The results of NewAlliance’s operations are included in our Consolidated Statements of Operations from the date of acquisition.

Under the terms of the merger agreement, as amended, each outstanding share of NewAlliance stock was converted into the right to receive either 1.10 shares of common stock of the Company, or $14.28 in cash, or a combination thereof. As a result, NewAlliance stockholders received 94 million shares of Company common stock, valued at $1.3 billion, based on the $14.00 closing price of the Company’s stock on April 15, 2011, and cash consideration of $199 million. Also under the terms of the merger agreement, NewAlliance employees became 100% vested in any NewAlliance stock options they held and these options converted into options to purchase Company common stock. These options had a fair value of $16 million on the date of acquisition.

9

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

Consideration paid:
First Niagara Financial Group, Inc. common stock issued	$	1,315,786
Cash payments to NewAlliance stockholders		198,681
Fair value of NewAlliance employee stock options		15,766
Total consideration paid		1,530,233
Recognized amounts of identifiable assets acquired and (liablities assumed), at fair value:
Cash and cash equivalents	$	126,322
Investment securities available for sale		2,759,329
Loans		5,113,195
Federal Home Loan Bank common stock		120,820
Bank owned life insurance		137,359
Premises and equipment		64,250
Core deposit intangible		23,800
Other assets		194,646
Deposits		(5,312,265	)
Borrowings		(2,299,321	)
Other liabilities		(74,629	)
Total identifiable net assets		853,506
Goodwill	$	676,727

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

Information about the acquired NewAlliance loan portfolio as of April 15, 2011 is in the following table, and excludes lines of credit:

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

The core deposit intangible asset recognized as part of the NewAlliance merger is being amortized over its estimated useful life of approximately seven years utilizing an accelerated method. The goodwill, which is not amortized for book purposes, was assigned to our banking segment and is not deductible for tax purposes. The fair values of savings and transaction deposit accounts acquired from NewAlliance were assumed to approximate the carrying value as these accounts have no stated maturity and are payable on demand. Certificates of deposit were valued by projecting out the expected cash flows based on the contractual terms of the certificates of deposit. These cash flows were discounted based on a market rate for a certificate of deposit with a corresponding maturity.

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

Direct costs related to the NewAlliance acquisition were expensed as incurred and amounted to $82.3 million for the six months ended June 30, 2011. Severance costs comprised more than half of these acquisition and integration expenses, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses.

10

The following table presents financial information regarding the former NewAlliance operations included in our Consolidated Statement of Operations from the date of acquisition through June 30, 2011 under the column “Actual from acquisition date through June 30, 2011.” These amounts do not include merger and acquisition integration expenses. In addition, the following table presents unaudited pro forma information as if the acquisition of NewAlliance had occurred on January 1, 2011 under the “Pro forma” column. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Merger and acquisition integration costs of $82.3 million related to the NewAlliance merger that we incurred during the six months ended June 30, 2011 are not reflected in the unaudited pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with NewAlliance at the beginning of 2011. Cost savings are also not reflected in the unaudited pro forma amounts for the six months ended June 30, 2011.

	Actual from acquisition date through June 30, 2011		Pro forma six months June 30, 2011
Net interest income	$	57,086	$	472,873
Noninterest income		9,883		125,581
Net income		19,122		127,644
Pro forma earnings per share:
Basic			$	0.47
Diluted				0.47

11

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
June 30, 2012:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	638,121	$	22,184	$	(125	)	$	660,180
U.S. Treasury		19,937		807		—			20,744
U.S. government agencies		4,957		11		(4	)		4,964
U.S. government sponsored enterprises		318,580		14,017		(42	)		332,555
Corporate		637,147		7,452		(7,591	)		637,008
Trust preferred securities		17,106		80		(2,494	)		14,692
Total debt securities		1,635,848		44,551		(10,256	)		1,670,143
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		55,640		2,474		—			58,114
Federal National Mortgage Association		483,164		23,120		(13	)		506,271
Federal Home Loan Mortgage Corporation		429,944		14,923		—			444,867
Collateralized mortgage obligations:
Government National Mortgage Association		1,413,075		54,268		—			1,467,343
Federal National Mortgage Association		1,188,525		10,917		(1,206	)		1,198,236
Federal Home Loan Mortgage Corporation		763,741		10,368		(1,021	)		773,088
Non-agency issued		74,651		1,757		(98	)		76,310
Total collateralized mortgage obligations		3,439,992		77,310		(2,325	)		3,514,977
Total residential mortgage-backed securities		4,408,740		117,827		(2,338	)		4,524,229
Commercial mortgage-backed securities:
Non-agency issued		1,860,537		77,092		(2,410	)		1,935,219
Total mortgage-backed securities		6,269,277		194,919		(4,748	)		6,459,448
Collateralized loan obligations:
Non-agency issued		998,583		3,016		(13,415	)		988,184
Asset-backed securities collateralized by:
Student loans		350,921		2,358		(2,589	)		350,690
Credit cards		32,176		549		—			32,725
Auto loans		403,044		1,888		(110	)		404,822
Other		107		—		(6	)		101
Total asset-backed securities		786,248		4,795		(2,705	)		788,338
Other		30,849		425		(116	)		31,158
Total securities available for sale	$	9,720,805	$	247,706	$	(31,240	)	$	9,937,271
Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	6,188	$	336	$	(13	)	$	6,511
Federal National Mortgage Association		6,585		204		—			6,789
Federal Home Loan Mortgage Corporation		7,928		354		—			8,282
Collateralized mortgage obligations:
Government National Mortgage Association		1,149,660		46,366		—			1,196,026
Federal National Mortgage Association		26,609		973		—			27,582
Federal Home Loan Mortgage Corporation		266,902		21,174		—			288,076
Total collateralized mortgage obligations		1,443,171		68,513		—			1,511,684
Total securities held to maturity	$	1,463,872	$	69,407	$	(13	)	$	1,533,266

12

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

13

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
June 30, 2012:	value		losses			value		losses			value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions		17,398		(105	)		3,418		(20	)	$	20,816	$	(125	)
U.S. government agencies		—		—			2,382		(4	)		2,382		(4	)
U.S. government sponsored enterprises		6,652		(7	)		15,045		(35	)		21,697		(42	)
Corporate		165,069		(2,692	)		92,138		(4,899	)		257,207		(7,591	)
Trust preferred securities		6,590		(408	)		8,102		(2,086	)		14,692		(2,494	)
Total debt securities		195,709		(3,212	)		121,085		(7,044	)		316,794		(10,256	)
Mortgage-backed securities:
Residential mortgage-backed securities:
Federal National Mortgage Association		1,077		(4	)		321		(9	)		1,398		(13	)
Collateralized mortgage obligations:
Federal National Mortgage Association		283,473		(1,206	)		—		—			283,473		(1,206	)
Federal Home Loan Mortgage Corporation		101,854		(1,021	)		—		—			101,854		(1,021	)
Non-agency issued		6,158		(60	)		6,021		(38	)		12,179		(98	)
Total collateralized mortgage obligations		391,485		(2,287	)		6,021		(38	)		397,506		(2,325	)
Total residential mortgage-backed securities		392,562		(2,291	)		6,342		(47	)		398,904		(2,338	)
Commercial mortgage-backed securities:
Non-agency issued		156,283		(2,410	)		—		—			156,283		(2,410	)
Total mortgage-backed securities		548,845		(4,701	)		6,342		(47	)		555,187		(4,748	)
Collateralized loan obligations:
Non-agency issued		680,812		(13,415	)		—		—			680,812		(13,415	)
Asset-backed securities collateralized by:
Student loans		55,469		(2,589	)		—		—			55,469		(2,589	)
Auto loans		105,539		(110	)		—		—			105,539		(110	)
Other		—		—			101		(6	)		101		(6	)
Total asset-backed securities		161,008		(2,699	)		101		(6	)		161,109		(2,705	)
Other		8,531		(33	)		1,297		(83	)		9,828		(116	)
Total securities available for sale in an unrealized loss position	$	1,594,905	$	(24,060	)	$	128,825	$	(7,180	)	$	1,723,730	$	(31,240	)
Investment securities held to maturity:
Residential mortgage-backed securities:
Collateralized mortgage obligations:
Government National Mortgage Association	$	2,044	$	(13	)	$	—	$	—		$	2,044	$	(13	)

14

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

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

At June 30, 2012, of the 153 corporate debt obligations, collateralized loan obligations, and commercial mortgage-backed securities in an unrealized loss position, eight were in a continuous loss position for 12 months or more. At December 31, 2011, of the 62 corporate debt obligations, collateralized loan obligations, and commercial mortgage-backed securities in an unrealized loss position, one was in a continuous loss position for 12 months or more. We have assessed the securities in an unrealized loss position at June 30, 2012 and December 31, 2011 and determined that the declines in fair value below amortized cost were temporary. We also do not intend to sell these securities and it is not 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.

15

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

	Amortized		Fair
	cost		value
Debt securities:
Within one year	$	93,645	$	94,039
After one year through five years		969,618		999,216
After five years through ten years		524,918		531,216
After ten years		47,667		45,672
Total debt securities		1,635,848		1,670,143
Mortgage-backed securities		7,733,149		7,992,714
Collateralized loan obligations		998,583		988,184
Asset-backed securities		786,248		788,338
Other		30,849		31,158
	$	11,184,677	$	11,470,537

While the contractual maturities of our mortgage-backed securities, collateralized loan obligations, asset-backed securities, and other securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of these securities. The duration of our investment securities portfolio decreased to 3.1 years at June 30, 2012 from 4.1 years at December 31, 2011. Our securities portfolio repositioning decreased the duration by almost three months, our purchases of securities during the first half of 2012 decreased the duration by five months, and changes in rates decreased the duration by four months.

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:

	June 30, 2012									December 31, 2011
	Originated			Acquired			Total			Originated			Acquired			Total
Commercial:
Real estate	$	3,943,880		$	2,147,956		$	6,091,836		$	3,695,102		$	2,183,516		$	5,878,618
Construction		540,204			77,969			618,173			286,040			79,723			365,763
Business		3,665,935			848,602			4,514,537			2,951,807			819,842			3,771,649
Total commercial		8,150,019			3,074,527			11,224,546			6,932,949			3,083,081			10,016,030
Residential real estate		1,657,738			2,379,307			4,037,045			1,643,665			2,368,602			4,012,267
Home equity		1,194,363			1,488,873			2,683,236			1,132,373			1,033,615			2,165,988
Other consumer		390,038			428,651			818,689			167,018			111,280			278,298
Total consumer		3,242,139			4,296,831			7,538,970			2,943,056			3,513,497			6,456,553
Total loans and leases		11,392,158			7,371,358			18,763,516			9,876,005			6,596,578			16,472,583
Allowance for loan losses		(135,196	)		(3,320	)		(138,516	)		(118,192	)		(1,908	)		(120,100	)
Total loans and leases, net	$	11,256,962		$	7,368,038		$	18,625,000		$	9,757,813		$	6,594,670		$	16,352,483

As of June 30, 2012, we had a liability for unfunded loan commitments of $11 million. For the six months ended June 30, 2012, we recognized provision for credit losses related to our unfunded loan commitments of $0.4 million. We acquired an additional $3.0 billion in unfunded loan commitments as part of our HSBC Branch Acquisition, and consequently increased our liability by $4 million through a purchase accounting adjustment.

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

16

Acquired Loan Portfolios

We have acquired loans in four acquisitions since January 1, 2009. All loans were initially measured at fair value and subsequently accounted for under either Accounting Standards Codification (“ASC”) Topic 310-30 or ASC 310-20. 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:

	June 30,		December 31,
	2012		2011
Credit impaired acquired loans evaluated individually for future credit losses
Outstanding principal balance	$	35,822	$	52,272
Carrying amount		28,709		45,141
Acquired loans evaluated collectively for future credit losses
Outstanding principal balance		5,453,690		5,459,446
Carrying amount		5,366,238		5,369,414
Other acquired loans
Outstanding principal balance		2,056,604		1,239,025
Carrying amount		1,976,412		1,182,023
Total acquired loans
Outstanding principal balance		7,546,116		6,750,743
Carrying amount		7,371,358		6,596,578

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

Balance at January 1, 2011	$	(325,851	)
NewAlliance acquisition		(1,059,207	)
Net reclassifications from nonaccretable yield		(23,830	)
Accretion		221,988
Balance at December 31, 2011		(1,186,900	)
Accretion		127,412
HSBC Acquisition		(90,670	)
Net reclassifications to nonaccretable yield		144
Balance at June 30, 2012	$	(1,150,014	)

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.

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.

17

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

	Commercial						Consumer
	Business			Real estate			Residential			Home equity			Other consumer			Total
Six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	57,348		$	50,007		$	4,101		$	4,374		$	2,362		$	118,192
Provision for loan losses		33,487			(1,485	)		2,302			3,375			3,223			40,902
Charge-offs		(16,631	)		(4,010	)		(1,555	)		(2,963	)		(1,856	)		(27,015	)
Recoveries		1,530			433			280			266			803			3,312
Allowance related to loans sold		(26	)		(18	)		(52	)		(81	)		(18	)		(195	)
Balance at end of period	$	75,708		$	44,927		$	5,076		$	4,971		$	4,514		$	135,196
Allowance for loan losses:
Individually evaluated for impairment	$	1,645		$	2,734		$	2,494		$	397		$	23		$	7,293
Collectively evaluated for impairment		74,063			42,193			2,582			4,574			4,491			127,903
Total	$	75,708		$	44,927		$	5,076		$	4,971		$	4,514		$	135,196
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	40,514		$	64,734		$	12,405		$	1,617		$	72		$	119,342
Collectively evaluated for impairment		3,625,421			4,419,350			1,645,333			1,192,746			389,966			11,272,816
Total	$	3,665,935		$	4,484,084		$	1,657,738		$	1,194,363		$	390,038		$	11,392,158
Six months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	42,034		$	46,967		$	1,754		$	1,859		$	2,740		$	95,354
Provision for loan losses		21,390			1,254			1,728			2,412			(327	)		26,457
Charge-offs		(9,048	)		(6,117	)		(1,079	)		(1,671	)		(1,322	)		(19,237	)
Recoveries		2,026			1,398			240			61			729			4,454
Balance at end of period	$	56,402		$	43,502		$	2,643		$	2,661		$	1,820		$	107,028
Allowance for loan losses:
Individually evaluated for impairment	$	2,195		$	2,599		$	1,716		$	—		$	—		$	6,510
Collectively evaluated for impairment		54,207			40,903			927			2,661			1,820			100,518
Total	$	56,402		$	43,502		$	2,643		$	2,661		$	1,820		$	107,028
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	18,109		$	44,303		$	12,459		$	—		$	—		$	74,871
Collectively evaluated for impairment		2,384,472			3,631,154			1,601,937			1,014,418			152,843			8,784,824
Total	$	2,402,581		$	3,675,457		$	1,614,396		$	1,014,418		$	152,843		$	8,859,695
Three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	71,653		$	41,619		$	4,697		$	4,504		$	2,672		$	125,145
Provision for loan losses		15,039			5,282			586			2,084			2,384			25,375
Charge-offs		(12,063	)		(2,229	)		(336	)		(1,675	)		(915	)		(17,218	)
Recoveries		1,105			273			181			139			391			2,089
Allowance related to loans sold		(26	)		(18	)		(52	)		(81	)		(18	)		(195	)
Balance at end of period	$	75,708		$	44,927		$	5,076		$	4,971		$	4,514		$	135,196
Three months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	48,690		$	44,255		$	2,476		$	2,998		$	1,707		$	100,126
Provision for loan losses		10,343			2,034			344			492			418			13,631
Charge-offs		(3,961	)		(3,493	)		(376	)		(867	)		(631	)		(9,328	)
Recoveries		1,330			706			199			38			326			2,599
Balance at end of period	$	56,402		$	43,502		$	2,643		$	2,661		$	1,820		$	107,028

18

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

	Commercial						Consumer
	Business			Real estate			Residential		Home equity		Other consumer			Total
Six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	1,908		$	1,908
Provision for loan losses		—			4,801			—		—		2,000			6,801
Charge-offs		—			(4,999	)		—		—		(701	)		(5,700	)
Recoveries		—			198			—		—		113			311
Balance at end of period	$	—		$	—		$	—	$	—	$	3,320		$	3,320
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Collectively evaluated for impairment		—			—			—		—		3,320			3,320
Total	$	—		$	—		$	—	$	—	$	3,320		$	3,320
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	2,849		$	—		$	—	$	—	$	—		$	2,849
Collectively evaluated for impairment		549,839			—			—		1,098,995		324,729			1,973,563
Loans acquired with deteriorated credit quality		295,914			2,225,925			2,379,307		389,878		103,922			5,394,946
Total	$	848,602		$	2,225,925		$	2,379,307	$	1,488,873	$	428,651		$	7,371,358
Six months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses		346			536			—		—		—			882
Charge-offs		(346	)		(536	)		—		—		—			(882	)
Recoveries		—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—
Allowance for loan losses:
Individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Collectively evaluated for impairment		—			—			—		—		—			—
Total	$	—		$	—		$	—	$	—	$	—		$	—
Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	—		$	—		$	—	$	—	$	—		$	—
Collectively evaluated for impairment		509,186			—			—		639,984		43,722			1,192,892
Loans acquired with deteriorated credit quality		423,563			2,454,844			2,656,415		506,263		75,553			6,116,638
Total	$	932,749		$	2,454,844		$	2,656,415	$	1,146,247	$	119,275		$	7,309,530
Three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	1,601		$	1,601
Provision for loan losses		—			428			—		—		2,000			2,428
Charge-offs		—			(626	)		—		—		(358	)		(984	)
Recoveries		—			198			—		—		77			275
Balance at end of period	$	—		$	—		$	—	$	—	$	3,320		$	3,320
Three months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses		346			462			—		—		—			808
Charge-offs		(346	)		(462	)		—		—		—			(808	)
Recoveries		—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—

19

Credit Quality

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

Nonperforming loans

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

	June 30, 2012						December 31, 2011
	Originated		Acquired(1)		Total		Originated		Acquired		Total
Commercial:
Real estate	$	46,881	$	—	$	46,881	$	43,119	$	—	$	43,119
Business		30,714		4,976		35,690		20,173		—		20,173
Total commercial		77,595		4,976		82,571		63,292		—		63,292
Consumer:
Residential real estate		23,058		—		23,058		18,668		—		18,668
Home equity		8,119		14,042		22,161		6,790		—		6,790
Other consumer		926		356		1,282		1,048		—		1,048
Total consumer		32,103		14,398		46,501		26,506		—		26,506
Total	$	109,698	$	19,374	$	129,072	$	89,798	$	—	$	89,798

⁽¹⁾  The remaining credit discount recorded at acquisition remains adequate to cover losses on these balances.

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:

	June 30,
	2012		2011
Six months ended:
Additional interest income that would have been recorded if nonaccrual loans had performed in accordance with original terms	$	3,130	$	2,448
Three months ended:
Additional interest income that would have been recorded if nonaccrual loans had performed in accordance with original terms	$	1,466	$	1,279

20

Impaired loans

The following tables provide information about our impaired loans including ending recorded investments, principal balances, and related allowance amounts at the dates indicated. Loans with no related allowance for loan losses have adequate collateral securing their carrying value and in some circumstances have been charged down to their current carrying value based on the fair value of the collateral. The carrying value of our impaired loans, less any related allowance for loan losses, was 66% and 68% of the loans’ contractual principal balance at June 30, 2012 and December 31, 2011, respectively.

