FIRST NIAGARA FINANCIAL GROUP INC - FORM 10-Q

Attached files

file	filename
EX-32 - EXHIBIT 32 - FIRST NIAGARA FINANCIAL GROUP INC	c17766exv32.htm
EX-31.2 - EXHIBIT 31.2 - FIRST NIAGARA FINANCIAL GROUP INC	c17766exv31w2.htm
EX-31.1 - EXHIBIT 31.1 - FIRST NIAGARA FINANCIAL GROUP INC	c17766exv31w1.htm

UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-Q


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

For the quarterly period ended June 30, 2011


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

For the transition period from to

Commission file number 000-23975

FIRST NIAGARA FINANCIAL GROUP, INC.

(exact name of registrant as specified in its charter)


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

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

(716) 819-5500

(Registrant’s telephone number, including area code)

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

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 þ NO o

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


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

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

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 o NO o

As of August 5, 2011, there were issued and outstanding 294,871,523 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, 2011
TABLE OF CONTENTS


Item Number	Page Number

PART I — FINANCIAL INFORMATION

1. Financial Statements

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

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

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

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

Consolidated Statements of Cash Flows for the six months ended June 30, 2011 and 2010 (unaudited)		7

Notes to Consolidated Financial Statements (unaudited)		8

2. Management’s Discussion and Analysis of Financial Condition and Results of Operations		38

3. Quantitative and Qualitative Disclosures About Market Risk		70

4. Controls and Procedures		70

PART II — OTHER INFORMATION

1. Legal Proceedings		71

1A. Risk Factors		71

2. Unregistered Sales of Equity Securities and Use of Proceeds		71

3. Defaults Upon Senior Securities		71

4. [Removed and Reserved]

5. Other Information		71

6. Exhibits		71

Signatures		72

Exhibit 31.1
Exhibit 31.2
Exhibit 32

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,
	2011			2010
	(unaudited)
ASSETS

Cash and cash equivalents	$	318,820		$	213,820
Investment securities:
Available for sale, at fair value (amortized cost of $8,053,750 and $7,175,442 in 2011 and 2010; includes pledged securities that can be sold or repledged of $4,049,300 and $4,052,259 in 2011 and 2010)		8,219,695			7,289,455
Held to maturity, at amortized cost (fair value of $2,992,924 and $1,043,803 in 2011 and 2010; includes pledged securities that can be sold or repledged of $2,799,370 in 2011)		2,939,933			1,025,724
Federal Home Loan Bank and Federal Reserve Bank common stock, at amortized cost and fair value		305,241			183,800
Loans held for sale		51,141			37,977
Loans and leases (net of allowance for loan losses of $107,028 and $95,354 in 2011 and 2010)		16,062,197			10,388,060
Bank owned life insurance		378,241			230,718
Premises and equipment, net		292,778			217,555
Goodwill		1,719,208			1,023,977
Core deposit and other intangibles, net		110,504			90,167
Other assets		491,888			382,600


Total assets	$	30,889,646		$	21,083,853


LIABILITIES AND STOCKHOLDERS’ EQUITY

Liabilities:
Deposits	$	18,900,495		$	13,148,844
Short-term borrowings		1,466,745			1,788,566
Long-term borrowings		6,134,181			3,104,908
Other		395,390			276,465


Total liabilities		26,896,811			18,318,783


Stockholders’ equity:
Preferred stock, $0.01 par value, 50,000,000 shares authorized; none issued		—			—
Common stock, $0.01 par value, 500,000,000 shares authorized; 309,090,281 and 215,105,566 shares issued in 2011 and 2010		3,091			2,151
Additional paid-in capital		3,758,215			2,430,571
Retained earnings		353,387			376,670
Accumulated other comprehensive income		89,542			57,871
Common stock held by employee stock ownership plan, 2,488,277 and 2,621,978 shares in 2011 and 2010		(19,907	)		(20,758	)
Treasury stock, at cost, 13,844,897 and 5,993,906 shares in 2011 and 2010		(191,493	)		(81,435	)


Total stockholders’ equity		3,992,835			2,765,070


Total liabilities and stockholders’ equity	$	30,889,646		$	21,083,853

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Income (unaudited)

(in thousands, except per share amounts)


	Three months ended					Six months ended
	June 30,					June 30,
	2011		2010			2011		2010
Interest income:
Loans and leases	$	184,341	$	133,564		$	316,458	$	230,144
Investment securities and other		93,029		61,565			169,796		109,488

Total interest income		277,370		195,129			486,254		339,632

Interest expense:
Deposits		21,324		20,698			36,945		35,081
Borrowings		25,609		19,673			46,004		35,624

Total interest expense		46,933		40,371			82,949		70,705


Net interest income		230,437		154,758			403,305		268,927
Provision for credit losses		17,307		11,000			30,207		24,131


Net interest income after provision for credit losses		213,130		143,758			373,098		244,796


Noninterest income:
Banking services		24,613		21,529			43,619		37,536
Insurance commissions		17,044		12,768			32,799		24,931
Wealth management services		7,883		5,711			14,617		8,959
Mortgage banking		3,386		1,626			4,649		2,858
Lending and leasing		2,811		2,510			6,574		4,554
Bank owned life insurance		3,055		1,976			5,085		3,200
Other		2,103		(70	)		5,626		960

Total noninterest income		60,895		46,050			112,969		82,998


Noninterest expense:
Salaries and employee benefits		90,192		64,081			163,968		112,318
Occupancy and equipment		18,952		13,422			35,149		23,329
Technology and communications		13,929		11,403			26,800		20,052
Marketing and advertising		3,880		7,691			6,572		9,223
Professional services		9,138		4,054			15,177		6,564
Amortization of intangibles		6,573		5,311			12,062		8,558
Federal deposit insurance premiums		6,267		4,959			12,462		8,422
Merger and acquisition integration expenses		76,828		35,837			83,004		42,069
Restructuring charges		11,656		—			12,712		—
Other		17,726		11,445			32,385		20,850

Total noninterest expense		255,141		158,203			400,291		251,385


Income before income taxes		18,884		31,605			85,776		76,409
Income tax expense		5,334		11,602			27,308		27,507


Net income	$	13,550	$	20,003		$	58,468	$	48,902


Earnings per share:
Basic	$	0.05	$	0.10		$	0.24	$	0.25
Diluted	$	0.05	$	0.10		$	0.24	$	0.25

Weighted average common shares outstanding:
Basic		281,496		203,962			244,018		194,594
Diluted		282,420		204,402			244,914		195,082

Dividends per common share	$	0.16	$	0.14		$	0.32	$	0.28

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Comprehensive Income (unaudited)

(in thousands)


	Three months ended June 30,						Six months ended June 30,
	2011			2010			2011			2010
Net income	$	13,550		$	20,003		$	58,468		$	48,902

Other comprehensive income, net of income taxes:
Securities available for sale:
Net unrealized gains arising during the period		42,817			74,452			36,020			100,216
Reclassification adjustment for net unrealized holding gains on securities transferred to held to maturity during the period		—			—			(3,956	)		—

		42,817			74,452			32,064			100,216

Net unrealized holding gains on securities transferred from available for sale to held to maturity:
Net unrealized holding gains on securities transferred during the period		—			—			3,956			—
Less: amortization of net unrealized holding gains to income during the period		(407	)		—			(407	)		—

		(407	)		—			3,549			—

Net unrealized (losses) gains on interest rate swaps designated as cash flow hedges arising during the period		(6,065	)		161			(4,501	)		170

Amortization of net loss (gain) related to pension and post-retirement plans		356			(198	)		559			(42	)


Total other comprehensive income		36,701			74,415			31,671			100,344


Total comprehensive income	$	50,251		$	94,418		$	90,139		$	149,246

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Consolidated Statements of Changes in Stockholders’ Equity (unaudited)

(in thousands, except share and per share amounts)


									Accumulated		Common
			Additional						other		stock
	Common		paid-in			Retained			comprehensive		held by			Treasury
	stock		capital			earnings			income		ESOP			stock			Total
Balances at January 1, 2011	$	2,151	$	2,430,571		$	376,670		$	57,871	$	(20,758	)	$	(81,435	)	$	2,765,070

Net income		—		—			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


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

Net income		—		—			48,902			—		—			—			48,902
Total other comprehensive income, net		—		—			—			100,344		—			—			100,344
Common stock issued for the acquisition of Harleysville National Corporation (20,295,305 shares)		203		299,700			—			—		—			—			299,903
Purchase of noncontrolling interest in consolidated subsidiary, net of tax		—		(614	)		—			—		—			—			(614	)
ESOP shares committed to be released (131,435 shares)		—		647			—			—		839			—			1,486
Stock-based compensation expense		—		2,646			—			—		—			—			2,646
Excess tax benefit from stock-based compensation		—		892			—			—		—			—			892
Exercise of stock options and restricted stock activity (529,869 shares)		—		(4,182	)		(1,866	)		—		—			7,141			1,093
Common stock dividends of $0.28 per share		—		—			(54,848	)		—		—			—			(54,848	)


Balances at June 30, 2010	$	2,151	$	2,427,285		$	345,136		$	102,858	$	(21,543	)	$	(82,422	)	$	2,773,465

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

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


	Six months ended June 30,
	2011			2010
Cash flows from operating activities:
Net income	$	58,468		$	48,902
Adjustments to reconcile net income to net cash provided by operating activities:
Accretion of fees and discounts, net		(1,101	)		(6,227	)
Provision for credit losses		30,207			24,131
Depreciation of premises and equipment		15,555			9,805
Amortization of intangibles		12,062			8,558
Origination of loans held for sale		(260,700	)		(253,523	)
Proceeds from sales of loans held for sale		247,839			209,820
ESOP and stock based-compensation expense		5,241			4,132
Deferred income tax expense		10,790			20,262
Other, net		23,684			10,853


Net cash provided by operating activities		142,045			76,713


Cash flows from investing activities:
Proceeds from sales of securities available for sale		493,738			121,524
Proceeds from maturities of securities available for sale		134,506			314,431
Principal payments received on securities available for sale		598,301			409,737
Purchases of securities available for sale		(1,322,486	)		(2,420,695	)
Principal payments received on securities held to maturity		161,565			100,396
Purchases of securities held to maturity		(93,082	)		(51,752	)
Purchases of Federal Home Loan Bank and Federal Reserve Bank common stock		(620	)		(43,954	)
Net increase in loans and leases		(582,008	)		(46,442	)
Acquisitions, net of cash and cash equivalents		(51,344	)		1,148,646
Purchases of premises and equipment		(28,390	)		(21,885	)
Other, net		(8,636	)		3,034


Net cash used in investing activities		(698,456	)		(486,960	)


Cash flows from financing activities:
Net increase in deposits		455,262			101,190
Repayments of short-term borrowings, net		(12,379	)		(338,307	)
Proceeds from long-term borrowings		550,943			946,534
Repayments of long-term borrowings		(135,832	)		(150,000	)
Purchases of treasury stock		(121,137	)		—
Proceeds from exercise of stock options		5,140			1,216
Excess tax benefit from stock-based compensation		490			892
Dividends paid on common stock		(81,076	)		(54,841	)


Net cash provided by financing activities		661,411			506,684


Net increase in cash and cash equivalents		105,000			96,437

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


Cash and cash equivalents at end of period	$	318,820		$	332,705


Supplemental disclosures
Cash paid during the period for:
Income taxes	$	57,737		$	30,078
Interest expense		101,314			64,301

Acquisition of noncash assets and liabilities:
Assets acquired		9,062,211			4,146,768
Liabilities assumed		7,679,315			4,995,993
Other noncash activity:
Securities available for sale purchased not settled		25,737			40,394
Securities transferred from available for sale to held to maturity (at fair value)		1,994,193			—

See accompanying notes to consolidated financial statements.

FIRST NIAGARA FINANCIAL GROUP, INC. AND SUBSIDIARIES

Notes to Consolidated Financial Statements (unaudited)

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

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

These consolidated financial statements do not include all of the information and footnotes required by GAAP for a full year presentation and certain disclosures have been condensed or omitted in accordance with rules and regulations of the Securities and Exchange Commission. In our opinion, all adjustments necessary for a fair presentation have been included. These consolidated financial statements should be read in conjunction with the audited consolidated financial statements and notes thereto included in our 2010 Annual Report on Form 10-K. Results for the six months ended June 30, 2011 do not necessarily reflect the results that may be expected for the year ending December 31, 2011. We reviewed subsequent events and determined that no further disclosures or adjustments were required. Amounts in prior period financial statements are reclassified whenever necessary to conform to the current period presentation. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

Note 1. Acquisitions

NewAlliance Bancshares, Inc.

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

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

The results of NewAlliance’s operations are included in our Consolidated Statements of Income from the date of acquisition. In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following table:


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


Total consideration paid		1,530,233


Recognized amounts of identifiable assets acquired and (liablities assumed), at fair value:
Cash and cash equivalents	$	126,322
Investment securities available for sale		2,759,329
Loans		5,113,195
Federal Home Loan Bank common stock		120,820
Bank owned life insurance		137,359
Premises and equipment		65,306
Core deposit intangible		23,800
Other assets		172,111
Deposits		(5,312,265	)
Borrowings		(2,299,321	)
Other liabilities		(64,142	)

Total identifiable net assets		842,514


Goodwill	$	687,719

The above recognized amounts of loans, 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.

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

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


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

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

Fair value of acquired loans	$	5,113,195

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

The fair value of savings and transaction deposit accounts acquired from NewAlliance 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 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 was largely comprised of 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 merger and acquisition integration expenses, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses.

The following table presents financial information regarding the former NewAlliance operations included in our Consolidated Statement of Income from the date of acquisition through 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, 2010 under the “Pro forma” columns. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. Merger and acquisition integration costs of $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. Merger and acquisition integration costs of $42.1 million related to our April 9, 2010 merger with Harleysville National Corporation that we incurred during the six months ended June 30, 2010 are not reflected in the unaudited pro forma amounts. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with NewAlliance at the beginning of 2010. Cost savings are also not reflected in the unaudited pro forma amounts for the six months ended June 30, 2011 and 2010.


	Actual from acquisition		Pro forma
	date through		Six months ended June 30,
	June 30, 2011		2011		2010
Net interest income	$	57,086	$	472,873	$	389,289
Noninterest income		9,883		125,581		114,283
Net income		19,122		127,644		108,274

Pro forma earnings per share:
Basic			$	0.47	$	0.44
Diluted				0.47		0.44

Harleysville National Corporation

On April 9, 2010, the Company acquired all of the outstanding common shares of Harleysville National Corporation (“Harleysville”), the parent company of Harleysville National Bank and Trust Company, and thereby acquired all of Harleysville National Bank and Trust Company’s 83 branch locations across nine Eastern Pennsylvania counties. Under the terms of the merger agreement, Harleysville stockholders received 0.474 shares of Company common stock in exchange for each share of Harleysville common stock, resulting in our issuance of 20.3 million common shares of First Niagara Financial Group, Inc. common stock with an acquisition date fair value of $299 million. Also under the terms of the merger agreement, Harleysville employees became 100% vested in any Harleysville stock options they held. These options had a fair value of $1 million on the date of acquisition. The merger with Harleysville enabled us to expand into the Eastern Pennsylvania market, improve our core deposit base, and add additional scale in our banking operations.

The results of Harleysville’s operations are included in our Consolidated Statements of Income from the date of acquisition. In connection with the merger, the consideration paid, the assets acquired, and the liabilities assumed were recorded at fair value on the date of acquisition, as summarized in the following table:


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


Total consideration paid		299,903


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

Total identifiable net assets		169,014


Goodwill	$	130,889

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

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


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

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

Fair value of acquired loans	$	2,644,256

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

The fair value of savings and transaction deposit accounts acquired from Harleysville 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 comparing the contractual cost of the portfolio to an identical portfolio bearing current market rates. The projected cash flows from maturing certificates were calculated based on contractual rates. The fair value of the certificates of deposit was calculated by discounting their contractual cash flows at a market rate for a certificate of deposit with a corresponding maturity.

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

Direct costs related to the Harleysville acquisition were expensed as incurred and amounted to $42.1 million during the six months ended June 30, 2010. These merger and acquisition integration expenses included salaries and benefits, technology and communications, occupancy and equipment, marketing and advertising, professional services, a contribution to First Niagara Bank Foundation to support charitable giving in Eastern Pennsylvania where the Harleysville branches are located, and other noninterest expenses.

The following table presents financial information regarding the former Harleysville operations included in our Consolidated Statement of Income from the date of acquisition through June 30, 2010. The amounts presented do not include merger and acquisition integration expenses. The following table also presents unaudited pro forma information as if the acquisition of Harleysville had occurred on January 1, 2010. This pro forma information gives effect to certain adjustments, including purchase accounting fair value adjustments, amortization of core deposit and other intangibles and related income tax effects. The pro forma information does not necessarily reflect the results of operations that would have occurred had the Company merged with Harleysville at the beginning of 2010. Cost savings are also not reflected in the unaudited pro forma amounts.


