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UNITED STATES
SECURITIES AND EXCHANGE COMMISSION

Washington, D.C. 20549

FORM 10-K


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

For the Fiscal Year Ended December 31, 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 No. 001-35390

FIRST NIAGARA FINANCIAL GROUP, INC.

(Exact name of registrant as specified in its charter)


Delaware		42-1556195
(State or other jurisdiction of incorporation or organization)		(I.R.S. Employer Identification Number)


726 Exchange Street, Suite 618, Buffalo, NY		14210
(Address of Principal Executive Offices)		(Zip Code)

(716) 819-5500
(Registrant’s telephone number)

Securities Registered Pursuant to Section 12(b) of the Act:


Title of Class		Name of Exchange on which Registered

Common Stock, par value $0.01 per share		The NASDAQ Stock Market LLC
Fixed-to-Floating Rate Perpetual Non-Cumulative		New York Stock Exchange
Preferred Stock, Series B, par value $0.01 per share

Securities Registered Pursuant to Section 12(g) of the Act:
None

Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. YES þ NO o

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. YES o NO þ

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 if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not contained herein, and will not be contained, to the best of Registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10-K or any amendment to this Form 10-K. 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

As of February 24, 2012, there were issued and outstanding 351,845,091 shares of the Registrant’s Common Stock. The aggregate market value of the voting and non-voting common equity held by non-affiliates of the Registrant, computed by reference to the last sale price on June 30, 2011, as reported by The NASDAQ Stock Market LLC, was approximately $3,868,384,436.

Unless the context otherwise requires, the terms “we”, “us”, and “our” refer to First Niagara Financial Group, Inc. and its subsidiaries on a consolidated basis.

PART I


ITEM 1.		Business

GENERAL

First Niagara Financial Group, Inc.

First Niagara Financial Group, Inc. (the “Company”), a Delaware corporation whose principal executive offices are located at 726 Exchange Street, Suite 618, Buffalo, New York, provides a wide range of retail and commercial banking as well as other financial services through its wholly-owned bank subsidiary, First Niagara Bank, N.A. (the “Bank”). The Company is a bank holding company subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”). At December 31, 2011, we had $32.8 billion of assets, $19.4 billion of deposits and $4.8 billion of stockholders’ equity.

The Company was organized in April 1998 through reorganization to a two-tiered mutual holding company and converted to a federal charter in November 2002. In January 2003, we converted the mutual holding company to stock form, with our shares of common stock owned by the mutual holding company being sold to depositors and other investors.

Since 1998, we deployed the proceeds from several stock offerings by making multiple whole-bank and nonbank financial services company acquisitions, acquiring branches, and by opening several de novo branches in target markets across Upstate New York and Pennsylvania. This strategy, coupled with our organic growth initiatives, which includes an emphasis on expanding our commercial banking operations and financial services businesses, has resulted in our successful transition from a traditional thrift to a commercial bank.

In April 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 all of Harleysville National Bank and Trust Company’s 83 branch locations in Eastern Pennsylvania. 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 million shares of Company common stock, with an acquisition date fair value of $299 million.

In April 2011, we 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 all of NewAlliance Bank’s 88 branch locations in Connecticut and Western Massachusetts. Under the terms of the merger agreement, 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, and cash consideration of $199 million stockholders.

On July 30, 2011, the Bank entered into an agreement with HSBC Bank USA, National Association (“HSBC”) and affiliates to acquire, after assignment of our purchase right for certain branches, approximately $11 billion of deposit liabilities and approximately $2 billion in loans in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets for a deposit premium of 6.67% (the “HSBC Acquisition”). Without considering expected proceeds from the assignment of our purchase right, the purchase price totals approximately $1 billion, based on December 31, 2011 balances.

See Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” for further information about the HSBC Acquisition.

Our profitability is primarily dependent on the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates and competition within our markets. These rates are also highly sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as policies of the federal government and its regulatory agencies, including the Federal Reserve. We manage our interest rate risk as described in “Interest Rate and Market Risk” in this report, Part II Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

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

First Niagara Bank, N.A.

First Niagara Bank, N.A. was organized in 1870, and is a regional nationally chartered bank providing financial services to individuals, families and businesses. In connection with the reorganization of the Company into a two-tiered mutual holding company in November 2002, the Bank was converted from a New York State chartered mutual savings bank to a New York State chartered stock savings bank and in April 2010, the Bank became a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”).

The Bank is positioned as one of the leading regional banks in Upstate New York, Pennsylvania, Connecticut and Western Massachusetts, providing our retail consumer and business customers with banking services including residential and commercial real estate loans, commercial business loans, consumer loans, wealth management products, as well as retail and commercial deposit products. Additionally, we offer insurance and employee benefits consulting services through a wholly-owned subsidiary of the Bank. As of December 31, 2011, the Bank and all of its subsidiaries had $32.7 billion of assets, $19.4 billion of deposits, and $4.7 billion of stockholder’s equity, employed over 5,100 people, and operated through 333 branches and several financial services subsidiaries.

The Bank’s subsidiaries provide a range of financial services to individuals and companies in our market and service areas. These subsidiaries include: First Niagara Funding, Inc., our real estate investment trust (“REIT”) which primarily originates and holds some of our commercial real estate and business loans; First Niagara Servicing Company, which owns and partially services loans that are collateralized by property in Connecticut; and First Niagara Risk Management, Inc. (“FNRM”), our full service insurance agency, which sells insurance products, including business and personal insurance, surety bonds, life, disability and long-term care coverage, and other risk management advisory services. FNRM also provides risk management advisory services as to alternative risk and self-insurance, claims investigation and adjusting services, and third-party administration of self-insured workers’ compensation plans.

OTHER INFORMATION

We maintain a website at www.fnfg.com. Our annual reports on Form 10-K, proxy statements, quarterly reports on Form 10-Q, current reports on Form 8-K, and all amendments to those reports, are made available, free of charge, on the Investor Relations page on our website, as soon as reasonably practicable after we electronically file them or furnish them to the Securities and Exchange Commission (“SEC”). You may also obtain copies, without charge, by writing to our Investor Relations Department, 726 Exchange Street, Suite 618, Buffalo, New York 14210.

We have adopted a Code of Ethics that is applicable to our senior financial officers, including our Chief Executive Officer, Chief Financial Officer and Corporate Controller, among others. The Code of Ethics is available on the Investor Relations page of our website along with any amendments to or waivers from that policy. Additionally, we have adopted a general Code of Conduct that sets forth standards of ethical business conduct for all of our directors, officers and employees. This Code of Conduct is also available on our website.

FORWARD LOOKING STATEMENTS

Certain statements we make in this document may be considered “forward-looking statements” as that term is defined in Section 27A of the Securities Act of 1933, as amended (the “Securities Act”), and Section 21E of the Securities Exchange Act of 1934, as amended (the “Exchange Act”), that involve substantial risks and uncertainties. You can identify these forward-looking statements by our use of such words as estimate, project, believe, intend, anticipate, plan, seek, expect, and other similar expressions. These forward-looking statements include: statements of our goals, intentions, and expectations; statements regarding our business plans, prospects, growth, and operating strategies; statements regarding the asset quality of our loan and investment portfolios; and estimates of our risks and future costs and benefits.

Forward-looking statements are subject to significant risks, assumptions, and uncertainties, including, among other things, the following important factors that could affect the actual outcome of future events:

•		General economic conditions, either nationally or in our market or service areas, that are worse than expected;

•		Significantly increased competition among depository and other financial institutions;

•		Inflation and changes in the interest rate environment that reduce our margins or fair value of financial instruments;

•		Changes in laws or government regulations affecting financial institutions, including changes in regulatory fees and capital requirements;

•		Our ability to enter new markets successfully and capitalize on growth opportunities;

•		Our ability to successfully integrate acquired entities;

•		Changes in consumer spending, borrowing, and savings habits;

•		Changes in accounting policies and practices, as may be adopted by the bank regulatory agencies, taxing authorities and the Financial Accounting Standards Board; and

•		Changes in our organization, compensation, and benefit plans.

Because of these and other uncertainties, our actual future results may be materially different from the results indicated by these forward-looking statements.

MARKET AREAS AND COMPETITION

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

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

We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community. As of December 31, 2011 we operated 333 bank branches, including 115 in Upstate New York primarily located near Buffalo, Rochester, Syracuse and Albany; 130 branches in Pennsylvania primarily located near Philadelphia, Pittsburgh, Erie, and Warren; 76 branches in Connecticut primarily located near New Haven and Hartford; and 12 in Western Massachusetts primarily located near Springfield.

LENDING ACTIVITIES

Our principal lending activity has been the origination of commercial business and real estate loans, and residential mortgage loans to commercial and retail customers generally located within our primary market and service areas.

Our Commercial business is positioned for continuing success with best-in-class service. Our footprint provides ample opportunity for growth and our strategy seeks to capitalize on our commercial business scale by driving organic growth, investing in infrastructure, and expanding our product set. We are focused on providing a full range of services to our commercial banking clients with plans to invest further in healthcare capabilities, use asset based lending opportunities for access to broader markets and industries, enhance our leasing capability, lead more syndicated transactions, and leverage our risk management products to further increase fee income.

Our Retail business is focused on acquiring core deposit relationships from consumer and small business customers. These core deposit relationships provide a low cost of funds and are the cornerstone of household profitability. Our Retail business is also focused on consumer finance, offering an array of products including residential mortgage and home equity loans. Beginning in 2012, we will expand our capabilities surrounding credit cards and indirect auto finance.

Winning, expanding and retaining core relationship customers is driven by a clear value proposition:

	•		Doing business with us will be simple, easy and fast for our customers.

	•		We will deliver a friendly, helpful and proactive customer experience.

	•		We will take a personal interest in helping our customers earn more, pay less and borrow wisely.

We are committed to delivering a superior and differentiated customer experience driven by our engaged employee culture, a convenient and efficient multi-channel customer experience and the strength of a dense and efficient branch network. Product development efforts are focused on meeting the banking, investment and insurance needs of our clients and our products are designed to be simple and easy to use while creating a fair value exchange for our customers and shareholders. Through a targeted and multi-channel marketing effort we deliver relevant offers to our customers and prospects and efficiently drive the sales and service experience.

Commercial Business Loans

Our commercial business loan portfolio includes business term loans and lines of credit issued to companies in our market and service areas, some of which are secured in part by additional owner occupied real estate. Additionally, we make secured and unsecured commercial loans and extend lines of credit for the purpose of financing equipment purchases, inventory, business expansion, working capital, and for other general purposes. The terms of these loans generally range from less than one year to seven years with either a fixed interest rate or a variable interest rate indexed to a London Inter-Bank Offered Rate (“LIBOR”) or our prime rate. Our lines of credit typically carry a variable interest rate indexed to either LIBOR or our prime rate.

As part of our strategic initiatives to fully service our larger corporate clients generally located within our primary market and service areas, we look to strengthen our commercial business relationships by offering not only larger loans, but more and better solutions. One such example of a better solution is our relatively new capital markets business. Through our capital markets business, we lead and co-lead syndicated loan transactions and have broadened our ability to include interest rate risk management derivative products for our commercial borrowers. To facilitate expansion of our ongoing commercial loan growth, we offer additional commercial business products and services such as standby letters of credit, cash management, foreign exchange, remote deposit capture, merchant services, wire transfers, lock-box, business credit and debit cards, and online banking.

We also make commercial business and real estate loans which are 50% to 90% government guaranteed through the Small Business Administration. Based on the additional guarantee, terms of these loans range from one to 20 years and generally carry a variable rate of interest indexed to the prime rate. This insured loan product allows us to better meet the needs of our small business customers without subjecting us to undue credit risk. Commercial business lending is generally considered to involve a higher degree of credit risk than secured real estate lending. The repayment of unsecured commercial business loans are wholly dependent upon the success of the borrower’s business, while secured commercial business loans may be secured by collateral that we cannot readily market.

In addition to loans to commercial clients, we also provide financing to commercial clients in the form of equipment finance agreements and capital leases. Our primary focus is middle market transactions with bank customers and prospects, municipal and healthcare tax exempt leases, and upper middle market/investment grade transactions purchased from quality independent leasing companies and other bank owned equipment finance subsidiaries located in the Northeast region of the United States, in amounts ranging from $250 thousand to $20 million.

Commercial Real Estate and Multi-family Lending

We originate commercial real estate loans secured predominantly by first liens on apartment buildings, office buildings, shopping centers, and industrial and warehouse properties. Our current policy with regard to these loans is to minimize our risk by emphasizing geographic distribution within our market and service areas and diversification of these property types.

Commercial and multi-family real estate loans that we originate are generally limited to three, five, or seven year adjustable-rate products which we initially price at prevailing market interest rates. These interest rates, which may be subject to interest rate floors, subsequently reset annually after completion of the initial adjustment period at new market rates that generally range at a spread over the current applicable market index such as Federal Home Loan Bank (“FHLB”) Advance Rates. The maximum term that we offer for commercial real estate loans is generally not more than 10 years, with a payment schedule based on not more than a 30 year amortization schedule for multi-family loans, and 20 years for commercial real estate loans.

We also offer the availability of commercial real estate and multi-family construction loans to our better relationship borrowers. Most of our construction loans provide for disbursement of loan funds during the construction period and conversion to a permanent loan when the construction is complete, and either tenant lease-up provisions or prescribed debt service coverage ratios are met. We make the construction phase of the loan on a short-term basis, usually not exceeding two years, with floating interest rates that are indexed to either a LIBOR or our prime rate. The construction loan application process includes the same criteria which are required for our permanent commercial mortgage loans, as well as a submission of completed plans, specifications, and cost estimates related to the proposed construction. We use these items as an additional basis to determine the expected appraised value of the subject property upon its completion. The appraisal is an important component because construction loans involve additional risks related to advancing loan funds upon the security of the project under construction, which is of uncertain value prior to the completion of construction and subsequent lease-up.

We continue to emphasize commercial real estate and multi-family lending because of the higher interest rates, relative to expected losses, associated with this asset class. Commercial real estate and multi-family loans, however, carry significantly more risk as compared to residential mortgage lending, because they typically involve larger loan balances concentrated with a single borrower or groups of related borrowers. Additionally, the payment experience on loans that are secured by income producing properties is typically dependent on the successful operation of the related real estate project and thus, may subject us to adverse conditions in the real estate market or to the general economy. To help manage this risk, we have put in place concentration limits based upon property types and maximum amounts that we lend to an individual or group of borrowers. In addition, our policy for commercial lending generally requires a loan-to-value (“LTV”) ratio of 75% or lower on purchases of existing commercial real estate and 80% or lower on purchases of existing multi-family real estate. For construction loans, the maximum LTV ratio varies depending on the project, however it generally does not exceed the lesser of 75% to 80% LTV based on property type or 90% of cost.

Residential Real Estate Lending

We originate mortgage loans to enable our customers to finance residential real estate, both owner occupied and non-owner occupied, in our primary market and service areas. We offer traditional fixed-rate and adjustable-rate mortgage (“ARM”) products, with monthly and bi-weekly payment features, that have maturities up to 30 years, and maximum loan amounts determined by market generally up to $2.5 million. Our bi-weekly mortgages feature an accelerated repayment schedule and are linked to a deposit account to facilitate payments.

We generally have sold newly originated conventional 15 to 30 year fixed-rate loans as well as FHA insured and VA guaranteed loans in the secondary market to government sponsored enterprises such as Federal National Mortgage Association (“FNMA”) and Federal Home Loan Mortgage Corporation (“FHLMC”) or to wholesale lenders. We intend to continue to hold our newly originated ARMs in our portfolio. Our LTV requirements for residential real estate loans vary depending on the loan program as well as the secondary market investor. Loans with LTVs in excess of 80% are required to carry mortgage insurance. We generally originate loans that meet accepted secondary market underwriting standards.

We offer ARM products secured by residential properties. These ARMs have terms generally up to 30 years, with rates that generally adjust annually after three, five, or seven years. After that initial fixed rate period of time, the interest rate on these loans is reset based upon a spread or margin above a specified index (e.g., a U.S. Treasury Constant Maturity Index or LIBOR). Our ARM loans are generally subject to limitations on interest rate increases and decreases of up to 2% per adjustment period and a total adjustment of up to 5% over the life of the loan. These loans generally require that any payment adjustment resulting from a change in the interest rate be sufficient to result in full amortization of the loan by the end of the term, and thus, do not permit any of the increased payment to be added to the principal amount of the loan, commonly referred to as negative amortization.

ARMs generally pose higher credit risks relative to fixed-rate loans primarily because, as interest rates rise, the payment amounts due from the borrowers rise, thereby increasing the potential for default. In order to manage this risk, we generally do not originate adjustable-rate loans with less than an initial fixed term of three years. Adjustable rate loans with less than a five year fixed term are subject to more stringent underwriting standards. Additionally, we do not offer ARM loans with initial teaser rates.