	June 30, 2012						December 31, 2011
			Unpaid						Unpaid
	Recorded		principal		Related		Recorded		principal		Related
	investment		balance		allowance		investment		balance		allowance
With no related allowance recorded:
Commercial:
Real estate	$	45,025	$	63,552	$	—	$	39,781	$	53,103	$	—
Business (1)		29,147		49,117		—		23,143		37,080		—
Total commercial		74,172		112,669		—		62,924		90,183		—
Consumer:
Residential real estate		—		—		—		—		—		—
Home equity		3		3		—		3		3		—
Other consumer		—		—		—		—		—		—
Total consumer		3		3		—		3		3		—
Total	$	74,175	$	112,672	$	—	$	62,927	$	90,186	$	—
With a related allowance recorded:
Commercial:
Real estate	$	19,709	$	25,967	$	2,734	$	20,603	$	30,794	$	2,890
Business		11,367		17,643		1,645		5,768		6,855		1,826
Total commercial		31,076		43,610		4,379		26,371		37,649		4,716
Consumer:
Residential real estate		12,405		12,757		2,494		12,911		12,911		2,151
Home equity		1,614		1,686		397		1,797		1,817		431
Other consumer		72		93		23		81		103		25
Total consumer		14,091		14,536		2,914		14,789		14,831		2,607
Total	$	45,167	$	58,146	$	7,293	$	41,160	$	52,480	$	7,323
Total
Commercial:
Real estate	$	64,734	$	89,519	$	2,734	$	60,384	$	83,897	$	2,890
Business		40,514		66,760		1,645		28,911		43,935		1,826
Total commercial		105,248		156,279		4,379		89,295		127,832		4,716
Consumer:
Residential real estate		12,405		12,757		2,494		12,911		12,911		2,151
Home equity		1,617		1,689		397		1,800		1,820		431
Other consumer		72		93		23		81		103		25
Total consumer		14,094		14,539		2,914		14,792		14,834		2,607
Total	$	119,342	$	170,818	$	7,293	$	104,087	$	142,666	$	7,323

⁽¹⁾  Includes impaired acquired loans with a recorded investment of $2.8 million and unpaid principal balance of $2.9 million impaired at June 30, 2012. There were no impaired acquired loans at December 31, 2011.

21

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

	Six months ended June 30,
	2012				2011
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized
Commercial:
Real estate	$	71,409	$	563	$	46,993	$	190
Business (1)		39,884		283		22,249		35
Total commercial		111,293		846		69,242		225
Consumer:
Residential real estate		12,480		206		12,337		288
Home equity		1,628		30		—		—
Other consumer		77		2		—		—
Total consumer		14,185		238		12,337		288
Total	$	125,478	$	1,084	$	81,579	$	513

	Three months ended June 30,
	2012				2011
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized
Commercial:
Real estate	$	63,161	$	278	$	45,220	$	54
Business (1)		46,083		134		20,590		23
Total commercial		109,244		412		65,810		77
Consumer:
Residential real estate		12,816		100		13,128		93
Home equity		1,687		14		—		—
Other consumer		74		1		—		—
Total consumer		14,577		115		13,128		93
Total	$	123,821	$	527	$	78,938	$	170

⁽¹⁾  Includes impaired acquired loans with a average recorded investment of $1.8 million and $3.5 million impaired for the six and three months ended June 30, 2012, respectively. There were no impaired acquired loans for both the six and three months ended June 30, 2011.

Period end nonaccrual loans differed from the amount of total impaired loans as certain troubled debt restructurings (“TDRs”), which are considered impaired loans, were accruing interest because the borrower demonstrated its ability to satisfy the terms of the restructured loan for at least six consecutive payments. Also contributing to the difference are nonaccrual commercial loans less than $200 thousand and nonaccrual consumer loans, which are not considered impaired unless they have been modified in a TDR as they are evaluated collectively when determining the allowance for loan losses. The following table is a reconciliation between nonaccrual loans and impaired loans at the dates indicated:

	Commercial			Consumer			Total
June 30, 2012:
Nonaccrual loans	$	82,571		$	46,501		$	129,072
Plus: Accruing TDRs		32,599			9,541			42,140
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses		(9,922	)		(41,948	)		(51,870	)
Total impaired loans	$	105,248		$	14,094		$	119,342
December 31, 2011:
Nonaccrual loans	$	63,292		$	26,506		$	89,798
Plus: Accruing TDRs		32,916			10,972			43,888
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses		(6,913	)		(22,686	)		(29,599	)
Total impaired loans	$	89,295		$	14,792		$	104,087

22

Credit Quality Indicators

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

					Greater than								Greater than
	30-59 days		60-89 days		90 days		Total				Total loans		90 days
	past due		past due		past due		past due		Current		receivable		and  accruing(1)
June 30, 2012
Originated loans
Commercial:
Real estate	$	7,563	$	8,100	$	24,700	$	40,363	$	4,443,721	$	4,484,084	$	—
Business		2,894		1,146		22,008		26,048		3,639,887		3,665,935		—
Total commercial		10,457		9,246		46,708		66,411		8,083,608		8,150,019		—
Consumer:
Residential real estate		4,929		1,767		18,711		25,407		1,632,331		1,657,738		—
Home equity		2,516		2,534		6,050		11,100		1,183,263		1,194,363		—
Other consumer		1,309		477		690		2,476		387,562		390,038		—
Total consumer		8,754		4,778		25,451		38,983		3,203,156		3,242,139		—
Total	$	19,211	$	14,024	$	72,159	$	105,394	$	11,286,764	$	11,392,158	$	—
Acquired loans
Commercial:
Real estate	$	24,906	$	5,959	$	45,762	$	76,627	$	2,149,298	$	2,225,925	$	45,762
Business		4,619		1,382		8,677		14,678		833,924		848,602		6,083
Total commercial		29,525		7,341		54,439		91,305		2,983,222		3,074,527		51,845
Consumer:
Residential real estate		16,189		9,427		65,070		90,686		2,288,621		2,379,307		65,070
Home equity		9,456		3,663		17,014		30,133		1,458,740		1,488,873		7,605
Other consumer		5,189		1,294		1,500		7,983		420,668		428,651		1,148
Total consumer		30,834		14,384		83,584		128,802		4,168,029		4,296,831		73,823
Total	$	60,359	$	21,725	$	138,023	$	220,107	$	7,151,251	$	7,371,358	$	125,668
December 31, 2011
Originated loans
Commercial:
Real estate	$	8,246	$	973	$	23,829	$	33,048	$	3,948,094	$	3,981,142	$	—
Business		4,906		716		10,540		16,162		2,935,645		2,951,807		—
Total commercial		13,152		1,689		34,369		49,210		6,883,739		6,932,949		—
Consumer:
Residential real estate		9,977		4,641		15,559		30,177		1,613,488		1,643,665		—
Home equity		1,976		2,707		6,284		10,967		1,121,406		1,132,373		—
Other consumer		1,454		686		814		2,954		164,064		167,018		—
Total consumer		13,407		8,034		22,657		44,098		2,898,958		2,943,056		—
Total	$	26,559	$	9,723	$	57,026	$	93,308	$	9,782,697	$	9,876,005	$	—
Acquired loans
Commercial:
Real estate	$	24,003	$	1,302	$	47,228	$	72,533	$	2,190,706	$	2,263,239	$	47,228
Business		5,076		742		9,141		14,959		804,883		819,842		9,141
Total commercial		29,079		2,044		56,369		87,492		2,995,589		3,083,081		56,369
Consumer:
Residential real estate		19,720		10,041		66,068		95,829		2,272,773		2,368,602		66,068
Home equity		7,549		3,933		18,574		30,056		1,003,559		1,033,615		18,574
Other consumer		1,799		1,162		2,226		5,187		106,093		111,280		2,226
Total consumer		29,068		15,136		86,868		131,072		3,382,425		3,513,497		86,868
Total	$	58,147	$	17,180	$	143,237	$	218,564	$	6,378,014	$	6,596,578	$	143,237

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

23

Our internal loan gradings provide 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
June 30, 2012
Originated loans:
Pass	$	4,060,005	$	3,395,100	$	7,455,105		91.5	%
Pass watch(1)		121,326		73,577		194,903		2.4
Total Pass		4,181,331		3,468,677		7,650,008		93.9	%
Criticized:(2)
Accrual		255,872		166,544		422,416		5.1	%
Nonaccrual		46,881		30,714		77,595		1.0
Total criticized		302,753		197,258		500,011		6.1
Total	$	4,484,084	$	3,665,935	$	8,150,019		100.0	%
Acquired loans:
Pass	$	1,847,907	$	677,906	$	2,525,813		82.2	%
Pass watch(1)		72,048		66,531		138,579		4.5
Total Pass		1,919,955		744,437		2,664,392		86.7	%
Criticized:(2)
Accrual		305,970		99,189		405,159		13.2	%
Nonaccrual		—		4,976		4,976		0.1
Total criticized		305,970		104,165		410,135		13.3
Total	$	2,225,925	$	848,602	$	3,074,527		100.0	%
December 31, 2011
Originated loans:
Pass	$	3,568,407	$	2,700,152	$	6,268,559		90.4	%
Pass watch(1)		42,896		28,663		71,559		1.0
Total Pass		3,611,303		2,728,815		6,340,118		91.4	%
Criticized:(2)
Accrual		326,720		202,819		529,539		7.7	%
Nonaccrual		43,119		20,173		63,292		0.9
Total criticized		369,839		222,992		592,831		8.6
Total	$	3,981,142	$	2,951,807	$	6,932,949		100.0	%
Acquired loans:
Pass	$	1,910,533	$	724,794	$	2,635,327		85.5	%
Pass watch(1)		9,736		—		9,736		0.3
Total Pass		1,920,269		724,794		2,645,063		85.8	%
Criticized:(2)
Accrual		342,970		95,048		438,018		14.2	%
Nonaccrual		—		—		—		—
Total criticized		342,970		95,048		438,018		14.2
Total	$	2,263,239	$	819,842	$	3,083,081		100.0	%

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

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

24

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
June 30, 2012
Originated loans by refreshed FICO score:
Over 700	$	1,319,792	$	938,138	$	240,084	$	2,498,014		77.0	%
660-700		155,963		136,167		79,477		371,607		11.5
620-660		70,209		57,519		35,528		163,256		5.0
580-620		39,826		24,248		11,898		75,972		2.3
Less than 580		58,332		33,677		10,307		102,316		3.2
No score(1)		13,616		4,614		12,744		30,974		1.0
Total	$	1,657,738	$	1,194,363	$	390,038	$	3,242,139		100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	1,620,400	$	1,102,489	$	236,147	$	2,959,036		68.9	%
660-700		208,929		151,549		72,304		432,782		10.1
620-660		110,494		84,845		37,808		233,147		5.4
580-620		63,820		54,869		19,189		137,878		3.2
Less than 580		117,224		70,224		19,629		207,077		4.8
No score(1)		258,440		24,897		43,574		326,911		7.6
Total	$	2,379,307	$	1,488,873	$	428,651	$	4,296,831		100.0	%
December 31, 2011
Originated loans by refreshed FICO score:
Over 700	$	1,290,287	$	875,451	$	82,345	$	2,248,083		76.5	%
660-700		159,293		139,666		25,951		324,910		11.0
620-660		75,552		55,294		14,445		145,291		4.9
580-620		41,323		24,271		5,277		70,871		2.4
Less than 580		62,303		32,676		9,370		104,349		3.5
No score(1)		14,907		5,015		29,630		49,552		1.7
Total	$	1,643,665	$	1,132,373	$	167,018	$	2,943,056		100.0	%
Acquired loans by refreshed FICO score:
Over 700	$	1,668,117	$	752,107	$	49,879	$	2,470,103		70.4	%
660-700		173,139		97,410		15,567		286,116		8.1
620-660		86,600		60,298		9,249		156,147		4.4
580-620		47,022		40,700		4,592		92,314		2.6
Less than 580		93,157		57,911		8,909		159,977		4.6
No score(1)		300,567		25,189		23,084		348,840		9.9
Total	$	2,368,602	$	1,033,615	$	111,280	$	3,513,497		100.0	%

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

Troubled Debt Restructures

As of June 30, 2012 and December 31, 2011, we had no TDRs in our acquired loan portfolio. The following table details additional information about our TDRs from our originated loan portfolio at the dates indicated:

	June 30,		December 31,
	2012		2011
Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accruing interest	$	42,140	$	43,888
Nonaccrual		26,413		33,502
Total troubled debt restructurings	$	68,553	$	77,390

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The modifications made to restructured loans typically consist of an extension of the payment terms, deferral of principal, or a rate reduction. 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
Six months ended June 30, 2012
Commercial:
Commercial real estate
Extension of term		7	$	3,473	$	181	$	—
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		18		8,073		629		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
Other		6		677		1		204
Home equity
Extension of term and rate reduction		2		124		—		25
Total consumer		17		2,335		5		479
Total		35	$	10,408	$	634	$	579
Six months ended June 30, 2011
Commercial:
Commercial real estate
Extension of term		1	$	217	$	—	$	—
Other		1		2,797		19		—
Commercial business
Extension of term		1		6		—		—
Extension of term and rate reduction		2		1,483		174		—
Total commercial		5		4,503		193		—
Consumer:
Residential real estate
Extension of term		2	$	401	$	—	$	31
Rate reduction		3		153		—		35
Deferral of principal and extension of term		3		493		—		33
Extension of term and rate reduction		12		1,231		1		124
Other		1		153		1		4
Home equity
Extension of term and rate reduction		2		189		—		50
Total consumer		23		2,620		2		277
Total		28	$	7,123	$	195	$	277

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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 June 30, 2012
Commercial:
Commercial real estate
Extension of term		5	$	3,144	$	135	$	—
Deferral of principal		1		259		14		—
Commercial business
Extension of term		3		2,306		237		2
Deferral of principal		1		187		—		—
Rate reduction		1		125		—		—
Combination of concession types		1		199		6		96
Total commercial		12		6,220		392		98
Consumer:
Residential real estate
Other		6		677		1		204
Total consumer		6		677		1		204
Total		18		6,897		393		302
Three months ended June 30, 2011
Commercial:
Commercial business
Extension of term and rate reduction		1	$	911	$	161	$	—
Total commercial		1	$	911	$	161	$	—
Consumer:
Residential real estate
Extension of term		1	$	105	$	—	$	3
Deferral of principal and extension of term		1		112		—		4
Extension of term and rate reduction		7		382		—		40
Home equity
Extension of term and rate reduction		2		185		—		50
Total consumer		11		784		—		97
Total		12	$	1,695	$	161	$	97

⁽¹⁾ Postmodification balances approximate premodification balances. The aggregate amount of charge-offs as a result of the restructurings were not significant. All TDRs were in our originated loan portfolio.

27

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:

	Six months ended June 30,
	2012		2011
Commercial:
Real estate	$	399	$	—
Business		707		—
Total commercial		1,106		—
Consumer:
Residential real estate		—		—
Home Equity		—		—
Consumer		—		—
Total consumer		—		—
Total	$	1,106	$	—
	Three months ended June 30,
	2012		2011
Commercial:
Real estate	$	—	$	—
Business		—		—
Total commercial		—		—
Consumer:
Residential real estate		—		—
Home Equity		—		—
Consumer		—		—
Total consumer		—		—
Total	$	—	$	—

Residential Mortgage Banking

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

	June 30,
	2012		2011
Mortgages serviced for others	$	2,453,285	$	1,834,004
Mortgage servicing asset recorded for loans serviced for others		20,399		14,989

Note 4. Derivative Financial Instruments

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

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

	Asset derivatives				Liability derivatives
	Notional amount		Fair value (1)		Notional amount		Fair value (2)
June 30, 2012
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	14,948	$	2,199
Derivatives not designated as hedging instruments:
Securities sale agreement		3,116,536		2,640		—		—
Interest rate swap agreements		1,563,080		90,388		1,563,080		90,962
Total derivatives	$	4,679,616	$	93,028	$	1,578,028	$	93,161
December 31, 2011
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	—	$	—	$	1,315,278	$	11,998
Derivatives not designated as hedging instruments:
Interest rate swap agreements		866,661		57,868		866,661		58,346
Total derivatives	$	866,661	$	57,868	$	2,181,939	$	70,344

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

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

Derivatives designated in hedging relationships

We designate interest rate swap agreements used to manage changes in the fair value of loans due to interest rate changes as fair value hedges. We have designated the risk of changes in the fair value of loans attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the fair value of the hedged items or derivatives attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. The change in fair value of the derivatives, including both the effective and ineffective portions, is recognized in earnings and, so long as our fair value hedging relationships remain highly effective, such change is offset by the gain or loss due to the change in fair value of the loans. The net impact of the fair value hedging relationships on net income was not significant during the three and six months ended June 30, 2012 and 2011.

Historically, we have also entered into interest rate swaps to offset the variability in the interest cash outflows of LIBOR based borrowings. These derivative instruments have been designated as cash flow hedges. At June 30, 2012, none of our derivatives were classified as cash flow hedges. During the second quarter of 2012, borrowings that were hedged in cash flow hedging relationships were paid off in connection with the HSBC Branch Acquisition and the related swaps that were hedging these borrowings were terminated. We have designated the risk of changes in the amount of interest payment cash flows to be made during the term of the borrowings attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the amount of interest payment cash flows for the hedged items or derivatives attributable to a change in credit risk have been excluded from our assessment of hedge effectiveness. Our interest rate swaps designated as cash flow hedges had maturities that corresponded to the maturity of the related hedged borrowing. Any gain or loss associated with the effective portion of our cash flow hedges was recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings. Any gain or loss associated with the ineffective portion of our cash flow hedges, including ineffectiveness, is recognized immediately in earnings.

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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 June 30,						Six months ended June 30,
Cash Flow Hedges	2012			2011			2012			2011
Interest rate swap agreements:
Amount of gain (loss) on derivatives recognized in other comprehensive income, net of tax	$	8,099		$	(6,065	)	$	6,359		$	(4,501	)
Amount of (loss) on derivatives reclassified from other comprehensive income to income		(13,003	)(1)		(1,550	)(2)		(14,860	)(3)		(2,619	)(2)

⁽¹⁾  Of this amount, $11.7 million was recognized in merger and acquisition integration expenses and $1.3 million was recognized in interest expense on borrowings in our Consolidated Statements of Operations.

⁽²⁾  Recognized in interest expense on borrowings in our Consolidated Statements of Operations.

⁽³⁾  Of this amount, $11.7 million was recognized in merger and acquisition integration expenses and $3.2 million was recognized in interest expense on borrowings in our Consolidated Statements of Operations.

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 $12.1 million and $2.8 million for the six months ended June 30, 2012 and 2011, respectively, and it is included in capital markets income in our Consolidated Statements of Operations.

In the second quarter of 2012, we executed an investment securities repositioning transaction involving the sale of $3.1 billion in investment securities to a third party (“purchaser”) at a certain price as of the date of the sale (“floor price”). Under the sales agreement, the purchaser will subsequently sell the securities over a set period of time and we will receive 50 percent of any additional net profits received in excess of the floor price. We will not be required to pay any amounts under this agreement under any circumstances. The agreement qualifies as a free standing derivative and is accounted for at fair value. As of June 30, 2012 the value of the derivative was $2.6 million.