	Actual from acquisition		Pro forma
	date through		Six months ended
	June 30, 2010		June 30, 2010
Net interest income	$	42,805	$	308,606
Noninterest income		8,360		96,313
Net income		14,988		44,002

Pro forma earnings per share:
Basic			$	0.21
Diluted				0.21

HSBC Bank Branches

On July 30, 2011, First Niagara Bank, N.A., entered into an Agreement with HSBC Bank USA, National Association (“HSBC”) and affiliates to acquire, after estimated divestitures, approximately $11.0 billion of deposit liabilities and approximately $2.0 billion in loans in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets for a deposit premium of 6.67% (the “Acquisition”). At closing, the Bank will not receive any loans greater than 60 days delinquent. The Bank will also acquire certain wealth management relationships, and approximately $4.3 billion of assets under management of such relationships, of HSBC Securities (USA) Inc. The Acquisition, which is expected to close in the first half of 2012, is subject to receipt of all required governmental approvals, including anti-competition approvals (or expirations of waiting periods).

Other

As part of our plan to enhance our risk management operations, workforce, and products and services to benefit customers in our newly added New England market, on April 14, 2011, we acquired Pierson & Smith, an insurance brokerage, consulting and third party administration firm in Norwalk, Connecticut. Further, we acquired several insurance agencies in 2010. In August 2010, we acquired RTI Insurance Services, Inc. and Three Rivers Financial Services, Inc., in November 2010, we acquired Summit Insurance Group Inc. and Summit Benefits, LLC, and in December 2010, we acquired Banyan Consulting, LLC. These acquisitions, either individually or in the aggregate, did not have a material impact on our consolidated financial condition or operations.

Note 2. Investment Securities

The amortized cost, gross unrealized gains and losses, and fair value of our investment securities at June 30, 2011 and December 31, 2010 are summarized as follows:


	Amortized		Unrealized		Unrealized			Fair
June 30, 2011:	cost		gains		losses			value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	676,306	$	11,899	$	(471	)	$	687,734
U.S. government agencies		5,819		5		(9	)		5,815
U.S. government sponsored enterprises		628,481		10,406		(303	)		638,584
Corporate		207,546		1,684		(665	)		208,565
Trust preferred securities		29,677		497		(1,272	)		28,902


Total debt securities		1,547,829		24,491		(2,720	)		1,569,600


Mortgage-backed securities:
Residential mortgage-backed securities:
Government National Mortgage Association		104,221		2,895		—			107,116
Federal National Mortgage Association		868,595		13,152		(84	)		881,663
Federal Home Loan Mortgage Corporation		755,796		10,101		(55	)		765,842

Collateralized mortgage obligations:
Government National Mortgage Association		2,679,306		86,568		(163	)		2,765,711
Federal National Mortgage Association		730,942		14,306		(1,002	)		744,246
Federal Home Loan Mortgage Corporation		734,082		13,949		(191	)		747,840
Non-agency issued		128,110		1,621		(1,000	)		128,731


Total collateralized mortgage obligations		4,272,440		116,444		(2,356	)		4,386,528


Total residential mortgage-backed securities		6,001,052		142,592		(2,495	)		6,141,149

Commercial mortgage-backed securities:
Non-agency issued		473,892		4,938		(978	)		477,852


Total mortgage-backed securities		6,474,944		147,530		(3,473	)		6,619,001
Asset-backed securities		128		—		(6	)		122
Other		30,849		202		(79	)		30,972


Total securities available for sale	$	8,053,750	$	172,223	$	(6,278	)	$	8,219,695


Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	6,838	$	85	$	(5	)	$	6,918
Federal National Mortgage Association		18,267		244		—			18,511
Federal Home Loan Mortgage Corporation		15,965		278		—			16,243

Collateralized mortgage obligations:
Government National Mortgage Association		2,035,392		37,128		(1,576	)		2,070,944
Federal National Mortgage Association		244,632		6,868		(280	)		251,220
Federal Home Loan Mortgage Corporation		618,839		12,958		(2,709	)		629,088


Total collateralized mortgage obligations		2,898,863		56,954		(4,565	)		2,951,252


Total securities held to maturity	$	2,939,933	$	57,561	$	(4,570	)	$	2,992,924


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


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


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

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


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


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

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


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


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


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


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

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


	Less than 12 months					12 months or longer					Total
	Fair		Unrealized			Fair		Unrealized			Fair		Unrealized
June 30, 2011:	value		losses			value		losses			value		losses
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	72,969	$	(467	)	$	1,597	$	(4	)	$	74,566	$	(471	)
U.S. government agencies		—		—			2,276		(9	)		2,276		(9	)
U.S. government sponsored enterprises		64,633		(303	)		—		—			64,633		(303	)
Corporate		50,687		(665	)		—		—			50,687		(665	)
Trust preferred securities		16,856		(526	)		900		(746	)		17,756		(1,272	)


Total debt securities		205,145		(1,961	)		4,773		(759	)		209,918		(2,720	)


Mortgage-backed securities:

Residential mortgage-backed securities:
Federal National Mortgage Association		37,026		(84	)		—		—			37,026		(84	)
Federal Home Loan Mortgage Corporation		20,191		(55	)		—		—			20,191		(55	)

Collateralized mortgage obligations:
Government National Mortgage Association		18,531		(163	)		—		—			18,531		(163	)
Federal National Mortgage Association		102,553		(1,002	)		—		—			102,553		(1,002	)
Federal Home Loan Mortgage Corporation		95,242		(191	)		—		—			95,242		(191	)
Non-agency issued		30,923		(397	)		15,224		(603	)		46,147		(1,000	)


Total collateralized mortgage obligations		247,249		(1,753	)		15,224		(603	)		262,473		(2,356	)


Total residential mortgage-backed securities		304,466		(1,892	)		15,224		(603	)		319,690		(2,495	)

Commercial mortgage-backed securities:
Non-agency issued		128,605		(978	)		—		—			128,605		(978	)

Total mortgage-backed securities		433,071		(2,870	)		15,224		(603	)		448,295		(3,473	)

Asset-backed securities		—		—			122		(6	)		122		(6	)
Other		3,216		(79	)		—		—			3,216		(79	)


Total securities available for sale in an unrealized loss position	$	641,432	$	(4,910	)	$	20,119	$	(1,368	)	$	661,551	$	(6,278	)


Investment securities held to maturity:
Residential mortgage-backed securities:
Government National Mortgage Association	$	2,236	$	(5	)	$	—	$	—		$	2,236	$	(5	)
Collateralized mortgage obligations:
Government National Mortgage Association		165,610		(1,576	)		—		—			165,610		(1,576	)
Federal National Mortgage Association		24,173		(280	)		—		—			24,173		(280	)
Federal Home Loan Mortgage Corporation		95,504		(2,709	)		—		—			95,504		(2,709	)


Total securities held to maturity in an unrealized loss position	$	287,523	$	(4,570	)	$	—	$	—		$	287,523	$	(4,570	)


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


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


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

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


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


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

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


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


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


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

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

As of June 30, 2011, 99% of the fair value of our investment securities portfolio was rated A- or higher. At March 31, 2011, we transferred $2.0 billion of securities from our available for sale portfolio to our held to maturity portfolio as we determined that we have the intent and ability to hold these securities to maturity. The transferred securities were primarily mortgage-backed securities and collateralized mortgage obligations (“CMOs”) issued by the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”), and had net unrealized gains, net of tax, of $4 million on the date of transfer, which will be amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the premium on the same transferred debt securities.

At June 30, 2011, of the 22 non-agency CMOs in an unrealized loss position, seven were in a continuous unrealized loss position for 12 months or more. At December 31, 2010, of the 22 non-agency CMOs in an unrealized loss position, eight were in a continuous unrealized loss position for 12 months or more. We have assessed these securities in an unrealized loss position at June 30, 2011 and December 31, 2010 and determined that the declines in fair value below amortized cost were temporary.

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


	Amortized		Fair
	cost		value
Debt securities:
Within one year	$	123,193	$	123,720
After one year through five years		622,812		634,249
After five years through ten years		733,921		743,907
After ten years		67,903		67,724

Total debt securities		1,547,829		1,569,600

Mortgage-backed securities		9,414,877		9,611,925
Asset-backed securities		128		122
Other		30,849		30,972

	$	10,993,683	$	11,212,619

While the contractual maturities of our mortgage-backed securities, asset-backed securities, and other securities generally exceed ten years, we expect the effective lives to be significantly shorter due to prepayments of the underlying loans and the nature of the mortgage-backed, asset-backed, and other securities that we own. The duration of our securities available for sale increased to 3.95 years at June 30, 2011 from 3.73 years at December 31, 2010 as a result of an increase in yield volatility and an increase in the weighted average life of our portfolio caused by slowing prepayments in our mortgage-backed securities portfolio, which, in turn, extends the life of the bonds.

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


	Amortized		Unrealized		Unrealized			Fair
	cost		gains		losses			value
Residential mortgage-backed securities:
Government National Mortgage Association	$	2,207	$	80	$	—		$	2,287
Federal National Mortgage Association		18,283		318		—			18,601
Federal Home Loan Mortgage Corporation		16,100		496		—			16,596

Collateralized mortgage obligations:
Government National Mortgage Association		1,584,892		26,759		(10,663	)		1,600,988
Federal National Mortgage Association		6,792		58		—			6,850
Federal Home Loan Mortgage Corporation		359,539		775		(11,443	)		348,871


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


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

Note 3. Loans and Leases

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


	June 30,			December 31,
	2011			2010
Commercial:
Real estate	$	5,665,992		$	3,964,106
Construction		464,309			406,751
Business		3,335,330			2,623,079


Total commercial		9,465,631			6,993,936

Residential real estate		4,270,811			1,692,198
Home equity		2,160,665			1,524,570
Other consumer		272,118			272,710


Total loans and leases		16,169,225			10,483,414

Allowance for loan losses		(107,028	)		(95,354	)


Total loans and leases, net	$	16,062,197		$	10,388,060

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


	June 30,		December 31,
	2011		2010
Outstanding principal balance	$	7,482,363	$	2,750,133
Carrying amount		7,309,530		2,649,719

The following table presents changes in the accretable discount, which includes income recognized from contractual interest cash flows, for the dates indicated:


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

Balance at December 31, 2010		(360,924	)
NewAlliance acquisition		(1,146,587	)
Net reclassifications to non accretable yield		884
Accretion		125,212


Balance at June 30, 2011	$	(1,381,415	)

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

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

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

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

The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans by portfolio segment for the six months ended June 30:


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for loan losses:
Balance at beginning of period	$	89,001		$	6,353		$	—		$	—	$	95,354
Provision for loan losses		22,644			3,813			882			—		27,339
Charge-offs		(15,165	)		(4,072	)		(882	)		—		(20,119	)
Recoveries		3,424			1,030			—			—		4,454


Balance at end of period	$	99,904		$	7,124		$	—		$	—	$	107,028


Allowance for loan losses:
Individually evaluated for impairment	$	4,794		$	1,716		$	—		$	—	$	6,510
Collectively evaluated for impairment		95,110			5,408			—			—		100,518


Total	$	99,904		$	7,124		$	—		$	—	$	107,028


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	62,412		$	12,459		$	—		$	—	$	74,871
Collectively evaluated for impairment		6,015,626			2,769,198			—			—		8,784,824
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			3,387,593			3,921,937		7,309,530


Total	$	6,078,038		$	2,781,657		$	3,387,593		$	3,921,937	$	16,169,225


*2010*
Allowance for loan losses:
Balance at beginning of period	$	82,813		$	5,490		$	—		$	—	$	88,303
Provision for loan losses		21,483			2,648			—			—		24,131
Charge-offs		(22,008	)		(1,924	)		—			—		(23,932	)
Recoveries		1,091			816			—			—		1,907


Balance at end of period	$	83,379		$	7,030		$	—		$	—	$	90,409


Allowance for loan losses:
Individually evaluated for impairment	$	9,272		$	29		$	—		$	—	$	9,301
Collectively evaluated for impairment		74,107			7,001			—			—		81,108


Total	$	83,379		$	7,030		$	—		$	—	$	90,409


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	48,986		$	10,127		$	—		$	—	$	59,113
Collectively evaluated for impairment		4,458,631		$	2,436,848			—			—		6,895,479
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			1,897,673			1,112,255		3,009,928


Total	$	4,507,617		$	2,446,975		$	1,897,673		$	1,112,255	$	9,964,520


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

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


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total

*2011*
Allowance for loan losses:
Balance at beginning of period	$	92,945		$	7,181		$	—		$	—	$	100,126
Provision for loan losses		12,377			1,254			808			—		14,439
Charge-offs		(7,454	)		(1,874	)		(808	)		—		(10,136	)
Recoveries		2,036			563			—			—		2,599


Balance at end of period	$	99,904		$	7,124		$	—		$	—	$	107,028


*2010*
Allowance for loan losses:
Balance at beginning of period	$	83,873		$	5,615		$	—		$	—	$	89,488
Provision for loan losses		9,013			1,987			—			—		11,000
Charge-offs		(10,242	)		(1,016	)		—			—		(11,258	)
Recoveries		735			444			—			—		1,179


Balance at end of period	$	83,379		$	7,030		$	—		$	—	$	90,409

As of June 30, 2011, we had a liability for unfunded commitments of $5.8 million, which included $2.9 million in purchase accounting adjustments related to our acquired unfunded commitments. For the three and six months ending June 30, 2011, we recognized a provision for credit loss related to our unfunded commitments of $2.9 million.

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


	June 30,		December 31,
	2011		2010
Commercial:
Commercial real estate:
Acquisition and development	$	780	$	1,870
Multifamily		6,218		3,075
Investment real estate		19,537		24,536
Owner occupied		16,346		14,584

Total commercial real estate		42,881		44,065
Business		20,021		25,819

Total commercial		62,902		69,884

Consumer:
Residential real estate		14,484		14,461
Home equity		4,748		4,605
Other consumer		379		373

Total consumer		19,611		19,439


Total	$	82,513	$	89,323

The following table details additional information on our nonaccrual loans in our legacy portfolio segment for the six months ending June 30 and our total troubled debt restructurings at June 30:


	2011		2010
Interest income that would have been recorded if nonaccrual loans were performing in accordance with original terms	$	2,448	$	2,701

Aggregate recorded investment of impaired loans with terms modified through a troubled debt restructuring:
Accruing interest		18,794		19,397
Nonaccrual		32,350		17,641

Total troubled debt restructurings	$	51,144	$	37,038

The following table details the amount of our legacy impaired loans by class with no related allowance for loan losses, as well as the amount of impaired loans for which there is a related allowance for loan losses as of June 30, 2011 and December 31, 2010. Loans with no related allowance for loan losses have adequate collateral securing their carrying value and in some circumstances, have been charged down to their current carrying value.