Home Equity Lending

We offer fixed-rate, fixed-term, monthly and bi-weekly payment home equity loans, and prime-based variable rate home equity lines of credit (“HELOCs”) within our market footprint. These products typically allow customers to borrow up to 85% of the appraised value of the collateral property (including the first mortgage) with a maximum loan amount generally no greater than $500 thousand. Our fixed-rate home equity loans generally have repayment terms up to 15 years. The “Ultraflex” home equity line of credit product allows borrowers the payment option of a five year interest only draw period or a 10 year principal and interest draw period, with a 20 year repayment period to follow. Additionally, this product offers an option allowing customers to convert portions or all of their variable rate line balances to a fixed rate loan. Customers may have up to three fixed rate loans within their line of credit at one time.

Consumer Loans

We offer a variety of consumer loans ranging from fixed-rate installment loans to variable rate lines of credit; examples include indirect mobile home loans, personal secured loans, and unsecured loans. Terms of these loans range from six months to 72 months and typically do not exceed $50 thousand. Secured loans are generally collateralized by vehicles, savings accounts, or certificates of deposit. We generally only extend unsecured loans, credit cards, and lines of credit to our most creditworthy customers. Consumer loans can generally entail greater risk of loss than residential mortgage loans, particularly in the case of consumer loans that are unsecured or secured by assets that tend to depreciate rapidly, such as automobiles and mobile homes.

Asset Quality Review

We review loans on a regular basis. Consistent with regulatory guidelines, we provide for the classification of loans which are considered to be of lesser quality as special mention, substandard, doubtful, or loss. We consider a loan substandard if it is inadequately protected by the current net worth and paying capacity of the borrower or of the collateral pledged, if any. Substandard loans have a well defined weakness that jeopardizes liquidation of the loan. Substandard loans include those loans where there is the distinct possibility that we will sustain some loss of principal if the deficiencies are not corrected. Loans that we classify as doubtful have all of the weaknesses inherent in those loans that are classified as substandard but also have the added characteristic that the weaknesses presented make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, improbable. Loans that we classify as loss are those considered uncollectible and of such little value that their continuance as an asset is not appropriate and the uncollectible amounts are charged off. Loans that do not expose us to risk sufficient to warrant classification in one of the aforementioned categories, but which possess some weaknesses, are designated special mention. A special mention loan has potential weaknesses that deserve management’s close attention. If left uncorrected, these potential weaknesses may result in deterioration of the repayment prospects for the asset or in the institution’s credit position at some future date. Special mention assets are not adversely classified and do not expose an institution to sufficient risks to warrant classification. Any loan not rated special mention, substandard, doubtful, or loss is considered pass rated. Beginning in the fourth quarter of 2011, we established a watch-list for loans that are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.

When we classify problem loans greater than $200 thousand as either substandard or doubtful, we evaluate them individually for impairment. When we classify problem loans as a loss, we charge-off the amount of impairment against the allowance for loan losses. Our determination as to the classification of our loans and the amount of our allowance is subject to ongoing review by regulatory agencies, which can require us to establish additional general or specific loss allowances. We regularly review our loan portfolio to ensure that they are correctly graded and classified in accordance with our policy or applicable regulations.

Allowance for Loan Losses

We establish our allowance for loan losses through a provision for credit losses based on our evaluation of the credit quality of our loan portfolio. We determine our allowance for loan losses by portfolio segment, which consists of commercial loans and consumer loans. We further segregate these segments between our legacy loans and acquired loans. Our commercial loan portfolio segment includes both business and commercial real estate loans. Our consumer portfolio segment includes residential real estate, home equity, and other consumer loans. A detailed description of our methodology for calculating our allowance for loan losses is included in “Critical Accounting Policies and Estimates” filed herewith in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

WEALTH MANAGEMENT

We offer wealth management services through two delivery channels, Private Client Services (“PCS”) and First Niagara Investment Services (“FNIS”). PCS provides holistic wealth management solutions using investment, fiduciary and banking services. FNIS is the Bank’s branch based investment brokerage platform that offers mutual funds and annuities as well as other investment products using financial consultants and appropriately licensed employees.

Private Client Services

Our PCS Group utilizes a comprehensive approach to wealth management incorporating wealth planning, investment management, fiduciary, risk management, credit and banking services for our customers. Revenue from PCS is primarily comprised of investment fees, estate settlement fees and credit and banking revenue paid by our clients. Investment fees are based on the current market value of assets under management, the amount of which is impacted by fluctuations in stock and bond market prices. Estate settlement fees are based on the total market value of real and personal property settled. Credit and banking revenue is primarily generated by interest income earned on commercial and consumer loans. PCS offers wealth management services to manage client funds utilizing various third party investment vehicles including separately managed accounts, bonds, exchange traded funds and mutual funds. Assets under management of PCS totaled $1.4 billion at December 31, 2011.

First Niagara Investment Services

FNIS offers wealth management, retirement planning, education funding and wealth protection products and services to our retail and commercial clients. Through a third party broker dealer relationship we offer vehicles including stocks, bonds, mutual funds, annuities, life insurance, long term care insurance, and advisory products. The planning services and products we offer are distributed through our branch network using financial consultants and licensed branch employees.

Revenue from investment and insurance products consists primarily of commissions paid by our clients, investment managers, and third party product providers. New business activity and the corresponding revenue that we earn are particularly affected by fluctuations in stock and bond market prices, the development of new products, interest rate fluctuations, commodity prices, regulatory changes, the relative attractiveness of investment products offered under current market conditions, and changes in the investment patterns of our clients. Assets under management of FNIS totaled approximately $3.5 billion at December 31, 2011.

FINANCIAL SERVICES

To complement our traditional core banking business, we offer a wide range of insurance products and consulting services to help both our retail and commercial customers achieve their financial goals. These products and services are delivered through FNRM, our financial services business, which includes risk management (insurance) consulting services.

Through FNRM, we offer a wide range of commercial and personal insurance products and services including our claims investigation and adjusting services, third party administration of self insured workers compensation plans, alternative risk management services, as well as self insurance consulting services. FNRM also provides industry specific insurance programs related to healthcare, moving and storage, construction/surety, non-profits, ice rinks, and municipalities.

The revenue attributable to FNRM consists primarily of fees paid by our clients as well as commissions, fees, and contingent profit sharing paid by insurance carriers. Commission rates that we earn vary based on the type of insurance product, the carrier being represented, and the services that our agency provides. As of December 31, 2011, we are servicing approximately $880 million in annual insurance premium volume.

INVESTMENT ACTIVITIES

Our investment policy provides that investment decisions will be made based on the ability of an investment to generate earnings consistent with factors of quality, maturity, marketability, and risk diversification.

We invest in U.S. Government and agency securities, municipal bonds, corporate debt obligations, asset-backed securities collateralized by student loans, credit cards, and auto leases or loans, collateralized loan obligations backed by corporate loans and other types of structured financing, small business administration pooled loans, mortgage-backed securities and collateralized mortgage obligations (“CMOs”) issued and guaranteed by the FNMA, FHLMC, Government National Mortgage Association (“GNMA”), or non-agency issued and backed by residential conventional “whole loans” or commercial real estate loans.

Our investment strategy generally utilizes a risk management approach of diversified investing to optimize investment yields while managing our overall interest rate risk and liquidity position. To accomplish these objectives, we focus on investments in mortgage related securities, including CMOs, and other structured products. We attempt to maintain a high degree of liquidity in our investment securities and generally do not invest in debt securities with expected average lives at purchase in excess of six years.

As of December 31, 2011, our investment portfolio is primarily comprised of residential mortgage-backed securities. We expect the composition of our investment portfolio to include more diversified product types such as commercial mortgage-backed securities, asset-backed securities, collateralized loan obligations and corporate bonds. In addition to the purchases made in these security types in anticipation of our pending HSBC transaction, we also plan to grow our positions in these security types throughout 2012 with reinvestment of cash proceeds from our existing securities.

SOURCES OF FUNDS

Deposits and borrowed funds, primarily FHLB advances and repurchase agreements, are the primary sources of funds we use in lending, investing, and other general purposes. In addition, we receive repayments on and proceeds from our sales of loans and securities, and cash flows from our operations. We have available lines of credit with the FHLB of New York, Federal Reserve Bank (“FRB”), and two commercial banks, which can provide us liquidity if the above funding sources are not sufficient to meet our short-term liquidity needs.

Deposits

We offer a variety of deposit products with a range of interest rates and terms. Our retail deposit accounts consist of savings, negotiable order of withdrawal (“NOW”), checking, money market, and certificate of deposit accounts. Our commercial account offerings include business savings and checking, money market, cash management accounts, and a totally free checking product. We also accept municipal deposits. In order to further diversify liquidity sources, the Bank has obtained certificates of deposit and money market deposit accounts through brokers.

Borrowed Funds

We utilize borrowings to manage the overall maturity of our liabilities and to leverage our capital for the purpose of improving our return on equity. These borrowings primarily consist of advances and repurchase agreements with the FHLB, nationally recognized securities brokerage firms, and with our commercial and municipal customers.

SEGMENT INFORMATION

Information about our business segments is included in Note 19 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.” We have identified two business segments: banking and financial services. Our financial services activities consist predominantly of insurance sales. All of our other activities are considered banking.

SUPERVISION AND REGULATION

General

The banking industry is highly regulated. Statutory and regulatory controls are designed primarily for the protection of depositors and the financial system, and not for the purpose of protecting shareholders. The following discussion is not intended to be a complete list of all the activities regulated by the banking laws or of the impact of such laws and regulations on us and the Bank. Changes in applicable law or regulation, and in their interpretation and application by regulatory agencies, cannot be predicted, but may have a material effect on our business and results.

On April 9, 2010, the Company converted from a savings and loan holding company to a bank holding company. We are not a financial holding company and thus are not entitled to the broader powers granted to those entities under the Bank Holding Company Act of 1956, as amended (“BHC Act”). As a bank holding company, we are regulated under the BHC Act and subject to inspection, examination and supervision by the Federal Reserve. In general, the BHC Act limits the business of bank holding companies that are not financial holding companies to banking, managing or controlling banks, performing servicing activities for subsidiaries, and engaging in activities that the Federal Reserve has determined, by order or regulation, are so closely related to banking as to be a proper incident thereto under the BHC Act. We are also subject to the disclosure and regulatory requirements of the Securities Act of 1933, as amended, and the Securities Exchange Act of 1934, as amended, as administered by the SEC. Our common stock is listed on the NASDAQ Global Select Market (“NASDAQ”) under the trading symbol “FNFG” and is subject to NASDAQ rules for listed companies. Our fixed-to-floating rate perpetual non-cumulative preferred stock, series B is listed on the New York Stock Exchange (“NYSE”) under the trading symbol “FNFG PRB” and is subject to NYSE rules for listed companies.

On April 9, 2010, the Bank converted from a Federal savings association to a national banking association organized under the National Bank Act. As a national bank, the Bank is subject to regulation and examination by the OCC and the Federal Deposit Insurance Corporation (the “FDIC”). Insured banks, including the Bank, are subject to extensive regulation of many aspects of their business. These regulations relate to, among other things: (i) the nature and amount of loans that may be made by the Bank and the rates of interest that may be charged; (ii) types and amounts of other investments; (iii) branching; (iv) permissible activities; (v) reserve requirements; and (vi) dealings with officers, directors and affiliates.

Regulatory Reforms

The events of the past few years have led to numerous new laws in the United States and internationally for financial institutions. The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act” or “Dodd-Frank”), which was enacted in July 2010, significantly restructures the financial regulatory regime in the United States. Although the Dodd-Frank Act’s provisions that have received the most public attention generally have been those applying to or more likely to affect larger institutions, it contains numerous other provisions that will affect all bank holding companies and banks, including the Company and the Bank. Among other provisions affecting our businesses:

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Dodd-Frank changed the assessment base for Federal deposit insurance from the amount of insured deposits to consolidated assets less tangible capital, eliminated the ceiling and the size of the Deposit Insurance Fund (the “DIF”), and increased the floor applicable to the size of the DIF. Dodd-Frank also changed the methodology for calculating the assessment rate to factor in the ability of a depository institution to withstand asset and funding related stress.

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Dodd-Frank repealed the Federal prohibitions on the payment of interest on demand deposits, thereby permitting depository institutions to pay interest on business transaction and other accounts.

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Dodd-Frank centralized responsibility for consumer financial protection by creating a new agency, the Consumer Financial Protection Bureau (“CFPB”), and giving it responsibility for implementing, examining and enforcing compliance with Federal consumer protection laws.

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Dodd-Frank provided that debit card interchange fees must be reasonable and proportional to the cost incurred by the issuer with respect to the transaction. This provision is known as the “Durbin Amendment.” In June 2011, the Federal Reserve adopted regulations setting the maximum permissible interchange fee as the sum of 21 cents per transaction and 5 basis points multiplied by the value of the transaction, with an additional adjustment of up to one cent per transaction if the issuer implements certain fraud-prevention standards.

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Dodd-Frank requires the Federal Reserve to adopt enhanced supervision and prudential standards for, among others, bank holding companies with total consolidated assets of $50 billion or more (often referred to as “systemically important financial institutions”), and authorized the Federal Reserve to establish such standards either on its own or upon the recommendations of the Financial Stability Oversight Council (“FSOC”), a new systemic risk oversight body created by Dodd-Frank. In December 2011, the Federal Reserve issued for public comment a notice of proposed rulemaking establishing enhanced prudential standards responsive to these provisions for:

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risk-based capital requirements and leverage limits;

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stress testing of capital;

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liquidity requirements;

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overall risk management requirements;

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resolution plan and credit exposure reporting; and

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concentration/credit exposure limits.

These rules, which we refer to as the “Proposed SIFI Rules”, address a wide, diverse array of regulatory areas, each of which is highly complex. Most of the Proposed SIFI Rules will not apply to the Company as long as its total consolidated assets remain below $50 billion. However, if organic growth or growth through acquisitions causes the Company to have total consolidated assets of $50 billion or more, these rules will apply. Two aspects of the Proposed SIFI Rules — requirements for annual stress testing of capital, potential losses, and certain other items under one base and two stress scenarios provided by the Federal Reserve and certain corporate governance provisions requiring, among other things, that each bank holding company establish a risk committee of its board of directors and that that committee include a “risk expert” — apply to bank holding companies with total consolidated assets of $10 billion or more, including the Company. In January 2012, the OCC issued for public comment a notice of proposed rulemaking establishing comparable stress testing provisions applicable to national banks, including the Bank. These rules generally will become operative on the first day of the fifth calendar quarter after the effective date of the final rule, although certain requirements have different transition periods. The annual stress test requirement is proposed to become operative upon the effective date of the final rule. Comments on the Proposed SIFI Rules are due by March 31, 2012.

The implications of the Dodd-Frank Act for our businesses will depend to a large extent on the manner in which rules adopted pursuant to the Dodd-Frank Act are implemented by the primary U.S. financial regulatory agencies as well as potential changes in market practices and structures in response to the requirements of the Dodd-Frank Act. We continue to analyze the impact of rules adopted under Dodd-Frank, including the Proposed SIFI Rules, on our businesses. However, the full impact will not be known until the rules, and other regulatory initiatives that overlap with the rules, are finalized and their combined impacts can be understood.

The Basel Committee on Banking Supervision (the “Basel Committee”) released in December 2010 revised final frameworks for the regulation of capital and liquidity of internationally active banking organizations. These new frameworks are generally referred to as “Basel III”. Although the U.S. banking agencies have not yet published a notice of proposed rulemaking to implement Basel III in the United States, they are likely to do so (at least with respect to the Basel III capital framework) during the first half of 2012. We anticipate that the Basel III capital framework as adopted in the United States will apply to the Company and will establish substantially higher capital requirements than currently apply. The application of the Basel III liquidity framework to bank holding companies with less than $50 billion of total consolidated assets is less certain. We discuss Basel III in greater detail below in this section under “Capital Requirements” and “Liquidity Requirements”.

Bank Holding Company Regulation

The BHC Act requires the prior approval of the Federal Reserve for the acquisition by a bank holding company of 5% or more of the voting stock or substantially all of the assets of any bank or bank holding company. Also, under the BHC Act, bank holding companies are prohibited, with certain exceptions, from engaging in, or from acquiring 5% or more of the voting stock of any company engaging in, activities other than (i) banking or managing or controlling banks, (ii) furnishing services to or performing services for their subsidiaries or (iii) activities that the Federal Reserve has determined to be so closely related to banking or managing or controlling banks as to be a proper incident thereto.

Payment of Dividends

The principal source of the Company’s liquidity is dividends from the Bank. The prior approval of the OCC is required if the total of all dividends declared by a national bank in any calendar year would exceed the sum of the bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits national banks, such as the Bank, from paying dividends that would be greater than the bank’s undivided profits after deducting statutory bad debt in excess of the bank’s allowance for loan losses. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, the Bank could pay aggregate dividends of $319 million to the Company without obtaining affirmative governmental approvals, as of December 31, 2011. This amount is not necessarily indicative of amounts that may be paid or available to be paid in future periods.