Note 5. Earnings Per Share

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

	Three months ended June 30,						Six months ended June,
	2012			2011			2012			2011
Net (loss) income available to common stockholders	$	(18,471	)	$	13,550		$	36,279		$	58,468
Less income allocable to unvested restricted stock awards		113			130			163			223
Net (loss) income allocable to common stockholders	$	(18,584	)	$	13,420		$	36,116		$	58,245
Weighted average common shares outstanding:
Total shares issued		366,002			293,598			366,002			254,568
Unallocated employee stock ownership plan shares		(2,312	)		(2,561	)		(2,334	)		(2,591	)
Unvested restricted stock awards		(1,196	)		(786	)		(931	)		(675	)
Treasury shares		(13,553	)		(8,755	)		(13,855	)		(7,284	)
Total basic weighted average common shares outstanding		348,941			281,496			348,882			244,018
Incremental shares from assumed exercise of stock options		—			522			—			550
Incremental shares from assumed vesting of restricted stock awards		—			402			265			346
Total diluted weighted average common shares outstanding		348,941			282,420			349,147			244,914
Basic (loss) earnings per common share	$	(0.05	)	$	0.05		$	0.10		$	0.24
Diluted (loss) earnings per common share	$	(0.05	)	$	0.05		$	0.10		$	0.24
Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations		12,950			1,963			11,878			1,923

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Note 6. Other Comprehensive Income

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

	Pretax			Income taxes			Net
Six months ended June 30, 2012:
Securities available for sale:
Net unrealized holding gains arising during the period	$	58,012		$	22,558		$	35,454
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		46,171			18,017			28,154
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
Reclassification adjustment for net unrealized holding gains on securities transferred		(4,054	)		(1,556	)		(2,498	)
Less: amortization of net unrealized holding gains to income		(1,329	)		(489	)		(840	)
Net unrealized holding gains on securities transferred		(5,383	)		(2,045	)		(3,338	)
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		14,860			5,700			9,160
Net unrealized losses on interest rate swaps designated as cash flow hedges		10,270			3,911			6,359
Pension and postretirement plans:
Pension remeasurement		7,461			2,849			4,612
Amortization of net loss related to pension and post-retirement plans		766			445			321
		8,227			3,294			4,933
Total other comprehensive income	$	59,285		$	23,177		$	36,108
Six months ended June 30, 2011:
Securities available for sale:
Net unrealized holding gains arising during the period	$	58,312		$	22,292		$	36,020
Reclassification adjustment for net unrealized holding gains on securities transferred		(6,380	)		(2,424	)		(3,956	)
Net unrealized gains on securities available for sale		51,932			19,868			32,064
Net unrealized holding gains on securities transferred between available for sale and held to maturity:
Reclassification adjustment for net unrealized holding gains on securities transferred		6,380			2,424			3,956
Less: amortization of net unrealized holding gains to income		(656	)		(249	)		(407	)
		5,724			2,175			3,549
Interest rate swaps designated as cash flow hedges:
Net unrealized gains arising during the period		(10,007	)		(3,882	)		(6,125	)
Reclassification adjustment for realized losses included in net income		2,619			995			1,624
Net unrealized gains on interest rate swaps designated as cash flow hedges		(7,388	)		(2,887	)		(4,501	)
Amortization of net loss related to pension and post-retirement plans		666			107			559
Total other comprehensive income	$	50,934		$	19,263		$	31,671

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

	Net unrealized gains on securities available for sale		Net unrealized gains (losses) on securities transferred  between available for sale to held to maturity			Unrealized (losses) gains on interest rate swaps designated as cash flow hedges			Defined benefit plans			Total
Balance, January 1, 2012	$	105,276	$	2,652		$	(13,003	)	$	(27,113	)	$	67,812
Period change, net of tax		28,154		(3,338	)		6,359			4,933			36,108
Balance June 30, 2012	$	133,430	$	(686	)	$	(6,644	)	$	(22,180	)	$	103,920
Balance January 1, 2011	$	70,690	$	—		$	2,978		$	(15,797	)	$	57,871
Period change, net of tax		32,064		3,549			(4,501	)		559			31,671
Balance June 30, 2011	$	102,754	$	3,549		$	(1,523	)	$	(15,238	)	$	89,542

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

Note 7. Fair Value Measurements

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

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

Securities Available for Sale

The fair value estimates of available for sale securities are based on quoted market prices of identical securities, where available (Level 1). However, as quoted prices of identical securities are not often available, the fair value estimate for almost our entire investment portfolio is based on quoted market prices of similar securities, adjusted for differences between the securities (Level 2). Adjustments may include amounts to reflect differences in underlying collateral, interest rates, estimated prepayment speeds, and counterparty credit quality. Due to the lack of observable market data, we have classified our trust preferred securities and collateralized loan obligations in Level 3 of the fair value hierarchy. We determined the fair value using third party pricing services, including brokers. As of June 30, 2012, $310 million of our investment securities were priced utilizing broker quotes. For details regarding our pricing process and sources, refer to Item 2, “Management’s Discussion and Analysis of Financial Condition and Results of Operations—Critical Accounting Policies and Estimates.”

32

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 Operations and better aligns with our management of the portfolio from a business perspective. This election is made at the time of origination and is irrevocable. The secondary market for securities backed by similar loan types is actively traded, which provides readily observable market pricing to be used as input for the estimate for the fair value of our loans. Accordingly, we have classified this fair value measurement as Level 2. Interest income on these loans is recognized in Interest Income—Loans and Leases in our Consolidated Statements of Operations.

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

	June 30, 2012		December 31, 2011
Fair value carrying amount	$	101,596	$	94,484
Aggregate unpaid principal balance		98,108		91,540
Fair value carrying amount less aggregate unpaid principal balance	$	3,488	$	2,944

Interest Rate Swaps

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

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

33

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
June 30, 2012
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	660,180	$	—	$	660,180	$	—
U.S. Treasury		20,744		20,744		—		—
U.S. government agencies		4,964		—		4,964		—
U.S. government sponsored enterprises		332,555		—		332,555		—
Corporate		637,008		—		637,008		—
Trust preferred securities		14,692		—		—		14,692
Total debt securities		1,670,143		20,744		1,634,707		14,692
Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		58,114		—		58,114		—
Federal National Mortgage Association		506,271		—		506,271		—
Federal Home Loan Mortgage Corporation		444,867		—		444,867		—
Collateralized mortgage obligations:
Government National Mortgage Association		1,467,343		—		1,467,343		—
Federal National Mortgage Association		1,198,236		—		1,198,236		—
Federal Home Loan Mortgage Corporation		773,088		—		773,088		—
Non-agency issued		76,310		—		76,310		—
Total collateralized mortgage obligations		3,514,977		—		3,514,977		—
Total residential mortgage-backed securities		4,524,229		—		4,524,229		—
Commercial mortgage-backed securities:
Non-agency issued		1,935,219		—		1,935,219		—
Total mortgage-backed securities		6,459,448		—		6,459,448		—
Collateralized loan obligations:
Non-agency issued		988,184		—		—		988,184
Asset-backed securities collateralized by:
Student loans		350,690		—		350,690		—
Credit cards		32,725		—		32,725		—
Auto loans		404,822		—		404,822		—
Other		101		—		101		—
Total asset-backed securities		788,338		—		788,338		—
Other		31,158		23,007		8,151		—
Total securities available for sale		9,937,271		43,751		8,890,644		1,002,876
Loans held for sale (1)		101,596		—		101,596		—
Derivatives		93,028		—		93,028		—
Total assets	$	10,131,895	$	43,751	$	9,085,268	$	1,002,876
Liabilities:
Interest rate swaps	$	93,161	$	—	$	93,161	$	—

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

During the first quarter of 2012, we transferred $158 million of collateralized loan obligations (“CLOs”) from level 2 to level 3 of the fair value hierarchy. We began purchasing the investments in the fourth quarter of 2011 and while our purchase price provided observable data regarding the fair value of the securities in the fourth quarter of 2011, observable market data has not been available to incorporate into the pricing during the first half of 2012 and our purchase price becomes less relevant as time elapses from the purchase date. As a result, the fair values utilized significant unobservable inputs and warranted classification as level 3 fair value measurements.

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

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

There were no significant transfers of assets or liabilities into or out of Level 1, Level 2, or Level 3 of the fair value hierarchy during the six months ended June 30, 2011.

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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)
Six months ended June 30, 2012
Collateral dependent impaired loans	$	18,208	$	—	$	10,626	$	7,582	$	(5,461	)
Six months ended June 30, 2011
Collateral dependent impaired loans	$	21,968	$	—	$	7,622	$	14,346	$	(6,652	)

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 six months ended June 30, 2012, we recorded an increase of $5.5 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $18 million at June 30, 2012. During the six months ended June 30, 2011 we recorded an increase of $6.7 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $22 million at June 30, 2011.

Level 3 Assets

The changes in Level 3 assets and liabilities measured at estimated fair value on a recurring basis were as follows for the periods indicated:

	Six months ended June 30,
	2012									2011
	Trust									Trust
	preferred			Collateralized						preferred
	securities			loan obligations			Total			securities
Balance at beginning of period	$	25,032		$	—		$	25,032		$	919
NewAlliance acquisition		—			—			—			27,924
Transfers from level 2(1)		—			157,999			157,999			—
Purchases		—			840,492			840,492			—
Settlements		(12,199	)		—			(12,199	)		—
Gains (losses) included in other comprehensive income		2,345			(10,307	)		(7,962	)		59
Losses included in earnings		(486	)		—			(486	)		—
Balance at end of period	$	14,692		$	988,184		$	1,002,876		$	28,902

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

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

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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 a sharp reduction of issuances, a significant reduction in trading volumes and wide bid-ask spreads, all driven by the lack of market participants. Although estimated prices are generally obtained for such securities, the level of market observable assumptions used is severely 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. Because of the inactivity in the markets and the lack of observable valuation inputs, the securities are valued by a third party specialist using a discounted cash flow approach and proprietary pricing model. The model uses inputs such as estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market prices for similar securities and collateral structure types.

Our collateral dependent loans are typically valued using appraisals. To the extent that significant adjustments are made to the appraised collateral value due to a lack of direct marketplace information or saleability issues, those measurements are classified as level 3.

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		Valuation	Unobservable	Quantitative
	Value		technique	input	Measures
June 30, 2012
Collateralized loan obligations	$	988,184	Third party pricing adjusted for credit quality and spread changes	Market spreads		180 - 795 bps
Collateral dependent impaired loans		7,582	Appraisals adjusted for market and saleability conditions	Discount due to lack of market data or saleability conditions		20-50	%

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

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

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:

	June 30, 2012							December 31, 2011
			Estimated fair		Fair value					Estimated fair
	Carrying value		value		level			Carrying value		value
Financial assets:
Cash and cash equivalents	$	488,227	$	488,227		1		$	836,555	$	836,555
Investment securities available for sale		9,937,271		9,937,271		1,2,3	(1)		9,348,296		9,348,296
Investment securities held to maturity		1,463,872		1,533,266		2			2,669,630		2,752,723
Federal Home Loan Bank and Federal Reserve Bank common stock		329,555		329,555		2			358,159		358,159
Loans held for sale		101,596		101,596		2			94,484		94,484
Loans and leases, net		18,625,000		19,341,703		2,3	(2)		16,352,483		16,991,059
Derivatives		93,028		93,028		2			57,868		57,868
Accrued interest receivable		107,983		107,983		2			103,543		103,543
Financial liabilities:
Deposits	$	27,896,987		27,970,970		2		$	19,405,115	$	19,460,668
Borrowings		1,690,307		1,756,914		2			8,127,121		8,328,797
Interest rate swap agreements		93,161		93,161		2			70,344		70,344
Accrued interest payable		9,798		9,798		2			21,127		21,127

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

⁽²⁾  Loans and leases classified as level 2 are made up of $10.6 million of collateral dependent impaired loans without significant adjustments made to appraised values. All other loans and leases are classified as level 3.

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

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

Cash and Cash Equivalents

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

Investment Securities

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

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 June 30, 2012:
Net interest income	$	259,020		$	(7	)	$	259,013
Provision for credit losses		28,100			—			28,100
Net interest income after provision for credit losses		230,920			(7	)		230,913
Noninterest income		78,790			16,808			95,598
Amortization of core deposit and other intangibles		8,759			1,080			9,839
Other noninterest expense		323,241			12,559			335,800
Income before income taxes		(22,290	)		3,162			(19,128	)
Income tax expense		(9,422	)		1,218			(8,204	)
Net income	$	(12,868	)	$	1,944		$	(10,924	)
Three months ended June 30, 2011:
Net interest income	$	230,520		$	(83	)	$	230,437
Provision for credit losses		17,307			—			17,307
Net interest income after provision for credit losses		213,213			(83	)		213,130
Noninterest income		44,091			16,804			60,895
Amortization of core deposit and other intangibles		5,334			1,239			6,573
Other noninterest expense		234,932			13,636			248,568
Income before income taxes		17,038			1,846			18,884
Income tax expense		4,633			701			5,334
Net income	$	12,405		$	1,145		$	13,550
Six months ended June 30, 2012:
Net interest income	$	501,402		$	(18	)	$	501,384
Provision for credit losses		48,100			—			48,100
Net interest income after provision for credit losses		453,302			(18	)		453,284
Noninterest income		131,833			33,673			165,506
Amortization of core deposit and other intangibles		14,083			2,222			16,305
Other noninterest expense		504,065			25,447			529,512
Income before income taxes		66,987			5,986			72,973
Income tax expense		21,736			2,296			24,032
Net income	$	45,251		$	3,690		$	48,941
Six months ended June 30, 2011:
Net interest income	$	403,450		$	(145	)	$	403,305
Provision for credit losses		30,207			—			30,207
Net interest income after provision for credit losses		373,243			(145	)		373,098
Noninterest income		80,374			32,595			112,969
Amortization of core deposit and other intangibles		9,796			2,266			12,062
Other noninterest expense		361,212			27,017			388,229
Income before income taxes		82,609			3,167			85,776
Income tax expense		26,104			1,204			27,308
Net income	$	56,505		$	1,963		$	58,468

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Note 9. New Accounting Standards

In April 2011, the Financial Accounting Standards Board (the “FASB”) released amended guidance to improve the accounting for repurchase transactions by amending the “effective control” criteria for transactions involving repurchase agreements and other agreements that both entitle and obligate a transferor to repurchase or redeem financial assets before their maturity. The revised guidance removes the criterion requiring a transferor to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in default by a transferee, from the assessment of effective control. As a result, the level of cash collateral received by the transferor in a repurchase agreement or other similar agreement is no longer relevant in determining if a transfer should be accounted for as a sale. This guidance became effective for us in the first quarter of 2012 and is being applied prospectively. It did not have a material impact on our financial statements.

In May 2011, the FASB released an amendment to change the format in which entities report comprehensive income in their financial statements. Under the new guidance, entities have the option to present total comprehensive income, the components of net income, and the components of other comprehensive income in a single continuous statement or two separate but consecutive statements. This guidance became effective for us on January 1, 2012, and did not have a significant impact on our financial statements. Guidance related to the presentation requirements for reclassification adjustments has been deferred pending further deliberation by the FASB. We do not expect the remaining guidance will have a significant impact on our financial statements.

In May 2011, the FASB released new guidance to converge the fair value measurement guidance in GAAP with that of International Financial Reporting Standards (“IFRS”). The amendment provides both clarifying guidance regarding the FASB’s intent about the application of existing requirements as well as changes in certain principles or requirements. This guidance became effective for us on January 1, 2012. The amendments related to fair value measurements did not have a material impact on our financial statements and the additional disclosure requirements have been incorporated into Note 7, Fair Value Measurements.

In September 2011, the FASB released new guidance on the testing of goodwill for impairment. The update permits an entity to first assess qualitative factors to determine whether it is necessary to perform the two-step impairment test required by GAAP. The amendments became effective on January 1, 2012 and we will apply the new guidance when we perform our annual impairment test in November 2012.

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

The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future performance and perceived opportunities in the market. Our actual results may differ significantly from the results, performance, and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, changes in the credit quality of our borrowers and obligors on investment securities we own, increased regulation of financial institutions or other effects of recently enacted legislation, and other factors discussed under Item 1A. “Risk Factors” in both this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2011. First Niagara Financial Group, Inc. does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.

OVERVIEW

First Niagara Financial Group, Inc. (the “Company”) is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”), a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”). At June 30, 2012, we had $35 billion in assets, $28 billion in deposits, and 452 full-service branch locations across Upstate New York, Pennsylvania, Connecticut, and Western Massachusetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association (“HSBC”) and its affiliates (the “HSBC Branch Acquisition”) in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets, as contemplated by the Purchase and Assumption Agreement, dated July 30, 2011, as amended and restated as of May 17, 2012 (the “Purchase Agreement”) and paid a deposit premium of $764 million. In accordance with the Purchase Agreement, the Bank acquired cash of $7.4 billion, performing loans with a fair value of approximately $1.6 billion, core deposit and other intangibles of $82 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 $766 million. The cash received was used to pay down wholesale borrowings, including those used to purchase securities in advance of the HSBC Branch Acquisition. The goodwill will be tax deductible. In addition, we acquired certain wealth management relationships and approximately $2.5 billion of assets under management of such relationships. At closing, the Bank did not receive any loans greater than 60 days delinquent. Concurrent with the HSBC Branch Acquisition, we consolidated 15 existing First Niagara branches into acquired HSBC branches and in the third quarter of 2012, we will consolidate 19 of the HSBC branches into First Niagara branches, resulting in 103 net new full-service branches from the Branch Acquisition.

In connection with the regulatory process for the HSBC Branch Acquisition, we agreed with the U.S. Department of Justice (“DOJ”) to assign our purchase rights related to 26 HSBC branches in the Buffalo area. In January 2012, we entered into an agreement with KeyBank, N.A. (“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 $2.1 billion in deposits and approximately $260 million in loans, and paid us a deposit premium of $95 million.

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

On June 22, 2012, Five Star acquired four First Niagara branches with $59 million in loans, assumed approximately $129 million in deposits, and paid us a deposit premium of $5.3 million. Five Star will acquire four of the HSBC branches in the third quarter of 2012 and will pay us a deposit premium of 4.0% on the deposits assumed.

On July 20, 2012, Community Bank acquired the remaining 16 HSBC branches, with a total of $107 million in loans, $697 million in deposits, and paid us a deposit premium of $23 million. Community Bank will acquire three First Niagara branches in the third quarter of 2012, assume approximately $70 million in loans, $130 million in deposits, and pay us a deposit premium of 3.22%.

We incurred $144 million in pre-tax merger and acquisition expenses related to the HSBC Branch Acquisition during the first half of 2012, primarily in the second quarter, including $65 million in prepayment penalties on borrowings and swap termination fees; redundant facilities and employee severance costs; technology costs related to system conversions; and professional fees.