	June 30, 2011						December 31, 2010
			Unpaid						Unpaid
	Recorded		principal		Related		Recorded		principal		Related
	investment		balance		allowance		investment		balance		allowance
With no related allowance recorded:
Commercial:
Commercial real estate:
Acquisition and development	$	636	$	636	$	—	$	311	$	311	$	—
Multifamily		2,788		4,356		—		2,243		7,783		—
Investment real estate		13,355		20,338		—		7,767		14,442		—
Owner occupied		8,869		9,628		—		4,662		7,315		—

Total commercial real estate		25,648		34,958		—		14,983		29,851		—
Business		12,873		18,170		—		6,154		9,403		—

Total commercial		38,521		53,128		—		21,137		39,254		—
Consumer:
Residential real estate		4		4		—		8,855		8,794		—


Total	$	38,525	$	53,132	$	—	$	29,992	$	48,048	$	—


With a related allowance recorded:
Commercial:
Commercial real estate:
Acquisition and development	$	5,820	$	5,820	$	1,541	$	8,012	$	8,512	$	443
Multifamily		153		3,560		153		388		397		15
Investment real estate		7,434		11,531		256		17,451		21,413		1,786
Owner occupied		5,248		7,268		649		7,365		7,481		1,482

Total commercial real estate		18,655		28,179		2,599		33,216		37,803		3,726
Business		5,236		7,571		2,195		17,388		17,599		1,594

Total commercial		23,891		35,750		4,794		50,604		55,402		5,320
Consumer:
Residential real estate		12,455		12,378		1,716		2,270		2,302		173


Total	$	36,346	$	48,128	$	6,510	$	52,874	$	57,704	$	5,493

Total
Commercial:
Commercial real estate:
Acquisition and development	$	6,456	$	6,456	$	1,541	$	8,323	$	8,823	$	443
Multifamily		2,941		7,916		153		2,631		8,180		15
Investment real estate		20,789		31,869		256		25,218		35,855		1,786
Owner occupied		14,117		16,896		649		12,027		14,796		1,482

Total commercial real estate		44,303		63,137		2,599		48,199		67,654		3,726
Business		18,109		25,741		2,195		23,542		27,002		1,594

Total commercial		62,412		88,878		4,794		71,741		94,656		5,320
Consumer:
Residential real estate		12,459		12,382		1,716		11,125		11,096		173


Total	$	74,871	$	101,260	$	6,510	$	82,866	$	105,752	$	5,493

At June 30, 2011 and December 31, 2010, nonaccrual loans differed from the amount of total impaired loans as certain TDRs, which are considered impaired loans, were accruing interest due to the satisfactory performance of the borrowers under the restructured terms of the loans. Also contributing to the difference are nonaccrual commercial loans less than $200 thousand and nonaccrual consumer loans, which are not considered impaired unless they have been modified in a TDR as they are evaluated collectively when determining the allowance for loan losses. The following table is a reconciliation between nonaccrual loans and impaired loans at the dates indicated:


	Commercial			Consumer			Total
June 30, 2011:
Nonaccrual loans	$	62,902		$	19,611		$	82,513
Plus: Accruing TDRs		7,885			10,909			18,794
Less: Smaller balance nonaccrual loans evaluated collectively when determining the allowance for loan losses		(8,375	)		(18,061	)		(26,436	)

Total impaired loans	$	62,412		$	12,459		$	74,871


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

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

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


	2011				2010
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized
Commercial:
Commercial real estate:
Acquisition and development	$	7,290	$	58	$	8,890	$	198
Multifamily		2,935		67		1,808		—
Investment real estate		22,251		44		24,285		32
Owner occupied		14,517		21		6,657		48

Total commercial real estate		46,993		190		41,640		278
Business		22,249		35		6,032		23

Total commercial		69,242		225		47,672		301
Consumer:
Residential real estate		12,337		288		9,855		62


Total	$	81,579	$	513	$	57,527	$	363

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


	2011				2010
	Average		Interest		Average		Interest
	recorded		income		recorded		income
	investment		recognized		investment		recognized
Commercial:
Commercial real estate:
Acquisition and development	$	7,301	$	—	$	7,732	$	90
Multifamily		2,940		28		2,984		—
Investment real estate		21,951		14		26,487		8
Owner occupied		13,028		12		10,281		2

Total commercial real estate		45,220		54		47,484		100
Business		20,590		23		10,094		10

Total commercial		65,810		77		57,578		110
Consumer:
Residential real estate		13,128		93		9,359		37


Total	$	78,938	$	170	$	66,937	$	147

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


	30-59 days		60-89 days		Greater than 90		Total				Total loans		Greater than 90
June 30, 2011	past due		past due		days past due		past due		Current		receivable		days and accruing
Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	636	$	636	$	101,033	$	101,669	$	—
Multifamily		1,216		—		335		1,551		1,074,847		1,076,398		—
Investment real estate		1,121		—		13,357		14,478		1,528,215		1,542,693		—
Owner occupied		2,807		84		10,586		13,477		941,220		954,697		—

Total commercial real estate		5,144		84		24,914		30,142		3,645,315		3,675,457		—
Business		3,394		2,698		5,681		11,773		2,390,808		2,402,581		—

Total commercial		8,538		2,782		30,595		41,915		6,036,123		6,078,038		—


Consumer:
Residential real estate		11,176		2,205		12,527		25,908		1,588,488		1,614,396		—
Home equity		2,368		2,061		4,478		8,907		1,005,511		1,014,418		—
Other consumer		1,139		504		346		1,989		150,854		152,843		—

Total consumer		14,683		4,770		17,351		36,804		2,744,853		2,781,657		—


Total	$	23,221	$	7,552	$	47,946	$	78,719	$	8,780,976	$	8,859,695	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	18	$	—	$	1,573	$	1,591	$	14,423	$	16,014	$	1,573
Multifamily		—		301		857		1,158		234,061		235,219		857
Investment real estate		5,894		—		27,959		33,853		1,051,816		1,085,669		27,959
Owner occupied		4,849		5,230		17,278		27,357		1,090,585		1,117,942		17,278

Total commercial real estate		10,761		5,531		47,667		63,959		2,390,885		2,454,844		47,667
Business		5,587		623		10,863		17,073		915,676		932,749		10,863

Total commercial		16,348		6,154		58,530		81,032		3,306,561		3,387,593		58,530


Consumer:
Residential real estate		17,129		14,835		58,605		90,569		2,565,846		2,656,415		58,605
Home equity		8,639		5,061		15,965		29,665		1,116,582		1,146,247		15,965
Other consumer		1,955		1,189		1,769		4,913		114,362		119,275		1,769

Total consumer		27,723		21,085		76,339		125,147		3,796,790		3,921,937		76,339


Total	$	44,071	$	27,239	$	134,869	$	206,179	$	7,103,351	$	7,309,530	$	134,869


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

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

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


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

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


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


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

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

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

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

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

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

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


	Commercial real estate
	Acquisition and				Investment real		Owner						Percent of
	development		Multifamily		estate		occupied		Business		Total		Total
*June 30, 2011*
Legacy loans:
Pass	$	24,680	$	1,044,473	$	1,349,620	$	857,731	$	2,153,652	$	5,430,156		89.3	%
Criticized:⁽¹⁾
Accrual		76,209		25,707		173,536		80,620		228,908		584,980		9.6	%
Nonaccrual		780		6,218		19,537		16,346		20,021		62,902		1.1	%

Total criticized		76,989		31,925		193,073		96,966		248,929		647,882		10.7	%

Total	$	101,669	$	1,076,398	$	1,542,693	$	954,697	$	2,402,581	$	6,078,038		100.0	%


Acquired loans:
Pass	$	1,786	$	199,681	$	973,230	$	938,996	$	791,139	$	2,904,832		85.7	%
Criticized:⁽¹⁾
Accrual		14,228		35,538		112,439		178,946		141,610		482,761		14.3	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		14,228		35,538		112,439		178,946		141,610		482,761		14.3	%

Total	$	16,014	$	235,219	$	1,085,669	$	1,117,942	$	932,749	$	3,387,593		100.0	%


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

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

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


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

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

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


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

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

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


	Residential				Other				Percent of
	real estate		Home equity		consumer		Total		Total
*June 30, 2011*
Legacy loans by refreshed FICO score:
Over 700	$	1,267,456	$	777,045	$	70,534	$	2,115,035		76.1	%
660-700		153,202		126,575		21,363		301,140		10.8	%
620-660		76,468		50,125		12,435		139,028		5.0	%
580-620		39,774		21,240		14,839		75,853		2.7	%
Less than 580		63,594		32,009		10,581		106,184		3.8	%
No score		13,902		7,424		23,091		44,417		1.6	%

Total	$	1,614,396	$	1,014,418	$	152,843	$	2,781,657		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	1,934,834	$	825,234	$	49,796	$	2,809,864		71.7	%
660-700		216,045		133,020		17,302		366,367		9.3	%
620-660		86,579		59,292		10,065		155,936		4.0	%
580-620		258,744		6,845		6,251		271,840		6.9	%
Less than 580		116,606		49,373		9,125		175,104		4.5	%
No score		43,607		72,483		26,736		142,826		3.6	%

Total	$	2,656,415	$	1,146,247	$	119,275	$	3,921,937		100.0	%


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

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


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

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

Information about residential mortgage loans we service for others is as follows at the dates indicated:


	June 30,		December 31,
	2011		2010
Mortgages serviced for others	$	1,834,004	$	1,554,083

Mortgage servicing rights		14,989		12,591

Note 4. Derivative Financial Instruments

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

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


	Asset derivatives				Liability derivatives
	Notional		Fair		Notional		Fair
	amount		Value ⁽¹⁾		amount		Value ⁽²⁾
*June 30, 2011*
Derivatives designated as hedging instruments:
Interest rate swap agreements	$	600,000	$	1,954	$	765,599	$	6,516

Derivatives not designated as hedging instruments:
Interest rate swap agreements		599,453		30,886		602,394		31,262

Total derivatives	$	1,199,453	$	32,840	$	1,367,993	$	37,778


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

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

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


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

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

Derivatives designated in hedging relationships

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

We have also entered into interest rate swaps to offset the variability in the interest cash outflows of London Inter-Bank Offered Rate (LIBOR) based borrowings. These derivative instruments are designated as cash flow hedges. We have designated the risk of changes in the amount of interest payment cash flows to be made during the term of the borrowings attributable to changes in the benchmark rate as the hedged risk. Accordingly, changes to the amount of interest payment cash flows for the hedged items or derivatives attributable to a change in credit risk are excluded from our assessment of hedge effectiveness. Our interest rate swaps designated as cash flow hedges have maturities that correspond to the maturity of the related hedged borrowing. The maturities of the hedged borrowings range from 2011 to 2014. Any gain or loss associated with the effective portion of our cash flow hedges is recognized in other comprehensive income and is subsequently reclassified into earnings in the period during which the hedged forecasted transactions affects earnings. Any gain or loss associated with the ineffective portion of our cash flow hedges is recognized immediately in earnings. During the next twelve months, we expect to reclassify $7.9 million of pre-tax net loss on cash flow hedges from accumulated other comprehensive income to earnings. This amount is estimated and could differ from amounts actually recognized due to changes in interest rates.

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


	Three months ended June 30,						Six months ended June 30,
Fair Value Hedges⁽¹⁾	2011			2010			2011		2010
Interest rate swap agreements:

Amount of (loss) gain on derivative instruments ⁽²⁾	$	(228	)	$	(330	)	$	9	$	(478	)


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

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


	Three months ended June 30,						Six months ended June 30,
Cash Flow Hedges	2011			2010			2011			2010
Interest rate swap agreements:
Amount of (loss) gain on derivatives recognized in other comprehensive income, net of tax	$	(6,065	)	$	161		$	(4,501	)	$	170

Amount of loss on derivatives reclassified from other comprehensive income to income⁽¹⁾		(1,550	)		(389	)		(2,619	)		(781	)


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

Derivatives not designated in hedging relationships

In addition to our derivatives designated in hedge relationships, we act as an interest rate swap counterparty for certain commercial borrowers in the normal course of servicing our customers, which are accounted for as free standing derivatives. We manage our exposure to such interest rate swaps by simultaneously entering into corresponding and offsetting interest rate swaps with third parties that mirror the terms of the interest rate swaps we have with the commercial borrowers. These positions (referred to as “back-to-back swaps”) directly offset each other and our exposure is the positive fair value of the derivatives due to changes in credit risk of our commercial borrowers and third parties. We earn fee income for this service that we provide our customers, as indicated in the table below.

The following table presents information about amounts recognized for our back-to-back swaps due to changes in fair value for the three and six months ended June 30:


	Three months ended June 30,						Six months ended June 30,
Derivatives not designated as hedging instruments	2011			2010			2011			2010
Loss on interest rate swap agreements ⁽¹⁾	$	(190	)	$	(278	)	$	(242	)	$	(146	)
Fee income earned ⁽¹⁾		834			199			3,062			214


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

Note 5. Income Taxes

Our net deferred tax asset totaled $134 million and $123 million at June 30, 2011 and December 31, 2010, respectively. The increase primarily relates to deferred tax assets related to NewAlliance partially offset by deferred tax liabilities resulting from the increase in the unrealized gain on securities available for sale.

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


Balance at beginning of period	$	8,299
Additions for tax positions of prior year recorded due to current year acquisitions		260
Reductions for tax positions of prior years		(6,089	)


Balance at end of period	$	2,470

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

Note 6. Restructuring Charges

As a result of our recent acquisitions, management has adjusted certain aspects of our delivery channels and infrastructure. Specifically, we have adjusted the branch network in Eastern Pennsylvania; consolidated certain back office facilities; and restructured our back office infrastructure and operations.

These efforts resulted in expenses of $11.7 million and $1.1 million in the quarters ended June 30, 2011 and March 31, 2011, respectively. Concerning our plans to adjust our branch network, we recognized $3.3 million in the quarter ended June 30, 2011 and estimate the remaining pre-tax impact of this initiative to be in the range of $15 million to $18 million. For our plans to exit other acquired facilities, mostly in Eastern Pennsylvania, we recognized $2.7 million in the quarter ended June 30, 2011 and we estimate the remaining pre-tax impact of exiting these facilities to be in the range of $16 million to $20 million. Finally, for actions to restructure our back office services, we recognized $5.7 million in the quarter ended June 30, 2011 and we estimate the remaining pre-tax impact of this to be in the range of $11 million to $14 million.

These charges are all attributable to our banking segment. The liability balance related to these measures was not significant at June 30, 2011.

Note 7. Earnings Per Share

The following table is a computation of our basic and diluted earnings per share using the two-class method for the three and six months ended June 30:


	Three months ended						Six months ended
	June 30,						June 30,
	2011			2010			2011			2010
Net income	$	13,550		$	20,003		$	58,468		$	48,902
Less income allocable to unvested restricted stock awards		130			44			223			116


Net income allocable to common stockholders	$	13,420		$	19,959		$	58,245		$	48,786


Weighted average common shares outstanding:
Total shares issued		293,598			213,321			254,568			204,117
Unallocated employee stock ownership plan shares		(2,561	)		(2,802	)		(2,591	)		(2,831	)
Unvested restricted stock awards		(786	)		(485	)		(675	)		(480	)
Treasury shares		(8,755	)		(6,072	)		(7,284	)		(6,212	)

Total basic weighted average common shares outstanding		281,496			203,962			244,018			194,594

Incremental shares from assumed exercise of stock options		522			249			550			295
Incremental shares from assumed vesting of restricted stock awards		402			191			346			193


Total diluted weighted average common shares outstanding		282,420			204,402			244,914			195,082


Basic earnings per common share	$	0.05		$	0.10		$	0.24		$	0.25


Diluted earnings per common share	$	0.05		$	0.10		$	0.24		$	0.25


Anti-dilutive stock options and restricted stock awards excluded from the diluted weighted average common share calculations		1,963			1,705			1,923			1,297

Note 8. Other Comprehensive Income

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


	Pretax			Income taxes			Net
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 to held to maturity		(6,380	)		(2,424	)		(3,956	)

Net unrealized losses on securities available for sale		51,932			19,868			32,064

Net unrealized holding gains on securities transferred from available for sale to held to maturity:
Net unrealized holding gains transferred during the period		6,380			2,424			3,956
Less: amortization of net unrealized holding gains to income during the period		(656	)		(249	)		(407	)

		5,724			2,175			3,549

Interest rate swaps designated as cash flow hedges:
Net unrealized losses 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 losses on interest rate swaps designated as cash flow hedges		(7,388	)		(2,887	)		(4,501	)

Amortization of net gain related to pension and post-retirement plans		666			107			559

Total other comprehensive income	$	50,934		$	19,263		$	31,671


2010:
Securities available for sale:
Unrealized holding gains arising during the period	$	165,943		$	65,727		$	100,216
Interest rate swaps designated as cash flow hedges:
Net unrealized losses arising during the period		(457	)		(143	)		(314	)
Reclassification adjustment for realized losses included in net income		781			297			484

Net unrealized gains on interest rate swaps designated as cash flow hedges		324			154			170
Amortization of net gain related to pension and post-retirement plans		517			559			(42	)

Total other comprehensive income	$	166,784		$	66,440		$	100,344

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


			Net unrealized gains
			on securities		Unrealized gains (losses)
	Net unrealized gains		transferred from		on interest rate swaps
	on securities		available for sale to		designated as cash flow			Defined benefit
	available for sale		held to maturity		hedges			plans			Total
Balance, January 1, 2011	$	70,690	$	—	$	2,978		$	(15,797	)	$	57,871
Period change, net of tax		32,064		3,549		(4,501	)		559			31,671

Balance June 30, 2011	$	102,754	$	3,549	$	(1,523	)	$	(15,238	)	$	89,542


Balance, January 1, 2010	$	17,206	$	—	$	(1,154	)	$	(13,538	)	$	2,514
Period change, net of tax		100,216		—		170			(42	)		100,344

Balance June 30, 2010	$	117,422	$	—	$	(984	)	$	(13,580	)	$	102,858

Note 9. Fair Value Measurements

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

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

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

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

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

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

Assets and Liabilities Measured at Fair Value on a Recurring Basis

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


	Fair Value Measurements
	Total		Level 1		Level 2		Level 3
June 30, 2011
Assets:
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	687,734	$	—	$	687,734	$	—
U.S. government agencies		5,815		—		5,815		—
U.S. government sponsored enterprises		638,584		—		638,584		—
Corporate		208,565		—		208,565		—
Trust preferred securities		28,902		—		—		28,902


Total debt securities		1,569,600		—		1,540,698		28,902

Mortgage-backed securities:

Residential mortgage-backed securities:
Government National Mortgage Association		107,116		—		107,116		—
Federal National Mortgage Association		881,663		—		881,663		—
Federal Home Loan Mortgage Corporation		765,842		—		765,842		—

Collateralized mortgage obligations:
Government National Mortgage Association		2,765,711		—		2,765,711		—
Federal National Mortgage Association		744,246		—		744,246		—
Federal Home Loan Mortgage Corporation		747,840		—		747,840		—
Non-agency issued		128,731		—		128,731		—


Total collateralized mortgage obligations		4,386,528		—		4,386,528		—


Total residential mortgage-backed securities		6,141,149		—		6,141,149		—
Commercial mortgage-backed securities:
Non-agency issued		477,852		—		477,852		—


Total mortgage-backed securities		6,619,001		—		6,619,001		—

Asset-backed securities		122		—		122		—
Other		30,972		14,864		16,108		—


Total securities available for sale		8,219,695		14,864		8,175,929		28,902

Loans held for sale⁽¹⁾		51,141		—		51,141		—

Interest rate swaps		32,840		—		32,840		—

Total assets	$	8,303,676	$	14,864	$	8,259,910	$	28,902


Liabilities:
Interest rate swaps	$	37,778	$	—	$	37,778	$	—


⁽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. However, as described in Note 2, Investment Securities, we transferred $2.0 billion of securities from our available for sale portfolio to our held to maturity portfolio as of March 31, 2011. All such securities were classified as Level 2 fair value measurements. These securities, which were transferred at fair value, are not included in the table above and will no longer be recorded at fair value on a recurring basis in our Statement of Financial Condition.