In addition, we and the Bank are subject to other regulatory policies and requirements relating to the payment of dividends, including requirements to maintain adequate capital above regulatory minimum capital levels. The appropriate Federal regulatory authority is authorized to determine under certain circumstances relating to the financial condition of a bank holding company or a bank that the payment of dividends would be an unsafe or unsound practice and to prohibit payment thereof. The appropriate Federal regulatory authorities have stated that paying dividends that deplete a bank’s capital base to an inadequate level would be an unsafe and unsound banking practice and that banking organizations should generally pay dividends only out of current operating earnings. In addition, in the current financial and economic environment, the Federal Reserve has indicated that bank holding companies should carefully review their dividend policy and has discouraged payment ratios that are at maximum allowable levels unless both asset quality and capital are very strong.

Under rules adopted by the Federal Reserve in November 2011, known as the Comprehensive Capital Analysis and Review (or “CCAR”) Rules, bank holding companies with $50 billion or more of total consolidated assets are required to submit annual capital plans to the Federal Reserve and generally may pay dividends and repurchase stock only under a capital plan as to which the Federal Reserve has not objected. The CCAR rules will not apply to us for so long as our total consolidated assets remain below $50 billion. However, we anticipate that our capital ratios reflected in the stress test calculations required of us under the Proposed SIFI Rules (described above under “Regulatory Reforms”) will be an important factor considered by the Federal Reserve in evaluating whether proposed payments of dividends or stock repurchases may be an unsafe or unsound practice.

Transactions with Affiliates

Federal laws strictly limit the ability of banks to engage in transactions with their affiliates, including their bank holding companies. Regulations promulgated by the Federal Reserve limit the types and amounts of these transactions (including loans due and extensions of credit from their U.S. bank subsidiaries) that may take place and generally require those transactions to be on an arm’s-length basis. In general, these regulations require that “covered transactions” between a subsidiary bank and its parent company or the nonbank subsidiaries of the bank holding company must be limited to 10% of the bank subsidiary’s capital and surplus and, with respect to such parent company and all such nonbank subsidiaries, to an aggregate of 20% of the bank subsidiary’s capital and surplus. Further, loans and extensions of credit to affiliates generally are required to be secured by eligible collateral in specified amounts. The Dodd-Frank Act significantly expands the coverage and scope of the limitations on affiliate transactions within a banking organization. For example, commencing in July 2011, the Dodd-Frank Act required that the 10% of capital limit on these transactions applies to financial subsidiaries as well. “Covered transactions” are defined by statute to include a loan or extension of credit, as well as a purchase of securities issued by an affiliate, a purchase of assets (unless otherwise exempted by the Federal Reserve) from the affiliate, the acceptance of securities issued by the affiliate as collateral for a loan, and the issuance of a guarantee, acceptance or letter of credit on behalf of an affiliate.

Federal law also limits a bank’s authority to extend credit to its directors, executive officers and 10% shareholders, as well as to entities controlled by such persons. Among other things, extensions of credit to insiders are required to be made on terms that are substantially the same as, and follow credit underwriting procedures that are not less stringent than, those prevailing for comparable transactions with unaffiliated persons. Also, the terms of such extensions of credit may not involve more than the normal risk of repayment or present other unfavorable features and may not exceed certain limitations on the amount of credit extended to such persons, individually and in the aggregate, which limits are based, in part, on the amount of the bank’s capital.

Banks are subject to prohibitions on certain tying arrangements. A depository institution is prohibited, subject to some exceptions, from extending credit to or offering any other service, or fixing or varying the consideration for such extension of credit or service, on the condition that the customer obtain some additional service from the institution or its affiliates or not obtain services of a competitor of the institution.

Source of Strength Doctrine

Federal Reserve policy has historically required bank holding companies to act as a source of financial and managerial strength to their subsidiary banks. The Dodd-Frank Act codified this policy as a statutory requirement. Under this requirement, the Company is expected to commit resources to support the Bank, including at times when we may not be in a financial position to provide such resources. Any capital loans by a bank holding company to any of its subsidiary banks are subordinate in right of payment to depositors and to certain other indebtedness of such subsidiary banks. In the event of a bank holding company’s bankruptcy, any commitment by the bank holding company to a Federal bank regulatory agency to maintain the capital of a subsidiary bank will be assumed by the bankruptcy trustee and entitled to priority of payment.

In addition, under the National Bank Act, which applies to national banks, if the capital stock of the Bank is impaired by losses or otherwise, the OCC is authorized to require us to pay the deficiency through an assessment. If the assessment is not paid within three months, the OCC could order us to sell our holdings of the Bank’s stock to make good the deficiency.

Capital Requirements

As a bank holding company, the Company is subject to consolidated regulatory capital requirements administered by the Federal Reserve. The Bank is subject to similar capital requirements administered by the OCC. The Federal regulatory authorities’ risk-based capital guidelines are based upon the 1988 capital accord (“Basel I”) of the Basel Committee. The Basel Committee is a committee of central banks and bank supervisors/regulators from the major industrialized countries that develops broad policy guidelines for use by each country’s supervisors in determining the supervisory policies they apply. The requirements are intended to ensure that banking organizations have adequate capital given the risk levels of assets and off-balance sheet financial instruments. Under the requirements, banking organizations are required to maintain minimum ratios for Tier 1 capital and total capital to risk-weighted assets (including certain off-balance sheet items, such as letters of credit). For purposes of calculating the ratios, a banking organization’s assets and some of its specified off-balance sheet commitments and obligations are assigned to various risk categories. A depository institution’s or holding company’s capital, in turn, is classified in one of two tiers, depending on type:

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Core Capital (Tier 1). Tier 1 capital includes common equity, retained earnings, qualifying non-cumulative perpetual preferred stock, minority interests in equity accounts of consolidated subsidiaries (and, under existing standards, a limited amount of qualifying trust preferred securities and qualifying cumulative perpetual preferred stock at the holding company level), less goodwill, most intangible assets and certain other assets.

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Supplementary Capital (Tier 2). Tier 2 capital includes, among other things, perpetual preferred stock and trust preferred securities not meeting the Tier 1 definition, qualifying mandatory convertible debt securities, qualifying subordinated debt, and allowances for possible loan and lease losses, subject to limitations.

The Dodd-Frank Act applies the same leverage and risk-based capital requirements that apply to insured depository institutions to bank holding companies such as the Company. Among other things, going forward this will preclude us from including in Tier 1 capital trust preferred securities or cumulative preferred stock, if any, issued on or after May 19, 2010. We have not issued any trust preferred securities or cumulative preferred stock since that date. Our existing capital trust preferred securities are grandfathered as Tier 1 capital as our consolidated assets were less than $15 billion on December 31, 2009.

Like other bank holding companies, the Company is currently required to maintain Tier 1 capital and “Total capital” (the sum of Tier 1 and Tier 2 capital) equal to at least 4.0% and 8.0%, respectively, of our total risk-weighted assets (including various off-balance-sheet items, such as letters of credit). The Bank, like other depository institutions, is required to maintain similar capital levels under capital adequacy guidelines. In addition, for a depository institution to be considered “well-capitalized” under the regulatory framework for prompt corrective action, its Tier 1 and total capital ratios must be at least 6.0% and 10.0% on a risk-adjusted basis, respectively.

Bank holding companies and banks are also required to comply with minimum leverage ratio requirements. The leverage ratio is the ratio of a banking organization’s Tier 1 capital to its total adjusted quarterly average assets (as defined for regulatory purposes). The requirements necessitate a minimum leverage ratio of 3.0% for bank holding companies and national banks that either have the highest supervisory rating or have implemented the relevant Federal regulatory authority’s risk-adjusted measure for market risk. All other bank holding companies and national banks are required to maintain a minimum leverage ratio of 4.0%, unless a different minimum is specified by a relevant regulatory authority. In addition, for a depository institution to be considered “well-capitalized” under the regulatory framework for prompt corrective action, its leverage ratio must be at least 5.0%.

In 2004, the Basel Committee published a new capital accord (“Basel II”) to replace Basel I. Basel II provides two approaches for setting capital standards for credit risk — an internal ratings-based approach tailored to individual institutions’ circumstances and a standardized approach that bases risk weightings on external credit assessments to a much greater extent than that permitted in existing risk-based capital guidelines. Basel II also sets capital requirements for operational risk and refines the existing capital requirements for market risk exposures. Basel II applies to bank holding companies and banks having $250 billion or more in total consolidated assets or $10 billion or more of foreign exposures (referred to as “core” banks) and, accordingly, currently does not apply either to the Company or the Bank.

In December 2010, the Basel Committee released its final framework for strengthening international capital and liquidity regulation, now officially identified by the Basel Committee as “Basel III”. Basel III, when implemented by the U.S. banking agencies and fully phased-in, will require bank holding companies and their bank subsidiaries to maintain substantially more capital, with a greater emphasis on common equity.

The Basel III final capital framework, among other things, (i) introduces a new capital measure called “Common Equity Tier 1” (“CET1”), (ii) specifies that Tier 1 capital consist of CET1 and “Additional Tier 1 capital” instruments meeting specified requirements, (iii) defines CET1 narrowly by requiring that most adjustments to regulatory capital measures be made to CET1 and not to the other components of capital and (iv) expands the scope of the adjustments as compared to existing regulations.

When fully phased in on January 1, 2019, Basel III will require banks to maintain (i) as a newly adopted international standard, a minimum ratio of CET1 to risk-weighted assets of at least 4.5%, plus a 2.5% “capital conservation buffer” (which is added to the 4.5% CET1 ratio as that buffer is phased in, effectively resulting in a minimum ratio of CET1 to risk-weighted assets of at least 7% upon full implementation), (ii) a minimum ratio of Tier 1 capital to risk-weighted assets of at least 6.0%, plus the capital conservation buffer (which is added to the 6.0% Tier 1 capital ratio as that buffer is phased in, effectively resulting in a minimum Tier 1 capital ratio of 8.5% upon full implementation), (iii) a minimum ratio of Total capital (that is, Tier 1 plus Tier 2) to risk-weighted assets of at least 8.0%, plus the capital conservation buffer (which is added to the 8.0% total capital ratio as that buffer is phased in, effectively resulting in a minimum total capital ratio of 10.5% upon full implementation) and (iv) as a newly adopted international standard, a minimum leverage ratio of 3%, calculated as the ratio of Tier 1 capital to balance sheet exposures plus certain off-balance sheet exposures (as the average for each quarter of the month-end ratios for the quarter).

Basel III also provides for a “countercyclical capital buffer,” generally to be imposed when bank regulatory agencies determine that excess aggregate credit growth has become associated with a buildup of systemic risk, that would be a CET1 add-on to the capital conservation buffer in the range of 0% to 2.5% when fully implemented (potentially resulting in total buffers of between 2.5% and 5%).

The aforementioned capital conservation buffer is designed to absorb losses during periods of economic stress. Banking institutions with a ratio of CET1 to risk-weighted assets above the minimum but below the conservation buffer (or below the combined capital conservation buffer and countercyclical capital buffer, when the latter is applied) will face constraints on dividends, equity repurchases and compensation based on the amount of the shortfall.

The implementation of the Basel III final framework will commence on January 1, 2013. On that date, applicable banking institutions will be required to meet the following minimum capital ratios:

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3.5% CET1 to risk-weighted assets.

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4.5% Tier 1 capital to risk-weighted assets.

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8.0% Total capital to risk-weighted assets.

The Basel III final framework provides for a number of deductions from and adjustments to CET1. These include, for example, the requirement that mortgage servicing rights, deferred tax assets dependent upon future taxable income and significant investments in non-consolidated financial entities be deducted from CET1 to the extent that any one such category exceeds 10% of CET1 or all such categories in the aggregate exceed 15% of CET1.

Implementation of the deductions and other adjustments to CET1 will begin on January 1, 2014 and will be phased in over a five-year period (20% per year). The implementation of the capital conservation buffer will begin on January 1, 2016 at the 0.625% level and be phased in over a four-year period (increasing by that amount on each subsequent January 1, until it reaches 2.5% on January 1, 2019).

The timing for the Federal banking agencies’ publication of proposed rules to implement the Basel III capital framework and the implementation schedule is uncertain, but the Federal banking agencies have indicated informally that rules implementing the Basel III capital framework will be published for comment during the first half of 2012. The rules ultimately adopted and made applicable to the Company may be different from the Basel III final framework as published in December 2010. Requirements to maintain higher levels of capital or to maintain higher levels of liquid assets could adversely impact the Company’s net income and return on equity. The current requirements and the Company’s actual capital levels are detailed in Note 11 of “Notes to Consolidated Financial Statements” filed in Part II, Item 8, “Financial Statements and Supplementary Data.”

The Proposed SIFI Rules discussed above would require bank holding companies, such as the Company, with $10 billion or more but less than $50 billion in assets to perform annual stress tests to assess the potential impact on earnings and capital, taking into account the current condition of the company and its risks, exposures, business strategies and activities.

Liquidity Requirements

Historically, regulation and monitoring of bank and bank holding company liquidity has been addressed as a supervisory matter, without required formulaic measures. The Basel III liquidity framework requires banks and bank holding companies to measure their liquidity against specific liquidity tests that, although similar in some respects to liquidity measures historically applied by banks and regulators for management and supervisory purposes, going forward would be required by regulation. One test, referred to as the liquidity coverage ratio (“LCR”), is designed to ensure that the banking entity maintains an adequate level of unencumbered high-quality liquid assets equal to the entity’s expected net cash outflow for a 30-day time horizon (or, if greater, 25% of its expected total cash outflow) under an acute liquidity stress scenario. The other test, referred to as the net stable funding ratio (“NSFR”), is designed to promote more medium- and long-term funding of the assets and activities of banking entities over a one-year time horizon. These requirements will incent banking entities to increase their holdings of U.S. Treasury securities and other sovereign

debt as a component of assets and increase the use of long-term debt as a funding source. The Basel III liquidity framework contemplates that the LCR will be subject to an observation period continuing through mid-2013 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard on January 1, 2015. Similarly, it contemplates that the NSFR will be subject to an observation period through mid-2016 and, subject to any revisions resulting from the analyses conducted and data collected during the observation period, implemented as a minimum standard by January 1, 2018. These new standards are subject to further rulemaking and their terms may well change before implementation.

Prompt Corrective Action Regulations

The Federal Deposit Insurance Act, as amended (“FDIA”), requires among other things, the Federal banking agencies to take “prompt corrective action” in respect of depository institutions that do not meet minimum capital requirements. The FDIA sets forth the following five capital tiers: “well-capitalized,” “adequately capitalized,” “undercapitalized,” “significantly undercapitalized” and “critically undercapitalized.” A depository institution’s capital tier will depend upon how its capital levels compare with various relevant capital measures and certain other factors, as established by regulation. The relevant capital measures are the total capital ratio, the Tier 1 capital ratio and the leverage ratio.

A bank will be (i) “well-capitalized” if it has a total risk-based capital ratio of 10.0% or greater, a Tier 1 risk-based capital ratio of 6.0% or greater, and a leverage ratio of 5.0% or greater, and is not subject to any order or written directive by any such regulatory authority to meet and maintain a specific capital level for any capital measure; (ii) “adequately capitalized” if it has a total risk-based capital ratio of 8.0% or greater, a Tier 1 risk-based capital ratio of 4.0% or greater, and a leverage ratio of 4.0% or greater and is not “well-capitalized”; (iii) “undercapitalized” if it has a total risk-based capital ratio that is less than 8.0%, a Tier 1 risk-based capital ratio of less than 4.0% or a leverage ratio of less than 4.0%; (iv) “significantly undercapitalized” if it has a total risk-based capital ratio of less than 6.0%, a Tier 1 risk-based capital ratio of less than 3.0% or a leverage ratio of less than 3.0%; and (v) “critically undercapitalized” if its tangible equity is equal to or less than 2.0% of average quarterly tangible assets. An institution may be downgraded to, or deemed to be in, a capital category that is lower than indicated by its capital ratios if it is determined to be in an unsafe or unsound condition or if it receives an unsatisfactory examination rating with respect to certain matters. A bank’s capital category is determined solely for the purpose of applying prompt corrective action regulations, and the capital category may not constitute an accurate representation of the bank’s overall financial condition or prospects for other purposes.

The FDIA generally prohibits a depository institution from making any capital distributions (including payment of a dividend) or paying any management fee to its parent holding company if the depository institution would thereafter be “undercapitalized.” “Undercapitalized” institutions are subject to growth limitations and are required to submit a capital restoration plan to the appropriate banking agencies. The agencies may not accept such a plan without determining, among other things, that the plan is based on realistic assumptions and is likely to succeed in restoring the depository institution’s capital. In addition, for a capital restoration plan to be acceptable, the depository institution’s parent holding company must guarantee that the institution will comply with such capital restoration plan. The bank holding company must also provide appropriate assurances of performance. The aggregate liability of the parent holding company is limited to the lesser of (i) an amount equal to 5.0% of the depository institution’s total assets at the time it became undercapitalized and (ii) the amount which is necessary (or would have been necessary) to bring the institution into compliance with all capital standards applicable with respect to such institution as of the time it fails to comply with the plan. If a depository institution fails to submit an acceptable plan, it is treated as if it is “significantly undercapitalized.”