On April 15, 2011, we acquired all of the outstanding common shares of NewAlliance Bancshares, Inc. (“NewAlliance”), the parent company of NewAlliance Bank, and thereby acquired NewAlliance Bank’s 88 branch locations in Connecticut and Western Massachusetts. As a result of the merger, we acquired assets with a fair value of $9.2 billion, including investment securities with a fair value of $2.8 billion, loans with a fair value of $5.1 billion, and we assumed deposits of $5.3 billion and borrowings of $2.3 billion. Under the terms of the merger agreement, NewAlliance stockholders received 94 million shares of Company common stock and cash consideration of $199 million.

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BUSINESS AND INDUSTRY

We operate as a multi-faceted regional bank with a community banking model that provides customers with a full range of products and services. These products include commercial and residential real estate loans, commercial business loans and leases, home equity and other consumer loans, wealth management products, as well as various retail consumer and commercial deposit products. Additionally, we offer risk management services through a wholly-owned subsidiary of the Bank.

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

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

In June 2012, the Federal Open Market Committee (“FOMC”) decided to extend previous actions to keep interest rates low, and announced they would extend “Operation Twist” through the end of the year. Further, the Federal Reserve reaffirmed their position to keep low interest rates though at least late 2014. These most recent actions continued previous efforts by the FOMC to keep interest rates low, and continue to impact our net interest income by; (i) continuing to reduce the yields on our assets which we were not able to fully offset by reducing the cost of our liabilities, which have been at historic lows; (ii), causing borrowers to repay their fixed rate loans at a faster rate; and (iii), reducing the rates at which cash flows from these repayments could be reinvested and at which new loans are yielding.

MARKET AREAS AND COMPETITION

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

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

REGULATORY REFORM

We continue to monitor the potential effects on our businesses of regulatory reform, including the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the revised capital and liquidity frameworks published by the Basel Committee on Banking Supervision in December 2010 and known as “Basel III.”

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

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

Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2011 under Item 1, “Business—Supervision and Regulation,” and Item 1A, “Risk Factors.”

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CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and that require our most subjective and complex judgments. Accordingly, our accounting estimates relating to investment securities accounting, the accounting treatment and valuation of our acquired loans, the adequacy of our allowance for loan losses, and the analysis of the carrying value of goodwill for impairment are deemed to be critical, as our judgments could have a material effect on our results of operations. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2011 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:

Investment Securities

As of June 30, 2012, our available for sale and held to maturity investment securities totaled $11.4 billion, or 32% 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. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on broker quotes, which are reviewed using the same process that is applied to our securities priced by pricing services where we are unable to obtain a secondary independent price.

We conduct a quarterly review and evaluation of our investment securities portfolio to determine if any declines in fair value below amortized cost are other than temporary. In making this determination, we consider some or all of the following factors: the period of time the securities have been in an unrealized loss position, the percentage decline in fair value in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, credit enhancement, projected losses, level of credit loss, and projected cash flows. If we intend to sell a security with a fair value below amortized cost or if it is more likely than not that we will be required to sell such a security, we would record an other than temporary impairment charge through current period earnings for the full decline in fair value below amortized cost. For debt securities that we do not intend to sell or it is more likely than not that we will not be required to sell before recovery, we would record an other than temporary impairment charge through current period earnings for the amount of the valuation decline below amortized cost that is attributable to credit losses. The remaining difference between the debt security’s fair value and amortized cost (i.e. decline in fair value not attributable to credit losses) are recognized in other comprehensive income.

Our investment securities portfolio includes residential mortgage-backed securities and collateralized mortgage obligations. As the underlying collateral of each of these securities is comprised of a large number of similar residential mortgage loans for which prepayments are probable and the timing and amount of such prepayments can be reasonably estimated, we estimate future principal prepayments of the underlying residential mortgage loans to determine a constant effective yield used to apply the interest method, with retroactive adjustments made as warranted. Our model assumes a conditional prepayment rate (“CPR”) of 23 over the remaining life with a peak modeled speed of 33. Should our CPR increase from our base case by 20%, we expect that we would incur approximately $15 million to $20 million of additional premium amortization over a three year period. Conversely, if our CPR were to decrease by 20%, we expect our premium amortization to decrease by $25 million to $30 million over that same period.

Acquired Loans

Loans that we acquire in acquisitions subsequent to January 1, 2009 are recorded at fair value with no carryover of the related allowance for loan losses. Determining the fair value of the loans involves estimating the amount and timing of principal and interest cash flows expected to be collected on the loans and discounting those cash flows at a market rate of interest.

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

• Loans 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.

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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.

Acquired loans accounted for under ASC 310-30 by analogy

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

The excess of expected cash flows from acquired loans over the estimated fair value of acquired loans at acquisition is referred to as the accretable discount and is recognized into interest income over the remaining life of the acquired loans using the interest method. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the acquired loans. Subsequent decreases to the expected cash flows require us to evaluate the need for an addition to the allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect takes into account actual credit performance of the acquired loans to date and our best estimates for the expected lifetime credit performance of the loans using currently available information. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment. To the extent that we experience a deterioration in credit quality in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

Acquired loans that met the criteria for nonaccrual of interest prior to the acquisition may be considered performing upon acquisition, regardless of whether the customer is contractually delinquent, if we can reasonably estimate the timing and amount of the expected cash flows on such loans and if we expect to fully collect the new carrying value of the loans. As such, we may no longer consider the loan to be nonaccrual or nonperforming and may accrue interest on these loans, including the impact of any accretable discount. We have determined that we can reasonably estimate future cash flows on our current portfolio of acquired loans that are past due 90 days or more and on which we are accruing interest and expect to fully collect the carrying value of the loans net of the allowance for acquired loan losses.

Allowance for Loan Losses

Originated loans

We establish our allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of our loan portfolio. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, and other factors that warrant recognition in determining our allowance for loan losses. We continue to monitor and modify the level of our allowance for loan losses to ensure it is adequate to cover losses inherent in our loan portfolio. In addition, various regulatory agencies, as an integral part of their examination process, periodically review our allowance for loan losses.

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

For our originated loans, our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative risk factors specific to respective loan types.

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

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Commercial loan portfolio segment

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

Consumer loan portfolio segment

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

Acquired Loans

Acquired loans accounted for under ASC 310-30 by analogy

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

Acquired loans accounted for under ASC 310-20

We establish our allowance for loan losses through a provision for credit losses based upon an evaluation process that is similar to our evaluation process used for originated loans. This evaluation, which includes a review of loans on which full collectability may not be reasonably assured, considers, among other matters, the estimated fair value of the underlying collateral, economic conditions, historical net loan loss experience, carrying value of the loans, which includes the remaining net purchase discount or premium, and other factors that warrant recognition in determining our allowance for loan losses.

Goodwill

We test goodwill for impairment annually, as of November 1. Goodwill impairment exists when a reporting unit’s carrying value of goodwill exceeds its implied fair value. Goodwill is also tested for impairment on an interim basis if an event occurs or circumstances change between annual tests that would more likely than not reduce the fair value of the reporting unit below its carrying amount. Significant judgment is applied when goodwill is assessed for impairment. This judgment includes developing cash flow projections, selecting appropriate discount rates, identifying relevant market comparables, incorporating general economic and market conditions and selecting an appropriate control premium. The selection and weighting of the various fair value techniques may result in a higher or lower fair value. Judgment is applied in determining the weightings that are most representative of fair value. The assumptions used in the goodwill impairment assessment and the application of these estimates and assumptions are discussed below.

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

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

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

The aggregate fair market values of these units are compared to our market capitalization, based on current stock prices, as an assessment of the appropriateness of the fair value measurements. A control premium analysis is performed to determine whether the implied control premium was within range of overall control premiums observed in the market place.

The second step (Step 2) of impairment testing is necessary only if a reporting unit’s carrying amount exceeds its fair value. Step 2 compares the implied fair value of the reporting unit goodwill with the carrying amount of the goodwill for the reporting unit. The implied fair value of goodwill is determined in the same manner as goodwill that is recognized in a business combination. Significant judgment and estimates are involved in estimating the fair value of the assets and liabilities of the reporting unit.

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SELECTED FINANCIAL DATA

	2012					2011
	June 30			March 31		December 31		September 30		June 30
	(In thousands, except per share amounts)
Selected financial condition data:
Total assets	$	35,105,756		$	35,517,805	$	32,810,615	$	31,209,507	$	30,889,646
Loans and leases, net		18,625,000			16,664,173		16,352,483		16,252,617		16,062,197
Investment securities:
Available for sale		9,937,271			12,248,058		9,348,296		8,349,237		8,219,695
Held to maturity		1,463,872			2,503,156		2,669,630		2,830,744		2,939,933
Goodwill and other intangibles		2,631,605			1,796,394		1,803,240		1,812,628		1,829,712
Deposits		27,896,987			19,029,387		19,405,115		19,624,177		18,900,495
Borrowings		1,690,307			11,041,440		8,127,121		7,085,343		7,600,926
Stockholders’ equity	$	4,818,213		$	4,875,446	$	4,798,178	$	4,000,675	$	3,992,835
Common shares outstanding		352,665			351,936		351,834		294,898		295,245
Selected operations data:
Interest income	$	299,841		$	290,780	$	291,906	$	287,147	$	277,370
Interest expense		40,828			48,409		49,393		51,718		46,933
Net interest income		259,013			242,371		242,513		235,429		230,437
Provision for credit losses		28,100			20,000		13,400		14,500		17,307
Net interest income after provision for credit losses		230,913			222,371		229,113		220,929		213,130
Noninterest income (1)		95,598			69,908		63,685		68,655		60,895
Merger and acquisition integration expenses		131,460			12,970		6,149		9,008		76,828
Restructuring charges		3,750			2,703		13,496		16,326		11,656
Noninterest expense		210,429			184,505		182,526		178,537		166,657
(Loss) income before income taxes		(19,128	)		92,101		90,627		85,713		18,884
Income taxes		(8,204	)		32,236		32,166		28,732		5,334
Net (loss) income		(10,924	)		59,865		58,461		56,981		13,550
Preferred stock dividend		7,547			5,115		—		—		—
Net (loss) income available to common stockholders	$	(18,471	)	$	54,750	$	58,461	$	56,981	$	13,550
Stock and related per share data:
Earnings (loss) per common share:
Basic	$	(0.05	)	$	0.16	$	0.19	$	0.19	$	0.05
Diluted		(0.05	)		0.16		0.19		0.19		0.05
Cash dividends		0.08			0.08		0.16		0.16		0.16
Book value(2)		12.84			13.00		12.79		13.72		13.68
Tangible book value per share(2)(3)		5.30			7.86		7.62		7.50		7.41
Market Price (NASDAQ: FNFG):
High		9.87			10.35		9.99		13.59		14.54
Low		7.49			8.71		8.22		9.15		13.02
Close	$	7.65		$	9.84	$	8.63	$	9.15	$	13.20

⁽¹⁾  Includes $16 million gain on sale of mortgage-backed securities from securities portfolio repositioning.

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

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

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	2012						2011
At or for the quarter ended	June 30			March 31			December 31			September 30			June 30
	(Dollars in thousands)
Selected financial ratios and other data:
Performance ratios(1):
Return on average assets		(0.12	)%		0.73	%		0.73	%		0.73	%		0.19	%
Common equity:
Return on average common equity		(1.64	)		4.88			5.63			5.61			1.42
Return on average tangible common equity(2)		(3.18	)		8.12			10.03			10.28			2.59
Total equity:
Return on average equity		(0.90	)		4.96			5.54			5.61			1.42
Return on average tangible equity(3)		(1.64	)		7.90			9.75			10.28			2.59
Net interest rate spread		3.16			3.20			3.35			3.35			3.53
Net interest rate margin		3.26			3.34			3.48			3.48			3.65
Efficiency ratio(4)		97.5			64.1			66.0			67.0			87.6
Dividend payout ratio		N/M			50.00	%		84.21	%		84.21	%		N/M
Capital ratios:
First Niagara Financial Group, Inc.
Total risk-based capital		11.37			16.75			17.84			12.56			12.69
Tier 1 risk-based capital		9.40			14.66			15.60			11.90			12.05
Tier 1 risk-based common capital(5)		7.41			12.47			13.23			11.29			11.41
Leverage ratio		6.32			9.67			9.97			7.42			7.81
Ratio of stockholders’ equity to total assets		13.72			13.73			14.62			12.82			12.93
Ratio of tangible common stockholders’ equity to tangible assets(6)		5.69			8.13			8.57			7.44			7.44
First Niagara Bank:
Total risk-based capital		10.57			15.66			16.47			12.17			12.37
Tier 1 risk-based capital		9.63			14.69			14.66			11.51			11.72
Leverage ratio		6.48	%		9.69	%		9.38	%		7.17	%		7.58	%
Asset quality:
Total nonaccruing loans	$	129,072		$	133,261		$	89,798		$	81,886		$	82,513
Other nonperforming assets		10,632			7,202			4,482			9,392			12,315
Total classified loans(7)		732,762			753,536			748,375			692,961			700,813
Total criticized loans(8)		1,030,471			1,044,731			1,144,222			1,268,879			1,253,937
Allowance for credit losses		138,516			126,746			120,100			112,749			107,028
Net loan charge-offs	$	15,838		$	13,254		$	5,835		$	8,125		$	7,537
Net charge-offs to average loans		0.36	%		0.32	%		0.14	%		0.20	%		0.20	%
Provision to average loans		0.63			0.48			0.32			0.34			0.38
Total nonaccruing loans to total loans		0.69			0.79			0.55			0.50			0.51
Total nonperforming assets to total assets		0.40			0.40			0.29			0.29			0.31
Allowance for loan losses to total loans		0.74			0.75			0.73			0.69			0.66
Allowance for loan losses to nonaccruing loans		107.3			95.1			133.7			137.7			129.7
Texas ratio(9)		13.35	%		8.97	%		8.55	%		10.19	%		10.12	%
Asset quality—Originated loans(10):
Net charge-offs of originated loans to average originated loans		0.55	%		0.34	%		0.22	%		0.35	%		0.32	%
Provision for originated loans to average originated loans		0.93			0.61			0.45			0.60			0.64
Total nonaccruing originated loans to total originated loans		0.96			1.09			0.91			0.87			0.93
Allowance for originated loan losses to originated loans		1.19			1.19			1.20			1.20			1.21
Other data:
Number of full service branches		452			334			333			332			346
Full time equivalent employees		6,103			4,753			4,827			4,712			4,751
Effective tax rate		42.9	%		35.0	%		35.5	%		33.5	%		28.2	%

N/M Not meaningful

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

⁽²⁾ Average tangible common equity excludes average goodwill, other intangibles and preferred stock of $2.5 billion, $2.1 billion, $1.9 billion, $1.8 billion, and $1.7 billion for the quarters ended June 30, 2012, March 31, 2012, December 31, 2011, September 30, 2011, and June 30, 2011, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽³⁾ Average tangible equity excludes average goodwill and other intangibles of $2.2 billion for the quarter ended June 30, 2012, $1.8 billion for the quarters ended March 31, 2012, December 31, 2011, and September 30, 2011, and $1.7 billion for the quarter ended June 30, 2011. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

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

⁽⁵⁾ Tier 1 risk-based common capital is computed by subtracting the subordinated debentures associated with trust preferred securities and preferred stock from Tier I capital, divided by risk weighted assets. Tier 1 risk-based common capital, as calculated for purposes of this financial data and the earnings release, does not reflect the adjustments provided for in Basel III. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and position.

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

⁽⁷⁾ Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2011.

⁽⁸⁾ Beginning in the third quarter of 2011, criticized loans includes consumer loans when they are 90 days or more past due. Prior to the third quarter of 2011, criticized loans included consumer loans when they were 60 days or more past due. The impact of the change at September 30, 2011 was a reduction of criticized loans by $24 million. Criticized loans include special mention, substandard, doubtful, and loss.

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

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

RESULTS OF OPERATIONS

Overview

The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. Our operating results exclude the gain on securities portfolio restructuring, merger and acquisition integration expenses, and restructuring charges. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry. In addition, we believe the exclusion of the nonoperating items from our performance enables management and investors to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations (in thousands).

	Three months ended									Six months ended
	June 30,			March 31,			June 30,			June 30,
	2012			2012			2011			2012			2011
Operating results (Non-GAAP):
Net interest income	$	259,013		$	242,371		$	230,437		$	501,384		$	403,305
Provision for credit losses		28,100			20,000			17,307			48,100			30,207
Noninterest income		79,703			69,908			60,895			149,611			112,969
Noninterest expense		210,429			184,505			166,657			394,934			304,575
Income taxes		33,557			37,721			36,126			71,278			60,476
Net operating income (Non-GAAP)	$	66,630		$	70,053		$	71,242		$	136,683		$	121,016
Operating earnings per diluted share (Non-GAAP)	$	0.17		$	0.19		$	0.25		$	0.35		$	0.49
Reconciliation of net operating income to net (loss) income	$	66,630		$	70,053		$	71,242		$	136,683		$	121,016
Nonoperating income and expenses, net of tax at effective tax rate:
Gain on securities portfolio repositioning		10,331			—			—			10,331			—
Merger and acquisition integration expenses		(85,448	)		(8,431	)		(50,092	)		(93,879	)		(54,241	)
Restructuring charges		(2,437	)		(1,757	)		(7,600	)		(4,194	)		(8,307	)
Total nonoperating income and expenses, net of tax		(77,554	)		(10,188	)		(57,692	)		(87,742	)		(62,548	)
Net (loss) income (GAAP)	$	(10,924	)	$	59,865		$	13,550		$	48,941		$	58,468
(Loss) earnings per diluted share (GAAP)	$	(0.05	)	$	0.16		$	0.05		$	0.10		$	0.24

Our results reflect our continued strong fundamentals of our regional banking business resulting from our commercial organic loan and noninterest income growth, along with strong deposit retention from our HSBC Branch Acquisition. We continued to execute and deliver on our core banking strategy by expanding the breadth and depth or our relationships with new and existing customers as we focused on increasing core retail and business checking accounts and the proportion of transactor/saver/borrower households. However, our positive operating performance was diminished by the impacts of mortgage-backed security premium amortization and higher provision for credit losses to support portfolio growth.

48

Comparison to Prior Quarter

Our second quarter 2012 GAAP results, including our earnings per diluted share, as compared to our first quarter 2012 GAAP results were most significantly impacted by:

• A 37% annualized increase in average earning assets reflecting the effects of investment securities purchased in anticipation of the HSBC Branch Acquisition, strong commercial loan growth, and the impact of the loans acquired from HSBC.

• $144 million in merger and acquisition integration expenses related to the HSBC Branch Acquisition.

• The $16 million gain resulting from the sale of investment securities.

• The benefits of our tenth consecutive quarter of double digit average commercial loan growth across our footprint and our deposit repricing initiative which was partially offset by $14 million in additional premium amortization on mortgage-backed securities and continued downward repricing of assets.

• Approximately $170 million of indirect auto originations in the second quarter of 2012 with an average yield of approximately 3.6%.

• Enhanced credit card product and servicing platform that provide greater cross-selling opportunties.

• A 15% increase in the number of new checking accounts, leading to higher fee income.

• A higher provision for credit losses primarily due to growth in our originated portfolio. In addition, net charge-offs increased due to the charge-off of one $8 million commercial credit in our Upstate New York market.

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

Comparison to Prior Year Quarter

Our second quarter 2012 GAAP results as compared to our second quarter 2011 GAAP results, including our diluted earnings per share, were primarily impacted by:

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

• The $16 million gain resulting from the sale of investment securities.