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


Total debt securities		905,757		—		904,838		919

Mortgage-backed securities:

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

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


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


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


Total mortgage-backed securities		6,358,630		—		6,358,630		—

Asset-backed securities		2,731		—		2,731		—
Other		22,337		14,731		7,606		—


Total securities available for sale		7,289,455		14,731		7,273,805		919

Interest rate swaps		30,187		—		30,187		—

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


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

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

Securities Available for Sale

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

Due to the lack of observable market data, we have classified our trust preferred securities, included in corporate debt securities, in Level 3 of the fair value hierarchy. We determined the fair value using third party pricing services including brokers.

Loans held for sale

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


	June 30, 2011
					Fair value carrying
	Fair value carrying		Aggregate unpaid principal		amount less aggregate
	amount		balance		unpaid principal balance
Loans held for sale
Total loans	$	51,141	$	49,648	$	1,493
Nonaccrual loans		—		—		—
Loans 90 days or more past due and still accruing		—		—		—


	Three months ending		Six months ending June
	June 30, 2011		30, 2011
	Gain or loss from fair		Gain or loss from fair
	value changes⁽¹⁾		value changes⁽¹⁾

Loans held for sale
Total loans	$	926	$	926
Nonaccrual loans		—		—
Loans 90 days or more past due and still accruing		—		—


⁽¹⁾		Classified in mortgage banking income in our Consolidated Statements of Income

Interest Rate Swaps

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

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

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


	2011		2010
Balance at beginning of period	$	919	$	480
NewAlliance acquisition		27,924		—
Gains included in other comprehensive income		59		222

Balance at end of period	$	28,902	$	702

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

Assets and Liabilities Measured at Fair Value on a Nonrecurring Basis

The following table summarizes our assets and liabilities measured at fair value on a nonrecurring basis for the six months ended June 30:


	Fair Value Measurements								Total gains
	Total		Level 1		Level 2		Level 3		(losses)
2011
Collateral dependent impaired loans	$	21,968	$	—	$	7,622	$	14,346	$	(6,652	)

2010
Collateral dependent impaired loans	$	55,396	$	—	$	55,396	$	—	$	1,703

Collateral Dependent Impaired Loans

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

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 $22.0 million at June 30, 2011. During the six months ended June 30, 2010 we recorded a net decrease of $1.7 million to our specific allowance as a result of adjusting the fair value of the collateral for certain collateral dependent impaired loans to $55.4 million at June 30, 2010.

Fair Value of Financial Instruments

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


	June 30, 2011				December 31, 2010
			Estimated fair				Estimated fair
	Carrying value		value		Carrying value		value
Financial assets:
Cash and cash equivalents	$	318,820	$	318,820	$	213,820	$	213,820
Investment securities available for sale		8,219,695		8,219,695		7,289,455		7,289,455
Investment securities held to maturity		2,939,933		2,992,924		1,025,724		1,043,803
Federal Home Loan Bank and Federal Reserve Bank common stock		305,241		305,241		183,800		183,800
Loans held for sale		51,141		51,141		37,977		38,357
Loans and leases, net		16,062,197		15,986,269		10,388,060		10,422,730
Mortgage servicing rights		14,989		15,937		12,591		13,178
Interest rate swap agreements		32,840		32,840		30,187		30,187
Accrued interest receivable		102,358		102,358		70,233		70,233

Financial liabilities:
Deposits	$	18,900,495	$	18,954,611	$	13,148,844	$	13,110,504
Borrowings		7,600,926		7,723,610		4,893,474		4,885,827
Interest rate swap agreements		37,778		37,778		27,506		27,506
Accrued interest payable		23,873		23,873		13,821		13,821

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

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

Cash and Cash Equivalents

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

Investment Securities

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

Federal Home Loan Bank and Federal Reserve Bank Common Stock

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

Loans and Leases

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

Accrued Interest Receivable and Accrued Interest Payable

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

Deposits

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

Borrowings

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

Commitments

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

Note 10. Segment Information

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

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


			Financial			Consolidated
Three months ended:	Banking		services			total
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


June 30, 2010:
Net interest income	$	154,758	$	—		$	154,758
Provision for credit losses		11,000		—			11,000


Net interest income after provision for credit losses		143,758		—			143,758
Noninterest income		33,896		12,154			46,050
Amortization of core deposit and other intangibles		4,647		664			5,311
Other noninterest expense		142,878		10,014			152,892


Income before income taxes		30,129		1,476			31,605
Income tax expense		11,012		590			11,602


Net income	$	19,117	$	886		$	20,003


			Financial			Consolidated
Six months ended:	Banking		services			total
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


June 30, 2010:
Net interest income	$	268,927	$	—		$	268,927
Provision for credit losses		24,131		—			24,131


Net interest income after provision for credit losses		244,796		—			244,796
Noninterest income		58,481		24,517			82,998
Amortization of core deposit and other intangibles		7,212		1,346			8,558
Other noninterest expense		222,833		19,994			242,827


Income before income taxes		73,232		3,177			76,409
Income tax expense		26,237		1,270			27,507


Net income	$	46,995	$	1,907		$	48,902


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

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

OVERVIEW

First Niagara Financial Group, Inc. is a Delaware corporation and a bank holding company (the “Company”), subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”), a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”). At June 30, 2011, we had $30.9 billion in assets, $18.9 billion in deposits, and 346 full-service branch locations across Upstate New York, Pennsylvania, Connecticut, and Western Massachussetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

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

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

BUSINESS AND INDUSTRY

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

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

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

MARKET AREAS AND COMPETITION

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

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

REGULATORY REFORM

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

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and that require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the adequacy of our allowance for loan losses, investment securities accounting, the accounting treatment and valuation of our acquired loans, and the analysis of the carrying value of goodwill for impairment are deemed to be critical, as our judgments could have a material effect on our results of operations. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2010 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:

Allowance for Loan Losses

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

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

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

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

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

We estimate the inherent risk of loss on all other loans by portfolio segment based primarily on our historical net loss experience, industry trends, trends in the local real estate market, and the current business and economic environment in our market areas. During the first quarter of 2011, we refined our process used to estimate the allowance by increasing the granularity of the historical net loss experience data utilized for both the consumer and commercial portfolio segments. These changes enhance our estimates and provide an opportunity to better align our allowance assumptions with the dynamic nature of our loan portfolio composition. We assessed the impact of the changes and concluded that they did not have a significant impact when compared to our estimates based on previous methodologies for either portfolio segment.

Prior to the first quarter, we estimated losses on our consumer loan portfolio segment utilizing average loss rates for each loan type based on historical net charge-offs. The enhancement in the first quarter provides further granularity by incorporating both loan type and delinquency rate trends into our loss rates. The enhanced approach estimates the inherent loss in the current portfolio based on their loan type and current delinquency status.

Acquired Loans

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

The excess of cash flows expected at acquisition over the estimated fair value is referred to as the accretable discount and is recognized into interest income over the remaining life of the loan. The difference between contractually required payments at acquisition and the cash flows expected to be collected at acquisition is referred to as the nonaccretable discount. The nonaccretable discount represents estimated future credit losses expected to be incurred over the life of the loan. Subsequent decreases to the expected cash flows require us to evaluate the need for an allowance for loan losses. Subsequent improvements in expected cash flows result in the reversal of a corresponding amount of the nonaccretable discount which we then reclassify as accretable discount that is recognized into interest income over the remaining life of the loan using the interest method. Our evaluation of the amount of future cash flows that we expect to collect is performed in a similar manner as that used to determine our allowance for loan losses. Charge-offs of the principal amount on acquired loans would be first applied to the nonaccretable discount portion of the fair value adjustment.

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

Investment Securities

As of June 30, 2011, our available for sale and held to maturity investment securities totaled $11.2 billion, or 36% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised almost entirely of Level 2 fair value measured securities. Fair value of our investment securities is based upon quoted market prices of identical securities, where available. If such quoted prices are not available, fair value is determined using valuation models that consider cash flow, security structure, and other observable information. We review the prices received from these third parties, on a quarterly basis, by comparing them to prices provided by a different independent pricing service. We have also reviewed detailed valuation methodologies provided to us by our pricing services. We did not adjust any of the prices provided to us by the independent pricing services at June 30, 2011 or December 31, 2010. Where sufficient information is not available to the pricing services to produce a reliable valuation, fair value is based on broker quotes.

We conduct a quarterly review and evaluation of our investment securities portfolio to determine if any declines in fair value below amortized cost are other than temporary. In making this determination we consider the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in fair value in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, credit enhancement, projected losses, level of credit loss, and projected cash flows. Any valuation decline below amortized cost that we determine to be other than temporary would require us to write down the credit component of such unrealized loss through a charge to current period earnings. If we intend to sell a security with a fair value below amortized cost or if it is more likely than not that we will be required to sell such a security, we would record an other than temporary impairment charge through current period earnings for the full decline in fair value below amortized cost.

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

Goodwill

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

The first step (Step 1) of impairment testing requires a comparison of each reporting unit’s fair value to carrying value to identify potential impairment. We have two reporting units: banking and financial services.

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

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

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

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

SELECTED FINANCIAL DATA


	2011					2010
At or for the quarter ended	June 30,		March 31			December 31		September 30		June 30
	(In thousands, except per share amounts)
Selected financial condition data:
Total assets	$	30,889,646	$	21,439,845		$	21,083,853	$	20,871,540	$	20,518,359
Loans and leases, net		16,062,197		10,611,117			10,388,060		9,978,952		9,874,111
Investment securities:
Available for sale		8,219,695		5,424,731	⁽¹⁾		7,289,455		7,341,505		7,131,393
Held to maturity		2,939,933		3,030,320	⁽¹⁾		1,025,724		1,125,184		1,038,866
Goodwill and other intangibles		1,829,712		1,108,811			1,114,144		1,099,446		1,099,155
Deposits		18,900,495		13,455,823			13,148,844		13,395,183		13,758,174
Borrowings		7,600,926		4,904,053			4,893,474		4,343,120		3,666,557
Stockholders’ equity	$	3,992,835	$	2,775,032		$	2,765,070	$	2,806,561	$	2,773,465
Common shares outstanding		295,245		209,432			209,112		209,059		209,040

Selected operations data:
Interest income	$	277,370	$	208,884		$	205,320	$	200,636	$	195,129
Interest expense		46,933		36,016			37,772		39,357		40,371

Net interest income		230,437		172,868			167,548		161,279		154,758
Provision for credit losses		17,307		12,900			13,500		11,000		11,000

Net interest income after provision for credit losses		213,130		159,968			154,048		150,279		143,758
Noninterest income		60,895		52,074			54,112		49,505		46,050
Noninterest expense⁽²⁾		255,141		145,150			139,334		132,609		158,203

Income before income taxes		18,884		66,892			68,826		67,175		31,605
Income tax expense		5,334		21,974			22,971		21,579		11,602


Net income	$	13,550	$	44,918		$	45,855	$	45,596	$	20,003


Stock and related per share data:
Earnings per common share:
Basic	$	0.05	$	0.22		$	0.22	$	0.22	$	0.10
Diluted		0.05		0.22			0.22		0.22		0.10
Cash dividends		0.16		0.16			0.15		0.14		0.14
Book value		13.68		13.45			13.42		13.63		13.48
Tangible book value per share⁽³⁾		7.41		8.08			8.01		8.29		8.14
Market Price (NASDAQ: FNFG):
High		14.54		15.10			14.40		13.79		14.88
Low		13.02		13.54			11.51		11.23		12.25
Close	$	13.20	$	13.58		$	13.98	$	11.65	$	12.53


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

⁽²⁾		Noninterest expense includes one-time expenses related to our merger and acquisition integration or restructuring activities of $88 million, $7 million, $6 million, $2 million, and $36 million for the quarters ended June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010, respectively.

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


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

Performance ratios⁽¹⁾:
Return on average assets		0.19	%		0.86	%		0.87	%		0.88	%		0.41	%
Return on average equity		1.42			6.56			6.46			6.44			2.97
Return on average tangible equity⁽²⁾		2.59			10.94			10.64			10.59			5.05

Net interest rate spread		3.53			3.68			3.52			3.47			3.52
Net interest rate margin		3.65			3.80			3.65			3.61			3.68
Efficiency ratio ⁽³⁾		87.6			64.5			62.9			62.9			78.8
Dividend payout ratio		320.00	%		72.73	%		68.18	%		63.64	%		140.00	%

Capital ratios:
*First Niagara Financial Group, Inc.*
Total risk-based capital		12.69	%		14.13	%		14.35	%		15.09	%		15.09	%
Tier 1 risk-based capital		12.05			13.32			13.54			14.25			14.27
Tier 1 common capital⁽⁴⁾		11.41			12.56			12.76			13.42			13.43
Leverage ratio		7.81			8.21			8.14			8.37			8.75
Ratio of stockholders’ equity to total assets		12.93			12.94			13.11			13.45			13.52
Ratio of tangible stockholders’ equity to tangible assets⁽⁵⁾		7.44			8.20			8.27			8.63			8.62
*First Niagara Bank, N.A.:*
Total risk-based capital		12.37			12.04			11.86			12.72			12.40
Tier 1 risk-based capital		11.72			11.23			11.06			11.88			11.59
Leverage ratio		7.58	%		6.92	%		6.64	%		6.97	%		7.10	%

Asset quality:
Total nonaccruing loans	$	82,513		$	80,368		$	89,323		$	94,180		$	74,338
Other nonperforming assets		12,315			6,955			8,647			8,619			8,559
Total classified loans⁽⁶⁾		700,813			564,037			481,074			462,902			386,123
Total criticized loans⁽⁷⁾		1,253,937			972,148			942,941			859,219			804,045
Allowance for loan losses		107,028			100,126			95,354			94,532			90,409
Net loan charge-offs	$	7,537		$	8,128		$	12,679		$	6,877		$	10,079
Net charge-offs to average loans (annualized)		0.20	%		0.31	%		0.49	%		0.27	%		0.41	%
Provision to average loans (annualized)		0.38			0.49			0.53			0.43			0.45
Total nonaccruing loans to total loans		0.51			0.75			0.85			0.93			0.74
Total nonperforming assets to total assets		0.31			0.41			0.46			0.49			0.40
Allowance for loan losses to total loans		0.66			0.93			0.91			0.93			0.90
Allowance for loan losses to legacy loans⁽⁸⁾		1.20			1.22			1.21			1.30			1.29
Allowance for loan losses to nonaccruing loans		129.7			124.6			106.8			100.4			121.6
Texas ratio⁽⁹⁾		10.12	%		8.51	%		8.94	%		8.85	%		7.43	%

Other data:
Number of branches		346			257			257			255			255
Full time equivalent employees		4,751			3,825			3,791			3,725			3,748


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

⁽²⁾		Average tangible equity excludes average goodwill and other intangibles of $1.7 billion, $1.1 billion, $1.1 billion, $1.1 billion, and $1.1 billion, for the quarters ended June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010, respectively. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and condition.