“Significantly undercapitalized” depository institutions may be subject to a number of requirements and restrictions, including orders to sell sufficient voting stock to become “adequately capitalized,” requirements to reduce total assets, and cessation of receipt of deposits from correspondent banks. “Critically undercapitalized” institutions are subject to the appointment of a receiver or conservator.

The appropriate Federal banking agency may, under certain circumstances, reclassify a well-capitalized insured depository institution as adequately capitalized. The FDIA provides that an institution may be reclassified if the appropriate Federal banking agency determines (after notice and opportunity for hearing) that the institution is in an unsafe or unsound condition or deems the institution to be engaging in an unsafe or unsound practice.

The appropriate agency is also permitted to require an adequately capitalized or undercapitalized institution to comply with supervisory provisions as if the institution were in the next lower category (but not treat a significantly undercapitalized institution as critically undercapitalized) based on supervisory information other than the capital levels of the institution.

We believe that, as of December 31, 2011, the Bank was “well-capitalized” based on the aforementioned ratios. The current requirements and the actual levels for the Bank are detailed in Note 11 of “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data.”

Deposit Insurance

Substantially all of the deposits of the Bank are insured up to applicable limits by the DIF and are subject to deposit insurance assessments to maintain the DIF. On April 1, 2011, the deposit insurance assessment base changed from total domestic deposits to the average consolidated total assets minus the average tangible equity of the depository institution, pursuant to a rule issued by the FDIC as required by the Dodd-Frank Act. Additionally, the deposit insurance assessment system was revised to create a two scorecard system, one for most large institutions, including the Bank, that have more than $10 billion in assets and another for “highly complex” institutions that have over $50 billion in assets and are fully owned by a parent with over $500 billion in assets. Each scorecard has a performance score and a loss severity score that is combined to produce a total score, which is translated into an initial assessment rate. In calculating these scores, the FDIC has continued to utilize a bank’s capital level and supervisory ratings (its “CAMELS ratings”), has introduced certain new financial measures to assess an institution’s ability to withstand asset related stress and funding related stress, and has eliminated the use of risk categories and long-term debt issuer ratings. The FDIC also has the ability to make discretionary adjustments to the total score, up or down, by a maximum of 15 points, based upon significant risk factors that are not adequately captured by the scorecard. The total score translates to an initial base assessment rate on a non-linear, sharply increasing scale.

For large institutions, including the Bank, the initial base assessment rate ranges from five to 35 basis points on an annualized basis (basis points representing cents per $100 of assessable assets). After the effect of potential base-rate adjustments, the total base assessment rate could range from 2.5 to 45 basis points on an annualized basis. The potential adjustments to an institution’s initial base assessment rate include (i) a potential decrease of up to five basis points for certain long-term unsecured debt and, except for well-capitalized institutions with a CAMELS rating of 1 or 2, (ii) a potential increase of up to 10 basis points for brokered deposits in excess of 10% of domestic deposits. As the DIF reserve ratio grows, the rate schedule will be adjusted downward. Additionally, the rule includes a new adjustment for depository institution debt whereby an institution must pay an additional premium equal to 50 basis points on every dollar (above 3% of an institution’s Tier 1 capital) of long-term, unsecured debt held that was issued by another insured depository institution (excluding debt guaranteed under the Temporary Liquidity Guarantee Program).

In October 2010, the FDIC adopted a new DIF restoration plan to ensure that the fund reserve ratio reaches 1.35% by September 30, 2020, as required by the Dodd-Frank Act. At least semi-annually, the FDIC will update its loss and income projections for the fund and, if needed, will increase or decrease assessment rates, following notice-and-comment rulemaking if required.

In November 2009, the FDIC issued a rule that required all insured depository institutions, with limited exceptions, to prepay their estimated quarterly risk-based assessments for the fourth quarter of 2009 and for all of 2010, 2011 and 2012. The rate increases and special assessment resulted in a significant increase to our FDIC premiums in 2009 and 2010. FDIC insurance expense totaled $29 million, $19 million and $17 million in 2011, 2010 and 2009, respectively.

In November 2010, the FDIC issued a final rule to implement provisions of the Dodd-Frank Act that provide for temporary unlimited coverage for noninterest-bearing transaction accounts. The separate coverage for noninterest-bearing transaction accounts became effective on December 31, 2010 and terminates on December 31, 2012.

Under the FDIA, if the FDIC finds that an institution has engaged in unsafe and unsound practices, is in an unsafe or unsound condition to continue operations, or has violated any applicable law, regulation, rule, order or condition imposed by the FDIC, the FDIC may determine that such violation or unsafe or unsound practice or condition requires the termination of deposit insurance.

Consumer Financial Protection Bureau Supervision

In July 2011, consistent with its mandate under Dodd-Frank to supervise depository institutions with more than $10 billion in assets, the CFPB notified the Bank that it will be supervised by the CFPB for certain consumer protection purposes. The CFPB will focus on:

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risks to consumers and compliance with the Federal consumer financial laws, when it evaluates the policies and practices of a financial institution;

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the markets in which firms operate and risks to consumers posed by activities in those markets;

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depository institutions that offer a wide variety of consumer financial products and services; depository institutions with a more specialized focus; and

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non-depository companies that offer one or more consumer financial products or services.

Given the recent establishment of the CFPB, there is significant uncertainty surrounding the expected impact of this bureau on us and other banks.

Safety and Soundness Standards

The FDIA requires the Federal bank regulatory agencies to prescribe standards, through regulations or guidelines, relating to internal controls, information systems and internal audit systems, loan documentation, credit underwriting, interest rate risk exposure, asset growth, asset quality, earnings, stock valuation and compensation, fees and benefits, and such other operational and managerial standards as the agencies deem appropriate. Guidelines adopted by the Federal bank regulatory agencies establish general standards relating to internal controls and information systems, internal audit systems, loan documentation, credit underwriting, interest rate exposure, asset growth and compensation, fees and benefits. In general, the guidelines require, among other things, appropriate systems and practices to identify and manage the risk and exposures specified in the guidelines. The guidelines prohibit excessive compensation as an unsafe and unsound practice and describe compensation as excessive when the amounts paid are unreasonable or disproportionate to the services performed by an executive officer, employee, director or principal stockholder. In addition, the agencies adopted regulations that authorize, but do not require, an agency to order an institution that has been given notice by an agency that it is not satisfying any of such safety and soundness standards to submit a compliance plan. If, after being so notified, an institution fails to submit an acceptable compliance plan or fails in any material respect to implement an acceptable compliance plan, the agency must issue an order directing action to correct the deficiency and may issue an order directing other actions of the types to which an undercapitalized institution is subject under the “prompt corrective action” provisions of the FDIA. See “Prompt Corrective Action Regulations” above. If an institution fails to comply with such an order, the agency may seek to enforce such order in judicial proceedings and to impose civil money penalties.

Incentive Compensation

The Dodd-Frank Act requires the Federal bank regulatory agencies and the SEC to establish joint regulations or guidelines prohibiting incentive-based payment arrangements at specified regulated entities, such as the Company and the Bank, having at least $1 billion in total assets that encourage inappropriate risks by providing an executive officer, employee, director or principal shareholder with excessive compensation, fees, or benefits or that could lead to material financial loss to the entity. In addition, these regulators must establish regulations or guidelines requiring enhanced disclosure to regulators of incentive-based compensation arrangements. The agencies proposed such regulations in April 2011, which may become effective before the end of 2012. If the regulations are adopted in the form initially proposed, they will impose limitations on the manner in which we may structure compensation for our executives.

In June 2010, the Federal Reserve, OCC and FDIC issued comprehensive final guidance on incentive compensation policies intended to ensure that the incentive compensation policies of banking organizations do not undermine the safety and soundness of such organizations by encouraging excessive risk-taking. The guidance, which covers all employees that have the ability to materially affect the risk profile of an organization, either individually or as part of a group, is based upon the key principles that a banking organization’s incentive compensation arrangements should (i) provide incentives that do not encourage risk-taking beyond the organization’s ability to effectively identify and manage risks, (ii) be compatible with effective internal controls and risk management, and (iii) be supported by strong corporate governance, including active and effective oversight by the organization’s board of directors. These three principles are incorporated into the proposed joint compensation regulations under Dodd-Frank, discussed above.

The Federal Reserve will review, as part of its regular, risk-focused examination process, the incentive compensation arrangements of banking organizations, such as the Company, that are not “large, complex banking organizations.” These reviews will be tailored to each organization based on the scope and complexity of the organization’s activities and the prevalence of incentive compensation arrangements. The findings of the supervisory initiatives will be included in reports of examination. Deficiencies will be incorporated into the organization’s supervisory ratings, which can affect the organization’s ability to make acquisitions and take other actions. Enforcement actions may be taken against a banking organization if its incentive compensation arrangements, or related risk-management control or governance processes, pose a risk to the organization’s safety and soundness and the organization is not taking prompt and effective measures to correct the deficiencies.

Depositor Preference

The FDIA provides that, in the event of the “liquidation or other resolution” of an insured depository institution, the claims of depositors of the institution, including the claims of the FDIC standing in for insured depositors, and certain claims for administrative expenses of the FDIC as a receiver, will have priority over other general unsecured claims against the institution. If an insured depository institution fails, insured and uninsured depositors, along with the FDIC, will have priority in payment ahead of unsecured, non-deposit creditors, including depositors whose deposits are payable only outside of the United States, and the parent bank holding company with respect to any extensions of credit it has made to such insured depository institution.

Insolvency of an Insured Depository Institution

If the FDIC is appointed the conservator or receiver of an insured depository institution, upon its insolvency or in certain other events, the FDIC has the power:

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to transfer any of the depository institution’s assets and liabilities to a new obligor without the approval of the depository institution’s creditors;

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to enforce the terms of the depository institution’s contracts pursuant to their terms; or

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to repudiate or disaffirm any contract or lease to which the depository institution is a party, the performance of which is determined by the FDIC to be burdensome and the disaffirmance or repudiation of which is determined by the FDIC to promote the orderly administration of the depository institution.

In addition, under Federal law, the claims of holders of deposit liabilities and certain claims for administrative expenses against an insured depository institution would be afforded priority over other general unsecured claims against such an institution, including claims of debt holders of the institution in the liquidation or other resolution of such an institution by any receiver. As a result, whether or not the FDIC ever sought to repudiate any debt obligations of the Bank, the debt holders would be treated differently from, and could receive, if anything, substantially less than the Bank’s depositors.

Liability of Commonly Controlled Institutions

FDIC-insured depository institutions can be held liable for any loss incurred, or reasonably expected to be incurred, by the FDIC due to the default of another FDIC-insured depository institution controlled by the same bank holding company, or for any assistance provided by the FDIC to another FDIC-insured depository institution controlled by the same bank holding company that is in danger of default. “Default” means generally the appointment of a conservator or receiver. “In danger of default” means generally the existence of certain conditions indicating that default is likely to occur in the absence of regulatory assistance. Such a “cross-guarantee” claim against a depository institution is generally superior in right of payment to claims of the holding company and its affiliates against that depository institution. At this time, the Bank is the only insured depository institution controlled by the Company for this purpose. However, if we were to control other FDIC-insured depository institutions in the future, the cross-guarantee would apply to all such FDIC-insured depository institutions.

Community Reinvestment Act and Fair Lending Laws

The Community Reinvestment Act of 1977 (“CRA”) requires depository institutions to assist in meeting the credit needs of their market areas consistent with safe and sound banking practice. Under the CRA, each depository institution is required to help meet the credit needs of its market areas by, among other things, providing credit to low and moderate income individuals and communities. Depository institutions are periodically examined for compliance with the CRA and are assigned ratings. Banking regulators take into account CRA ratings when considering approval of proposed acquisition transactions. The Bank received a “Satisfactory” CRA rating on its most recent Federal examination. The Fair Housing Act (“FHA”) and Equal Credit Opportunity Act (“ECOA”) are commonly known as the Fair Lending Laws. The FHA is a civil rights law that makes discrimination in housing lending illegal. The ECOA is a customer protection law prohibiting discrimination in all types of credit—both consumer and commercial—and requiring that certain notifications be given to loan applicants. The Americans with Disabilities Act (“ADA”) also bears on lending activities. Banks are obligated to reasonably accommodate individuals with disabilities when they apply for loans as well as during the entire lending process. Depository institutions are periodically examined for compliance with the Fair Lending Laws. Regulators are required to refer matters to the DOJ whenever the regulator has reason to believe that a creditor has engaged in a pattern or practice of discouraging or denying applications for credit in violation of ECOA.

Other Consumer Protection Laws

There are a number of consumer protection laws and implementing regulations that are designed to protect the interests of consumers in their credit transactions and other transactions with banks and financial service providers. More recently, the Dodd-Frank Act amended an existing consumer protection law to expand its scope so that it now covers deceptive acts or practices, and to provide examination and enforcement authority over the CFPB. Under Dodd-Frank it is unlawful for any provider of consumer financial products or services to engage in any unfair, deceptive or abusive act or practice (“UDAAP”). A violation of the consumer protection laws, and in particular UDAAP, could have serious legal, financial and reputational consequences.

Federal Home Loan Bank System

We are a member of the Federal Home Loan Bank System (“FHLB System”), which consists of 12 regional Federal Home Loan Banks (each a “FHLB”). The FHLB System provides a central credit facility primarily for member banks. As a member of the FHLB of New York, we are required to acquire and hold shares of capital stock in the FHLB in an amount equal to 0.2% of the total principal amount of our unpaid residential real estate loans, commercial real estate loans, home equity loans, CMOs, and other similar obligations at the beginning of each year, and 4.5% of our borrowings from the FHLB. As of December 31, 2011, we were in compliance with this requirement. While we are not a member of FHLB of Pittsburgh or Boston, we acquired FHLB of Pittsburgh and Boston common stock in connection with our mergers with Harleysville and NewAlliance, respectively.

Financial Privacy

Federal regulations require the Company to disclose its privacy policy, including identifying with whom we share “nonpublic personal information,” to our customers at the time the customer establishes a relationship with the Company and annually thereafter. In addition, we are required to provide our customers with the ability to “opt-out” of having the Company share their nonpublic personal information with nonaffiliated third parties before we can disclose that information, subject to certain exceptions.

The Federal banking agencies adopted guidelines establishing standards for safeguarding our customer information. The guidelines describe the agencies’ expectation that we create, implement, and maintain an information security program, which would include administrative, technical, and physical safeguards appropriate to our size and complexity and the nature and scope of our activities. The standards set forth in the guidelines are intended to ensure the security and confidentiality of our customer records and information, protect against any anticipated threats or hazards to the security or integrity of our customer records, and protect against unauthorized access to records or information that could result in substantial harm or inconvenience to our customers. Additionally, the guidance states that banks, such as the Bank, should develop and implement a response program to address security breaches involving customer information, including customer notification procedures. We have developed such a program.

Anti-Money Laundering and the USA PATRIOT Act

A major focus of governmental policy on financial institutions in recent years has been aimed at combating money laundering and terrorist financing. The USA PATRIOT Act of 2001 (the “Patriot Act”) substantially broadened the scope of United States anti-money laundering laws and regulations by imposing significant new compliance and due diligence obligations, creating new crimes and penalties and expanding the extra-territorial jurisdiction of the United States. The United States Treasury Department (the “Treasury”) has issued and, in some cases, proposed a number of regulations that apply various requirements of the Patriot Act to financial institutions such as the Bank. These regulations impose obligations on financial institutions to maintain appropriate policies, procedures and controls to detect, prevent and report money laundering and terrorist financing and to verify the identity of their customers. Certain of those regulations impose specific due diligence requirements on financial institutions that maintain correspondent or private banking relationships with non-U.S. financial institutions or persons. Failure of a financial institution to maintain and implement adequate programs to combat money laundering and terrorist financing, or to comply with all of the relevant laws or regulations, could have serious legal, financial, and reputational consequences for the institution.

Office of Foreign Assets Control Regulation

The United States has imposed economic sanctions that affect transactions with designated foreign countries, nationals and others. These are typically known as the “OFAC” rules based on their administration by the Treasury’s Office of Foreign Assets Control (“OFAC”). The OFAC administered sanctions targeting countries take many different forms. Generally, however, they contain one or more of the following elements: (i) restrictions on trade with or investment in a sanctioned country, including prohibitions against direct or indirect imports from and exports to a sanctioned country and prohibitions on “U.S. persons” engaging in financial transactions relating to making investments in, or providing investment related advice or assistance to, a sanctioned country; and (ii) a blocking of assets in which the government or specially designated nationals of the sanctioned country have an interest, by prohibiting transfers of property subject to U.S. jurisdiction (including property in the possession or control of U.S. persons). Blocked assets (e.g., property and bank deposits) cannot be paid out, withdrawn, set off or transferred in any manner without a license from OFAC. Failure to comply with these sanctions could have serious legal, financial, and reputational consequences.