• Lower yields on loans and securities as a result of Operation Twist, described in the section titled “Business and Industry.”

• A 38% increase in the number of new checking accounts.

• Our December 2011 issuance of 57 million common shares.

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

Comparison to Prior Year to Date

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

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

• Our April 2011 merger with NewAlliance.

• The $16 million gain resulting from the sale of investment securities.

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

• Lower yields on loans and securities as a result of Operation Twist, described in the section titled “Business and Industry.”

• Our December 2011 issuance of 57 million common shares.

• $13 million in dividends on the 14 million shares of preferred stock we issued in December 2011.

Net Interest Income

Net interest income of $259 million increased 7% from the prior quarter, reflecting the beneficial impacts of acquired assets and deposits and the subsequent repayment of higher cost borrowings. Those benefits were partially offset by $14 million in additional premium amortization on mortgage-backed securities and continued downward repricing of assets. Tax equivalent net interest margin in the second quarter of 2012 was 3.26%, or eight basis points, lower than the prior quarter given the effects of the additional investment security premium amortization.

Average earning assets increased 37% annualized compared to the prior quarter, reflecting the effects of investment securities purchased in anticipation of the HSBC Branch Acquisition, continued strength in commercial loan growth, and the impact of $1.6 billion in loans acquired from HSBC. Investment securities averaged $14.0 billion, an increase of 48% annualized from the prior quarter.

During the second quarter of 2012, we sold $3.1 billion in investment securities and paid down a commensurate amount of borrowings. In light of the closing of the HSBC Branch Acquisition in May 2012 and the impact of the continued low rate environment, we elected to de-lever and de-risk our balance sheet to improve the overall asset sensitivity of the balance sheet by approximately 200 to 300 basis points. The actions reduce our overall premium associated with our mortgage-backed securities portfolio by 44% and the risk from acceleration of premium amortization in future periods is lower as a 20% increase in CPRs in future periods would result in a cumulative reduction of $15 to $20 million in pre-tax earnings over a three year period.

49

Comparison to Prior Quarter

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

	Three months ended June 30, 2012					Three months ended March 31, 2012					Increase (decrease)
	Average outstanding balance		Taxable equivalent yield/rate			Average outstanding balance		Taxable equivalent yield/rate			Average outstanding balance			Taxable equivalent yield/rate
Interest-earning assets:
Loans and leases(1)
Commercial:
Real estate	$	6,500,678		4.88	%	$	6,300,002		4.98	%	$	200,676			(0.10	)%
Business		4,293,186		4.03			3,915,481		4.08			377,705			(0.05	)
Total commercial lending		10,793,864		4.54			10,215,483		4.63			578,381			(0.09	)
Residential real estate		3,964,214		4.07			3,945,244		4.28			18,970			(0.21	)
Home equity		2,411,901		4.42			2,156,668		4.40			255,233			0.02
Other consumer		526,981		8.54			277,902		7.34			249,079			1.20
Total loans		17,696,960		4.59			16,595,297		4.62			1,101,663			(0.03	)
Mortgage-backed securities(2)		10,848,354		2.62			10,253,774		3.19			594,580			(0.57	)
Other investment securities(2)		3,184,359		3.43			2,277,900		3.48			906,459			(0.05	)
Money market and other investments		817,696		2.20			672,641		2.28			145,055			(0.08	)
Total interest-earning assets		32,547,369		3.77	%		29,799,612		3.99	%		2,747,757			(0.22	)%
Noninterest-earning assets(3)(4)		3,952,377					3,324,475					627,902
Total assets	$	36,499,746				$	33,124,087				$	3,375,659
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,302,080		0.14	%	$	2,565,639		0.03	%	$	736,441			0.11	%
Checking accounts		3,095,152		0.08			2,223,870		0.10			871,282			(0.02	)
Money market deposits		9,124,749		0.28			7,167,175		0.28			1,957,574			—
Certificates of deposit		4,018,527		0.83			3,827,367		0.98			191,160			(0.15	)
Total interest-bearing deposits		19,540,508		0.34			15,784,051		0.38			3,756,457			(0.04	)
Borrowings
Short-term borrowings		5,045,973		0.55			3,632,125		0.65			1,413,848			(0.10	)
Long-term borrowings		2,432,985		2.91			5,334,198		2.07			(2,901,213	)		0.84
Total borrowings		7,478,958		1.31			8,966,323		1.50			(1,487,365	)		(0.19	)
Total interest-bearing liabilities		27,019,466		0.61	%		24,750,374		0.79	%		2,269,092			(0.18	)%
Noninterest-bearing deposits		3,835,130					3,052,665					782,465
Other noninterest-bearing liabilities		765,359					470,773					294,586
Total liabilities		31,619,955					28,273,812					3,346,143
Stockholders’ equity(3)		4,879,791					4,850,275					29,516
Total liabilities and stockholders’ equity	$	36,499,746				$	33,124,087				$	3,375,659
Net interest rate spread				3.16	%				3.20	%					(0.04	)%
Net interst rate margin				3.26	%				3.34	%					(0.08	)%

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

⁽²⁾  Average outstanding balances are at amortized cost.

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

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

50

Our taxable equivalent net interest income of $264 million for the quarter ended June 30, 2012 increased by $16 million quarter over quarter. Overall, the yield on earning assets declined 22 basis points quarter over quarter. The combined effects of higher premium amortization, interest expense on the subordinated notes issued last December, and refinancing or repricing of our variable rate loans into lower yields were negated by higher interest income generated on new loan and securities volumes as well as continued benefits from our deposit repricing initiatives. Specifically:

• Our average balance of investment securities increased quarter over quarter by approximately $1.5 billion due to purchases of investment securities with an approximate yield of 3.5% as part of our strategy to buy securities in anticipation of the pending HSBC Branch Acquisition. The average balance of investment securities was not significantly impacted by the securities portfolio repositioning due to the timing of the transaction. The increase in average balance was offset by a decrease in yield of 43 basis points during the second quarter of 2012 with over half the decline driven by the $14 million increase in amortization expense related to investment securities.

• Our average balance of loans increased by $1.1 billion, of which $753 million was related to the HSBC Branch Acquisition. The remaining increase was attributed to growth of $429 million in our commercial loans, offset by declines in our residential loan category. Loan yields were relatively flat compared to the linked quarter.

• While the spread between commercial loan yields and the associated cost of funds continues to hold up relatively well, the overall yield is declining as we continue to manage our balance sheet toward a shorter duration. To reduce the duration of the commercial loan portfolio, we have (i) a higher percentage of new originations that are variable; (ii) we have been successful in rolling-over fixed rate maturing commercial loans into variable rates; and (iii) where we haven’t been successful in rolling-over fixed rate maturing commercial loans into variable, the loans have funded at a lower fixed rate.

• Excluding the HSBC Branch Acquisition impact, our average balances of interest bearing deposits declined by $118 million and our average rate paid declined by four basis points due to our deposit pricing actions. The decline in our average balances was driven by our interest rate and treasury management strategies as we continue to move down deposit pricing and reduce excess liquidity.

• Our average borrowings decreased quarter over quarter by approximately $1.5 billion as the increased borrowings related to the HSBC Branch Acquisition strategy were paid down upon closing of the transaction. Our average rate also decreased by 19 basis points.

51

Comparison to Prior Year to Date

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

	Six months ended June 30,										Increase (decrease)
	2012					2011
	Average outstanding balance		Yield/rate			Average outstanding balance		Yield/rate			Average outstanding balance			Yield/rate
Interest-earning assets:
Loans and leases(1)
Commercial:
Real estate	$	6,400,340		4.93	%	$	5,122,388		5.48	%	$	1,277,952			(0.55	)%
Business		4,104,334		4.05			2,869,424		4.39			1,234,910			(0.34	)
Total commercial lending		10,504,674		4.59			7,991,812		5.09			2,512,862			(0.50	)
Residential real estate		3,954,729		4.18			2,781,506		4.70			1,173,223			(0.52	)
Home equity		2,284,285		4.41			1,777,078		4.56			507,207			(0.15	)
Other consumer		402,442		8.13			269,536		6.99			132,906			1.14
Total loans		17,146,130		4.60			12,819,932		5.02			4,326,198			(0.42	)
Mortgage-backed securities(2)		10,551,064		2.90			8,103,505		3.68			2,447,559			(0.78	)
Other investment securities(2)		2,730,678		3.45			1,212,218		3.90			1,518,460			(0.45	)
Money market and other investments		745,169		2.23			292,594		3.15			452,575			(0.92	)
Total interest-earning assets		31,173,041		3.88	%		22,428,249		4.47	%		8,744,792			(0.59	)%
Noninterest-earning assets(3)(4)		3,638,876					2,702,054					936,822
Total assets	$	34,811,917				$	25,130,303				$	9,681,614
Interest-bearing liabilities:
Deposits
Savings deposits	$	2,933,860		0.09	%	$	1,907,423		0.23	%	$	1,026,437			(0.14	)%
Checking accounts		2,659,511		0.09			1,850,995		0.12			808,516			(0.03	)
Money market deposits		8,145,962		0.28			5,713,454		0.54			2,432,508			(0.26	)
Certificates of deposit		3,922,947		0.90			3,807,430		0.98			115,517			(0.08	)
Total interest-bearing deposits		17,662,280		0.36			13,279,302		0.56			4,382,978			(0.20	)
Borrowings
Short-term borrowings		4,339,049		0.59			1,675,446		0.32			2,663,603			0.27
Long-term borrowings		3,883,592		2.34			4,312,111		2.03			(428,519	)		0.31
Total borrowings		8,222,641		1.41			5,987,557		1.55			2,235,084			(0.14	)
Total interest-bearing liabilities		25,884,921		0.69	%		19,266,859		0.87	%		6,618,062			(0.18	)%
Noninterest-bearing deposits		3,443,898					2,217,179					1,226,719
Other noninterest-bearing liabilities		618,065					335,148					282,917
Total liabilities		29,946,884					21,819,186					8,127,698
Stockholders’ equity(3)		4,865,033					3,311,117					1,553,916
Total liabilities and stockholders’ equity	$	34,811,917				$	25,130,303				$	9,681,614
Net interest rate spread				3.19	%				3.60	%					(0.41	)%
Net interst rate margin				3.30	%				3.72	%					(0.42	)%

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

⁽²⁾ Average outstanding balances are at amortized cost.

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

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

Our taxable equivalent net interest income for the six months ended June 30, 2012 increased $98 million, or 24%, compared to the same period in 2011 reflecting an increase in net interest earning assets of $2.1 billion offset by a decrease in our net interest margin of 42 basis points. The increase in net interest earning assets reflects the period over period increase in interest earning assets of $8.7 billion due to our HSBC Branch Acquisition, including securities that were purchased in anticipation of the HSBC Branch Acquisition, as well as a full quarter impact of the NewAlliance Acquisition completed in the second quarter of 2011, and continued organic loan growth in our Upstate New York and Pennsylvania markets, and the successful completion of our securities purchase initiative in anticipation of the HSBC Branch Acquisition. Over the same period our interest bearing liabilities increased by $6.6 billion. Offsetting the growth in the average interest earning assets were lower yields on our loans and securities in the first half of 2012 compared to the first half of 2011 brought on by the market pressures on interest rates. Our yields on interest earning assets in the first quarter of 2012 decreased 59 basis points compared to the first quarter of 2011 while costs on interest bearing liabilities decreased only 18 basis points, for a net compression in the interest rate spread of 41 basis points.

52

Comparison to Prior Year Quarter

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

	Three months ended June 30, 2012					Three months ended June 30, 2011					Increase (decrease)
	Average outstanding balance		Taxable equivalent yield/rate			Average outstanding balance		Taxable equivalent yield/rate			Average outstanding balance			Taxable equivalent yield/rate
Interest-earning assets:
Loans and leases(1)
Commercial:
Real estate	$	6,500,678		4.88	%	$	5,807,141		5.42	%	$	693,537			(0.54	)%
Business		4,293,186		4.03			3,119,841		4.30			1,173,345			(0.27	)
Total commercial lending		10,793,864		4.54			8,926,982		5.03			1,866,882			(0.49	)
Residential real estate		3,964,214		4.07			3,848,440		4.56			115,774			(0.49	)
Home equity		2,411,901		4.42			2,038,870		4.58			373,031			(0.16	)
Other consumer		526,981		8.54			270,356		7.10			256,625			1.44
Total loans		17,696,960		4.59			15,084,648		4.93			2,612,312			(0.34	)
Mortgage-backed securities(2)		10,848,354		2.62			9,041,368		3.58			1,806,986			(0.96	)
Other investment securities(2)		3,184,359		3.43			1,472,757		3.88			1,711,602			(0.45	)
Money market and other investments		817,696		2.20			354,634		2.58			463,062			(0.38	)
Total interest-earning assets		32,547,369		3.77	%		25,953,407		4.37	%		6,593,962			(0.60	)%
Noninterest-earning assets(3)(4)		3,952,377					3,143,618					808,759
Total assets	$	36,499,746				$	29,097,025				$	7,402,721
Interest-bearing liabilities:
Deposits
Savings deposits	$	3,302,080		0.14	%	$	2,554,837		0.29	%	$	747,243			(0.15	)%
Checking accounts		3,095,152		0.08			2,027,385		0.13			1,067,767			(0.05	)
Money market deposits		9,124,749		0.28			6,406,684		0.58			2,718,065			(0.30	)
Certificates of deposit		4,018,527		0.83			4,355,235		0.88			(336,708	)		(0.05	)
Total interest-bearing deposits		19,540,508		0.34			15,344,141		0.56			4,196,367			(0.22	)
Borrowings
Short-term borrowings		5,045,973		0.55			1,454,341		0.41			3,591,632			0.14
Long-term borrowings		2,432,985		2.91			5,528,743		1.76			(3,095,758	)		1.15
Total borrowings		7,478,958		1.31			6,983,084		1.47			495,874			(0.16	)
Total interest-bearing liabilities		27,019,466		0.61	%		22,327,225		0.84	%		4,692,241			(0.23	)%
Noninterest-bearing deposits		3,835,130					2,542,134					1,292,996
Other noninterest-bearing liabilities		765,359					388,565					376,794
Total liabilities		31,619,955					25,257,924					6,362,031
Stockholders’ equity(3)		4,879,791					3,839,101					1,040,690
Total liabilities and stockholders’ equity	$	36,499,746				$	29,097,025				$	7,402,721
Net interest rate spread				3.16	%				3.53	%					(0.37	)%
Net interst rate margin				3.26	%				3.65	%					(0.39	)%

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

⁽²⁾  Average outstanding balances are at amortized cost.

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

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

53

Our taxable equivalent net interest income increased $28 million, or 12%, for the second quarter of 2012 compared to the second quarter of 2011 reflecting an increase in net interest earning assets of $1.9 billion offset by a decrease in our net interest margin of 39 basis points. The increase in net interest earning assets reflects the period over period increase in interest earning assets of $6.6 billion due to our HSBC Branch Acquisition, including securities that were purchased in anticipation of the HSBC Branch Acquisition, as well as a full quarter impact of the NewAlliance Acquisition completed in the second quarter of 2011, and continued organic loan growth in our Upstate New York and Pennsylvania markets. Over the same period our interest bearing liabilities increased by $4.7 billion. Offsetting the growth in the average interest earning assets were lower yields on our loans and securities in the second quarter of 2012 compared to the second quarter of 2011 brought on by the market pressures on interest rates. Our yields on interest earning assets in the second quarter of 2012 decreased 60 basis points compared to the second quarter of 2011 while costs on interest bearing liabilities decreased only 23 basis points, for a net compression in the interest rate spread of 37 basis points.

Provision for Credit Losses

Our provision for credit losses is comprised of three components: consideration of the adequacy of our allowance for originated loan losses; needs for allowance for acquired loan losses due to deterioration in credit quality subsequent to acquisition; and potential losses associated with our unfunded loan commitments. Our total provision for credit losses was $28 million for the second quarter of 2012 compared to $20 million and $17 million for the first quarter of 2012 and second quarter of 2011.

Our provision for credit losses related to our originated loans is based upon the inherent risk of our loans and considers such interrelated factors as the composition and other credit risk factors of our loan portfolio, growth in our loan portfolio, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic considerations. The provision for credit losses related to originated loans amounted to $25 million for the second quarter of 2012, compared to $16 million and $14 million for the first quarter of 2012 and second quarter of 2011, respectively.

Our provision for credit losses related to our acquired loans is based upon a deterioration in expected cash flows subsequent to the acquisition of the loans. These acquired loans were originally recorded at fair value on the date of acquisition. As the fair value at time of acquisition incorporated lifetime expected credit losses, there was no carryover of the related allowance for loan losses. During the second quarter of 2012, we recognized $2 million in provision for credit losses for our acquired loans, compared to $4 million in the first quarter of 2012.

Additionally, our total provision for credit losses for the second quarter of 2012 includes $0.3 million for unfunded loan commitments. This is due to the organic growth in our unfunded commitments and the associated reserve. Our total unfunded commitments at June 30, 2012 were $8.6 billion, which included $3.0 billion of unfunded commitments acquired in the HSBC Branch Acquisition. The liability is included in Other Liabilities in our Consolidated Statements of Condition and amounted to $11 million and $7 million at June 30, 2012 and December 31, 2011, respectively. The remaining increase of $4 million was established as part of purchase accounting related to the HSBC Branch Acquisition.

Noninterest Income

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

	Three months ended
	June 30,			March 31,			June 30,
	2012			2012			2011
Banking services	$	27,823		$	21,593		$	24,613
Insurance commissions		17,072			16,833			17,044
Wealth management services		9,207			9,039			7,883
Mortgage banking		7,174			5,649			3,386
Lending and leasing		4,245			3,123			2,811
Bank owned life insurance		3,848			3,387			3,055
Capital markets income		6,831			6,539			655
Gain on securities portfolio repositioning		15,895			—			—
Other		3,503			3,745			1,448
Total noninterest income	$	95,598		$	69,908		$	60,895
Noninterest income as a percentage of net revenue		27.0	%		22.4	%		20.9	%

Comparison to Prior Quarter

Noninterest income increased $26 million, or 37%, for the quarter ended June 30, 2012, compared to the first quarter of 2012. In addition to the partial quarter benefit from the HSBC Branch Acquisition and the $16 million gain resulting from the sale of certain mortgage-backed securities in a repositioning of our securities portfolio which we believe will improve our overall earnings quality and consistency, fee income growth in the second quarter of 2012 reflected strong banking services and mortgage banking revenues, lending and leasing fees, and sustained strength in capital markets income. Changes in certain components of noninterest income are described below:

54

• Revenues from banking services revenues benefited not only from the accounts acquired in the HSBC Branch Acquisition but also from the increase in the number of new checking accounts opened during the quarter.

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

• Sustained strength in capital markets income reflects the continued value of our more robust commercial product capabilities.

Excluding the gain on the investment securities portfolio repositioning, noninterest income as a percentage of net revenue increased from 22.4% in first quarter of 2012 to 23.5% in the second quarter of 2012 reflecting the benefit of ongoing fee income initiatives in our commercial and retail banking operations.