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

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

⁽⁵⁾		Tangible common stockholders’ equity and tangible assets exclude goodwill and other intangibles of $1.8 billion. $1.1 billion, $1.1 billion, $1.1 billion, and $1.1 billion as of June 30, 2011, March 31, 2011, December 31, 2010, September 30, 2010, and June 30, 2010, respectively. This is a non-GAAP financial measure that we believe provides investors with information that is useful in understanding our financial performance and condition.


⁽⁶⁾		Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Classification of Assets” in our Annual Report on 10-K for the year ended December 31, 2010.

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

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

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

RESULTS OF OPERATIONS

Overview

The following table summarizes the results of our operations for the periods indicated:


	Three months ended						Six months ended
	June 30,		March 31,		June 30,		June 30,
	2011		2011		2010		2011		2010
Operating results:⁽¹⁾
Net interest income	$	230,437	$	172,868	$	154,758	$	403,305	$	268,927
Provision for credit losses		17,307		12,900		11,000		30,207		24,131
Noninterest income		60,895		52,074		46,050		112,969		82,998
Noninterest expense		166,657		137,918		121,612		304,575		208,562
Income tax expense		36,126		24,350		23,285		60,476		41,675


Net operating income	$	71,242	$	49,774	$	44,911	$	121,016	$	77,557


Operating earnings per diluted share	$	0.25	$	0.24	$	0.22	$	0.49	$	0.40


Reconciliation of net operating income to net income	$	71,242	$	49,774	$	44,911	$	121,016	$	77,557
Nonoperating expenses, net of tax:
Merger and acquisition integration expenses		50,092		4,147		24,395		54,241		28,148
Restructuring charges		7,600		709		—		8,307		—
Other		—		—		513		—		507


Total nonoperating expenses, net of tax		57,692		4,856		24,908		62,548		28,655


Net income	$	13,550	$	44,918	$	20,003	$	58,468	$	48,902


Earnings per diluted share	$	0.05	$	0.22	$	0.10	$	0.24	$	0.25


⁽¹⁾		We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. In addition, we believe the exclusion of these nonoperating items enables management to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations.

Net income for the three months ended June 30, 2011 amounted to $14 million, or $0.05 per diluted common share, compared to $20 million, or $0.10 per diluted common share for the three months ended June 30, 2010 and $45 million, or $0.22 per diluted common share for the three months ended March 31, 2011.

Our financial results were significantly impacted by several events. Our NewAlliance and Harleysville acquisitions were the primary drivers that resulted in after-tax merger and acquisition integration expenses of $50 million, $4 million and $24 million in the quarters ended June 30, 2011, March 31, 2011 and June 30, 2010, respectively. In connection with the New Alliance acquisition, we issued 94 million shares to NewAlliance shareholders on April 15, 2011. These shares caused a 37% increase in our weighted average shares outstanding in the current quarter compared to the quarter ended March 31, 2011. Additionally, we recognized $8 million and $1 million in after-tax expenses in the current quarter and in the quarter ended March 31, 2011, respectively, as we began to take certain measures to restructure elements of our business to enhance our performance.

Excluding the impact of the merger and acquisition integration expenses and the restructuring charges, “operating” net income for the three months ended June 30, 2011 amounted to $71 million, or $0.25 per diluted share compared to $45 million, or $0.22 per diluted common share for the three months ended June 30, 2010 and $50 million, or $0.24 per diluted common share for the three months ended March 31, 2011. Operating income is a non-GAAP measure which provides a meaningful comparison of our underlying operational performance and we believe facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry.

Net income for the six months ended June 30, 2011 amounted to $58 million, or $0.24 per diluted common share, compared to $49 million, or $0.25 per diluted common share, for the six months ended June 30, 2010. The 20% increase in net income and $0.01 decrease in diluted earnings per shares reflects our larger franchise resulting from our April 2011 merger with NewAlliance and was partially offset by the 26% increase in weighted average diluted shares due to the issuance of 94 million shares to NewAlliance shareholders. Excluding the impact of the merger and acquisition integration expenses, operating net income for the six months ended June 30, 2011 amounted to $121 million, or $0.49 per diluted share compared to $78 million, or $0.40 per diluted common share for the six months ended June 30, 2010.

Results for the three months ended June 30, 2011 compared to the three months ended March 31, 2011 were most significantly impacted by a $59 million increase in our taxable equivalent net interest income driven by our expansion into New England and organic loan growth. Our average interest-earning assets increased by $7.1 billion while our average interest-bearing liabilities increased by $6.1 billion. Loans acquired from NewAlliance accounted for $4.3 billion of average loan balances at June 30, 2011 while deposits assumed from NewAlliance accounted for $4.4 billion of average deposit balances at June 30, 2011. Additionally, our net interest spread and our taxable equivalent net interest margin each decreased by 15 basis points to 3.53% and 3.65%, respectively.

Results for the six months ended June 30, 2011 compared to the six months ended June 30, 2010 were also significantly impacted by a $140 million increase in our taxable equivalent net interest income as a result of our expansion into New England as well as organic loan growth. Our average interest-earning assets increased by $7.4 billion, while our average interest-bearing liabilities increased by $6.6 billion. Our organic loan commercial and home equity loan growth were partially offset by a decrease in the residential loan portfolio due to ongoing consumer preference for long-term fixed rate products, which we generally do not hold in our portfolio.

The provision for credit losses increased to $17 million for the quarter ended June 30, 2011, compared to $11 million for the quarter ended June 30, 2010 and $13 million for the quarter ended March 31, 2011. Of this amount, $14 million related to loans and increased our allowance for loan losses, and $3 million related to unfunded loan commitments and increased our liability for unfunded loan commitments. Our net charge-offs for the quarter ended June 30, 2011 remained unchanged from the quarter ended March 31, 2011 at $8 million and decreased from $10 million for the quarter ended June 30, 2010. However, nonaccruing loans increased to $83 million at June 30, 2011 compared to $80 million and $74 million at March 31, 2011 and June 30, 2010, respectively.

Noninterest income amounted to $61 million for the quarter ended June 30, 2011, compared to $46 million for the quarter ended June 30, 2010 and $52 million for the quarter ended March 31, 2011. The increase from the second quarter of 2010 is primarily due to our merger with NewAlliance and our insurance agency acquisitions during the second half of 2010. The increase in noninterest income during the current quarter from the first quarter of 2011 also resulted from the merger with NewAlliance while the majority of the increase in revenues from wealth management services has been due to an increase in production in Eastern Pennsylvania. In addition, lower mortgage rates have driven higher mortgage refinancing activity resulting in an increase in revenues from mortgage banking. Insurance revenues increased modestly during the current quarter compared to the first quarter of 2011 due to the seasonality of these revenues in the first quarter offset by the impact of our April 2011 insurance agency acquisition in New England. Other noninterest income decreased during the current quarter as capital markets revenue returned to a normalized level after an exceptionally strong first quarter of 2011.

Noninterest income amounted to $113 million for the six months ended June 30, 2011, compared to $83 million for the same period in 2010. This increase was primarily the result of our merger with NewAlliance and our insurance agency acquisitions. However, the increase in revenues from wealth management services has been due to a steady increase in activity in Eastern Pennsylvania.

Noninterest expense increased to $255 million for the quarter ended June 30, 2011 from $158 million for the quarter ended June 30, 2010 and $145 million for the quarter ended March 31, 2011. The increase from the second quarter of 2010 is primarily due to our merger with NewAlliance, our insurance agency acquisitions, charges we incurred in restructuring certain elements of our business to enhance our performance, and the build out of our infrastructure to support the growth in our franchise. The increase in noninterest expense for the quarter ended June 30, 2011 from the quarter ended March 31, 2011 is also primarily due to the impact of our merger with NewAlliance, our insurance agency acquisition, and restructuring charges.

Noninterest expense amounted to $400 million for the first half of 2011, compared to $251 million for the first half of 2010. This increase was primarily the result of our merger with NewAlliance, our insurance agency acquisitions, and restructuring charges.

Net Interest Income

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


	Three months ended June 30,										Increase
	2011					2010					(decrease)
	Average					Average					Average
	outstanding					outstanding					outstanding
	balance		Yield/rate			balance		Yield/rate			balance			Yield/rate

Interest-earning assets:
Loans and leases⁽¹⁾
Commercial:
Real estate	$	5,807,141		5.42	%	$	4,194,002		5.91	%	$	1,613,139			(0.49	)%
Business		3,119,841		4.30			2,079,222		5.21			1,040,619			(0.91	)

Total commercial lending		8,926,982		5.03			6,273,224		5.68			2,653,758			(0.65	)
Residential real estate		3,848,440		4.56			1,900,471		5.18			1,947,969			(0.62	)
Home equity		2,038,870		4.58			1,374,245		4.82			664,625			(0.24	)
Other consumer		270,356		7.10			260,953		6.62			9,403			0.48

Total loans		15,084,648		4.93			9,808,893		5.48			5,275,755			(0.55	)
Mortgage-backed securities⁽²⁾		9,041,368		3.58			6,262,548		3.48			2,778,819			0.10
Other investment securities⁽²⁾		1,472,757		3.88			859,256		4.05			613,501			(0.17	)
Money market and other investments		354,634		2.58			235,637		1.23			118,997			1.35

Total interest-earning assets		25,953,407		4.37	%		17,166,334		4.62	%		8,787,072			(0.25	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		3,143,618					2,181,754					961,864


Total assets	$	29,097,025				$	19,348,088				$	9,748,936


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,554,837		0.29	%	$	1,242,052		0.17	%	$	1,312,785			0.12	%
Checking accounts		2,027,385		0.13			1,675,705		0.25			351,680			(0.12	)
Money market deposits		6,406,684		0.58			4,725,441		0.68			1,681,243			(0.10	)
Certificates of deposit		4,355,235		0.88			4,007,431		1.10			347,804			(0.22	)

Total interest-bearing deposits		15,344,141		0.56			11,650,629		0.71			3,693,512			(0.15	)
Borrowings
FHLB advances		3,286,646		1.41	%		1,073,018		2.43	%		2,213,628			(1.02	)%
Repurchase agreements		3,272,284		0.93			1,524,186		1.60			1,748,098			(0.67	)
Senior notes		296,837		6.89			308,661		7.14			(11,824	)		(0.25	)
Other borrowings		127,317		4.37			85,733		7.19			41,584			(2.82	)

Total borrowings		6,983,084		1.47			2,991,598		2.63			3,991,486			(1.16	)

Total interest-bearing liabilities		22,327,225		0.84	%		14,642,227		1.10	%		7,684,998			(0.26	)%

Noninterest-bearing deposits		2,542,134					1,728,853					813,281
Other noninterest-bearing liabilities		388,565					277,838					110,727

Total liabilities		25,257,924					16,648,918					8,609,006
Stockholders’ equity⁽³⁾		3,839,101					2,699,170					1,139,931

Total liabilities and stockholders’ equity	$	29,097,025				$	19,348,088				$	9,748,937


Net interest rate spread				3.53	%				3.52	%					0.01	%

Net interst rate margin				3.65	%				3.68	%					(0.03	)%


	Six months ended June 30,										Increase
	2011					2010					(decrease)
	Average					Average					Average
	outstanding					outstanding					outstanding
	balance		Yield/rate			balance		Yield/rate			balance		Yield/rate

Interest-earning assets:
Loans and leases⁽¹⁾
Commercial:
Real estate	$	5,122,388		5.48	%	$	3,642,202		5.82	%	$	1,480,186		(0.34	)%
Business		2,869,424		4.39			1,896,341		4.92			973,083		(0.53	)

Total commercial lending		7,991,812		5.09			5,538,543		5.51			2,453,269		(0.42	)
Residential real estate		2,781,506		4.70			1,773,786		5.20			1,007,720		(0.50	)
Home equity		1,777,078		4.56			1,041,198		4.84			735,880		(0.28	)
Other consumer		269,536		6.99			224,316		7.39			45,220		(0.40	)

Total loans		12,819,932		5.02			8,577,843		5.42			4,242,089		(0.40	)
Mortgage-backed securities⁽²⁾		8,103,505		3.68			5,486,961		3.53			2,616,544		0.15
Other investment securities⁽²⁾		1,212,218		3.90			805,159		3.69			407,059		0.21
Money market and other investments		292,594		3.15			161,729		1.80			130,865		1.35

Total interest-earning assets		22,428,249		4.47	%		15,031,692		4.60	%		7,396,557		(0.13	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		2,702,054					1,927,907					774,147


Total assets	$	25,130,303				$	16,959,599				$	8,170,704


Interest-bearing liabilities:
Deposits
Savings deposits	$	1,907,423		0.23	%	$	1,080,622		0.16	%	$	826,801		0.07	%
Checking accounts		1,850,995		0.12			1,356,953		0.21			494,042		(0.09	)
Money market deposits		5,713,454		0.54			4,210,230		0.69			1,503,224		(0.15	)
Certificates of deposit		3,807,430		0.98			3,418,887		1.09			388,543		(0.11	)

Total interest-bearing deposits		13,279,302		0.56			10,066,692		0.71			3,212,610		(0.15	)
Borrowings
FHLB advances		2,403,895		1.55			858,141		2.92			1,545,754		(1.37	)
Repurchase agreements		3,167,927		0.94			1,434,744		1.45			1,733,183		(0.51	)
Senior notes		296,811		6.97			251,163		8.59			45,648		(1.62	)
Other borrowings		118,924		4.22			70,526		6.33			48,398		(2.11	)

Total borrowings		5,987,557		1.55			2,614,574		2.74			3,372,983		(1.19	)

Total interest-bearing liabilities		19,266,859		0.87	%		12,681,266		1.12	%		6,585,593		(0.25	)%

Noninterest-bearing deposits		2,217,179					1,488,544					728,635
Other noninterest-bearing liabilities		335,148					238,566					96,582

Total liabilities		21,819,186					14,408,376					7,410,810
Stockholders’ equity⁽³⁾		3,311,117					2,551,223					759,894

Total liabilities and stockholders’ equity	$	25,130,303				$	16,959,599				$	8,170,704


Net interest rate spread				3.60	%				3.48	%				0.12	%

Net interst rate margin				3.72	%				3.65	%				0.07	%


	Three months ended June 30,					Three months ended March 31,					Increase
	2011					2011					(decrease)
	Average					Average					Average
	outstanding					outstanding					outstanding
	balance		Yield/rate			balance		Yield/rate			balance			Yield/rate

Interest-earning assets:
Loans and leases⁽¹⁾
Commercial:
Real estate	$	5,807,141		5.42	%	$	4,430,619		5.56	%	$	1,376,522			(0.14	)%
Business		3,119,841		4.30			2,615,778		4.43			504,063			(0.13	)

Total commercial lending		8,926,982		5.03			7,046,397		5.14			1,880,585			(0.11	)
Residential real estate		3,848,440		4.56			1,738,384		4.96			2,110,056			(0.40	)
Home equity		2,038,870		4.58			1,508,189		4.52			530,681			0.06
Other consumer		270,356		7.10			272,894		6.59			(2,538	)		0.51

Total loans		15,084,648		4.93			10,565,864		5.12			4,518,784			(0.19	)
Mortgage-backed securities⁽²⁾		9,041,368		3.58			7,155,225		3.81			1,886,143			(0.23	)
Other investment securities⁽²⁾		1,472,757		3.88			948,783		3.95			523,974			(0.07	)
Money market and other investments		354,634		2.58			193,430		4.15			161,204			(1.57	)

Total interest-earning assets		25,953,407		4.37	%		18,863,302		4.58	%		7,090,105			(0.21	)%

Noninterest-earning assets⁽³⁾⁽⁴⁾		3,143,618					2,256,204					887,414


Total assets	$	29,097,025				$	21,119,506				$	7,977,519


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,554,837		0.29	%	$	1,243,856		0.10	%	$	1,310,981			0.19	%
Checking accounts		2,027,385		0.13			1,732,971		0.11			294,414			0.02
Money market deposits		6,406,684		0.58			5,012,521		0.48			1,394,163			0.10
Certificates of deposit		4,355,235		0.88			3,253,538		1.11			1,101,697			(0.23	)

Total interest-bearing deposits		15,344,141		0.56			11,242,886		0.56			4,101,255			—
Borrowings
FHLB advances		3,286,646		1.41			1,437,270		1.96			1,849,376			(0.55	)
Repurchase agreements		3,272,284		0.93			3,136,477		0.93			135,807			—
Senior notes		296,837		6.89			296,783		7.05			54			(0.16	)
Other borrowings		127,317		4.37			92,557		4.82			34,760			(0.45	)

Total borrowings		6,983,084		1.47			4,963,087		1.67			2,019,997			(0.20	)


Total interest-bearing liabilities		22,327,225		0.84	%		16,205,973		0.90	%		6,121,252			(0.06	)%

Noninterest-bearing deposits		2,542,134					1,837,248					704,886
Other noninterest-bearing liabilities		388,565					299,019					89,546

Total liabilities		25,257,924					18,342,240					6,915,684
Stockholders’ equity⁽³⁾		3,839,101					2,777,266					1,061,835

Total liabilities and stockholders’ equity	$	29,097,025				$	21,119,506				$	7,977,519


Net interest rate spread				3.53	%				3.68	%					(0.15	)%

Net interst rate margin				3.65	%				3.80	%					(0.15	)%


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

⁽²⁾		Average outstanding balances are at amortized cost.