Sarbanes-Oxley Act

The stated goals of the Sarbanes-Oxley Act of 2002 (“SOX”) are to increase corporate responsibility, to provide for enhanced penalties for accounting and auditing improprieties at publicly traded companies, and to protect investors by improving the accuracy and reliability of corporate disclosures pursuant to the securities laws.

SOX addresses, among other matters, audit committees; certification of financial statements and internal controls by the Chief Executive Officer and Chief Financial Officer; the forfeiture of bonuses or other incentive-based compensation and profits from the sale of an issuer’s securities by directors and senior officers in the twelve month period following initial publication of any financial statements that later require restatement; a prohibition on insider trading during pension plan blackout periods; disclosure of off-balance sheet transactions; a prohibition on certain loans to directors and officers; expedited filing requirements for Forms 4; disclosure of a code of ethics and filing a Form 8-K for significant changes or waivers of such code; “real time” filing of periodic reports; the formation of a public accounting oversight board; auditor independence; and various increased criminal penalties for violations of securities laws. The SEC has enacted rules to implement various provisions of SOX.

The Fair and Accurate Credit Transactions Act of 2003

The Fair and Accurate Credit Transactions Act of 2003 (the “FACT Act”) includes many provisions concerning national credit reporting standards, and permits consumers, including our customers, to opt out of information sharing among affiliated companies for marketing purposes. The FACT Act also requires the Company to notify its customers if it reports negative information about them to credit bureaus or if the credit that we grant to them is on less favorable terms than are generally available. We also must comply with guidelines established by our Federal banking regulators to help detect identity theft.


ITEM 1A.		Risk Factors

Making or continuing an investment in securities issued by the Company, including our common stock, involves certain risks that you should carefully consider. The risks and uncertainties described below are not the only risks that may have a material adverse effect on the Company. Additional risks and uncertainties also could adversely affect our business, financial condition and results of operations. If any of the following risks actually occur, our business, financial condition or results of operations could be negatively affected, the market price for your securities could decline, and you could lose all or a part of your investment. Further, to the extent that any of the information contained in this Annual Report on Form 10-K constitutes forward-looking statements, the risk factors set forth below also are cautionary statements identifying important factors that could cause the Company’s actual results to differ materially from those expressed in any forward-looking statements made by or on behalf of the Company.

Economic Conditions May Adversely Affect Our Liquidity and Financial Condition

From December 2007 through June 2009, the U.S. economy was in recession. Business activity across a wide range of industries and regions in the U.S. was greatly reduced. Although economic conditions have begun to improve, certain sectors, such as real estate, remain weak and unemployment remains high. Local governments and many businesses are in serious difficulty due to lower consumer spending and the lack of liquidity in the credit markets. A slowing of improvement or a return to deteriorating business and economic conditions could have one or more of the following adverse effects on our business:

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A decrease in the demand for loans and other products and services offered by us;

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A decrease in net interest income derived from our lending and deposit gathering activities;

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A decrease in the value of our loans held for sale or other assets secured by consumer or commercial real estate;

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An impairment of certain intangible assets, such as goodwill; and

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An increase in the number of customers and counterparties who become delinquent, file for protection under bankruptcy laws or default on their loans or other obligations to us. An increase in the number of delinquencies, bankruptcies or defaults could result in a higher level of nonperforming assets, net charge-offs, provision for loan losses and valuation adjustments on loans held for sale.

Commercial Real Estate and Business Loans Increase Our Exposure to Credit Risks

At December 31, 2011, our portfolio of commercial real estate and business loans totaled $10.0 billion, or 61% of total loans. We plan to continue to emphasize the origination of these types of loans, which generally expose us to a greater risk of nonpayment and loss than residential real estate loans because repayment of such loans often depends on the successful operations and income stream of the borrowers. Additionally, such loans typically involve larger loan balances to single borrowers or groups of related borrowers compared to residential real estate loans. Also, many of our borrowers have more than one commercial loan outstanding. Consequently, an adverse development with respect to one loan or one credit relationship can expose us to a significantly greater risk of loss compared to an adverse development with respect to a residential real estate loan.

Increases to the Provision for Credit Losses May Cause Our Earnings to Decrease

Our customers might not repay their loans according to the original terms, and the collateral securing the payment of those loans might be insufficient to pay any remaining loan balance. Hence, we may experience significant loan losses, which could have a materially adverse effect on our operating results. We make various assumptions and judgments about the collectability of our loan portfolio, including the creditworthiness of our borrowers and the value of the real estate and other assets serving as collateral for the repayment of loans. In determining the amount of the allowance for loan losses, we rely on loan quality reviews, past loss experience, and an evaluation of economic conditions, among other factors. If our assumptions prove to be incorrect, our allowance for loan losses may not be sufficient to cover losses inherent in our loan portfolio, resulting in additions to the allowance. Material additions to the allowance would materially decrease our net income.

Our emphasis on the origination of commercial real estate and business loans is one of the more significant factors in evaluating our allowance for loan losses. As we continue to increase the amount of these loans, additional or increased provisions for credit losses may be necessary and as a result would decrease our earnings.

Bank regulators periodically review our allowance for loan losses and may require us to increase our provision for credit losses or loan charge-offs. Any increase in our allowance for loan losses or loan charge-offs as required by these regulatory authorities could have a materially adverse effect on our results of operations and/or financial condition.

Concentration of Loans in Our Primary Market Area May Increase Risk

Our success is impacted by the general economic conditions in the geographic areas in which we operate, primarily Upstate New York, Pennsylvania, Connecticut, and Western Massachusetts. Accordingly, the local economic conditions in these markets have a significant impact on the ability of borrowers to repay loans. As such, a decline in real estate valuations in these markets would lower the value of the collateral securing those loans. In addition, a significant weakening in general economic conditions such as inflation, recession, unemployment, or other factors beyond our control could reduce our ability to generate new loans and increase default rates on those loans and otherwise negatively affect our financial results.

Changes in Interest Rates Could Adversely Affect Our Results of Operations and Financial Condition

Our results of operations and financial condition could be significantly affected by changes in interest rates. Our financial results depend substantially on net interest income, which is the difference between the interest income that we earn on interest-earning assets and the interest expense we pay on interest-bearing liabilities. Because our interest-bearing liabilities generally reprice or mature more quickly than our interest-earning assets, an increase in interest rates generally may result in a decrease in our net interest income.

Changes in interest rates also affect the value of our interest-earning assets and in particular our investment securities. Generally, the value of our investment securities fluctuates inversely with changes in interest rates. Decreases in the fair value of our investment securities, therefore, could have an adverse effect on our stockholders’ equity or our earnings if the decrease in fair value is deemed to be other than temporary.

Changes in interest rates may also affect the average life of our loans and mortgage related securities. Decreases in interest rates can result in increased prepayments of loans and mortgage-related securities, as borrowers refinance to reduce borrowing costs. As prepayment speeds on mortgage related securities increase, the premium amortization increases prospectively, and additionally there would be a catch up adjustment required under the application of the interest method of income recognition, and will therefore result in lower net interest income. Under these circumstances, we are also subject to reinvestment risk to the extent that we are unable to reinvest the cash received from such prepayments at rates that are comparable to the rates on our existing loans and securities. Additionally, increases in interest rates may decrease loan demand and make it more difficult for borrowers to repay adjustable rate loans.

The Success of the HSBC Acquisition Will Depend on a Number of Uncertain Factors

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

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

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

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

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

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

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our ability to deploy the cash received in the HSBC Acquisition on a timely basis in today’s low interest rate environment, into assets, including investment securities, bearing sufficiently high yields without incurring unacceptable credit or interest rate risk;

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our ability to invest the fund acquired in the HSBC Acquisition into loans at sufficient yields;

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

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

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

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

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

If We Continue to Grow and Our Total Consolidated Assets Reach $50 Billion, We Will Become Subject to Stricter Prudential Standards Required by the Dodd-Frank Act for Large Bank Holding Companies.

The Federal Reserve, pursuant to the requirements of the Dodd-Frank Act, has proposed rules applying stricter prudential standards to, among others, bank holding companies having $50 billion or more in total consolidated assets. The stricter prudential standards include risk-based capital and leverage requirements, liquidity requirements, risk-management requirements, annual stress testing conducted by the Federal Reserve, credit limits and early remediation regimes; the Federal Reserve is also required by the Dodd-Frank Act to adopt rules regarding credit exposure reporting by these institutions. The Dodd-Frank Act permits, but does not require, the Federal Reserve to apply to these institutions heightened prudential standards in a number of other areas, including short-term debt limits and enhanced public disclosure.

We completed three acquisitions during the last several years that have contributed substantially to our growth — NewAlliance (in 2011) and Harleysville (in 2010), both discussed in Note 2 to our consolidated financial statements included in this Annual Report on Form 10-K and under “Management’s Discussion and Analysis of Financial Condition and Results of Operation — Overview” in this report, and our acquisition of certain assets and assumption of certain liabilities related to 57 branches of National City Bank in Western Pennsylvania (2009), addressed in prior filings under the Exchange Act. At December 31, 2008, our total consolidated assets were $9.3 billion, as compared to $32.8 billion at December 31, 2011. Upon consummation of the HSBC Acquisition, we expect to have approximately $38 billion in total consolidated assets. If our assets reach the $50 billion threshold, whether driven by organic growth or future acquisitions, we will become subject to the stricter prudential standards required by the Dodd-Frank Act.

Growing By Acquisition Entails Certain Risks

In 2010 we acquired Harleysville, in 2011 we acquired NewAlliance, and we expect to complete our pending HSBC Acquisition on May 18, 2012, subject to customary closing conditions, including regulatory approval. We will continue to evaluate other acquisition opportunities, including of financial institutions, financial services companies and branches. Growth by acquisition involves risks. The success of our acquisitions may depend on, among other things, our ability to realize anticipated cost savings and to combine the businesses of the acquired company with our businesses in a manner that does not result in decreased revenues resulting from any disruption of existing customer relationships of the acquired company. If we are not able to achieve these objectives, the anticipated benefits of an acquisition may not be realized fully or at all or may take longer to realize than planned. Further, the asset quality or other financial characteristics of a company we may acquire may deteriorate after the acquisition agreement is signed or after the acquisition closes.

We May Incur Restructuring Charges That May Reduce Our Earnings

We continually evaluate the efficiency of our operations. From time to time, we may engage in certain cost-cutting measures to improve efficiency. Charges related to such efforts could adversely affect earnings in the period in which the charges are incurred.

Strong Competition May Limit Our Growth and Profitability

Competition in the banking and financial services industry is intense. We compete with commercial banks, savings institutions, mortgage brokerage firms, credit unions, finance companies, mutual funds, insurance companies, and brokerage and investment banking firms operating locally and elsewhere. Many of these competitors (whether regional or national institutions) have substantially greater resources and lending limits than us and may offer certain services that we do not or cannot provide. Our profitability depends upon our ability to successfully compete in our market areas.

We May Not Be Able to Attract and Retain Skilled People

Our success depends, in large part, on our ability to attract new employees, retain and motivate our existing employees, and continue to compensate employees competitively amid intense public and regulatory scrutiny on the compensation practices of financial institutions. Our compensation plans are an important element in the attraction and retention of key employees. Competition for the best people in most activities engaged in by us can be intense and we may not be able to hire these people or to retain them.

We Are Subject to Extensive Government Regulation and Supervision

We are subject to extensive federal and state regulation and supervision. Banking regulations are primarily intended to protect depositors’ funds, federal deposit insurance funds and the financial system as a whole, not security holders. These regulations affect our lending practices, capital structure, investment practices, dividend policy and growth, among other things. Congress and federal regulatory agencies continually review banking laws, regulations and policies for possible changes. The Dodd-Frank Act, enacted in July 2010, instituted major changes to the banking and financial institutions regulatory regimes in light of the recent performance of and government intervention in the financial services sector. Other changes to statutes, regulations or regulatory policies, including changes in interpretation or implementation of statutes, regulations or policies, could affect us in substantial and unpredictable ways. Such changes could subject us to additional costs, limit the types of financial services and products we may offer and/or increase the ability of non-banks to offer competing financial services and products, among other things. Failure to comply with laws, regulations or policies could result in sanctions by regulatory agencies, civil money penalties and/or reputation damage, which could have a material adverse effect on the Company’s business, financial condition and results of operations. See “Supervision and Regulation” for more information about the regulation to which we are subject.

Any Future FDIC Insurance Premium Increases May Adversely Affect our Earnings

The amount that is assessed by the FDIC for deposit insurance is set by the FDIC based on a variety of factors. These include the DIF’s reserve ratio, the Bank’s assessment base, which is equal to average consolidated total assets minus average tangible equity, and various inputs into the FDIC’s assessment rate calculation, including the Bank’s:

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CAMELS rating,

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criticized and classified assets,

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capital levels, including the Tier 1 leverage ratio

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higher-risk assets, defined as constructions and development loans, leveraged loans and securities, nontraditional mortgages and subprime consumer loans,

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ratio of core earnings to average assets,

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ratio of core deposits to total liabilities,

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liquidity ratio (as defined by the FDIC),

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our projected shortfall (in event of failure) between projected insured deposits and the projected assets available to pay off projected insured deposits as a percentage of current domestic deposits,

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amount of unsecured debt, including subordinated debt and debt issues by another depository institution, and

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amount of brokered deposits.

If there are additional financial institution failures we may be required to pay even higher FDIC premiums than the recently increased levels. Such increases or required prepayments of FDIC insurance premiums may adversely impact our earnings. See “Supervision and Regulation—Deposit Insurance” for more information about FDIC insurance premiums.

We Are a Holding Company and Depend on Our Subsidiaries for Dividends, Distributions and Other Payments

We are a legal entity separate and distinct from our banking and other subsidiaries. Our principal source of cash flow, including cash flow to pay dividends to our stockholders and principal and interest on our outstanding debt, is dividends from the Bank. There are statutory and regulatory limitations on the payment of dividends by the Bank to us, as well as by us to our stockholders. Regulations of the OCC affect the ability of the Bank to pay dividends and other distributions to us and to make loans to us. If the Bank is unable to make dividend payments to us and sufficient capital is not otherwise available, we may not be able to make dividend payments to our common stockholders or principal and interest payments on our outstanding debt. See “Payment of Dividends” above under “Supervision and Regulation.”

In addition, our right to participate in a distribution of assets upon a subsidiary’s liquidation or reorganization is subject to the prior claims of the subsidiary’s creditors.

We Hold Certain Intangible Assets that Could Be Classified as Impaired in The Future. If These Assets Are Considered to Be Either Partially or Fully Impaired in the Future, Earnings Could Decrease

We are required to test our goodwill and core deposit intangible assets for impairment on a periodic basis. The impairment testing process considers a variety of factors, including the current market price of our common shares, the estimated net present value of our assets and liabilities, and information concerning the terminal valuation of similarly situated insured depository institutions. If an impairment determination is made in a future reporting period, our earnings and the book value of these intangible assets will be reduced by the amount of the impairment. If an impairment loss is recorded, it will have little or no impact on the tangible book value of our common shares or our regulatory capital levels, but such an impairment loss could significantly restrict the Bank’s ability to make dividend payments to us.

We Are Subject to a Variety of Operational Risks, Including Reputational Risk, Legal and Compliance Risk, the Risk of Fraud or Theft by Employees or Outsiders, Which May Adversely Affect Our Business and Results of Operations

We are exposed to many types of operational risks, including reputational risk, legal and compliance risk, the risk of fraud or theft by employees or outsiders, unauthorized transactions by employees, or operational errors, including clerical or record keeping errors or those resulting from faulty or disabled computer or telecommunications systems or disclosure of confidential proprietary information of our customers. Negative public opinion can result from our actual or alleged conduct in any number of activities, including lending practices, sales practices, customer treatment, corporate governance and acquisitions and from actions taken by government regulators and community organizations in response to those activities. Negative public opinion can adversely affect our ability to attract and keep customers and can expose us to litigation and regulatory action. Actual or alleged conduct by the Company can result in negative public opinion about our other business.

If personal, nonpublic, confidential, or proprietary information of customers in our possession were to be mishandled or misused, we could suffer significant regulatory consequences, reputational damage, and financial loss. Such mishandling or misuse could include, for example, if such information were erroneously provided to parties who are not permitted to have the information, either by fault of our systems, employees or counterparties, or where such information is intercepted or otherwise inappropriately taken by third parties.

Because the nature of the financial services business involves a high volume of transactions, certain errors may be repeated or compounded before they are discovered and successfully rectified. Our necessary dependence upon automated systems to record and process transactions and the large transaction volumes may further increase the risk that technical flaws or employee tampering or manipulation of those systems will result in losses that are difficult to detect. We also may be subject to disruptions of our operating systems arising from events that are wholly or partially beyond our control (for example, computer viruses or electrical or telecommunications outages), which may give rise to disruption of service to customers and to financial loss or liability. We are further exposed to the risk that our external vendors may be unable to fulfill their contractual obligations (or will be subject to the same risk of fraud or operational errors by their respective employees as we are) and to the risk that we (or our vendors’) business continuity and data security systems prove to be inadequate. The occurrence of any of these risks could result in a diminished ability to operate our business, potential liability to clients, reputational damage, and regulatory intervention, which could adversely affect our business, financial condition, and results of operations, perhaps materially.