Comparison to Prior Year Quarter

Noninterest income increased $35 million, or 57%, for the quarter ended June 30, 2012, compared to the second quarter of 2011. The increases in revenues from banking services, mortgage banking, and lending and leasing were primarily attributable to the HSBC Branch Acquisition in May 2012 and our April 2012 NewAlliance merger. However, other factors contributing to changes in certain components of noninterest income are described below:

• The increase in banking services revenues reflects an increase due to the HSBC Branch Acquisition and ongoing fee income initiatives, partially offset by the impact of the Durbin Amendment to the Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Durbin Amendment”).

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

• Wealth management services revenues increased due to the expansion of our licensed banker program whereby certain branch employees are licensed to sell securities and insurance products and work closely with our financial consultants in selling such products to our customers, and the growth strategy of our Private Client Services group as we opened offices in Buffalo, Rochester and Pittsburgh in 2011 to add to offices we acquired in Philadelphia and Connecticut.

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

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

• A $16 million gain resulting from the sale of certain mortgage-backed securities in a repositioning of our securities portfolio which we believe will improve our overall earnings quality and consistency.

Comparison to Prior Year to Date

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

	Six months ended June 30,
	2012			2011
Banking services	$	49,416		$	43,619
Insurance commissions		33,905			32,799
Wealth management services		18,246			14,617
Mortgage banking		12,823			4,649
Lending and leasing		7,368			4,923
Bank owned life insurance		7,235			5,085
Capital markets income		13,370			2,916
Gain on securities portfolio repositioning		15,895			—
Other		7,248			4,361
Total noninterest income	$	165,506		$	112,969
Noninterest income as a percentage of net revenue		24.8	%		21.9	%

Noninterest income increased $53 million, or 47%, for the six months ended June 30, 2012, compared to the six months ended June 30, 2011. The increase is primarily attributable to the HSBC Branch Acquisition, gain on securities portfolio repositioning, and our April 2011 merger with NewAlliance. However, other factors contributing to changes in certain components of noninterest income are described below:

• Revenues from banking services for the first half of 2012 benefited from our ongoing fee income initiatives but were also impacted by the Durbin Amendment.

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

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

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

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

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Excluding the gain on the investment securities portfolio sale, noninterest income as a percentage of net revenue increased from 21.9% in first half of 2012 to 23.0% in the first half of 2012 reflecting the benefits of our acquisitions and our capital markets business.

Noninterest Expense

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

	Three months ended
	June 30,			March 31,			June 30,
	2012			2012			2011
Salaries and benefits	$	104,507		$	96,477		$	90,192
Occupancy and equipment		24,089			22,017			18,952
Technology and communications		24,434			19,713			13,929
Marketing and advertising		6,676			6,763			3,880
Professional services		9,263			8,895			9,138
Amortization of intangibles		9,839			6,466			6,573
FDIC premiums		10,552			6,133			6,267
Merger and acquisition integration expenses		131,460			12,970			76,828
Restructuring charges		3,750			2,703			11,656
Other		21,069			18,041			17,726
Total noninterest expenses		345,639			200,178			255,141
Less nonoperating expenses:
Merger and acquisition integration expenses		(131,460	)		(12,970	)		(76,828	)
Restructuring charges		(3,750	)		(2,703	)		(11,656	)
Total operating noninterest expenses(1)	$	210,429		$	184,505		$	166,657
Efficiency ratio(2)		97.5	%		64.1	%		87.6	%
Operating efficiency ratio(1)		62.1	%		59.1	%		57.2	%

⁽¹⁾  We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income less the gain on investment securities portfolio repositioning.

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

Comparison to Prior Quarter

Noninterest expenses increased $145 million during the quarter ended June 30, 2012 from the quarter ended March 31, 2012 primarily due to merger and acquisition integration expenses incurred in the HSBC Branch Acquisition as well as the additional expenses resulting from operating these branches. Changes in certain other components of noninterest expense are described below:

• Salaries and benefits increased $8 million as the average number of full time equivalents increased from 4,753 at March 31, 2012 to 6,103 at June 30, 2012 as a result of the HSBC Branch Acquisition. Partially offsetting the impact of the HSBC Branch Acquisition was the benefit of our first quarter 2012 $111 million tax deductible contribution to our defined benefit plans, which reduced our pension expense by almost $2 million for the quarter ended June 30, 2012. In addition, we experienced higher payroll taxes in the first quarter due to the seasonality of certain taxes.

• FDIC premiums increased not only due to the assets acquired and goodwill recorded in the HSBC Branch Acquisition, but also due to the organic growth in our balance sheet and changes in certain components of our assessment rate.

Comparison to Prior Year Quarter

Noninterest expenses increased $90 million for the quarter ended June 30, 2012 from the quarter ended June 30, 2011 primarily due to costs incurred in the HSBC Branch Acquisition as well as additional expense resulting from operating these branches. However, other factors contributing to changes in certain components of noninterest expense are described below:

• Salaries and benefits increased $14 million, reflective of the increase in our full time equivalent employees, resulting from acquisitions and the growth of our infrastructure.

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

• While FDIC expense increased more than $4 million during the quarter ended June 30, 2012 from the same quarter of 2011, we were able to somewhat mitigate the impact of the NewAlliance and HSBC acquired assets with our capital management strategies. The Company made capital contributions to the Bank of $645 million and $150 million in the fourth quarter of 2011 and the first quarter of 2012, respectively.

• Restructuring charges decreased $8 million.

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Merger and acquisition integration expenses of $131 million and $13 million for the three months ended June 30, 2012 and March 31, 2012, respectively, were attributable to the pending HSBC Branch Acquisition. The $77 million of merger and acquisition integration expenses for the three months ended June 30, 2011 were primarily attributable to our merger with NewAlliance.

Comparison to Prior Year to Date

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

	Six months ended June 30,
	2012			2011
Salaries and benefits	$	200,984		$	163,968
Occupancy and equipment		46,106			35,149
Technology and communications		44,147			26,800
Marketing and advertising		13,439			6,572
Professional services		18,158			15,177
Amortization of intangibles		16,305			12,062
FDIC premiums		16,685			12,462
Merger and acquisition integration expenses		144,430			83,004
Restructuring charges		6,453			12,712
Other		39,110			32,385
Total noninterest expense		545,817			400,291
Less nonoperating expenses:
Merger and acquisition integration expenses		(144,430	)		(83,004	)
Restructuring charges		(6,453	)		(12,712	)
Total operating noninterest expense(1)	$	394,934		$	304,575
Efficiency ratio(2)		81.8	%		77.5	%
Operating efficiency ratio(1)		60.7	%		59.0	%

⁽¹⁾  We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry. The operating efficiency ratio is computed by dividing operating noninterest expense by the sum of net interest income and noninterest income less the gain on investment securities portfolio repositioning.

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

Noninterest expense increased $146 million, or 36%, for the six months ended June 30, 2012, compared to the same period in 2011, primarily due to the merger and acquisition integration expenses incurred in the HSBC Branch Acquisition, the additional expenses resulting from operating the HSBC branches, and the growth of our infrastructure. FDIC premiums increased not only due to the growth of our balance sheet but also due to growth in certain components of our assessment rate. However, we were able to partially mitigate the impact of these factors through our capital management strategies. The Company made capital contributions to the Bank of $645 million and $150 million in the fourth quarter of 2011 and the first quarter of 2012, respectively.

Income Taxes

Our effective tax rate of 42.9% for the three months ended June 30, 2012 increased from 35.0% for the three months ended March 31, 2012 and increased from 28.3% for the three months ended June 30, 2011. The increase from the three months ended March 31, 2012 and June 30, 2011 is primarily due to lower pre-tax income as a result of higher expense levels attributable to the HSBC Branch Acquisition resulting in a pre-tax loss for the second quarter of 2012. Additionally, there was a reversal of $1.1 million in uncertain tax positions in the second quarter of 2011.

Our effective tax rate for the six months ended June 30, 2012 was 32.9% and 31.8% for the six months ended June 30, 2011. The increase in the effective tax rate is primarily due to the reversal of $1.1 million in uncertain tax positions in the second quarter of 2011.

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ANALYSIS OF FINANCIAL CONDITION AT JUNE 30, 2012

Overview

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

			December 31, 2011
	June 30, 2012 Consolidated		Consolidated		Balances acquired  from HSBC		Proforma HSBC		Comparison to Proforma  HSBC
Investment securities	$	11,730,698		12,376,085		—		12,376,085		(645,387	)
Loans and leases:
Commercial:
Real estate		6,710,009		6,244,381		141,919		6,386,300		323,709
Business		4,514,537		3,771,649		173,779		3,945,428		569,109
Total commercial loans		11,224,546		10,016,030		315,698		10,331,728		892,818
Residential real estate		4,037,045		4,012,267		324,253		4,336,520		(299,475	)
Home equity		2,683,236		2,165,988		563,599		2,729,587		(46,351	)
Other consumer		818,689		278,298		389,029		667,327		151,362
Total loans and leases		18,763,516		16,472,583		1,592,579		18,065,162		698,354
Deposits:
Savings accounts	$	4,103,773		2,621,016		1,644,020		4,265,036		(161,263	)
Interest-bearing checking		3,887,568		2,259,576		1,449,352		3,708,928		178,640
Money market deposits		10,919,766		7,220,902		4,478,240		11,699,142		(779,376	)
Noninterest-bearing deposits		4,774,764		3,335,356		1,469,309		4,804,665		(29,901	)
Certificates of deposit		4,211,116		3,968,265		813,668		4,781,933		(570,817	)
Total deposits		27,896,987		19,405,115		9,854,589		29,259,704		(1,362,717	)
Total borrowings		1,690,307		8,127,121		—		8,127,121		(6,436,814	)

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

• Our available for sale investment securities portfolio decreased $645 million over the balance at December 31, 2011 due to the securities portfolio repositioning in the second quarter of 2012, the proceeds of which were used to pay down short-term borrowings. This was partially offset by our strategy to purchase securities in anticipation of receiving cash proceeds from the pending HSBC Branch Acquisition.

• Our ending loan balances increased from $18.1 billion on a proforma basis to $18.8 billion at June 30, 2012. The increase was driven by continued organic growth in our commercial loan portfolio of $893 million, or 17% annualized.

• Core deposits decreased by $792 million or 7% on an annualized basis, due to our interest rate and treasury management strategies as we continue to move down deposit pricing. We continue to focus on core customer acquisition reflected in the 14% increase in the number of new personal checking account openings from December 31, 2011.

• Total borrowings decreased by $6.4 billion, as cash proceeds received from the HSBC Branch Acquisition and securities portfolio repositioning were used to pay down borrowings.

Lending Activities

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

Our total loans and leases outstanding increased $2.3 billion from December 31, 2011 to June 30, 2012, which included $1.6 billion in loans from the HSBC Branch Acquisition. Our commercial loan portfolio increased $1.2 billion, or 24% annualized, resulting from our continued strategic focus on the portfolio. Our period over period results display the strong organic growth across our footprint in our commercial lending activities. Our Upstate New York market continues to perform well as the commercial loan portfolio increased $649 million, or 26% annualized. Excluding the HSBC Branch Acquisition, the commercial loan portfolio increased $334 million, or 13% annualized over the fourth quarter of 2011. In addition to the continued growth trends in Upstate New York, our Eastern and Western Pennsylvania markets have exhibited strong growth with an increase in their commercial loan portfolios of $235 million, or 32% annualized and $94 million, or 15% annualized, respectively over the fourth quarter of 2011. Our relatively new market in Connecticut and Western Massachusetts gained traction during the first half of 2012 with an increase of $104 million, or 11% annualized, over the fourth quarter of 2011. Commercial loans as a percentage of our total loans of approximately 60% remained in line with the loan type composition at December 31, 2011.

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Period over period, we experienced a net increase of $25 million in our residential real estate portfolio. The net increase reflects the addition of $324 million of loans acquired from HSBC, offset by net run-off in the portfolio as ongoing consumer preference is for long-term fixed rate products, which we generally sell and do not hold in our portfolio. Our home equity and other consumer loan portfolios increased dramatically as a result of the HSBC Branch Acquisition. Other consumer loans also increased due to significant growth in our indirect auto portfolio.

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

	June 30,						December 31,
	2012						2011
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	6,091,836			32.4	%	$	5,878,618			35.7	%
Construction		618,173			3.3			365,763			2.2
Business		4,514,537			24.1			3,771,649			22.9
Total commercial		11,224,546			59.8			10,016,030			60.8
Consumer:
Residential real estate		4,037,045			21.5			4,012,267			24.4
Home equity		2,683,236			14.3			2,165,988			13.1
Other consumer		818,689			4.4			278,298			1.7
Total loans and leases		18,763,516			100.0	%		16,472,583			100.0	%
Allowance for loan losses		(138,516	)					(120,100	)
Total loans and leases, net	$	18,625,000					$	16,352,483

Included in the table above are acquired loans with a carrying value of $7.4 billion and $6.6 billion at June 30, 2012 and December 31, 2011, respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at fair value with no carryover of any related allowance for loan losses. To the extent that the credit quality of loans deteriorates subsequent to acquisition, an allowance for loan loss is established. Our allowance for loan loss on our acquired loans recognized subsequent to acquisition was $3.3 million and $1.6 million at June 30, 2012 and December 31, 2011, respectively.

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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 thousands):

	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Capital markets(1)		Total loans and leases
June 30, 2012:
Commercial:
Real estate	$	3,499,729	$	615,926	$	1,169,115	$	1,425,239	$	—	$	6,710,009
Business		2,180,397		706,306		547,585		573,046		507,203		4,514,537
Total commercial		5,680,126		1,322,232		1,716,700		1,998,285		507,203		11,224,546
Consumer:
Residential real estate		1,424,305		63,784		277,734		2,271,222		—		4,037,045
Home equity		1,343,056		186,959		589,949		563,272		—		2,683,236
Other consumer		668,063		56,594		42,627		51,405		—		818,689
Total loans and leases	$	9,115,550	$	1,629,569	$	2,627,010	$	4,884,184	$	507,203	$	18,763,516
December 31, 2011:
Commercial:
Real estate	$	3,204,416	$	544,326	$	1,066,456	$	1,429,183	$	—	$	6,244,381
Business		1,826,347		684,291		414,829		464,607		381,575		3,771,649
Total commercial		5,030,763		1,228,617		1,481,285		1,893,790		381,575		10,016,030
Consumer:
Residential real estate		1,225,529		55,410		292,573		2,438,755		—		4,012,267
Home equity		807,898		162,925		608,670		586,495		—		2,165,988
Other consumer		164,602		56,015		45,627		12,054		—		278,298
Total loans and leases	$	7,228,792	$	1,502,967	$	2,428,155	$	4,931,094	$	381,575	$	16,472,583

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

We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on our sound credit fundamentals. Our enhanced specialty offerings in equipment financing, healthcare, and syndications continue to provide additional opportunities to enhance our relationships with our commercial customer base. Overall, our commercial pipelines at the end of the second quarter of 2012 continue to be robust, particularly in our newer markets.

The table below presents a breakout of the unpaid principal balance of our commercial real estate and commercial business loan portfolios by loan size as of the periods indicated (in millions):

	June 30, 2012				December 31, 2011
	Amount		Count		Amount		Count
Commercial real estate loans by balance size(1)
Greater than or equal to $20 million	$	347		13	$	248		9
$10 million to $20 million		993		72		933		67
$5 million to $10 million		1,181		168		1,025		147
$1 million to $5 million		2,432		1,135		2,364		1,105
Less than $1 million(2)		1,757		7,707		1,674		7,137
Total commercial real estate loans	$	6,710		9,095	$	6,244		8,465
Commercial business loans by size(1)
Greater than or equal to $20 million	$	266		10	$	224		8
$10 million to $20 million		799		63		462		34
$5 million to $10 million		756		110		743		105
$1 million to $5 million		1,330		599		1,151		518
Less than $1 million(2)		1,364		23,032		1,192		19,969
Total commercial business loans	$	4,515		23,814	$	3,772		20,634

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

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

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In line with our commercial real estate portfolio composition at December 31, 2011, 69% of our commercial real estate loans are non owner occupied at June 30, 2012. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type at the date indicated (in thousands):

	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Other(1)		Total
June 30, 2012
Non owner occupied commercial real estate loans:
Construction, acqusition and development	$	389,007	$	31,273	$	89,786	$	77,787	$	68,500	$	656,353
Multifamily and apartments		932,779		54,400		141,010		214,645		46,498		1,389,332
Office and professional space		483,769		63,315		80,643		281,917		58,831		968,475
Retail		335,849		39,603		114,294		210,257		96,910		796,913
Warehouse and industrial		137,738		21,423		45,298		90,507		20,132		315,098
Other		275,330		22,030		135,889		62,230		27,614		523,093
Total non owner occupied commercial real estate loans	$	2,554,472	$	232,044	$	606,920	$	937,343	$	318,485	$	4,649,264
December 31, 2011
Non owner occupied commercial real estate loans:
Construction, acqusition and development	$	341,176	$	36,326	$	59,691	$	61,674	$	61,595	$	560,462
Multifamily and apartments		868,076		64,095		160,276		177,320		40,800		1,310,567
Office and professional space		487,517		48,562		84,320		320,638		78,084		1,019,121
Retail		325,909		41,613		120,088		221,610		86,080		795,300
Warehouse and industrial		138,940		40,413		43,249		110,067		19,955		352,624
Other		211,734		18,035		69,490		69,250		23,595		392,104
Total non owner occupied commercial real estate loans	$	2,373,352	$	249,044	$	537,114	$	960,559	$	310,109	$	4,430,178

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

Investment Securities Portfolio

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

Interest rates, after ending the first quarter of 2012 at relative highs since October 2011, steadily decreased during the second quarter of 2012 reaching the then historical lows in June 2012. In June 2012, the Federal Reserve reiterated its view that it intended to keep interest rates low through at least the end of 2014, solidifying its support of low interest rates. At the same time, the yield curve remained flat driven by concerns in the European Union and the domestic U.S. economy which resulted in lower 10-year Treasury yields and lower mortgage rates. Our June 30, 2012 expectations of future prepayment speeds in our collateralized mortgage obligation and mortgage-backed securities portfolio reflected significant changes in market information during the second quarter that the lower interest rate environment and the pace of the mortgage prepayment cycle will likely persist for a longer period, and therefore impact premium amortization with our collateralized mortgage obligation and mortage-backed securities portfolio in the future.

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

The sale of the securities will serve to reduce future volatility in our net interest margin by reducing the impact of prepayments on the mortgage-backed securities portfolio yield. In addition, the sale of these securities with the greatest levels of prepayment risk coupled with the pay down of short-term borrowings improves our asset sensitivity, allowing us to be better positioned to benefit when interest rates rise while at the same time managing the near term volatility created by the current sustained low interest rate environment. The lower remaining premiums, which decreased to $130 million, or 2.3% of the mortgage-backed securities portfolio at June 30, 2012, from $232 million, or 2.8% of the portfolio at December 31, 2011, and collateral characteristics of our residual mortgage-backed securities portfolio reduce yield volatility. In addition, the remaining investment securities portfolio remains highly liquid, highly rated and well diversified.

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

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

The sale of the residential mortgage-backed investment securities reduced our holdings in such mortgage-backed securities to 53% at June 30, 2012 from 73% at December 31, 2011. At each of June 30, 2012 and December 31, 2011, 98% of our residential mortgage-backed securities in our available for sale portfolio were issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”). GNMA, FNMA, and FHLMC guarantee the contractual cash flows of these investments. FNMA and FHLMC are government sponsored enterprises that are currently under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government.