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

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

Year Over Year Changes

Our taxable equivalent net interest income increased $140 million, or 51%, for the first six months of 2011 compared to the first six months of 2010. This increase resulted from a $7.4 billion, or 49%, increase in our average interest-earning assets, and a $6.6 billion, or 52%, increase in our interest-bearing liabilities. The increase in average interest-earning assets and interest bearing liabilities was primarily due to the NewAlliance merger, which we completed in the second quarter of 2011. In addition to the results of the merger, our year over year increases are the result of our focus on organic loan growth. Excluding the average balance of loans acquired from NewAlliance of $4.3 billion, our average loan balance for the second quarter of 2011 was $10.8 billion, which was an increase of $1.0 billion or 10% over the same quarter in 2010. This increase was concentrated in commercial lending, which increased $1.1 billion compared to the same quarter of 2010, and home equity, which increased $136 million or 10%, compared to the same quarter of 2010. Offsetting these increases were a decrease of $198 million in residential real estate due to ongoing consumer preference for long-term fixed rate products, which we generally do not hold in our portfolio.

Quarter Over Quarter Changes

Our taxable equivalent net interest income increased $59 million for the quarter ending June 30, 2011 compared to the quarter ending March 31, 2011. Our average interest earning assets increased $7.1 billion and average interest bearing liabilities increased by $6.1 billion. The increases were primarily attributable to our NewAlliance merger which closed in the second quarter of 2011, which added $4.3 billion to our average loan balances and $4.4 billion to our average deposit balances in the second quarter. Our second quarter net interest rate spread and net interest rate margin both decreased by 15 basis points from the first quarter of 2011.

Significant changes in our average balances and yields from the first quarter of 2011 to the second quarter of 2011 include:

	•		The increase in our average balance of investment securities of $2.4 billion was primariliy driven by our acquisition of NewAlliance in the second quarter, which accounted for $2.3 billion of the increase. The average yield on investment securities decreased from 3.83% in the first quarter of 2011 to 3.63%. This decrease was, in part, driven by the overall decrease in interest rates in the second quarter of 2011 compared to the first quarter of 2011. Additionally, the decrease in yield also resulted from the composition of the securities acquired from NewAlliance, which, in comparison to our portfolio prior to acquisition, had a lower weighted average yield due to shorter durations and a higher proportion of securities backed by pools of adjustable rate mortgages.

	•		In addition to the growth in our loan portfolio due to the acquisition of NewAlliance, our interest income continued to benefit from organic loan growth as well. Excluding the impact of our acquisition of NewAlliance, our average commercial loan portfolio increased by $293 million during the second quarter, or 17% on an annualized basis, as we continue to focus on growing our commercial portfolio through capitalizing on opportunities in our expanded footprint. The $293 million increase was comprised of $150 million in commercial real estate loans and $143 million in our commercial business loans.

	•		Our average balance of residential real estate loans increased by $2.1 billion compared to the first quarter of 2011 driven by the average balance of residential real estate loans acquired from NewAlliance of $2.1 billion. The decrease in yield of 40 basis points was driven by both the decrease in overall interest rates in the second quarter of 2011 and the lower yield on the loans acquired from NewAlliance.

	•		Our total interest rate on deposits remained flat with the incorporation of the deposits from our NewAlliance merger as rate decreases in certificates of deposits were offset by rate increases on savings and money market accounts. We continue to focus on achieving a more favorable deposit mix. Excluding the average balance of deposits acquired from NewAlliance, our core deposits grew 22% on an annualized basis compared to the first quarter of 2011. The growth was particularly focused in our money market accounts as they increased 36%, on an annualized basis, excluding deposits acquired from NewAlliance. Consistent with prior quarters, certificates of deposits decreased by 21% on an annual basis as our pricing strategy has remained focused on allowing the runoff of our highest paying certificates of deposit balances.

	•		Our average total borrowings increased $2.0 billion since the first quarter resulting from the borrowings acquired in the NewAlliance merger as well as our continued use of wholesale funding to replace the runoff of our certificates of deposit balance discussed above. Our average rate on borrowings declined 20 basis points in the second quarter compared to the first quarter. The decrease in rate resulted from maturities of long-term borrowings at higher rates, which were replaced with borrowings at lower rates due to the current interest rate environment.

Provision for Credit Losses

Our provision for credit losses attributable to loans is based upon our assessment of the adequacy of our allowance for loan losses and our liability for unfunded loan commitments, with consideration given to such interrelated factors as the composition of and credit risk in our loan portfolio, the level of our nonaccruing and delinquent loans, and related collateral or government guarantees, net charge-offs, and economic considerations. The provision for credit losses related to loans amounted to $14 million, or 0.38% of average loans, for the quarter ended June 30, 2011, compared to $13 million and $11 million, or 0.49% and 0.45% of average loans, for the quarters ended March 31, 2011 and June 30, 2010, respectively. Excluding average acquired loans, our provision for credit losses related to loans as a percentage of average loans was 0.73% for the second quarter of 2011, 0.64% for the first quarter of 2011 and 0.66% for the second quarter of 2010. These acquired loans were originally recorded at fair value on the date of acquisition, with no carryover of the related allowance for loan losses. Criticized loans of $1.3 billion at June 30, 2011 compared to $972 million at March 31, 2011. The increase in criticized loans of $282 million was primarily attributed to the criticized loans acquired from NewAlliance. Our net charge-offs of $8 million in the current quarter were consistent with our net charge-offs in the first current of 2011 and were slightly lower than the $10 million in net charge-offs recorded in the second quarter of 2010. Additionally our nonaccruing loans increased to $83 million at June 30, 2011 compared to $80 million and $74 million at March 31, 2011 and June 30, 2010, respectively.

In addition to the provision for credit losses related to loans of $14 million, our provision for credit losses included $3 million for unfunded loan commitments. The liability resulting from this provision is included in Other Liabilities in our Consolidated Statement of Condition.

Noninterest Income

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


	June 30,			March 31,			June 30,
	2011			2011			2010
Banking services	$	24,613		$	19,006		$	21,529
Insurance commissions		17,044			15,755			12,768
Wealth management services		7,883			6,734			5,711
Mortgage banking		3,386			1,263			1,626
Lending and leasing		2,811			3,763			2,510
Bank owned life insurance		3,055			2,030			1,976
Other		2,103			3,523			(70	)


Total noninterest income	$	60,895		$	52,074		$	46,050


Noninterest income as a percentage of net revenue		20.9	%		23.1	%		22.9	%

Noninterest income increased $15 million, or 32% for the quarter ended June 30, 2011, compared to the second quarter of 2010. The increases in revenues from banking services, mortgage banking, lending and leasing, and other noninterest income were primarily attributable to our April 2011 merger with NewAlliance. The $4 million increase in insurance commissions is attributable to our insurance agency acquisitions in Pennsylvania during 2010 and New England in 2011. A portion of the increase in revenues from wealth management services was due to the NewAlliance merger but the majority of the increase is due to increased activity in Eastern Pennsylvania.

The $9 million, or 17%, increase in noninterest income for the quarter ended June 30, 2011 from the quarter ended March 31, 2011 was primarily driven by our merger with NewAlliance. The modest increase in insurance revenues reflects the impact of our April 2011 insurance agency acquisition in New England offset by the seasonality of these revenues as renewals tend to be highest in the first quarter of the year. In addition, a portion of the increase in revenues from mortgage banking resulted from a decrease in mortgage rates driving an increase in mortgage banking activity. A portion of the increase in revenues from wealth management services was due to the NewAlliance merger but the majority of the increase is due to increased activity in Eastern Pennsylvania where we have seen a steady increase in activity since our merger with Harleysville. The decrease in other noninterest income is reflective of the decrease in capital markets revenue to a normalized level after an exceptionally strong first quarter of 2011.

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


	2011			2010
Banking services	$	43,619		$	37,536
Insurance commissions		32,799			24,931
Wealth management services		14,617			8,959
Mortgage banking		4,649			2,858
Lending and leasing		6,574			4,554
Bank owned life insurance		5,085			3,200
Other		5,626			960


Total noninterest income	$	112,969		$	82,998


Noninterest income as a percentage of net revenue		21.9	%		23.6	%

Noninterest income increased $30 million, or 36% for the six months ended June 30, 2011, compared to the six months ended June 30, 2010. The increases in revenues from banking services, mortgage banking, lending and leasing, and other noninterest income were primarily attributable to our April 2011 merger with NewAlliance. The almost $8 million increase in insurance commissions is attributable to our insurance agency acquisitions in Pennsylvania during 2010 and New England in 2011. A portion of the increase in revenues from wealth management services was due to the NewAlliance merger but the majority of the increase is due to increased activity in Eastern Pennsylvania where we have seen a steady increase in activity since our merger with Harleysville.

Noninterest Expense

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


	June 30,			March 31,			June 30,
	2011			2011			2010
Salaries and benefits	$	90,192		$	73,776		$	64,081
Occupancy and equipment		18,952			16,197			13,422
Technology and communications		13,929			12,871			11,403
Marketing and advertising		3,880			2,692			7,691
Professional services		9,138			6,039			4,054
Amortization of intangibles		6,573			5,489			5,311
FDIC premiums		6,267			6,195			4,959
Merger and acquisition integration expenses		76,828			6,176			35,837
Restructuring charges		11,656			1,056			—
Other		17,726			14,659			11,445


Total noninterest expense		255,141			145,150			158,203

Less nonoperating expenses:
Merger and acquisition integration expenses		(76,828	)		(6,176	)		(35,837	)
Restructuring charges		(11,656	)		(1,056	)		—
Other		—			—			(754)


Total operating noninterest expense⁽²⁾	$	166,657		$	137,918		$	121,612


Efficiency ratio⁽¹⁾		87.6	%		64.5	%		78.8	%


Operating efficiency ratio⁽²⁾		57.2	%		61.3	%		60.6	%


⁽¹⁾		We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. The efficiency ratio is computed by dividing noninterest expenses by the sum of net interest income and noninterest income.
⁽²⁾		We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. The operating efficiency ratio is computed by dividing operating noninterest expenses by the sum of net interest income and noninterest income.

Noninterest expenses increased $97 million, or 61%, for the quarter ended June 30, 2011, compared to the second quarter of 2010, which was primarily attributable to merger and acquisition integration expenses related to our April merger with NewAlliance, increased costs associated with the NewAlliance branches, our insurance agency acquisitions, charges we incurred in restructuring certain elements of our business, and the growth of our infrastructure. Salaries and benefits expenses increased 41% as we experienced an increase in the number of full time equivalent employees, from 3,748 at June 30, 2010 to 4,751 at June 30, 2011. The increases in occupancy and equipment and technology and communications resulted from the increase in our workforce during this time period and from the 88 branches we acquired in our merger with NewAlliance. Marketing and advertising decreased during the quarter ended June 30, 2011 compared to the same quarter in 2010 due to the timing of expenditures.

The $110 million, or 76%, increase in noninterest expenses for the quarter ended June 30, 2011 compared to the first quarter of 2011 was also primarily due to our merger with NewAlliance, our insurance agency acquisition, restructuring charges, and the continued growth of our infrastructure. Salaries and benefits increased during the quarter ended June 30, 2011 compared to the quarter ended March 31, 2011, as a result of incremental salaries associated with our merger with NewAlliance and insurance agency acquisition, as well as our infrastructure growth as we continued to strengthen our leadership structure to support our increasing size.

Merger and acquisition integration expenses of $77 million for the three months ended June 30, 2011 were primarily attributable to our merger with NewAlliance. Severance costs comprised more than half of these expenses, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses. Merger and acquisition integration expenses amounted to $36 million for the three months ended June 30, 2010 and were primarily attributable to our merger with Harleysville, including a contribution to First Niagara Bank Foundation to support charitable giving in Eastern Pennsylvania where the Harleysville branches are located. Merger and acquisition integration expenses amounted to $6 million for the three months ended March 31, 2011 and were primarily attributable to our merger with NewAlliance.

Our efficiency ratio for the current quarter was 87.6% compared to 64.5% for the quarter ended March 31, 2011, and 78.8% for the same quarter in 2010 reflecting the increase in our noninterest expenses as a result of our acquisitions, restructuring charges, and growth of our infrastructure. Our operating efficiency ratio improved to 57.2% for the quarter ended June 30, 2011 from 61.3%, and 60.6% for the quarters ended March 31, 2011 and June 30, 2010, respectively, reflecting our ability to grow organically and by acquisition in an efficient manner.

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


	2011			2010
Salaries and benefits	$	163,968		$	112,318
Occupancy and equipment		35,149			23,329
Technology and communications		26,800			20,052
Marketing and advertising		6,572			9,223
Professional services		15,177			6,564
Amortization of intangibles		12,062			8,558
FDIC premiums		12,462			8,422
Merger and acquisition integration expenses		83,004			42,069
Restructuring charges		12,712			—
Other		32,385			20,850


Total noninterest expense		400,291			251,385

Less nonoperating expenses:
Merger and acquisition integration expenses		(83,004	)		(42,069	)
Restructuring charges		(12,712	)		—
Other		—			(754	)

Total operating noninterest expense⁽²⁾	$	304,575		$	208,562


Efficiency ratio⁽¹⁾		77.5	%		71.4	%


Operating efficiency ratio⁽²⁾		59.0	%		59.3	%


⁽¹⁾		We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. The efficiency ratio is computed by dividing noninterest expenses by the sum of net interest income and noninterest income.

⁽²⁾		We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates investors’ assessments of business and performance trends in comparison to others in the financial services industry. The operating efficiency ratio is computed by dividing operating noninterest expenses by the sum of net interest income and noninterest income.

The 59% increase in noninterest expenses from the first half of 2010 to the first half of 2011 was primarily attributable to merger and acquisition integration expenses related to our April merger with NewAlliance, restructuring charges, and our infrastructure growth. Salaries and benefits increased $52 million, or 46%, as a result of the incremental salaries associated with the NewAlliance merger as well as the continued growth of our supporting infrastructure, reflecting the 27% increase in the number of full-time employees from June 30, 2010 to June 30, 2011.

Merger and acquisition integration expenses of $83 million for the six months ended June 30, 2011 were primarily attributable to our merger with NewAlliance. Severance costs comprised more than half of these expenses, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses.

For the six months ended June 30, 2011 and 2010, our efficiency ratio amounted to 77.5% and 71.4%, respectively. Our operating efficiency ratio improved to 59.0% for the six months ended June 30, 2011, from 59.3% for the same period in 2010, reflecting our ability to grow organically and by acquisition in an efficient manner.

Income Tax Expense

Our effective tax rate of 28.3% for the three months ended June 30, 2011 decreased from 32.8% and 36.7% for the three months ended March 31, 2011 and June 30, 2010, respectively. Our effective tax rate for the six months ended June 30, 2011 decreased to 31.8% compared to 36.0% for the same period in the prior year. The decrease in the rates is primarily due to lower pre-tax income as a result of higher expense levels attributable to our merger activity and the restructuring charges, coupled with a $1.1 million reversal of a liability related to uncertain tax positions taken in prior years. The projected tax rate for 2011 is estimated to be approximately 33%.