Our Information Systems May Experience an Interruption or Security Breach

We rely heavily on communications and information systems to conduct our business. Any failure, interruption or breach in security of these systems could result in failures or disruptions in our customer relationship management, general ledger, deposit, loan and other systems. While we have policies and procedures designed to prevent or limit the effect of the possible failure, interruption or security breach of our information systems, there can be no assurance that any such failure, interruption or security breach will not occur or, if they do occur, that they will be adequately addressed. The occurrence of any failure, interruption or security breach of our information systems could damage our reputation, result in a loss of customer business, subject us to additional regulatory scrutiny or expose us to civil litigation and possible financial liability.

Anti-takeover Laws and Certain Agreements and Charter Provisions May Adversely Affect Share Value

Certain provisions of our certificate of incorporation and state and federal banking laws, including regulatory approval requirements, could make it more difficult for a third party to acquire control of the Company without our board of directors’ approval. Under federal law, subject to certain exemptions, a person, entity or group must notify the Federal Reserve before acquiring control of a bank holding company. Acquisition of 10% or more of any class of voting stock of a bank holding company, including shares of our common stock, creates a rebuttable presumption that the acquirer “controls” the bank holding company. Also, a bank holding company must obtain the prior approval of the Federal Reserve before, among other things, acquiring direct or indirect ownership or control of more than 5% of the voting shares of any bank, including the Bank. There also are provisions in our certificate of incorporation that may be used to delay or block a takeover attempt. Taken as a whole, these statutory provisions and provisions in our certificate of incorporation could result in the Company being less attractive to a potential acquirer and thus could adversely affect the market price of our common stock.


ITEM 1B.		Unresolved Staff Comments

None.


ITEM 2.		Properties

Our headquarters are located in our Buffalo regional market center at 726 Exchange Street, Suite 618, Buffalo, New York where we lease 115,000 square feet of space. At December 31, 2011, we conducted our business through 115 full-service branches located across Upstate New York, 130 full-service branches in Pennsylvania, 76 branches in Connecticut, and 12 branches in Western Massachusetts, including several financial services offices. One hundred six of our branches are owned and 227 are leased.

In addition to our branch network and Buffalo regional market center, we occupy office space in our six other regional market centers located in Rochester, Albany, and Syracuse, New York and Pittsburgh and Philadelphia, Pennsylvania and New Haven, Connecticut where we provide financial services and perform certain back office operations. We also lease or own other facilities which are used as training centers and storage. Some of our facilities contain tenant leases that are subleases. These properties include 37 leased offices and 19 buildings which we own with a total occupancy of approximately 1,540,000 square feet, including our administrative center in Lockport, New York which has 76,000 square feet. At December 31, 2011, our premises and equipment had a net book value of $318 million. See Note 5 of the “Notes to Consolidated Financial Statements” filed herewith in Part II, Item 8, “Financial Statements and Supplementary Data” for further detail on our premises and equipment. All of these properties are generally in good condition and are appropriate for their intended use.


ITEM 3.		Legal Proceedings

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


ITEM 4.		Mine Safety Disclosures

Not applicable.

PART II


ITEM 5.		Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Our common stock is traded under the symbol ‘FNFG’ on the NASDAQ Global Select Market. At December 31, 2011, we had approximately 25,900 stockholders of record. During 2011, the high sales price of our common stock was $15.10 and the low sales price of our common stock was $8.22. We paid dividends of $0.64 per common share during 2011. In February 2012, we adjusted our quarterly cash dividend on our common stock to $0.08 per share, compared to the $0.16 per share that has been paid in recent quarters. As a result of these actions, we believe we will have in excess of eight quarters of cash liquidity without reliance on dividends from the Bank. The lower dividend payout will preserve approximately $110 million of our capital during 2012, accelerating the build of our capital ratios following the consummation of the HSBC Acquisition. The lower dividend payment could adversely affect the market price of our common stock. See additional information regarding the market price and dividends paid in Item 6, “Selected Financial Data.”

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 the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. The Bank paid dividends of $75 million and $60 million to the Company during 2011 and 2010, respectively. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, the Bank could pay additional dividends of approximately $319 million to the Company without obtaining regulatory approvals. Management does not believe these regulatory requirements will affect the Bank’s ability to pay dividends in the future given its well-capitalized position. See Part I, Item 1, “Supervision and Regulation” under the heading “Payment of Dividends” for a discussion of the OCC’s regulatory restrictions on dividend payments by the Bank.

During 2011, we repurchased 9 million shares of our common stock, but we did not repurchase any shares of our common stock during the fourth quarter of 2011. Under the current stock repurchase plan, approved by our Board of Directors on July 27, 2010, we are authorized to repurchase up to an additional 12 million shares of our common stock. This plan does not have an expiration date.


ITEM 6.		Selected Financial Data


At or for the year ended December 31,	2011⁽¹⁾		2010⁽²⁾		2009⁽³⁾			2008		2007
	(In thousands, except per share amounts)
Selected financial condition data:
Total assets	$	32,810,615	$	21,083,853	$	14,584,833		$	9,331,372	$	8,096,228
Loans and leases, net		16,352,483		10,388,060		7,208,883			6,384,284		5,651,427
Investment securities:
Available for sale		9,348,296		7,289,455		4,421,678			1,573,101		1,217,164
Held to maturity		2,669,630		1,025,724		1,093,552			—		—
Goodwill and other intangibles		1,803,240		1,114,144		935,384			784,549		750,071
Deposits		19,405,115		13,148,844		9,729,524			5,943,613		5,548,984
Borrowings		8,127,121		4,893,474		2,302,280			1,540,227		1,094,981
Stockholders’ equity	$	4,798,178	$	2,765,070	$	2,373,661		$	1,727,263	$	1,353,179

Selected operations data:
Interest income	$	1,065,307	$	745,588	$	490,758		$	441,138	$	422,772
Interest expense		184,060		147,834		126,358			172,561		198,594

Net interest income		881,247		597,754		364,400			268,577		224,178
Provision for credit losses		58,107		48,631		43,650			22,500		8,500

Net interest income after provision for credit losses		823,140		549,123		320,750			246,077		215,678
Noninterest income		245,309		186,615		125,975			115,735		131,811
Noninterest expense		806,333		523,328		326,672			228,410		222,466

Income before income taxes		262,116		212,410		120,053			133,402		125,023
Income taxes		88,206		72,057		40,676			44,964		40,938

Net income		173,910		140,353		79,377			88,438		84,085
Preferred stock dividend and discount accretion		—		—		12,046	⁽⁴⁾		1,184		—

Net income available to common stockholders	$	173,910	$	140,353	$	67,331		$	87,254	$	84,085


Stock and related per share data:
Earnings per common share:
Basic	$	0.64	$	0.70	$	0.46		$	0.81	$	0.82
Diluted		0.64		0.70		0.46			0.81		0.81
Cash dividends		0.64		0.57		0.56			0.56		0.54
Book value ⁽⁵⁾		12.79		13.42		12.84			15.02		13.41
Tangible book value per share⁽⁵⁾⁽⁶⁾		7.62		8.01		7.78			8.20		5.98
Market Price (NASDAQ: FNFG):
High		15.10		14.88		16.32			22.38		15.13
Low		8.22		11.23		9.48			9.98		11.15
Close	$	8.63	$	13.98	$	13.91		$	16.17	$	12.04


⁽¹⁾		Includes the impact of the merger with NewAlliance Bancshares, Inc. on April 15, 2011.

⁽²⁾		Includes the impact of the merger with Harleysville National Corporation on April 9, 2010.

⁽³⁾		Includes the impact of the acquisition of 57 National City Bank branch locations on September 4, 2009.

⁽⁴⁾		Includes $8 million of discount accretion related to the redemption of preferred stock issued as part of the Troubled Asset Relief Program.

⁽⁵⁾		Excludes unallocated employee stock ownership plan shares and unvested restricted stock shares.

⁽⁶⁾		Tangible common equity is used to calculate tangible book value per share and excludes goodwill and other intangibles of $1.8 billion, $1.1 billion, $935 million, $785 million, and $750 million at December 31, 2011, 2010, 2009, 2008, and 2007, respectively. Tangible common equity also excludes preferred stock of $338 million and $177 million at December 31, 2011 and December 31, 2008, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.


At or for the year ended December 31,	2011⁽¹⁾			2010⁽²⁾			2009⁽³⁾			2008			2007
	(Dollars in thousands)
Selected financial ratios and other data:

Performance ratios⁽⁴⁾:
Return on average assets		0.62	%		0.74	%		0.69	%		0.99	%		1.05	%
*Common equity:*
Return on average common equity		4.71			5.23			3.47			5.99			6.24
Return on average tangible common equity⁽⁵⁾		8.40			8.67			6.06			13.19			14.12
*Total equity:*
Return on average equity		4.68			5.23			3.95			5.99			6.24
Return on average tangible equity⁽⁶⁾		8.33			8.67			6.71			12.98			14.12

Earnings to fixed charges:
Including interest on deposits		2.34			2.38			1.93			1.76			1.62
Excluding interest on deposits		3.34			3.57			3.18			3.38			4.02
Net interest rate spread		3.46			3.48			3.40			3.19			2.84
Net interest rate margin		3.58			3.64			3.65			3.55			3.33
Efficiency ratio ⁽⁷⁾		71.58			66.72			66.62			59.43			62.49
Dividend payout ratio		100.00	%		81.43	%		121.74	%		69.14	%		65.85	%

Capital ratios:
*First Niagara Financial Group, Inc.*
Total risk-based capital		17.84			14.35			18.51			16.28			12.34
Tier 1 risk-based capital		15.60			13.54			17.41			15.04			11.09
Tier 1 risk-based common capital⁽⁸⁾		13.23			12.76			17.26			11.96			11.09
Leverage ratio⁽⁹⁾		9.97			8.14			—			—			—
Tangible capital⁽⁹⁾		—			—			10.34			11.08			8.28
Equity to assets		14.62			13.11			16.27			18.51			16.71
Tangible common equity to tangible assets⁽¹⁰⁾		8.57	%		8.27	%		10.54	%		8.96	%		8.21	%
*First Niagara Bank:*
Total risk-based capital		16.47			11.86	%		13.73	%		12.72	%		11.35	%
Tier 1 risk-based capital		14.66			11.06			12.63			11.48			10.10
Leverage ratio⁽⁹⁾		9.38			6.64			—			—			—
Tangible capital⁽⁹⁾		—			—			7.48			8.47			7.54

Asset quality:
Total nonaccruing loans	$	89,798		$	89,323		$	68,561		$	46,417		$	28,054
Other nonperforming assets		4,482			8,647			7,057			2,001			237
Total classified loans⁽¹¹⁾		748,375			481,074			280,391			139,009			62,560
Total criticized loans⁽¹²⁾		1,144,222			942,941			485,036			263,643			139,303
Allowance for credit losses		120,100			95,354			88,303			77,793			70,247
Net loan charge-offs	$	29,625		$	41,580		$	33,140		$	17,844		$	10,084
Net charge-offs to average loans		0.20	%		0.44	%		0.50	%		0.28	%		0.18	%
Provision to average loans		0.37			0.52			0.65			0.36			0.15
Total nonaccruing loans to total loans		0.55			0.85			0.94			0.72			0.49
Total nonperforming assets to total assets		0.29			0.46			0.52			0.52			0.35
Allowance for loan losses to total loans		0.73			0.91			1.20			1.20			1.23
Allowance for loan losses to nonaccruing loans		133.7			106.8			128.8			167.6			250.4
Texas ratio⁽¹³⁾		8.55	%		8.94	%		4.95	%		4.74	%		4.20	%

Asset quality — Legacy loans ⁽¹⁴⁾:
Net charge-offs on legacy loans to average legacy loans		0.32	%		0.58	%		0.51	%		0.28	%		0.18	%
Provision for legacy loans to average legacy loans		0.58			0.68			0.67			0.36			0.15
Total nonaccruing legacy loans to total legacy loans		0.91			1.14			1.03			0.72			0.49
Allowance for loan losses to legacy loans		1.20			1.22			1.33			1.20			1.23

Other data:
Number of full service branches		333			257			171			114			110
Full time equivalent employees		4,827			3,791			2,816			1,909			1,824
Effective tax rate		33.7	%		33.9	%		33.9	%		33.7	%		32.7	%


⁽¹⁾		Includes the impact of the merger with NewAlliance Bancshares, Inc. on April 15, 2011.

⁽²⁾		Includes the impact of the merger with Harleysville National Corporation on April 9, 2010.


⁽³⁾		Includes the impact of the acquisition of 57 National City Bank branch locations on September 4, 2009.

⁽⁴⁾		Computed using daily averages.

⁽⁵⁾		Average tangible common equity excludes average goodwill, other intangibles, and preferred stock of $1.6 billion, $1.1 billion, $900 million, $815 million, and $753 million for 2011, 2010, 2009, 2008, and 2007, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽⁶⁾		Average tangible equity excludes average goodwill and other intangibles of $1.6 billion, $1.1 billion, $829 million, $795 million, and $753 million for 2011, 2010, 2009, 2008, and 2007, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽⁷⁾		Computed by dividing noninterest expense by the sum of net interest income and noninterest income.

⁽⁸⁾		Computed by subtracting the sum of preferred stock and the junior subordinated debentures associated with trust preferred securities from Tier 1 capital, divided by risk weighted assets. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and position.

⁽⁹⁾		Tangible capital ratio presented for periods ended prior to First Niagara Bank’s conversion to a national bank regulated by the OCC. Leverage ratio disclosed for periods ended subsequent to such conversion.

⁽¹⁰⁾		Tangible common equity and tangible assets exclude goodwill and other intangibles of $1.8 billion, $1.1 billion, $935 million, $785 million, and $750 million at December 31, 2011, 2010, 2009, 2008, and 2007, respectively. Tangible common equity also excludes preferred stock of $338 million and $177 million at December 31, 2011 and December 31, 2008, respectively. This is a non-GAAP financial measure that we believe provides management and investors with information that is useful in understanding our financial performance and condition.

⁽¹¹⁾		Includes consumer loans, which are considered classified when they are 90 days or more past due. Classified loans include substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review”.

⁽¹²⁾		Beginning in 2011, criticized loans include consumer loans when they are 90 days or more past due. Prior to 2011, criticized loans include consumer loans when they are 60 days or more past due. Criticized loans include special mention, substandard, doubtful, and loss.

⁽¹³⁾		The Texas ratio is computed by dividing the sum of nonperforming assets and loans 90 days past due still accruing by the sum of tangible equity and the allowance for loan losses. This is a non-GAAP measure that we believe provides management and investors with information that is useful in understanding our financial performance and position.

⁽¹⁴⁾		Legacy loans represent total loans excluding acquired loans.


	2011								2010
	Fourth		Third		Second		First		Fourth		Third		Second		First
	quarter		quarter		quarter		quarter		quarter		quarter		quarter		quarter
	(In thousands, except per share amounts)
Selected Quarterly Data:

Interest income	$	291,906	$	287,147	$	277,370	$	208,884	$	205,320	$	200,636	$	195,129	$	144,503
Interest expense		49,393		51,718		46,933		36,016		37,772		39,357		40,371		30,334

Net Interest income		242,513		235,429		230,437		172,868		167,548		161,279		154,758		114,169
Provision for credit losses		13,400		14,500		17,307		12,900		13,500		11,000		11,000		13,131

Net interest income after provision for credit losses		229,113		220,929		213,130		159,968		154,048		150,279		143,758		101,038
Noninterest income		63,685		68,655		60,895		52,074		54,112		49,505		46,050		36,948
Merger and acquisition integration expenses		6,149		9,008		76,828		6,176		5,905		1,916		35,837		6,232
Restructuring charges		13,496		16,326		11,656		1,056		—		—		—
Other noninterest expense		182,526		178,537		166,657		137,918		133,429		130,693		122,366		86,950

Income before Income taxes		90,627		85,713		18,884		66,892		68,826		67,175		31,605		44,804
Income taxes		32,166		28,732		5,334		21,974		22,971		21,579		11,602		15,905

Net income	$	58,461	$	56,981	$	13,550	$	44,918	$	45,855	$	45,596	$	20,003	$	28,899


Earnings per share:
Basic	$	0.19	$	0.19	$	0.05	$	0.22	$	0.22	$	0.22	$	0.10	$	0.16
Diluted		0.19		0.19		0.05		0.22		0.22		0.22		0.10		0.16

Market price (NASDAQ: FNFG):
High		9.99		13.59		14.54		15.10		14.40		13.79		14.88		14.86
Low		8.22		9.15		13.02		13.54		11.51		11.23		12.25		13.00
Close		8.63		9.15		13.20		13.58		13.98		11.65		12.53		14.23

Cash dividends	$	0.16	$	0.16	$	0.16	$	0.16	$	0.15	$	0.14	$	0.14	$	0.14


ITEM 7.		Management’s Discussion and Analysis of Financial Condition and Results of Operations

The following is an analysis of our financial condition and results of operations. You should read this item in conjunction with our Consolidated Financial Statements and related notes filed with this report in Part II, Item 8, “Financial Statements and Supplementary Data” and the description of our business filed here within Part I, Item I, “Business.”