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

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

	Fair		% of total
	value		portfolio
June 30, 2012:
States and political subdivisions	$	660,180		5.8	%
U.S. Treasury		20,744		0.2
U.S. government agencies and enterprises		337,519		2.9
Corporate debt and trust preferred securities		651,700		5.6
Residential mortgage-backed securities		6,057,495		52.8
Commercial mortgage-backed securities		1,935,219		16.9
Collateralized loan obligations		988,184		8.6
Asset-backed securities		788,338		6.9
Other		31,158		0.3
Total investment securities	$	11,470,537		100	%
December 31, 2011
States and political subdivisions	$	703,178		5.8	%
U.S. Treasury		20,643		0.2
U.S. government agencies and enterprises		395,573		3.3
Corporate debt and trust preferred securities		361,042		3.0
Residential mortgage-backed securities		8,808,292		72.8
Commercial mortgage-backed securities		1,529,310		12.6
Collateralized loan obligations		157,999		1.3
Asset-backed securities		93,813		0.8
Other		31,169		0.2
Total investment securities	$	12,101,019		100.0	%

The duration of our investment securities portfolio decreased to 3.1 years at June 30, 2012 from 4.1 years at December 31, 2011. Our securities portfolio sale decreased the duration by almost three months, our purchases of securities during the first half of 2012 decreased the duration by five months, and changes in rates decreased the duration by four months.

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At June 30, 2012, the pre-tax net unrealized gains on our available for sale investment securities increased to $216 million from $170 million at December 31, 2011. The unrealized gain represents the difference between the fair value and the amortized cost of our securities. Generally, the value of our investment securities fluctuates in response to changes in market interest rates, changes in credit spreads, or levels of liquidity in the market.

Our investment in FHLB stock consists of $51 million, $24 million, and $121 million of FHLB of New York common stock, FHLB of Pittsburgh common stock, and FHLB of Boston common stock, respectively, at June 30, 2012 and of $101 million, $27 million, and $121 million of FHLB of New York common stock, FHLB of Pittsburgh common stock, and FHLB of Boston, respectively, at December 31, 2011. Our investment in FRB stock amounted to $134 million and $109 million at June 30, 2012 and December 31, 2011, respectively.

Deposits

Excluding the $9.9 billion in deposits (at fair value) acquired in the HSBC Branch Acquisition, our total deposits decreased $1.4 billion from December 31, 2011. At June 30, 2012, core deposits increased to 85% of total deposits from 80% at December 31, 2011, reflecting the composition of the deposits we acquired from HSBC. The decrease in balances was primarily driven by our interest rate and treasury management strategies as we continue to move down deposit pricing and reduce excess liquidity. We continue to focus on core deposit relationships which lead to greater cross-selling opportunities. During the second quarter of 2012, the number of new checking account openings increased 15% from the first quarter of 2012 and was up 38% over the prior year. Growth was strong in all markets but was most notable in markets impacted by the HSBC Branch Acquisition. We opened more new checking accounts in the acquired branches during the second quarter of 2012 than in our legacy branches. As of June 30, 2012 we have retained approximately 97% of the retail deposits acquired from HSBC.

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

	June 30, 2012					December 31, 2011
	Amount		Percent			Amount		Percent			Deposits acquired(1)		Increase (decrease) excluding HSBC acquired deposits
Core deposits:
Savings	$	4,103,773		14.7	%	$	2,621,016		13.5	%	$	1,644,020	$	(161,263	)
Interest-bearing checking		3,887,568		13.9			2,259,576		11.6			1,449,352		178,640
Money market deposits		10,919,766		39.2			7,220,902		37.3			4,478,240		(779,376	)
Noninterest-bearing		4,774,764		17.1			3,335,356		17.2			1,469,309		(29,901	)
Total core deposits		23,685,871		84.9			15,436,850		79.6			9,040,921		(791,900	)
Certificates		4,211,116		15.1			3,968,265		20.4			813,668		(570,817	)
Total deposits	$	27,896,987		100.0	%	$	19,405,115		100.0	%	$	9,854,589	$	(1,362,717	)

⁽²⁾  Excludes $0.5 billion municipal money market deposits that were subject to a price concession.

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

	Upstate New York		Western Pennsylvania		Eastern Pennsylvania		Connecticut and Western Massachusetts		Total deposits
June 30, 2012
Core deposits:
Savings	$	2,466,303	$	166,135	$	240,706	$	1,230,629	$	4,103,773
Interest-bearing checking		2,388,999		535,107		459,414		504,048		3,887,568
Money market deposits		7,229,537		1,220,857		1,081,467		1,387,905		10,919,766
Noninterest-bearing		2,851,027		699,961		524,027		699,749		4,774,764
Total core deposits		14,935,866		2,622,060		2,305,614		3,822,331		23,685,871
Certificates		1,932,513		628,428		551,400		1,098,775		4,211,116
Total deposits	$	16,868,379	$	3,250,488	$	2,857,014	$	4,921,106	$	27,896,987
December 31, 2011
Core deposits:
Savings	$	862,354	$	136,984	$	238,766	$	1,382,912	$	2,621,016
Interest-bearing checking		743,536		486,150		565,212		464,678		2,259,576
Money market deposits		3,372,154		1,295,675		1,158,837		1,394,236		7,220,902
Noninterest-bearing		1,417,374		699,234		523,656		695,092		3,335,356
Total core deposits		6,395,418		2,618,043		2,486,471		3,936,918		15,436,850
Certificates		1,105,717		839,983		709,810		1,312,755		3,968,265
Total deposits	$	7,501,135	$	3,458,026	$	3,196,281	$	5,249,673	$	19,405,115

Borrowings

Borrowings decreased to $1.7 billion at June 30, 2012 from $8.1 billion at December 31, 2011. Short-term borrowings decreased by $1.3 billion from December 31, 2011 to $958 million, and long-term borrowings decreased by $5.2 billion during that same period to $732 million. As noted above under Investment Securities, during the quarter ended June 30, 2012, we sold certain mortgage-backed securities and used the $3.1 billion in proceeds to repay short-term borrowings. This action improves our funding profile and our capital ratios. In addition, upon completion of the HSBC Branch Acquisition, we paid down wholesale borrowings, including those used to purchase investment securities in advance of this transaction.

Capital

During the first six months of 2012, our stockholders’ equity remained unchanged at $4.8 billion at June 30, 2012, compared to December 31, 2011. Increases resulting from our net income of $49 million, unrealized gains, net of taxes, on our investment securities available for sale of $28 million, and $5 million from the remeasurement, net of tax, of our pension plans due to a $111 million tax deductible contribution to such plans, were partially offset by $56 million, or $0.16 per share, in common stock dividends and $13 million in preferred stock dividends.

At June 30, 2012, we held over 13 million shares of our common stock as treasury shares. While we did not repurchase any shares of our common stock during the first six months of 2012, we currently have authorization from our Board of Directors to repurchase up to an additional 12 million shares of our common stock as part of our capital management initiatives. We issued 0.8 million shares from treasury stock in connection with grants of restricted stock awards during the six months June 30, 2012. Although treasury stock purchases are an important component of our capital management strategy, the extent to which we repurchase shares in the future will depend on a number of factors including the market price of our stock and alternative uses for our capital.

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

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The actual capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. at June 30, 2012 are presented in the following table (amounts in thousands):

	Actual					Minimum amount to be well-capitalized
	Amount		Ratio			Amount		Ratio
First Niagara Financial Group, Inc.:
Leverage ratio	$	2,128,702		6.32	%	$	1,684,100		5.00	%
Tier 1 risk-based capital		2,128,702		9.40			1,358,746		6.00
Total risk-based capital		2,575,999		11.37			2,265,610		10.00
First Niagara Bank, N.A.:
Leverage ratio	$	2,178,868		6.48	%	$	1,681,225		5.00	%
Tier 1 risk-based capital		2,178,868		9.63			1,357,550		6.00
Total risk-based capital		2,393,445		10.57			2,264,376		10.00

As of June 30, 2012, we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.). At June 30, 2012, our capital ratios reflect the impact of the HSBC Branch Acquisition offset by the benefits of our investment securities portfolio repositioning whereby we sold mortgage-backed securities with a carrying value of $3.1 billion and used the proceeds to pay down short-term borrowings. The repositioning will have a greater beneficial impact on our leverage ratio in the third quarter of 2012.

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

RISK MANAGEMENT

Credit Risk

Allowance for Loan Losses and Nonperforming Assets

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

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

Allowance for Loan Losses

The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. We place 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.

Our evaluation of our allowance for loan losses is based on a continuous review of our loan portfolio. The methodology that we use for determining the amount of the allowance for loan losses consists of several elements. We use an internal loan grading system with nine categories of loan grades used in evaluating our business and commercial real estate loans. In our loan grading system, pass loans are graded 1 through 5, special mention loans are graded 6, substandard loans are graded 7, doubtful loans are graded 8 and loss loans (which are fully charged off) are graded 9. Our definition of special mention, substandard, doubtful and loss are consistent with regulatory definitions.

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

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

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Substandard loans, including all impaired business and commercial real estate loans greater than $200 thousand, are reviewed on a quarterly basis by either management’s Classified Loan Review Committee (for such loans greater than $2 million) or by a Senior Credit Manager (for such loans between $200 thousand and $2 million). Such review considers, as applicable, current payment status, payment history, charge-off amounts, collateral valuation information (including appraisal dates), and commentary on collateral valuations, guarantor information, interim financial data, cash flow historical data and projections, rent roll data, and account history. Similar information is also reviewed for all special mention loans between $300 thousand and $2 million by a Senior Credit Manager and by the Classified Loan Review Committee for such loans greater than $2 million. Loans below these thresholds are reviewed by a loan officer on a quarterly basis ensuring that loan gradings are appropriate.

Updated valuations are obtained periodically in accordance with Interagency Appraisal and Evaluation Guidelines and internal policy. Appraisals or evaluations for assets securing substandard rated loans are completed within 90 days of the downgrade. On an ongoing basis, real estate collateral supporting substandard loans with an outstanding balance greater than $500 thousand is required to have an appraisal or evaluation performed at least every 18 months for general commercial properties and at least every 12 months for land and acquisition and development loans. Real estate collateral supporting substandard loans with an outstanding balance equal to or less than $500 thousand is required to have an appraisal or evaluation performed at least every 24 months for general commercial properties and at least every 18 months for land and acquisition and development loans. However, an appraisal or evaluation may be obtained more frequently than 18 to 24 months when volatile or unusual market conditions exist that could affect the ultimate realization of the value of the real estate collateral. Non-real estate collateral is reappraised on an as-needed basis, as determined by the loan officer, our Classified Loan Review Committee, or by credit risk management based upon the facts and circumstances of the individual relationship.

Among other factors, our quarterly reviews consist of an assessment of the fair value of collateral for all loans reviewed, including collateral dependent impaired loans. During this review process, an internal estimate of collateral value, as of each quarterly review date, is determined utilizing current information such as comparables from more current appraisals in our possession for similar collateral in our portfolio, recent sale information, current rent rolls, operating statements and cash flow information for the specific collateral. Further, we have an Appraisal Institute designated MAI appraiser on staff available for consultation during our quarterly estimation of collateral fair value. This current information is compared to the assumptions made in the most recent appraisal as well as in previous quarters. Quarterly adjustments to the estimated fair value of the collateral are made as determined necessary in the judgment of our experienced senior credit officers to reflect current market conditions and current operating results for the specific collateral.

Adjustments are made each quarter to the related allowance for loan losses for collateral dependent impaired loans to reflect the change, if any, in the estimated fair value of the collateral less estimated costs to sell as compared to the previous quarter. The determination of the appropriateness of obtaining new appraisals is also specifically addressed in each quarterly review. New appraisals will be obtained prior to the above noted required time frames if it is determined appropriate during these quarterly reviews. Further, our in-house MAI appraiser is available for consultation regarding the need for new valuations.

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

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

	June 30, 2012						December 31, 2011
	Amount of allowance for loan losses			Percent of loans to total loans			Amount of allowance for loan losses			Percent of loans to total loans
Commercial:
Real estate and construction	$	44,927			35.7	%	$	50,007			37.9	%
Business		75,708			24.1			57,348			22.9
Total commercial		120,635			59.8			107,355			60.8
Consumer:
Residential real estate		5,076			21.5			4,101			24.4
Home equity		4,971			14.3			4,374			13.1
Other consumer		7,834			4.4			4,270			1.7
Total	$	138,516			100.0	%	$	120,100			100.0	%
Allowance for loan losses to total loans		0.74	%					0.73	%

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

	Commercial						Consumer
	Business			Real estate			Residential			Home equity				Other consumer			Total
Six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	57,348		$	50,007		$	4,101		$	4,374			$	2,362		$	118,192
Provision for loan losses		33,487			(1,485	)		2,302			3,375				3,223			40,902
Charge-offs		(16,631	)		(4,010	)		(1,555	)		(2,963	)			(1,856	)		(27,015	)
Recoveries		1,530			433			280			266				803			3,312
Allowance related to loans sold		(26	)		(18	)		(52	)		(81	)			(18	)		(195	)
Balance at end of period	$	75,708		$	44,927		$	5,076		$	4,971			$	4,514		$	135,196
Six months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	42,034		$	46,967		$	1,754		$	1,859			$	2,740		$	95,354
Provision for loan losses		21,390			1,254			1,728			2,412				(327	)		26,457
Charge-offs		(9,048	)		(6,117	)		(1,079	)		(1,671	)			(1,322	)		(19,237	)
Recoveries		2,026			1,398			240			61				729			4,454
Balance at end of period	$	56,402		$	43,502		$	2,643		$	2,661			$	1,820		$	107,028
Three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	71,653		$	41,619		$	4,697		$	4,504			$	2,672		$	125,145
Provision for loan losses		15,039			5,282			586			2,084				2,384			25,375
Charge-offs		(12,063	)		(2,229	)		(336	)		(1,675	)			(915	)		(17,218	)
Recoveries		1,105			273			181			139				391			2,089
Allowance related to loans sold		(26	)		(18	)		(52	)		(81	)			(18	)		(195	)
Balance at end of period	$	75,708		$	44,927		$	5,076		$	4,971			$	4,514		$	135,196
Three months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	48,690		$	44,255		$	2,476		$	2,998			$	1,707		$	100,126
Provision for loan losses		10,343			2,034			344			492				418			13,631
Charge-offs		(3,961	)		(3,493	)		(376	)		(867	)	��		(631	)		(9,328	)
Recoveries		1,330			706			199			38				326			2,599
Balance at end of period	$	56,402		$	43,502		$	2,643		$	2,661			$	1,820		$	107,028

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

	Commercial						Consumer
	Business			Real estate			Residential		Home equity		Other consumer			Total
Six months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	1,908		$	1,908
Provision for loan losses		—			4,801			—		—		2,000			6,801
Charge-offs		—			(4,999	)		—		—		(701	)		(5,700	)
Recoveries		—			198			—		—		113			311
Balance at end of period	$	—		$	—		$	—	$	—	$	3,320		$	3,320
Six months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses		346			536			—		—		—			882
Charge-offs		(346	)		(536	)		—		—		—			(882	)
Recoveries		—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—
Three months ended June 30, 2012
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	1,601		$	1,601
Provision for loan losses		—			428			—		—		2,000			2,428
Charge-offs		—			(626	)		—		—		(358	)		(984	)
Recoveries		—			198			—		—		77			275
Balance at end of period	$	—		$	—		$	—	$	—	$	3,320		$	3,320
Three months ended June 30, 2011
Allowance for loan losses:
Balance at beginning of period	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses		346			462			—		—		—			808
Charge-offs		(346	)		(462	)		—		—		—			(808	)
Recoveries		—			—			—		—		—			—
Balance at end of period	$	—		$	—		$	—	$	—	$	—		$	—

As of June 30, 2012, we had a liability for unfunded loan commitments of $11 million. For the six months ended June 30, 2012, we recognized a provision for credit loss related to our unfunded loan commitments of $0.4 million. We acquired an additional $3.0 billion in unfunded loan commitments as part of our HSBC Branch Acquisition, and consequently increased our liability by $4 million through a purchase accounting adjustment. Our total unfunded commitments amounted to $8.6 billion at June 30, 2012.

Our net charge-offs of $29 million in 2012 were $13 million higher than our net charge-offs of $16 million in 2011. The period over period increases were driven primarily by an $8 million charge-off of one large commercial loan based in Upstate New York and $4 million of charge-offs on two commercial loans acquired in the Harleysville acquisition. Total net charge-offs for the second quarter represented 0.36% of average total loans compared with 0.20% of average total loans in the second quarter of 2011. Excluding our acquired loans, our net charge-off ratio for originated loans was 0.55 % for the second quarter of 2012 compared to 0.32% for second quarter of 2011.

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

	Six months ended
	June 30, 2012					June 30, 2011
	Net		Percent of			Net		Percent of
	charge-offs		average loans			charge-offs		average loans
Commercial:
Real estate	$	8,378		0.26	%	$	4,793		0.19	%
Business		15,101		0.74			7,830		0.55
Total commercial		23,479		0.45			12,623		0.32
Consumer:
Residential real estate		1,275		0.06			839		0.06
Home equity		2,697		0.24			1,610		0.18
Other consumer		1,641		0.82			593		0.44
Total	$	29,092		0.34	%	$	15,665		0.24	%

Our nonaccruing loans were $129 million at June 30, 2012 compared to $133 million at March 31, 2012 and $90 million at December 31, 2011. The increase from December 31, 2011 was largely due to four large commercial business loans in our Upstate New York footprint. These relationships have been adequately reserved for at quarter end. Additionally, the Interagency Supervisory Guidance issued in the first quarter of 2012 related to junior lien home equity loans resulted in $7 million of additional nonaccrual loans. Also contributing to the increase is $19 million of acquired lines of credit which were unchanged from March 31, 2012. These increases were offset by the removal of $22 million due to charge-offs, $12 million that was returned to accrual status, and $11 million due to transfers to real estate owned or paydowns. Nonperforming loans comprised 0.69% of total loans at June 30, 2012 compared to 0.55% at December 31, 2011. Excluding our acquired loans, our nonaccruing loans were 0.96% of originated loans at June 30, 2012 compared to 0.91% of originated loans at December 31, 2011.

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

	June 30, 2012			December 31,
	Total (1)			2011
Nonaccruing loans:
Commercial:
Real estate	$	46,881		$	43,119
Business		35,690			20,173
Total commercial		82,571			63,292
Consumer:
Residential real estate		23,058			18,668
Home equity		22,161			6,790
Other consumer		1,282			1,048
Total nonaccruing loans		129,072			89,798
Real estate owned		10,632			4,482
Total nonperforming assets(2)	$	139,704		$	94,280
Loans 90 days past due and still accruing interest(3)	$	125,668		$	143,237
Total nonperforming assets as a percentage of total assets		0.40	%		0.29	%
Total nonaccruing loans as a percentage of total loans		0.69	%		0.55	%
Total nonaccruing originated loans as a percentage of total originated loans		0.96	%		0.91	%
Allowance for loan losses to nonaccruing loans		107.3	%		133.7	%

⁽¹⁾  Includes $19 million of nonperforming acquired lines of credit, primarily in home equity. The remaining credit discount, recorded at acquisition, remains adequate to cover losses on these balances.