ANALYSIS OF FINANCIAL CONDITION AT JUNE 30, 2011

Overview

On April 15, 2011, we completed our acquisition of NewAlliance and the results of the merger are included in our consolidated statement of financial condition at June 30, 2011. The merger significantly impacted our balance sheet as can be seen through our comparison to the previous quarter presented below. Total assets increased $9.5 billion to $30.9 billion at June 30, 2011 from $21.4 billion at March 31, 2011 primarily attributable to our acquisition of $9.2 billion in total assets from NewAlliance in the second quarter. To provide perspective on the impact of our acquisition in our consolidated statement of financial condition, the table below details the balances acquired from NewAlliance in the second quarter and the balances at June 30, 2011 excluding the acquired balances as well as a comparison of the balances excluding NewAlliance to our consolidated balances as of March 31, 2011 (amounts in millions):


	Quarter ending June 30, 2011								Period over
			Balances						period change
			acquired from		Excluding		Quarter ending		excluding
	Consolidated		New Alliance		NewAlliance		March 31, 2011		NewAlliance
Investment securities	$	11,160		2,759		8,401		8,455		(54	)
Loans and leases:
Commercial:
Real estate		6,130		1,469		4,661		4,542		119
Business		3,335		433		2,902		2,697		205

Total commercial loans		9,465		1,902		7,563		7,239		324
Residential real estate		4,271		2,569		1,702		1,702		—
Home equity		2,161		632		1,529		1,507		22
Other consumer		272		10		262		263		(1	)

Total loans and leases		16,169		5,113		11,056		10,711		345

Deposits:
Savings accounts		2,768		1,543		1,225		1,271		(46	)
Interest-bearing checking		2,029		421		1,608		1,726		(118	)
Money market deposits		6,878		1,132		5,746		5,177		569
Noninterest-bearing deposits		2,739		694		2,045		2,050		(5	)
Certificates of deposit		4,487		1,522		2,965		3,231		(266	)

Total deposits		18,901		5,312		13,589		13,455		134

Short-term borrowings		1,467		478		989		970		19
Long-term borrowings		6,134		1,821		4,313		3,934		379

Total borrowings		7,601		2,299		5,302		4,904		398

Excluding the impact of balances acquired from NewAlliance from our June 30, 2011 ending balances, we noted the following trends:

	•		Our ending loan balances at June 30, 2011 increased $345 million, or 13% annualized, to $11.1 billion from $10.7 billion at March 31, 2011. The increase represents organic growth driven by our focus on our commercial lending efforts as seen in the $324 million increase in total commercial loans, or 18% on an annualized basis.

	•		The growth in deposits from NewAlliance was complemented by an increase of $569 million in money market deposits in our upstate New York, Eastern Pennsylvania and Western Pennsylvania markets. Our certificates of deposit decreased $266 million, reflecting our strategy not to renew maturing certificates.

	•		In addition to our assumption of $2.3 billion in borrowings from the NewAlliance acquisition, total borrowings increased by $398 million as we continued to increase our use of wholesale funding.

Lending Activities

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

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


	June 30, 2011						December 31, 2010
	Amount			Percent			Amount			Percent
Commercial:
Real estate	$	5,665,992			35.0	%	$	3,964,106			37.8	%
Construction		464,309			2.9			406,751			3.9
Business		3,335,330			20.6			2,623,079			25.0


Total commercial		9,465,631			58.5			6,993,936			66.7

Residential real estate		4,270,811			26.4			1,692,198			16.1
Home equity		2,160,665			13.4			1,524,570			14.6
Other consumer		272,118			1.7			272,710			2.6


Total loans and leases		16,169,225			100.0	%		10,483,414			100.0	%

Allowance for loan losses		(107,028	)					(95,354	)


Total loans and leases, net	$	16,062,197					$	10,388,060

Included in the table above are acquired loans with a carrying value of $7.3 billion and $2.6 billion at June 30, 2011 and December 31, 2010, respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at fair value with no carryover of any related allowance for loan losses. At June 30, 2011 and December 31, 2010 there was no allowance for loan losses related to these acquired loans.

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


	Upstate New		Western		Eastern				Total loans and
	York		Pennsylvania		Pennsylvania		New England		leases

June 30, 2011:
Commercial:
Real estate	$	2,830,800	$	466,550	$	1,024,780	$	1,343,862	$	5,665,992
Construction		288,688		29,151		27,043		119,427		464,309
Business		1,598,026		885,176		398,020		454,108		3,335,330


Total commercial		4,717,514		1,380,877		1,449,843		1,917,397		9,465,631

Residential real estate		1,353,825		53,224		265,319		2,598,443		4,270,811
Home equity		763,721		141,867		614,421		640,656		2,160,665
Other consumer		157,500		56,352		47,380		10,886		272,118


Total loans and leases	$	6,992,560	$	1,632,320	$	2,376,963	$	5,167,382	$	16,169,225


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

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

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


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

Our period over period results excluding NewAlliance display the strong organic growth in our commercial lending activities. Our commercial loan portfolio increased $259 million, or 12% annualized, in Upstate New York, $218 million, or 38% annualized, in Western Pennsylvania, and $78 million, or 11% annualized, in Eastern Pennsylvania during the first six months of 2011, as a result of our continued strategic focus on the portfolio. Our total average commercial loan portfolio, excluding the loans acquired from NewAlliance increased 17% annualized during the second quarter. This increase was concentrated in both commercial real estate loans and business loans. Commercial business loans for Western Pennsylvania include loans associated with our Capital Markets business of $280 million and $182 million as of June 30, 2011 and December 31, 2010, respectively. New commercial loans, including line of credit advances, increased to $1.8 billion in Upstate New York during the six months ended June 30, 2011, from $1.3 billion during the same period in 2010. New commercial loans, including line of credit advances, totaled $896 million in Western Pennsylvania for the six months ended June 30, 2011 compared to $710 million for the six months ended June 30, 2010. New commercial loans, including line of credit advances, totaled $477 million in Eastern Pennsylvania for the six months ended June 30, 2011.

While we originated $575 million in new residential real estate loans during the first six months of 2011, our residential real estate loan portfolio remained relatively flat with a $10 million increase excluding the loans acquired from NewAlliance as ongoing consumer preference is for long-term fixed rate products which we generally do not hold in our portfolio.

Excluding the loans acquired from NewAlliance, our home equity and other consumer loan portfolios decreased during the first six months of the year with a combined decrease of $7 million.

Investment Securities Portfolio

Our investment securities portfolio increased $2.8 billion to $11.2 billion at June 30, 2011 as a result of the investment securities we acquired in our merger with NewAlliance. As of June 30, 2011, 99% of the fair value of our investment securities portfolio was rated A- or higher. During the quarter ended March 31, 2011, we transferred $2.0 billion of securities from our available for sale portfolio to our held to maturity portfolio as we determined that we have the intent and ability to hold these securities to maturity, resulting in total securities classified as held to maturity of $3.0 billion. The transferred securities were primarily mortgage-backed securities and collateralized mortgage obligations (“CMOs”) issued by the Government National Mortgage Association (“GNMA”) and Federal National Mortgage Association (“FNMA”), and had net unrealized gains, net of tax, of $4 million on the date of transfer, which is amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the premium on the same transferred debt securities.

Our available for sale securities portfolio is primarily invested in residential mortgage-backed securities, which comprised 75% and 85% of our total available for sale portfolio at June 30, 2011 and December 31, 2010, respectively. At both June 30, 2011 and December 31, 2010, 98% of our residential mortgage backed securities were issued by GNMA, FNMA, or FHLMC. GNMA, FNMA, and FHLMC guarantee the contractual cash flows of these investments. FNMA and FHLMC are government sponsored enterprises that are under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. Our non-agency CMO portfolio consists primarily of investment grade securities. All of our non-agency CMOs carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. While the markets for this asset class have been less active than for agency CMOs, the markets have been more active for securities that possess strong credit characteristics such as those securities in our portfolio, providing observable inputs for our valuation and liquidity should the need to sell arise.

Our investment securities available for sale portfolio remains well positioned to provide a stable source of cash flow. The duration of our securities available for sale increased to 3.95 years at June 30, 2011 from 3.73 years at December 31, 2010 as a result of an increase in yield volatility and an increase in the weighted average life of our portfolio caused by slowing prepayments in our mortgage-backed securities portfolio, which, in turn, extends the life of the bonds.

At June 30, 2011, the pre-tax net unrealized gains on our available for sale investment securities increased to $166 million from $114 million at December 31, 2010. The unrealized gain represents the difference between the estimated fair value and the amortized cost of our securities. Generally, the value of our investment securities fluctuates in response to changes in market interest rates, changes in credit spreads, or levels of liquidity in the market. Interest rates have decreased during the quarter ended June 30, 2011, thereby causing the fair values of our fixed rate securities to increase.

Our investment in FHLB stock consists of $89 million, $27 million, and $121 million of FHLB of New York common stock, FHLB of Pittsburgh common stock, and FHLB of Boston, respectively, at June 30, 2011 and $86 million and $30 million of FHLB of New York common stock and FHLB of Pittsburgh common stock, at December 31, 2010, respectively. Our investment in Federal Reserve Bank of New York stock amounted to $68 million at both June 30, 2011 and December 31, 2010.

Deposits

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


	June 30, 2011					December 31, 2010
	Amount		Percent			Amount		Percent			Increase
Core deposits:
Savings	$	2,767,951		14.7	%	$	1,235,004		9.4	%	$	1,532,947
Interest-bearing checking		2,028,645		10.7			1,705,537		13.0			323,108
Money market deposits		6,878,214		36.4			4,919,014		37.4			1,959,200
Noninterest-bearing		2,738,917		14.5			1,989,505		15.1			749,412


Total core deposits		14,413,727		76.3			9,849,060		74.9			4,564,667
Certificates		4,486,768		23.7			3,299,784		25.1			1,186,984


Total deposits	$	18,900,495		100.0	%	$	13,148,844		100.0	%	$	5,751,651

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


	Upstate New		Western		Eastern
	York		Pennsylvania		Pennsylvania		New England		Total deposits
June 30, 2011
Core deposits:
Savings	$	880,833	$	135,858	$	255,550	$	1,495,710	$	2,767,951
Interest-bearing checking		625,528		484,651		506,406		412,060		2,028,645
Money market deposits		3,405,425		1,142,435		1,087,471		1,242,883		6,878,214
Noninterest-bearing		1,076,298		563,808		433,776		665,035		2,738,917


Total core deposits		5,988,084		2,326,752		2,283,203		3,815,688		14,413,727
Certificates		1,219,735		969,235		859,616		1,438,182		4,486,768


Total deposits	$	7,207,819	$	3,295,987	$	3,142,819	$	5,253,870	$	18,900,495


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


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


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

At June 30, 2011, our total deposits increased $5.8 billion from December 31, 2010, and core deposits have increased to 76% of total deposits. While the balance increases are largely a factor of our NewAlliance merger in the second quarter, our upstate New York, Western Pennsylvania, and Eastern Pennsylvania markets have also contributed to the growth. Excluding balances in our New England region, money market deposit accounts have increased across our footprint by $827 million, or 34% annualized, during the first six months of 2011 due primarily to our strategy to attract runoff from certificates of deposits into money market accounts, coupled with our participation in a program whereby we receive money market deposits through a financial intermediary. Municipal deposits, predominantly consisting of money market deposits, increased $197 million from $1.4 billion at December 31, 2010 to $1.6 billion at June 30, 2011.

Borrowings

Borrowings increased to $7.6 billion at June 30, 2011, including $2.3 billion assumed from our NewAlliance merger in the second quarter. Short term borrowings decreased by $322 million from December 31, 2010 to $1.5 billion, which was offset by an increase of $3.0 billion in long term borrowings during that same period to $6.1 billion as we worked to achieve a more favorable cost of funds. Wholesale borrowings were used to fund the run off of certificates and provide an additional funding source for loans, which helped us to effectively manage our borrowing costs.

Capital

During the first six months of 2011, our stockholders’ equity increased $1.2 billion to $4.0 billion at June 30, 2011 from $2.8 billion at December 31, 2010 as a result of our merger with NewAlliance, whereby we issued 94 million common shares with a value of $1.3 billion. Other contributing factors included net income of $58 million and $36 million in net unrealized gains, net of taxes, on our securities available for sale arising during the six months ended June 30, 2011. These amounts were offset by $121 million in treasury stock purchases and common stock dividends of $81 million, or $0.32 per share.

At June 30, 2011, we held almost 14 million shares of our common stock as treasury shares. During the first six months of 2011, we repurchased 8.7 million shares of our common stock at an average price of $13.98 per share and we currently have authorization from our Board of Directors to repurchase an additional 12 million shares as part of our capital management initiatives. We repurchased 0.4 million shares of our common stock at an average price of $13.04 during the month of July 2011. We issued 0.8 million shares from treasury stock in connection with the exercise of stock options and grants of restricted stock awards during the first six months of 2011. Although treasury stock purchases are an important component of our capital management strategy, the extent to which we repurchase shares in the future will depend on a number of factors including the market price of our stock and alternative uses for our capital.

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

The actual capital amounts, ratios, and requirements for First Niagara Financial Group, Inc. and First Niagara Bank, N.A. at June 30, 2011 are presented in the following table (amounts in thousands):


						Minimum amount to be well-
	Actual					capitalized
	Amount		Ratio			Amount		Ratio
First Niagara Financial Group, Inc.:

Leverage ratio	$	2,118,084		7.81	%		N/A		N/A
Tier 1 risk-based capital		2,118,084		12.05		$	1,054,648		6.00	%
Total risk-based capital		2,230,916		12.69			1,758,011		10.00

First Niagara Bank, N.A.:
Leverage ratio	$	2,054,174		7.58	%	$	1,354,996		5.00	%
Tier 1 risk-based capital		2,054,174		11.72			1,051,625		6.00
Total risk-based capital		2,167,006		12.37			1,751,824		10.00

As of June 30, 2011, we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the prompt corrective action regulations.

Our ability to pay dividends to our stockholders is substantially dependent upon the ability of the Bank to pay dividends to the Company. Subject to First Niagara Bank, N.A. meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by First Niagara Bank, N.A. in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, First Niagara Bank, N.A. could pay aggregate dividends of approximately $241 million to the Company, without obtaining affirmative regulatory approvals, as of June 30, 2011.

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

RISK MANAGEMENT

Credit Risk

Allowance for Loan Losses and Nonperforming Assets

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

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

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

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

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

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

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

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

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

The following table presents the activity in our allowance for loan losses and related recorded investment of the associated loans by portfolio segment for the six months ended June 30:


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for loan losses:
Balance at beginning of period	$	89,001		$	6,353		$	—		$	—	$	95,354
Provision for loan losses		22,644			3,813			882			—		27,339
Charge-offs		(15,165	)		(4,072	)		(882	)		—		(20,119	)
Recoveries		3,424			1,030			—			—		4,454


Balance at end of period	$	99,904		$	7,124		$	—		$	—	$	107,028


Allowance for loan losses:
Individually evaluated for impairment	$	4,794		$	1,716		$	—		$	—	$	6,510
Collectively evaluated for impairment		95,110			5,408			—			—		100,518


Total	$	99,904		$	7,124		$	—		$	—	$	107,028


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	62,412		$	12,459		$	—		$	—	$	74,871
Collectively evaluated for impairment		6,015,626			2,769,198			—			—		8,784,824
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			3,387,593			3,921,937		7,309,530


Total	$	6,078,038		$	2,781,657		$	3,387,593		$	3,921,937	$	16,169,225


*2010*
Allowance for loan losses:
Balance at beginning of period	$	82,813		$	5,490		$	—		$	—	$	88,303
Provision for loan losses		21,483			2,648			—			—		24,131
Charge-offs		(22,008	)		(1,924	)		—			—		(23,932	)
Recoveries		1,091			816			—			—		1,907


Balance at end of period	$	83,379		$	7,030		$	—		$	—	$	90,409


Allowance for loan losses:
Individually evaluated for impairment	$	9,272		$	29		$	—		$	—	$	9,301
Collectively evaluated for impairment		74,107			7,001			—			—		81,108


Total	$	83,379		$	7,030		$	—		$	—	$	90,409


Loans receivable:
Balance at end of period
Individually evaluated for impairment	$	48,986		$	10,127		$	—		$	—	$	59,113
Collectively evaluated for impairment		4,458,631			2,436,848			—			—		6,895,479
Loans acquired with deteriorated credit quality⁽¹⁾		—			—			1,897,673			1,112,255		3,009,928


Total	$	4,507,617		$	2,446,975		$	1,897,673		$	1,112,255	$	9,964,520


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

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


	Legacy						Acquired
	Commercial			Consumer			Commercial			Consumer		Total
*2011*
Allowance for loan losses:
Balance at beginning of period	$	92,945		$	7,181		$	—		$	—	$	100,126
Provision for loan losses		12,377			1,254			808			—		14,439
Charge-offs		(7,454	)		(1,874	)		(808	)		—		(10,136	)
Recoveries		2,036			563			—			—		2,599


Balance at end of period	$	99,904		$	7,124		$	—		$	—	$	107,028


*2010*
Allowance for loan losses:
Balance at beginning of period	$	83,873		$	5,615		$	—		$	—	$	89,488
Provision for loan losses		9,013			1,987			—			—		11,000
Charge-offs		(10,242	)		(1,016	)		—			—		(11,258	)
Recoveries		735			444			—			—		1,179


Balance at end of period	$	83,379		$	7,030		$	—		$	—	$	90,409

The following table details our net charge-offs by loan category for the six months ended June 30 (in thousands):


	2011					2010
	Net		Percent of			Net		Percent of
	charge-offs		average loans			charge-offs		average loans
Commercial:
Real estate	$	4,793		0.17	%	$	13,124		0.73	%
Business		7,830		0.51	%		7,793		0.83	%

Total commercial		12,623		0.29	%		20,917		0.76	%

Residential real estate		839		0.04	%		220		0.03	%
Home equity		1,610		0.16	%		520		0.10	%
Other consumer		593		0.44	%		368		0.33	%

	$	15,665		0.21	%	$	22,025		0.52	%


	June 30,			December 31,
	2011			2010
Nonaccruing loans:
Commercial:
Commercial real estate:
Acquisition and development	$	780		$	1,870
Multifamily		6,218			3,075
Investment real estate		19,537			24,536
Owner occupied		16,346			14,584

Total commercial real estate		42,881			44,065
Business		20,021			25,819

Total commercial		62,902			69,884

Consumer:
Residential real estate		14,484			14,461
Home equity		4,748			4,605
Other consumer		379			373

Total consumer		19,611			19,439


Total		82,513			89,323
Real estate owned		12,315			8,647


Total nonperforming assets ⁽¹⁾	$	94,828		$	97,970


Loans 90 days past due and still accruing interest⁽²⁾	$	134,869		$	58,097


Total nonperforming assets as a percentage of total assets		0.31	%		0.46	%


Total nonaccruing loans as a percentage of total loans		0.51	%		0.85	%


Allowance for loan losses to nonaccruing loans		129.7	%		106.8	%


⁽¹⁾		Nonperforming assets do not include $19 million and $22 million of performing renegotiated loans that are accruing interest at June 30, 2011 and December 31, 2010, respectively.