OVERVIEW

First Niagara Financial Group, Inc. is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Federal Reserve, serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A., a national bank subject to supervision and regulation by the OCC. We are a multi-faceted regional bank, with a community banking model, in Upstate New York, Pennsylvania, Connecticut, and Western Massachusetts with $32.8 billion of assets, $19.4 billion of deposits, and 333 branch locations as of December 31, 2011.

We were organized in April 1998 in connection with the conversion of First Niagara Bank, N.A. from a mutual savings bank to a stock savings bank. Since that time we have strategically deployed capital through the acquisition of community banks and financial services companies throughout Upstate New York, and most recently through our September 2009 acquisition of 57 National City Bank branch locations in Western Pennsylvania, our April 2010 merger with Harleysville in Eastern Pennsylvania, and our April 2011 merger with NewAlliance, which allowed us to further build our organization by adding operations in Connecticut and Western Massachusetts. We provide our customers with a full range of products and services delivered through our customer focused operations, which include retail and commercial banking; financial services and risk management (insurance); and commercial business services. These include commercial real estate loans, commercial business loans and leases, residential real estate, home equity and other consumer loans, as well as retail and commercial deposit products and insurance services. We also provide wealth management products and services.

Our strategy is to organically grow both loans and deposits, as these relationships are the primary drivers of our financial success. We have continued to open de novo branch locations, especially in areas where acquisition opportunities have been more limited. We committed to a de novo branch expansion strategy in order to expand our service area and fill coverage gaps within our footprint. We have also significantly expanded our commercial lending and business services to include a full complement of cash management and merchant banking services. This strategy has been effective in minimizing interest rate risk sensitivity and is a good source of noninterest bearing deposits. To supplement this organic growth, our strategy includes the acquisition of whole banks, bank branches, and financial services organizations.

On July 30, 2011, the Bank entered into an agreement with HSBC and affiliates to acquire, after assignment of our purchase right for certain branches discussed below, approximately $11 billion of deposit liabilities and approximately $2 billion in loans in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets for a deposit premium of 6.67%. Without considering expected proceeds from the assignment of our purchase right, the purchase price totals approximately $1 billion, based on December 31, 2011 balances. The goodwill recorded will be tax deductible. At closing, the Bank will not receive any loans greater than 60 days delinquent, (other than loans guaranteed by the Veterans’ Administration or the Federal Housing Administration). The Bank will also acquire certain wealth management relationships as part of the transaction.

In connection with the regulatory process for the acquisition, we agreed with the U.S. Department of Justice (“DOJ”) to assign our purchase rights related to 26 branches in the Buffalo area. In January 2012, we entered into an agreement with KeyBank, N.A. (“Key”) assigning our right to purchase the 26 Buffalo branches as well as 11 additional HSBC branches in the Rochester area for a total of $2.5 billion in deposits and approximately $400 million in loans. Under the terms of the agreement, Key will pay us a deposit premium of 4.6%. In January 2012, we also entered into separate agreements with Community Bank System, Inc. (“Community Bank”) and Financial Institutions, Inc. subsidiary Five Star Bank (“Five Star”) to purchase a total of 27 First Niagara and HSBC branches in Upstate New York with $1.4 billion in deposits and $315 million in loans. Of these 27 branches, 20 consist of HSBC branches for which we will assign our purchase rights to Community Bank and Five Star, and seven are First Niagara branches that will be sold. Under the terms of the agreements, Community Bank will acquire 19 branches, assume approximately $1.0 billion in deposits and pay us a deposit premium of 3.2% and Five Star will acquire eight branches, assume approximately $400 million in deposits and pay us a deposit premium of 4.0%.

The HSBC Acquisition represents a unique opportunity to acquire approximately $11 billion in low cost deposits and valuable customers (after giving effect to assignment of purchase rights for certain branches, any branch sales and any pre-closing attrition or other adjustments). We believe that the HSBC Acquisition will result in earnings growth and strengthen our franchise. The size of the HSBC Acquisition, in terms of loans to be acquired, deposit liabilities to be assumed, and the number of banking offices to be acquired, presents us with an attractive opportunity to significantly enhance our position in the Albany, Buffalo, Rochester and Syracuse, New York banking markets as well as in the New York—New Jersey—Connecticut banking market. Furthermore, the HSBC Acquisition provides us with the opportunity to grow our share of the consumer banking, business banking and wealth management businesses in Upstate New York. We believe that the Buffalo, Rochester, Syracuse, and Albany banking markets are attractive and have continued to outperform the nation with lower overall unemployment and positive house price appreciation, versus continued significant declines elsewhere in the U.S.

Our size relative to our competitors—smaller than large banks having a national reach, but significantly larger than the small local banks currently serving the target markets—will provide us with a strategic advantage in continuing to serve a segment of the market that desires both personalized attention and access to a broad array of financial products and services offered at competitive prices. We believe that the customers of the HSBC Branches will generally fit our traditional customer profile. Our expected retention of HSBC personnel will enable us to provide continuity of service to the customers of the HSBC Branches.

In addition, the total loan portfolio of that we expect to acquire as part of the HSBC Acquisition presents limited risk. The portfolio to be acquired is performing with no loans that are 60 days or more past due (other than loans guaranteed by the Veterans’ Administration or the Federal Housing Administration). The portfolio is an in-market seasoned portfolio and will be marked to fair value at closing. Since we will record all acquired loans at their fair value on the acquisition date, we expect future provision for credit losses related to the HSBC loan portfolio will be limited, if any, in the foreseeable future. The total deposits have a favorable composition. The increase in cash and cash equivalents as a result of the HSBC Acquisition, after, among other things, the assignment of our purchase rights for certain branches and after estimated pay down of wholesale borrowings, will enhance our liquidity and support increased loan growth in the future.

We intend to use the cash received in the HSBC Acquisition to pay down borrowings as well as purchase investment securities. Our purchase of investment securities will be primarily comprised of corporate debt commercial mortgage-backed securities, asset backed securities, and collateralized loan obligations.

On a pro-forma basis, after giving effect to the impact of 1) the assignment of our purchase rights for certain branches to Key, Community Bank and Five Star; 2) the sale of certain First Niagara branches to Five Star; 3) the estimated pay down of $5 billion of wholesale borrowings; and 4) purchase accounting adjustments and the recording of goodwill and intangibles, we expect we and the Bank will remain “well-capitalized” under applicable regulatory capital guidelines. On that same basis, we currently estimate total assets to be $38 billion, total liabilities will be approximately $33 billion and total stockholders’ equity will be approximately $5 billion. Goodwill and other intangibles resulting from the transaction will amount to $1 billion.

In connection with the HSBC Acquisition, in December 2011, we issued 57 million shares of common stock in an underwritten stock offering at a price of $8.50 per share. Net proceeds totaled $468 million. In addition, in December 2011, we issued 14 million shares of fixed-to-floating rate noncumulative preferred stock, series B, with a par value of $0.01 and a liquidation preference of $25 per share, in an underwritten stock offering. Net proceeds totaled $338 million. Further, in December 2011, we issued $300 million of 7.25% subordinated notes due 2021.

During 2011, we incurred $6 million of pre-tax expenses related to the HSBC Acquisition, and expect to incur approximately $145 million to $170 million in additional pre-tax expenses, which includes prepayment penalties on borrowings of approximately $60 million, with the vast majority of these expenses expected to be recognized in the first and second quarters of 2012. We expect to complete our pending HSBC Acquisition on May 18, 2012, subject to customary closing conditions, including regulatory approval.

FINANCIAL OVERVIEW

Despite the challenging economic environment in 2011, we produced solid operating net income and earnings per share that were driven by organic growth in commercial loans and core deposits and by our April merger with NewAlliance. We have been able to grow our customer base and diversify revenue sources and our credit quality remained strong. While the negative impact on margins from the unprecedented Federal Reserve actions is significant, we are actively managing loan and deposit pricing to lessen the impact on our results. Our actions to reduce deposit rates helped support our net interest margin and mitigated the immediate effects of accelerated asset prepayment and repricing on our residential mortgage assets. In addition, we raised $1.1 billion in new capital in December for the HSBC Acquisition.

Our net income for 2011 was $174 million compared to $140 million for 2010. Diluted earnings per share in 2011 was $0.64, compared to $0.70 in 2010, and reflected the impact of the 94 million shares issued to NewAlliance stockholders in April and our December 2011 issuance of 57 million common shares in an underwritten public offering.

Our operating (non-GAAP) net income, which excludes merger and acquisition integration expenses and restructuring charges, amounted to $267 million, or $0.98 per diluted share, for 2011, compared to $174 million, or $0.87 per diluted share, for 2010. Operating income is a non-GAAP financial measure which provides a meaningful comparison of our underlying operational performance and we believe facilitates management and investors’ assessments of business and performance trends in comparison to others in the financial services industry. In 2011, we incurred $98 million in merger and acquisition integration expenses and $43 million in restructuring charges as we adjusted certain aspects of our delivery channels and infrastructure. Merger and acquisition integration expenses amounted to $50 million in 2010.

Net interest income increased significantly to $881 million in 2011, up 47% from 2010. This increase was driven by a number of factors, including our April 2011 merger with NewAlliance, the full year impact of our Harleysville merger and strong commercial loan growth. Our net interest margin of 3.58% in 2011 decreased from 3.64% for 2010 as NewAlliance and the low interest rate environment negatively impacted our margins. Noninterest income increased $59 million, or 31%, due primarily to increases in fee based banking services and wealth management services in our recently acquired Pennsylvania, Connecticut and Western Massachusetts markets and an increase in insurance commissions due to our insurance agency acquisitions in 2010 and 2011. In addition, derivatives sales to existing commercial customers increased capital markets revenues by $7 million during 2011, which are included in other noninterest income.

Our merger with NewAlliance resulted in higher loan, investment and deposit balances. In addition, our commercial loan portfolio, which comprised 61% of total loans at December 31, 2011, increased 13%, excluding loans acquired from NewAlliance, due to organic growth driven by our focus on our commercial lending efforts. Our investment securities balances increased not only due to the securities we acquired from NewAlliance, but also due to our purchase of approximately $1.2 billion of securities in anticipation of asset needs related to the HSBC Acquisition. We funded these purchases with a combination of FHLB advances, repurchase agreements, and cash received through our capital raise in early December. Excluding deposits acquired from NewAlliance, our total deposit balances increased modestly, driven by planned certificate of deposit runoff offset by a 13% increase in core deposit balances, primarily in money market deposit accounts. We continued to execute our strategy not to renew maturing certificates of deposit, resulting in a decrease of $854 million in these accounts. Excluding $2.3 billion acquired from NewAlliance, our borrowings increased approximately $934 million reflecting our use of borrowings to fund our pre-buying strategy noted above and our issuance of $300 million in subordinated notes.

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 investment securities accounting, the accounting treatment and valuation of our acquired loans, adequacy of our allowance for loan losses, and the analysis of the carrying value of goodwill for impairment are deemed to be critical, as our judgments could have a material effect on our results of operations.

Investment Securities

As of December 31, 2011, our available for sale and held to maturity investment securities totaled $12.0 billion, or 37% of our total assets. We use third party pricing services to value our investment securities portfolio, which is comprised almost entirely of Level 2 fair value measured securities. Fair value of our investment securities is based upon quoted market prices of identical securities, where available. If such quoted prices are not available, fair value is determined using valuation models that consider cash flow, security structure, and other observable information. For the vast majority of the portfolio, we validate the prices received from these third parties, on a quarterly basis, by comparing them to prices provided by a different independent pricing service. For the remaining securities that are priced by these third parties where we are unable to obtain a secondary independent price, we review material price changes for reasonableness based upon changes in interest rates, credit outlook based upon spreads for similar securities, and the weighted average life of the debt securities. We have also reviewed detailed valuation methodologies provided to us by our pricing services. We did not adjust any of the prices provided to us by the independent pricing services at December 31, 2011 or 2010. Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on broker quotes, which are reviewed using the same process that is applied to our securities priced by pricing services where we are unable to obtain a secondary independent price.

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

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

Acquired Loans

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

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

•

Loans that were 90 days or more past due;

•

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

•

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

•

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

Any acquired loans that were not individually in the scope of ASC 310-30 because they didn’t meet the criteria above were pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type. We currently have 13 loan pools from our three acquisitions.

We performed a fair valuation of each of the pools and each pool was recorded at a discount. We determined that at least part of the discount on the acquired pools of loans was attributable to credit quality by reference to the valuation model used to estimate the fair value of these pools of loans. The valuation model incorporated lifetime expected credit losses into the loans’ fair valuation in consideration of factors such as evidence of credit deterioration since origination and the amounts of contractually required principal and interest that we did not expect to collect as of the acquisition date. Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, we have made an accounting policy election to apply ASC 310-30 by analogy to all of these acquired pools of loans as they all 1) were acquired in a business combination or asset purchase, 2) resulted in recognition of a discount attributable, at least in part, to credit quality; and 3) were not subsequently accounted for at fair value.

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

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

Allowance for Loan Losses

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

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

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

For our legacy loans, our allowance for loan losses consists of the following elements: (i) specific valuation allowances based on probable losses on specifically identified impaired loans; and (ii) valuation allowances based on net historical loan loss experience for similar loans with similar inherent risk characteristics and performance trends, adjusted, as appropriate, for qualitative 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 TDR are considered impaired. The need for specific valuation allowances are determined for impaired loans and recorded as necessary. For impaired loans, we consider the fair value of the underlying collateral, less estimated costs to sell, if the loan is collateral dependent, or we use the present value of estimated future cash flows in determining the estimates of impairment and any related allowance for loan losses for these loans. Confirmed losses are charged off immediately. Prior to a loan becoming impaired, we typically would obtain an appraisal through our internal loan grading process to use as the basis for the fair value of the underlying collateral.

We estimate the inherent risk of loss on all other legacy loans by portfolio segment. During 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.

Commercial loan portfolio segment

Prior to 2011, we estimated a portion of the allowance for loan losses within our legacy commercial loan portfolio segment utilizing historical net charge-off rates that were specific to the different loan types within the portfolio segment. Beginning in 2011, we estimate the allowance for these loans considering their type and loan grade. We first apply a historic loss rate to loans based on their type and loan grade. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions, or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. Our loan grading system is described in “Management’s Discussion and Analysis of Financial Condition and Results of Operations” under the heading “Credit Risk.”

Consumer loan portfolio segment

Prior to 2011, we estimated losses on our legacy consumer loan portfolio segment utilizing average loss rates for each loan type based on historical net charge-offs. Beginning in 2011, we estimate the allowance for loan losses for our consumer loan portfolio segment by first estimating the amount of loans that will eventually default based on delinquency severity. We then apply a loss rate to the amount of loans that we predict will default based on our historical net loss experience. This amount is then adjusted, as necessary, for qualitative considerations to reflect changes in underwriting, market or industry conditions or based on changes in trends in the composition of the portfolio, including risk composition, seasoning, and underlying collateral. We obtain and review refreshed FICO scores on a quarterly basis, and trends are evaluated for consideration as a qualitative adjustment to the allowance. Other qualitative considerations include, but are not limited to, the evaluation of trends in property values, building permits and unemployment.

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

Goodwill

We record the excess of the cost of acquired entities over the fair value of identifiable tangible and intangible assets acquired less the fair value of liabilities assumed as goodwill. We do not amortize goodwill, but we review it for impairment at our reporting unit level on an annual basis, or when events or changes in circumstances indicate that the carrying amounts may be impaired. We define a reporting unit as a distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available and reviewed regularly by that segment’s management.

We perform our annual impairment test of goodwill on November 1 of each year utilizing valuation methods we believe appropriate, given the availability and applicability of market-based inputs for those methods. For 2011 and 2010, we used both an income and a market approach. After giving appropriate consideration to all available information, we determined that the fair value of each reporting unit exceeded its carrying value and, therefore, there was no impairment of goodwill in either 2011 or 2010. During 2011, the banking industry was challenged by numerous factors, including actions by the Federal Reserve intended to keep long term interest rates low, regulatory actions emanating from Dodd-Frank and uncertainty about the U.S. economy stemming from events unfolding in Europe. These factors and continued low interest rates put negative pressure on ours and other banks’ profitability and market capitalizations and, when coupled with loan and investment prepayments resulting from the low interest rate environment, adversely affected net interest margins across the banking industry, including our own. Further declines in overall interest rates, increased regulatory costs or resulting lost revenue, or worsening credit losses as a result of adverse economic conditions could reduce the profitability of one or both of our reporting units. These factors could also result in us having a lower stock price and market capitalization, both of which are an important element of the overall evaluation of goodwill impairment.