⁽²⁾  Nonperforming assets do not include $42 million and $44 million of performing renegotiated loans that are accruing interest at June 30, 2012 and December 31, 2011, respectively.

⁽³⁾  All such loans represent acquired loans that were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans 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.

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The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. Early stage delinquencies of $33 million at June 30, 2012 in our originated loan portfolio remains in line with the fourth quarter of 2012 at $36 million of loans that are 30 to 89 days past due. Our acquired loans that were 30 to 89 days past due increased $7 million from $75 million as of December 31, 2011 to $82 million as of June 30, 2012, driven by the increase in our acquired loans from the HSBC Branch Acquisition.

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

	Percent of loans 30-59 days past due						Percent of loans 60-89 days past due						Percent of loans 90 or more days past due						Percent of loans past due
	June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011			June 30, 2012			December 31, 2011
Originated loans
Commercial:
Real estate		0.2	%		0.2	%		0.2	%		—	%		0.6	%		0.6	%		0.9	%		0.8	%
Business		0.1			0.2			—			—			0.6			0.4			0.7			0.5
Total commercial		0.1			0.2			0.1			—			0.6			0.5			0.8			0.7
Consumer:
Residential real estate		0.3			0.6			0.1			0.3			1.1			0.9			1.5			1.8
Home equity		0.2			0.2			0.2			0.2			0.5			0.6			0.9			1.0
Other consumer		0.3			0.9			0.1			0.4			0.2			0.5			0.6			1.8
Total consumer		0.3			0.5			0.1			0.3			0.8			0.8			1.2			1.5
Total		0.2			0.3			0.1			0.1			0.6			0.6			0.9			0.9
Acquired loans
Commercial:
Real estate		1.1			1.1			0.3			0.1			2.1			2.1			3.4			3.2
Business		0.5			0.6			0.2			0.1			1.0			1.1			1.7			1.8
Total commercial		1.0			0.9			0.2			0.1			1.8			1.8			3.0			2.8
Consumer:
Residential real estate		0.7			0.8			0.4			0.4			2.7			2.8			3.8			4.0
Home equity		0.6			0.7			0.2			0.4			1.1			1.8			2.0			2.9
Other consumer		1.2			1.6			0.3			1.0			0.3			2.0			1.9			4.7
Total consumer		0.7			0.8			0.3			0.4			1.9			2.5			3.0			3.7
Total		0.8	%		0.9	%		0.3	%		0.3	%		1.9	%		2.2	%		3.0	%		3.3	%

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Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. Overall levels of classified and criticized loans including our pass watch category increased slightly over the prior quarter. The following table presents a breakout of our commercial loans by loan grade at the dates indicated:

	Percent of Total
	June 30			December 31,
	2012			2011
Originated loans:
Pass		91.5	%		90.4	%
Pass watch(1)		2.4			1.0
Total pass		93.9	%		91.4	%
Criticized:(2)
Accrual		5.1	%		7.7
Nonaccrual		1.0			0.9
Total criticized		6.1			8.6
Total		100.0	%		100.0	%
Acquired loans:
Pass		82.2	%		85.5	%
Pass watch(1)		4.5			0.3
Total pass		86.7	%		85.8	%
Criticized:(2)
Accrual		13.2	%		14.2	%
Nonaccrual		0.1			—
Total criticized		13.3			14.2
Total		100.0	%		100.0	%

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

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

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

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

	Percent of Total
	June 30, 2012			December 31, 2011
Originated loans by refreshed FICO score:
Over 700		77.0	%		76.5	%
660-700		11.5			11.0
620-660		5.0			4.9
580-620		2.3			2.4
Less than 580		3.2			3.5
No score(1)		1.0			1.7
Total		100.0	%		100.0	%
Acquired loans by refreshed FICO score:
Over 700		68.9	%		70.4	%
660-700		10.1			8.1
620-660		5.4			4.4
580-620		3.2			2.6
Less than 580		4.8			4.6
No score(1)		7.6			9.9
Total		100.0	%		100.0	%

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

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

As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark that represented expected future losses in our acquired loan portfolio. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, was $228 million and $205 million as of June 30, 2012 and December 31, 2011, respectively.

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

	HSBC			New Alliance			Harleysville			National City			Total
June 30, 2012:
Provision for credit losses	$	100		$	272		$	816		$	1,240		$	2,428
Net charge-offs	$	—		$	72		$	637		$	—		$	709
Net charge-offs to average loans		—			0.01	%		0.17	%		—			0.04	%
Nonperforming loans	$	332		$	4,785		$	11,212		$	3,045		$	19,374
Total loans (1)		1,576,422			4,054,481			1,522,665			446,645			7,600,213
Allowance for acquired loan losses		100			200			1,780			1,240			3,320
Credit related discount(2)	$	45,977		$	125,241		$	42,861		$	14,776		$	228,855
Credit related discount as percentage of loans		2.92	%		3.09	%		2.81	%		3.31	%		3.01	%
Pass watch (3)	$	56,651		$	60,351		$	19,487		$	2,089		$	138,578
Criticized loans (4)		42,415			209,387			189,133			43,024			483,959
Classified loans (5)		22,954			145,292			145,342			21,181			334,769
Greater than 90 days past due and accruing (6)		21			72,221			50,659			2,767			125,668
December 31, 2011:
Provision for credit losses	$	—		$	—		$	2,347		$	—		$	2,347
Net charge-offs	$	—		$	—		$	439		$	—		$	439
Net charge-offs to average loans		—			—			0.10	%		—			0.03	%
Nonperforming loans	$	—		$	—		$	—		$	—		$	—
Total loans (1)		—			4,579,585			1,712,147			509,957			6,801,689
Allowance for acquired loan losses		—			—			1,908			—			1,908
Credit related discount(2)	$	—		$	142,601		$	44,829		$	17,681		$	205,111
Credit related discount as percentage of loans		—			3.11	%		2.62	%		3.47	%		3.02	%
Pass watch (3)	$	—		$	—		$	9,736		$	—		$	9,736
Criticized loans (4)		—			251,647			222,978			51,050			525,675
Classified loans (5)		—			184,674			163,604			28,666			376,944
Greater than 90 days past due and accruing		—			77,814			57,582			7,841			143,237

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

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

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

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

⁽⁵⁾ Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2011.

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

	June 30, 2012			December 31, 2011
Provision for credit losses	$	25,375		$	10,839
Net charge-offs	$	15,129		$	5,396
Net charge-offs to average loans		0.55	%		0.22	%
Nonperforming loans	$	109,699		$	89,798
Nonperforming loans to total loans		0.96	%		0.91	%
Total loans	$	11,392,158		$	9,876,005
Allowance for originated loan losses	$	135,196		$	118,192
Allowance for originated loan losses to total originated loans		1.19	%		1.20	%
Pass watch(1)	$	194,903		$	71,559
Criticized loans(2)		546,512			618,547
Classified loans(3)		397,993			371,431
Greater than 90 days past due and accruing		—			—

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

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

⁽³⁾ Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2011.

Our total allowance for loan losses related to both our originated and acquired loans increased $18 million from December 31, 2011 to $138 million at June 30, 2012 as our total provision for credit losses of $48 million exceeded our total net charge-offs of $29 million. The ratio of our total allowance for loan losses to total loans of 0.74% at June 30, 2012 compared to 0.73% as of December 31, 2011. Excluding acquired loans, the ratio of our allowance for originated loan losses to total loans was 1.19% of originated loans at June 30, 2012 and remained consistent with the measure at December 31, 2011.

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

As part of our credit risk management, we enter into modification agreements with troubled borrowers in order to mitigate our credit losses. Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) decreased to $69 million at June 30, 2012 from $77 million at December 31, 2011. The modifications made to these restructured loans typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, or a rate reduction. We generally do not forgive principal when restructuring loans. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. Our aggregate recorded investment in TDRs does not include modifications to acquired loans that are accounted for as part of a pool under ASC 310-30. We accrue interest on a TDR once the borrower has demonstrated the ability to perform in accordance with the restructured terms, either immediately before or after the restructuring, for six consecutive payments. TDRs accruing interest totaled $42 million and $44 million at June 30, 2012 and December 31, 2011, respectively.

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

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Residential Mortgage Banking

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

As is customary in the mortgage banking industry, we, or banks we have acquired, have made certain representations and warranties related to the sale of residential mortgage loans and to the performance of our obligations as servicer. The breach of any such representations or warranties could result in losses for us. Our maximum exposure to loss is equal to the outstanding principal balance of the sold loans, however, any loss would be reduced by any payments received on the loans or through the sale of collateral.

At June 30, 2012, our liability for estimated repurchase obligations on our serviced loan portfolio was $9 million compared to $8 million at December 31, 2011 and is included in other liabilities in our Consolidated Statements of Condition.

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

	June 30,			December 31,
	2012			2011
30 to 59 days past due		0.35	%		0.42	%
60 to 89 days past due		0.15			0.17
Greater than 90 days past due		0.72			0.81
Total past due loans		1.22	%		1.40	%

Investment Securities Credit Risk

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

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

	Amortized		Fair		Average credit rating of fair value amount
	cost		value		AA or better		A		BBB		BB or less		Not rated
June 30, 2012:
U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises debt securities, mortgage-backed securities, and collateralized mortgage obligations	$	6,141,435	$	6,339,448	$	6,330,752	$	—	$	—	$	—	$	8,696
Commercial mortgage-backed securities		1,860,537		1,935,219		977,828		745,316		212,075		—		—
Collateralized loan obligations		998,583		988,184		772,763		189,350		26,071		—		—
States and political subdivisions		638,121		660,180		478,663		130,121		29,466		588		21,342
Asset-backed securities		786,248		788,338		530,091		258,146		101		—		—
Corporate debt and trust preferred		654,253		651,700		—		232,375		135,538		282,787		1,000
Other		105,500		107,468		24,316		14,188		6,791		27,340		34,833
Total investment securities	$	11,184,677	$	11,470,537	$	9,114,413	$	1,569,496	$	410,042	$	310,715	$	65,871
December 31, 2011:
U.S. Treasury, U.S. government agencies, and U.S. government sponsored enterprises debt securities, mortgage-backed securities, and collateralized mortgage obligations	$	8,903,996	$	9,130,714	$	9,120,953	$	—	$	—	$	—	$	9,761
Commercial mortgage-backed securities		1,504,241		1,529,310		845,058		575,948		108,304		—		—
Collateralized loan obligations		158,091		157,999		118,584		33,495		5,920		—		—
States and political subdivisions		681,713		703,178		507,496		130,464		55,010		591		9,617
Asset-backed securities		96,451		93,813		71,157		22,547		109		—		—
Corporate debt and trust preferred		378,961		361,042		37,813		256,383		55,918		9,928		1,000
Other		124,178		124,963		44,276		6,945		9,227		29,352		35,163
Total investment securities	$	11,847,631	$	12,101,019	$	10,745,337	$	1,025,782	$	234,488	$	39,871	$	55,541

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

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We have assessed our securities that were in an unrealized loss position at June 30, 2012 and December 31, 2011 and determined that any decline in fair value below amortized cost was temporary. In making this determination we considered the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, projected collateral losses, projected cash flows and credit enhancement. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings. We do not intend to sell these securities in an unrealized loss position and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.

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

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

Liquidity Risk

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

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

• Support our operating activities,

• Meet increases in demand for loans and other assets,

• Provide for repayments of deposits and borrowings, and

• To fulfill contract obligations.

Factors or conditions that could affect our liquidity management objectives include profitability changes in the mix of assets and liabilities on our balance sheet; our investment, loan, and deposit balances; our reputation; and our credit rating. A significant change in our financial performance or credit rating could reduce the availability, or increase the cost, of funding from the national markets.

Consolidated liquidity

Sources of liquidity

We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest repayments on our investment and loan portfolios, short and long-term borrowings, as well as short-term federal funds, internally generated capital, and other credit facilities. The primary source of our non-deposit borrowings are FHLB advances, of which we had $362 million outstanding at June 30, 2012.

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

We have a total borrowing capacity of up to $6.6 billion from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $6.3 billion was available as of June 30, 2012.

Uses of liquidity

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

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In the ordinary course of business, we extend commitments to originate commercial and consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Our commitments generally have fixed expiration dates or other termination clauses and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. Our outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans increased to approximately $8.6 billion at June 30, 2012 from $4.9 billion at December 31, 2011, primarily due to lines of credit acquired in the HSBC Branch Acquisition.

Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Indicative of our strategic focus on commercial lending and relationship based home equity lending, at June 30, 2012 and December 31, 2011 our unused commercial lines of credit amounted to $3.2 billion and $2.8 billion, respectively, and our unused home equity and other consumer lines of credit increased to $4.3 billion at June 30, 2012 from $1.5 billion at the end of 2011, due primarily to consumer credit cards acquired in the HSBC Branch Acquisition. Our commercial business lines of credit generally possess an expiration period of less than one year and our home equity and other consumer lines of credit have an expiration period of up to ten years.

In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Our standby letters of credit, which generally have an expiration period of less than two years, amounted to $285 million and $278 million at June 30, 2012 and December 31, 2011, respectively. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements may be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in our issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.

Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional, 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell select loans with servicing released on a nonrecourse basis. Our commitments to sell residential mortgages amounted to $402 million and $275 million at June 30, 2012 and December 31, 2011, respectively.

Parent Company liquidity

The Company obtains its liquidity from multiple sources, including dividends from the Bank, principal repayments on investment securities, interest received from the Bank, a line of credit facility with a bank, and the issuance of debt and equity securities. The primary uses of the Company’s liquidity are dividends to stockholders, capital contributions to the Bank, debt service, operating expenses, repurchases of our common stock, and acquisitions. The Company’s most liquid assets are cash, interest-bearing demand accounts at correspondent banks, and federal funds sold, all of which totaled $446 million at June 30, 2012. As of June 30, 2012, the Company has in excess of ten quarters of cash liquidity without reliance on dividends from the Bank.

The Company’s ability to pay dividends to our stockholders is substantially dependent upon the Bank’s ability to pay dividends to the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. During the year ended December 31, 2011, the Bank paid dividends of $75 million to the Company. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, the Bank could pay additional dividends of approximately $387 million to the Company without obtaining regulatory approvals.

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Loan Maturity and Repricing Schedule

The following table sets forth certain information at June 30, 2012 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal (in thousands):

	Within one year		One through five years		After five years		Total
Commercial:
Real estate	$	2,640,866	$	2,724,550	$	726,420	$	6,091,836
Construction		495,462		55,942		66,769		618,173
Business		3,335,381		818,199		360,957		4,514,537
Total commercial		6,471,709		3,598,691		1,154,146		11,224,546
Residential real estate		1,414,079		2,029,337		593,629		4,037,045
Home equity		1,930,148		378,427		374,661		2,683,236
Other consumer		517,951		228,117		72,621		818,689
Total loans and leases	$	10,333,887	$	6,234,572	$	2,195,057	$	18,763,516

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

	Fixed		Adjustable		Total
Commercial:
Real estate	$	1,506,871	$	1,944,099	$	3,450,970
Construction		93,593		29,118		122,711
Business		979,284		199,872		1,179,156
Total commercial		2,579,748		2,173,089		4,752,837
Residential real estate		1,413,771		1,209,195		2,622,966
Home equity		753,088		—		753,088
Other consumer		300,738		—		300,738
Total loans and leases	$	5,047,345	$	3,382,284	$	8,429,629

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

Maturity	Commercial		Residential real estate		Home equity and consumer		Total
1 to 2 years	$	636,617	$	315,322	$	193,777	$	1,145,716
2 to 3 years		498,150		269,131		162,393		929,674
3 to 5 years		616,666		334,223		250,374		1,201,263
Total 1 to 5 Years		1,751,433		918,676		606,544		3,276,653
5 to 10 years		427,830		289,480		267,641		984,951
More than 10 years		400,485		205,615		179,641		785,741
Total	$	2,579,748	$	1,413,771	$	1,053,826	$	5,047,345

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

			Residential real estate
Maturity	Commercial				Total
1 to 2 years	$	392,849	$	513,085	$	905,934
2 to 3 years		447,115		295,417		742,532
3 to 5 years		1,007,294		302,159		1,309,453
Total 1 to 5 Years		1,847,258		1,110,661		2,957,919
5 to 10 years		316,854		98,534		415,388
More than 10 years		8,977		—		8,977
Total	$	2,173,089	$	1,209,195	$	3,382,284

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

Interest Rate and Market Risk

Our primary market risk is interest rate risk, which is defined as the potential variability of our earnings that arises from changes in market interest rates and the magnitude of the change at varying points along the yield curve. Changes in market interest rates, whether they are increases or decreases, can trigger repricings and changes in the pace of payments for both assets and liabilities, which individually or in combination may affect our net income, net interest income and net interest margin, either positively or negatively.

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

For example, as part of our normal commercial lending activities, a portion of our business and commercial real estate loans have adjustable interest rates that are based on longer term rates. The yield on these loans could fluctuate to a greater degree than loans that are based on relatively short-term rates. Accordingly, during the third quarter of 2011, as a result of actions taken by the Federal Reserve, the yield on our commercial loans was negatively impacted by lower long-term interest rates. Conversely, our cost of funding was not significantly affected by this change in interest rates because the pricing of these instruments is related to a shorter-term part of the interest rate curve.

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

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

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

	Calculated increase
	June 30, 2012					March 31, 2012
Changes in interest rates(1)	Net interest income		% Change			Net interest income		% Change
+200 basis points(2)	$	19,917		1.9	%	$	23,755		2.3	%
+100 basis points		8,794		0.8			12,443		1.2

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

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

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Impact of New Accounting Standards

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

ITEM 3. Quantitative and Qualitative Disclosures About Market Risk

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

ITEM 4. Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of June 30, 2012 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective as of June 30, 2012.

During the quarter ended June 30, 2012, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II—OTHER INFORMATION

ITEM 1. Legal Proceedings

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

ITEM 1A. Risk Factors

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

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

a) Not applicable.

b) Not applicable.

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

ITEM 3. Defaults Upon Senior Securities

Not applicable.

ITEM 4. Mine Safety Disclosures

Not applicable.

ITEM 5. Other Information

(a) Not applicable.

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(b) Not applicable.

ITEM 6. Exhibits

The following exhibits are filed herewith:

Exhibits
12	Ratio of Earnings to Fixed Charges
31.1	Certification of Principal Executive Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
31.2	Certification of Principal Financial Officer Pursuant to Section 302 of the Sarbanes-Oxley Act of 2002
32	Certification of Principal Executive Officer and Principal Financial Officer Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002
101	Interactive data files pursuant to Rule 405 of Regulation S-T: (i) the Consolidated Statements of Condition, (ii) the Consolidated Statements of Operations, (iii) the Consolidated Statements of Comprehensive Income, (iv) the Consolidated Statements of Changes in Stockholders’ Equity, (v) the Consolidated Statements of Cash Flows, and (vi) the Notes to Consolidated Financial Statements tagged as blocks of text and in detail(1)

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

SIGNATURES

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

	FIRST NIAGARA FINANCIAL GROUP, INC.
Date: August 9, 2012	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer
		(Principal Executive Officer)
Date: August 9, 2012	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Executive Vice President and Chief Financial Officer
		(Principal Financial Officer and Principal Accounting Officer)

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