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

The following table contains an aging analysis of our loans by class at June 30, 2011 (in thousands):


	30-59 days		60-89 days		Greater than 90		Total				Total loans		Greater than 90
June 30, 2011	past due		past due		days past due		past due		Current		receivable		days and accruing
Legacy loans
Commercial:
Commercial real estate:
Acquisition and development	$	—	$	—	$	636	$	636	$	101,033	$	101,669	$	—
Multifamily		1,216		—		335		1,551		1,074,847		1,076,398		—
Investment real estate		1,121		—		13,357		14,478		1,528,215		1,542,693		—
Owner occupied		2,807		84		10,586		13,477		941,220		954,697		—

Total commercial real estate		5,144		84		24,914		30,142		3,645,315		3,675,457		—
Business		3,394		2,698		5,681	$	11,773		2,390,808		2,402,581		—

Total commercial		8,538		2,782		30,595		41,915		6,036,123		6,078,038		—


Consumer:
Residential real estate		11,176		2,205		12,527	$	25,908		1,588,488		1,614,396		—
Home equity		2,368		2,061		4,478		8,907		1,005,511		1,014,418		—
Other consumer		1,139		504		346		1,989		150,854		152,843		—

Total consumer		14,683		4,770		17,351		36,804		2,744,853		2,781,657		—


Total	$	23,221	$	7,552	$	47,946	$	78,719	$	8,780,976	$	8,859,695	$	—


Acquired loans
Commercial:
Commercial real estate:
Acquisition and development	$	18	$	—	$	1,573	$	1,591	$	14,423	$	16,014	$	1,573
Multifamily		—		301		857		1,158		234,061		235,219		857
Investment real estate		5,894		—		27,959		33,853		1,051,816		1,085,669		27,959
Owner occupied		4,849		5,230		17,278		27,357		1,090,585		1,117,942		17,278

Total commercial real estate		10,761		5,531		47,667		63,959		2,390,885		2,454,844		47,667
Business		5,587		623		10,863	$	17,073		915,676		932,749		10,863

Total commercial		16,348		6,154		58,530		81,032		3,306,561		3,387,593		58,530


Consumer:
Residential real estate		17,129		14,835		58,605	$	90,569		2,565,846		2,656,415		58,605
Home equity		8,639		5,061		15,965		29,665		1,116,582		1,146,247		15,965
Other consumer		1,955		1,189		1,769		4,913		114,362		119,275		1,769

Total consumer		27,723		21,085		76,339		125,147		3,796,790		3,921,937		76,339


Total	$	44,071	$	27,239	$	134,869	$	206,179	$	7,103,351	$	7,309,530	$	134,869

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


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

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

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


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

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


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


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

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

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

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

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


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

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


	Commercial real estate
	Acquisition and				Investment real		Owner						Percent of
	development		Multifamily		estate		occupied		Business		Total		Total
*June 30, 2011*
Legacy loans:
Pass	$	24,680	$	1,044,473	$	1,349,620	$	857,731	$	2,153,652	$	5,430,156		89.3	%
Criticized:⁽¹⁾
Accrual		76,209		25,707		173,536		80,620		228,908		584,980		9.6	%
Nonaccrual		780		6,218		19,537		16,346		20,021		62,902		1.1	%

Total criticized		76,989		31,925		193,073		96,966		248,929		647,882		10.7	%

Total	$	101,669	$	1,076,398	$	1,542,693	$	954,697	$	2,402,581	$	6,078,038		100.0	%


Acquired loans:
Pass	$	1,786	$	199,681	$	973,230	$	938,996	$	791,139	$	2,904,832		85.7	%
Criticized:⁽¹⁾
Accrual		14,228		35,538		112,439		178,946		141,610		482,761		14.3	%
Nonaccrual⁽²⁾		—		—		—		—		—		—		—

Total criticized		14,228		35,538		112,439		178,946		141,610		482,761		14.3	%

Total	$	16,014	$	235,219	$	1,085,669	$	1,117,942	$	932,749	$	3,387,593		100.0	%


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

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

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


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

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

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


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

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


	Residential				Other				Percent of
	real estate		Home equity		consumer		Total		Total
*June 30, 2011*
Legacy loans by refreshed FICO score:
Over 700	$	1,267,456	$	777,045	$	70,534	$	2,115,035		76.1	%
660-700		153,202		126,575		21,363		301,140		10.8	%
620-660		76,468		50,125		12,435		139,028		5.0	%
580-620		39,774		21,240		14,839		75,853		2.7	%
Less than 580		63,594		32,009		10,581		106,184		3.8	%
No score		13,902		7,424		23,091		44,417		1.6	%

Total	$	1,614,396	$	1,014,418	$	152,843	$	2,781,657		100.0	%


Acquired loans by refreshed FICO score:
Over 700	$	1,934,834	$	825,234	$	49,796	$	2,809,864		71.7	%
660-700		216,045		133,020		17,302		366,367		9.3	%
620-660		86,579		59,292		10,065		155,936		4.0	%
580-620		258,744		6,845		6,251		271,840		6.9	%
Less than 580		116,606		49,373		9,125		175,104		4.5	%
No score		43,607		72,483		26,736		142,826		3.6	%

Total	$	2,656,415	$	1,146,247	$	119,275	$	3,921,937		100.0	%


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

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


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

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

As part of our evaluation of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for losses in our acquired loan portfolio. To the extent that credit quality deteriorates subsequent to acquisition, such deterioration would result in the establishment of an allowance for loan losses. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, was $267 million and $122 million as of June 30, 2011 and December 31, 2010, respectively. These loans continue to perform in line with our expectations at acquisition and as a result there was no allowance for loan losses associated with our acquired loan portfolio at June 30, 2011 or December 31, 2010. We maintain an allowance for loan losses for our legacy portfolio segment, which is heavily concentrated in the Upstate New York region. Although the economy in Upstate New York weathered the deteriorating credit conditions well in comparison to other geographic areas, a slower real estate market finally permeated the region during 2010, which resulted in increases throughout 2010 in both our nonaccruing loans and net charge-offs. During the second quarter, our credit quality remained largely the same as that of the first quarter with slight decreases in our net charge-offs as well as slight increases in our nonaccruing loans. Our allowance for loan losses increased $12 million from December 31, 2010 to $107 million at June 30, 2011 as our provision for loan losses of $14 million exceeded our net charge-offs of $8 million. The ratio of our allowance for loan losses to total loans of 0.66% at June 30, 2011 decreased compared to 0.91% at December 31, 2010, primarily due to the acquisition of loans from our NewAlliance merger in the second quarter which were recorded at fair value and do not have a carryover allowance. Excluding acquired loans, our ratio of our allowance for loan losses to loans was 1.20% at June 30, 2011 and 1.21% at December 31, 2010.

Challenges remain in the credit environment but second quarter results remain in line with the improvement seen in the first quarter. Excluding our acquired loans, our annualized net charge-off ratio was 0.38% for the second quarter of 2011 compared to 0.41% and 0.67% for the quarters ending March 31, 2011 and December 31, 2010, respectively. Our nonaccruing loans were 0.51% of total loans at June 30, 2011 compared to 0.75% at March 31, 2011 and 0.85% at December 31, 2010, primarily due to the increase in total loans from the NewAlliance merger.

Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) decreased to $51 million at June 30, 2011 from $55 million at December 31, 2010. Of these balances, $19 million and $22 million were accruing interest at June 30, 2011 and December 31, 2010, respectively. The modifications made to these restructured loans typically consist of an extension of the payment terms or providing for a period with interest-only payments with deferred principal payments paid during the remainder of the term. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. We accrue interest on a TDR once the borrower has demonstrated the ability to perform in accordance with the restructured terms for six consecutive payments.

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

Residential Mortgage Banking

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

As is customary in the mortgage banking industry, we, 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, 2011, our liability for repuchase obligations on our serviced loan portfolio was $5 million compared to $4 million at December 31, 2010 and is included in other liabilities in our Consolidated Statements of Condition.

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


	June 30, 2011			December 31, 2010
30 to 59 days past due		0.72	%		0.66	%
60 to 89 days past due		0.32	%		0.26	%
Greater than 90 days past due		0.67	%		0.48	%

Total past due loans		1.71	%		1.40	%

Investments

We have assessed our securities that were in an unrealized loss position at June 30, 2011 and December 31, 2010 and determined that any decline in fair value below amortized cost was temporary. In making this determination we considered the following factors: the period of time the securities were in an unrealized loss position, the percentage decline in comparison to the securities’ amortized cost, credit rating, the financial condition of the issuer and guarantor, where applicable, the delinquency or default rates of underlying collateral, credit enhancement, projected losses, levels of credit loss, and projected cash flows. We also do not intend to sell these securities and it is not more likely than not that we will be required to sell these securities before the recovery of their amortized cost bases, which may be at maturity.

Liquidity Risk

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

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

•

Support our operating activities,

•

Meet increases in demand for loans and other assets, and

•

Provide for repayments of deposits and borrowings.

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

Sources of liquidity

We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest payments we receive from our investment and loan portfolios, short and long-term borrowings, as well as purchasing short-term federal funds, internally generated capital, and other credit facilities. The primary sources of our non-deposit borrowings are repurchase agreements and FHLB advances, of which we had $2.9 billion and $3.6 billion outstanding at June 30, 2011, respectively.

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

We have a total borrowing capacity of up to $11.0 billion from various funding sources which include the FHLB, Federal Reserve Bank, and commercial banks that we can use to fund lending activities, liquidity needs, and/or to adjust and manage our asset and liability position, of which $4.5 billion was available as of June 30, 2011.

Uses of liquidity

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

In the ordinary course of business, we extend commitments to originate commercial and residential mortgages, commercial loans, and other consumer loans. Commitments to extend credit are agreements to lend to a customer as long as conditions established under the contract are not violated. Our commitments generally have fixed expiration dates or other termination clauses, and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. At June 30, 2011, we had outstanding unfunded commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $4.7 billion.

Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Our credit risk involved in issuing these commitments is essentially the same as that involved in extending loans to customers and is limited to the total amount of these instruments. Unused commercial lines of credit amounted to $2.6 billion at June 30, 2011 and generally have an expiration period of less than one year. Home equity and other consumer unused lines of credit totaled $1.5 billion at June 30, 2011 and have an expiration period of up to ten years.

In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Standby letters of credit amounted to $267 million at June 30, 2011 and generally have an expiration period of less than two years. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements are likely to be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in the issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.

Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rates on residential mortgage loans sold which results in monthly service fee income. We were committed to sell $160 million in residential mortgages at June 30, 2011.

Loan Maturity and Repricing Schedule

The following table sets forth certain information at June 30, 2011 regarding the amount of loans maturing or repricing in our portfolio. Demand loans having no stated schedule of repayment and no stated maturity are reported as due in one year or less. Adjustable-rate loans are included in the period in which interest rates are next scheduled to adjust rather than the period in which they contractually mature, and fixed-rate loans (including bi-weekly loans) are included in the period in which contractual payments are due. No adjustments have been made for prepayment of principal (in thousands):


			One through five
	Within one year		years		After five years		Total
Commercial:
Real estate	$	2,211,762	$	2,793,367	$	660,863	$	5,665,992
Construction		323,260		100,180		40,869		464,309
Business		2,598,758		660,968		75,604		3,335,330


Total commercial		5,133,780		3,554,515		777,336		9,465,631

Residential real estate		764,958		1,723,431		1,782,422		4,270,811
Home equity		1,248,643		282,045		629,977		2,160,665
Other consumer		131,628		76,402		64,088		272,118


Total loans and leases	$	7,279,009	$	5,636,393	$	3,253,823	$	16,169,225

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


	Fixed		Adjustable		Total
Commercial:
Real estate	$	1,845,590	$	1,608,640	$	3,454,230
Construction		108,055		32,994		141,049
Business		726,160		10,412		736,572


Total commercial		2,679,805		1,652,046		4,331,851

Residential real estate		1,780,383		1,725,470		3,505,853
Home equity		912,022		—		912,022
Other consumer		140,490		—		140,490


Total loans and leases	$	5,512,700	$	3,377,516	$	8,890,216

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

Interest Rate and Market Risk

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

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

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

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

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


	Calculated decrease
	June 30, 2011						March 31, 2011
	Net interest						Net interest
Changes in interest rates⁽¹⁾	income			% Change			income			% Change

+200 basis points⁽²⁾	$	(2,960	)		(0.3	)%	$	(8,172	)		(1.2	)%
+100 basis points		(546	)		(0.1	)		(5,073	)		(0.7	)


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

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

Impact of New Accounting Standards

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

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

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

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


ITEM 3.		Quantitative and Qualitative Disclosures About Market Risk

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


ITEM 4.		Controls and Procedures

In accordance with Rule 13a-15(b) of the Exchange Act, we carried out an evaluation as of June 30, 2011 under the supervision and with the participation of our management, including our Principal Executive Officer and Principal Financial Officer, of the effectiveness of the design and operation of our disclosure controls and procedures as defined in Rule 13a-15(e) and 15d-15(e) under the Exchange Act. Based on that evaluation, our Principal Executive Officer and Principal Financial Officer have concluded that our disclosure controls and procedures are effective as of June 30, 2011.

During the quarter ended June 30, 2011, there have been no changes in our internal controls over financial reporting that have materially affected, or are reasonably likely to materially affect, our internal controls over financial reporting.

PART II — OTHER INFORMATION


ITEM 1.		Legal Proceedings

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

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

On November 5, 2010, the plaintiffs in both actions advised NewAlliance that they had agreed to stay the Delaware actions and proceed in the Connecticut actions alone. After expedited discovery was conducted, the parties entered into a memorandum of understanding in which the Company and NewAlliance denied that they committed any of the wrongful acts alleged in the complaints, but agreed to amend the disclosures to stockholders in advance of the vote whether to approve the merger. A hearing on whether the settlement should be approved has been scheduled for August 22, 2011.


ITEM 1A.		Risk Factors

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


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


a)		Not applicable.


b)		Not applicable.


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


					Total number of shares		Maximum number of
					purchased as part of		shares yet to be
	Number of shares		Average price		publicly announced		purchased under the
Month	purchased		paid per share		repurchase plans		plans
April		400,000	$	14.16		400,000		20,600,000
May		4,536,000		14.10		4,536,000		16,064,000
June		3,730,000		13.81		3,730,000		12,334,000


Total		8,666,000	$	13.98

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


ITEM 3.		Defaults Upon Senior Securities

Not applicable.


ITEM 5.		Other Information


(a)		Not applicable.


(b)		Not applicable.


ITEM 6.		Exhibits

The following exhibits are filed herewith:


Exhibits

	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

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 8, 2011	By:	/s/ John R. Koelmel
		John R. Koelmel
		President and Chief Executive Officer (Principal Executive Officer)

Date: August 8, 2011	By:	/s/ Gregory W. Norwood
		Gregory W. Norwood
		Chief Financial Officer (Principal Financial Officer and Principal Accounting Officer)

FIRST NIAGARA FINANCIAL GROUP INC - FORM 10-Q - August 8, 2011

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