For our banking reporting unit, our application of the income approach was based upon assumptions of both balance sheet and income statement activity. An internal forecast was developed through consideration of current year financial performance and near term expectations regarding key business drivers such as anticipated loan and deposit growth. Long-term growth rates of 5% were then applied in determining the terminal value. A discount rate of 11% was used based upon consideration of the risk free rate, leverage factors, equity risk premium, and Company specific unsystematic risk factors. In our application of the market approach for our banking reporting unit, we utilized a control premium assumption and applied multiples from a set of comparable public companies to the earnings and tangible book value of our banking reporting unit.

For our financial services reporting unit, our income approach was based upon assumptions of income statement activity. An internal forecast was developed through consideration of current year financial performance and near term expectations regarding key business drivers. Long-term growth rates of 3% were then applied in determining the terminal value. A discount rate of 14% was used based upon consideration of the risk free rate, leverage factors, equity risk premium, and Company specific unsystematic risk factors. In our market approach for our financial services reporting unit, we utilized a control premium assumption and applied multiples from a set of comparable public companies to earnings for our financial services reporting unit.

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. As both of our reporting units’ fair values exceeded their carrying amount, we were not required to perform Step 2 in 2011 or 2010.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2011 AND DECEMBER 31, 2010

The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis. Our results for 2011 reflect the full year impact of our April 2010 merger with Harleysville, the partial year impact of our merger with NewAlliance in April 2011, and the partial year impact of our December 2011 common stock issuance. Our results for 2010 reflect the partial year impact of our April 2010 merger with Harleysville.

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


	Year ended
	December 31,
	2011			2010
Operating results (Non-GAAP):
Net interest income		881,247		$	597,754
Provision for credit losses		58,107			48,631
Noninterest income		245,309			186,615
Noninterest expense		665,638			472,684
Income taxes		136,093			88,936

Net operating income (Non-GAAP)	$	266,718		$	174,118


Operating earnings per diluted share (Non-GAAP)	$	0.98		$	0.87


Reconciliation of net operating income to net income	$	266,718		$	174,118
Nonoperating expenses, net of tax at effective tax rate:
Merger and acquisition integration expenses		(64,420	)		(33,252	)
Restructuring charges		(28,388	)		—
Other		—			(513	)

Total nonoperating expenses, net of tax		(92,808	)		(33,765	)

Net income (GAAP)	$	173,910		$	140,353


Earnings per diluted share (GAAP)	$	0.64		$	0.70

Net Interest Income

Our net interest income increased 47% to $881 million in 2011 compared to $598 million in 2010. The year over year increase primarily reflected our $8.5 billion increase in average interest earning assets to $25.2 billion, which was largely attributable to the NewAlliance merger. The increase in average interest earning assets outpaced the growth in average interest bearing liabilities, which increased $7.3 billion year over year, resulting in a $1.1 billion increase in net earning assets to $3.6 billion in 2011. The increase, on a taxable equivalent basis, in net interest income due to the increase in our average net earning assets was approximately $310 million.

The increase in net interest income driven by the increase in interest earning assets was offset by a decrease in net interest income of approximately $15 million, on a taxable equivalent basis, or 6 basis points in our net interest margin, reflecting the challenging interest rate environment in 2011. In particular, the Federal Reserve announced in August 2011 that it intended to keep interest rates low through at least mid-2013, and take certain actions designed to lower longer-term interest rates, referred to “Operation Twist”. This action had the impact of flattening the yield curve and reducing the yields on earning assets that are (i) adjustable rate and directly tied to longer term rates, such as certain commercial real estate loan products that we offer, and (ii) fixed rate where the rate is based on longer-term rates, such as certain of our residential real estate loan products. These reductions in yields directly impacted our net interest income in three important ways: first, they reduced the yields on our assets which we were not able to fully offset by reducing the cost of our liabilities; second, they caused borrowers to repay their fixed rate loans at a faster rate; and third, they reduced the interest rates at which cash flows from these repayments could be reinvested and at which new loans are yielding.

In January 2012, the Federal Reserve modified its position to keep low interest rates and extended the time horizon through at least late 2014. It also announced it will continue its “Operation Twist” initiative by continuing to extend the average maturity of its securities portfolio.

In light of the interest rate environment in 2011, we took targeted measures that partially mitigated this impact. Deposit pricing actions taken in the third quarter focused primarily on our money market deposit accounts lowered funding costs by attracting funds from maturing higher priced certificates of deposit and adding new account holders, which presented cross-selling opportunities for other deposit products. In addition, our net interest income benefitted from approximately $4 million in accretable yield recapture attributable to better than expected credit performance of certain loans acquired from Harleysville and National City Bank.

Our portfolio of residential mortgage-backed securities will continue to be directly impacted by the interest rate environment and yield curve, and the impact of those on prepayment speeds. As prepayment speeds on residential mortgage-backed securities increase, the premium amortization increases prospectively, and additionally there would be a catch up adjustment required under the application of the interest method of income recognition, and will therefore result in lower net interest income. As of December 31, 2011, the amount of net premiums on our residential mortgage-backed securities to be recognized in future periods amounted to approximately $230 million, which equates to a weighted average premium above par of approximately 2.8%. Subsequent changes to the interest rate environment will continue to impact our yield earned on these securities.

The following table presents our condensed average balance sheet 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):


	2011								2010								2009
	Average			Interest					Average			Interest					Average			Interest
	outstanding			earned/		Yield/			outstanding			earned/		Yield/			outstanding			earned/		Yield/
Average balance sheet	balance			paid		rate			balance			paid		rate			balance			paid		rate
Interest-earning assets:
Loans and leases⁽¹⁾
Commercial:
Real estate	$	5,650,972		$	305,645		5.33	%	$	3,960,268		$	227,966		5.75	%	$	2,739,914		$	158,351		5.77	%
Business		3,209,358			137,662		4.23			2,114,500			103,210		4.88			1,297,102			61,323		4.73

Total commercial lending		8,860,330			443,307		4.93			6,074,768			331,176		5.45			4,037,016			219,674		5.44
Residential real estate		3,474,282			157,730		4.54			1,790,873			91,191		5.09			1,831,304			96,780		5.28
Home equity		1,973,363			89,510		4.54			1,263,407			58,844		4.66			658,826			33,039		5.01
Other consumer		273,824			19,109		6.98			247,222			18,305		7.40			154,971			12,296		7.93

Total loans		14,581,799			709,656		4.87			9,376,270			499,516		5.32			6,682,117			361,789		5.41
Mortgage-backed securities⁽²⁾		8,816,880			309,731		3.51			6,358,817			221,467		3.48			2,828,434			114,168		4.04
Other investment securities⁽²⁾		1,399,723			57,719		4.12			826,475			30,425		3.68			465,004			17,496		3.76
Money market and other investments		412,767			10,720		2.60			180,042			5,381		2.99			175,633			3,114		1.77

Total interest-earning assets		25,211,169		$	1,087,826		4.31	%		16,741,604		$	756,789		4.52	%		10,151,188		$	496,567		4.89	%

Noninterest-earning assets⁽³⁾⁽⁴⁾		3,049,157								2,120,690								1,383,719


Total assets	$	28,260,326							$	18,862,294							$	11,534,907


Interest-bearing liabilities:
Deposits
Savings deposits	$	2,287,084		$	4,680		0.20	%	$	1,164,416		$	1,587		0.14	%	$	829,246		$	1,931		0.23	%
Checking accounts		1,957,783			2,379		0.12			1,541,259			2,951		0.19			680,606			996		0.15
Money market deposits		6,503,873			36,493		0.56			4,576,958			27,676		0.60			2,696,157			27,700		1.03
Certificates of deposit		4,057,139			39,686		0.98			3,526,389			38,936		1.10			2,290,845			42,924		1.87

Total interest-bearing deposits		14,805,879			83,238		0.56			10,809,022			71,150		0.66			6,496,854			73,551		1.13
Borrowings
Short-term borrowings		1,637,786			6,477		0.40			1,451,952			30,922		2.13			1,209,928			18,010		1.49
Long-term borrowings		5,124,090			94,345		1.84			1,978,263			45,762		2.31			751,245			34,797		4.63

Total borrowings		6,761,876			100,822		1.49			3,430,215			76,684		2.23			1,961,173			52,807		2.68

Total interest-bearing liabilities		21,567,755		$	184,060		0.85	%		14,239,237		$	147,834		1.04	%		8,458,027		$	126,358		1.49	%

Noninterest-bearing deposits		2,595,066								1,667,760								897,684
Other noninterest-bearing liabilities		384,578								271,918								168,221

Total liabilities		24,547,399								16,178,915								9,523,932
Stockholders’ equity⁽³⁾		3,712,927								2,683,379								2,010,975

Total liabilities and stockholders’ equity	$	28,260,326							$	18,862,294							$	11,534,907


Net interest income				$	903,766							$	608,955							$	370,209

Net interest rate spread							3.46	%							3.48	%							3.40	%

Net earning assets	$	3,643,414							$	2,502,367							$	1,693,161

Net interest rate margin							3.58	%							3.64	%							3.65	%

Ratio of average interest-earning assets to average interest-bearing liabilities		117	%							118	%							120	%


⁽¹⁾		Average outstanding balances are net of deferred costs and unearned discounts and include nonperforming loans and for 2010 and 2009, 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.

Rate/Volume Analysis

The following table presents (on a taxable-equivalent basis) the extent to which changes in interest rates and changes in the volume of our interest-earning assets and interest-bearing liabilities have affected our net interest income during the years indicated. We have provided information in each category with respect to: (i) changes attributable to changes in volume (changes in volume multiplied by prior rate); (ii) changes attributable to changes in rate (changes in rate multiplied by prior volume); and (iii) the net change. The changes attributable to the combined impact of volume and rate have been allocated proportionately to the changes due to volume and the changes due to rate for the years ended December 31 (in thousands):


	2011 vs. 2010								2010 vs. 2009
	Increase/(decrease)					Total			Increase/(decrease)					Total
	due to					increase			due to					increase
	Volume		Rate			(decrease)			Volume		Rate			(decrease)
Interest income on:
Loans	$	248,236	$	(38,096	)	$	210,140		$	143,605	$	(5,878	)	$	137,727
Mortgage-backed securities		86,155		2,109			88,264			120,001		(12,702	)		107,299
Other investment securities		23,253		4,041			27,294			13,314		(385	)		12,929
Money market and other investments		5,931		(592	)		5,339			3,705		(1,438	)		2,267

Total interest-earning assets		363,575		(32,538	)		331,037			280,625		(20,403	)		260,222

Interest expense of:
Savings deposits		2,091		1,002			3,093			619		(963	)		(344	)
Checking accounts		1,714		(2,286	)		(572	)		1,577		378			1,955
Money market deposits		10,411		(1,594	)		8,817			14,710		(14,734	)		(24	)
Certificates of deposit		2,835		(2,085	)		750			17,992		(21,980	)		(3,988	)
Borrowings		36,622		(12,484	)		24,138			34,092		(10,215	)		23,877

Total interest-bearing liabilities		53,673		(17,447	)		36,226			68,990		(47,514	)		21,476

Net interest income	$	309,902	$	(15,091	)	$	294,811		$	211,635	$	27,111		$	238,746

Provision for Credit Losses

Our provision for credit losses is comprised of three components: consideration of the adequacy of our allowance for loan losses related to our legacy loans, needs for allowance for loan losses attributable to our acquired loans due to deterioration in credit quality subsequent to acquisition, and potential losses associated with our unfunded loan commitments. Our total provision for credit losses was $58 million for 2011 compared to $49 million for 2010.

Our provision for loan losses related to our legacy loans is based upon the inherent risk of our loans and considers such interrelated factors as the composition and other credit risk factors of our loan portfolio, trends in asset quality including loan concentrations, and the level of our delinquent loans. Consideration is also given to collateral value, government guarantees, and regional and global economic considerations. The provision for credit losses related to legacy loans amounted to $51 million, or 0.58% of average legacy loans, for 2011, compared to $49 million, or 0.68% of average legacy loans, for 2010. During 2011, our allowance for loan losses related to our legacy loans increased $23 million to $118 million, compared to a $7 million increase during 2010.

Our provision for loan losses related to our acquired loans is based upon a deterioration in expected cash flows subsequent to the acquisition of the loans. These acquired loans were originally recorded at fair value on the date of acquisition. As the fair value at time of acquisition incorporated lifetime expected credit losses, there was no carryover of the related allowance for loan losses. Subsequent to acquisition, we periodically reforecast the expected cash flows for our acquired loans and compare this to our original estimates to evaluate the need for a loan loss provision. Due to a decrease in expected cash flows in 2011 related to a portfolio of other consumer loans acquired from Harleysville with an outstanding principal balance of approximately $59 million as of December 31, 2011, we recorded a provision for credit losses related to acquired other consumer loans for $2 million, representing our expected credit losses over the remaining life of the loans. In addition, we recognized $1 million in provision during 2011 related to commercial business and commercial real estate loans acquired from Harleysville due to a deterioration in credit performance. There was no such provision for loan losses related to our acquired loans for 2010 as the loans performed in line with our original estimates established at acquisition.

Additionally, our total provision for credit losses for 2011 included $4 million for unfunded loan commitments, primarily due to the increase in unfunded loan commitments to $5.1 billion at December 31, 2011. The liability resulting from this provision as well as the recognition of assumed liabilities through purchase accounting was $7 million as of December 31, 2011 and is included in Other Liabilities in our Consolidated Statement of Condition.

Noninterest Income

The following table presents our noninterest income for the years ended December 31 (amounts in thousands):


	2011			2010
Banking services	$	92,082		$	80,773
Insurance commissions		65,125			51,634
Wealth management services		30,729			19,838
Mortgage banking		15,182			12,230
Lending and leasing		13,536			11,449
Bank owned life insurance		11,129			7,261
Other		17,526			3,430

Total noninterest income	$	245,309		$	186,615


Noninterest income as a percentage of net revenue		21.8	%		23.8	%

Noninterest income increased $59 million, or 31%, for the year ended December 31, 2011, compared to the year ended December 31, 2010. The increases in revenues from banking services, mortgage banking, lending and leasing, and other noninterest income were primarily attributable to our April 2011 merger with NewAlliance. These increases are also attributable to the full year impact of our April 2010 merger with Harleysville, whereby a full year of activity is included in the results for 2011 and only nine months are included in the results for 2010.

While our results show an increase in revenues from banking services, we have been negatively impacted by the provision in the Dodd-Frank Act known as the “Durbin Amendment,” limiting permissible interchange fees that banks may charge. See Item 1, “Business,” under the heading “Supervision and Regulation — Regulatory Reforms”, for a further description of the Durbin Amendment. We have been working towards offsetting the Durbin Amendment’s impact through additional revenue generating initiatives that include bringing our deposit fee schedule in line with the market and growing our debit card penetration and usage rate. The impact of the Durbin Amendment, net of these revenue generating initiatives, was a reduction of our banking services revenues by approximately $4 million during the fourth quarter of 2011. Over time, we expect to recover approximately 50% of the lost revenues related to the Durbin Amendment as our revenue generating initiatives continue to be phased in during 2012.

The increase in insurance commissions is attributable to our insurance agency acquisitions in Pennsylvania during 2010 and Connecticut and Western Massachusetts in 2011. A portion of the increase in revenues from wealth management services was due to the NewAlliance merger but the majority of the increase is due to increased activity in Upstate New York and especially Eastern Pennsylvania where we experienced greater cross-selling of securities and insurance products through our branch network.

The increase in other noninterest income was primarily attributable to an $8 million increase in capital markets revenues, reflecting increased derivatives sales driven by cross-selling to existing healthcare, municipal, leasing, and other commercial customers. This relatively new business for us strengthens our commercial business relationships by offering more and better solutions and also diversifies our revenue sources.

Noninterest Expenses

The following table presents our noninterest expense for the years ended December 31 (amounts in thousands):


	2011			2010
Salaries and benefits	$	341,895		$	246,619
Occupancy and equipment		78,163			54,964
Technology and communications		62,376			45,698
Marketing and advertising		21,850			18,388
Professional services		36,017			18,528
Amortization of intangibles		25,544			19,458
FDIC premiums		28,860			18,923
Merger and acquisition integration expenses		98,161			49,890
Restructuring charges		42,534			—
Other		70,933			50,860

Total noninterest expense		806,333			523,328

Less nonoperating expenses:
Merger and acquisition integration expenses		(98,161	)		(49,890	)
Restructuring charges		(42,534	)		—
Other		—			(754	)

Total operating noninterest expense⁽¹⁾	$	665,638		$	472,684


Efficiency ratio⁽²⁾		71.6	%		66.7	%

Operating efficiency ratio⁽¹⁾		59.1	%		60.3	%


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

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

The $283 million, or 54%, increase in noninterest expenses during 2011 from 2010 is primarily due to a $95 million increase in salaries resulting from incremental salaries related to the NewAlliance merger, $48 million increase in merger and acquisition integration expenses, targeted investments in our infrastructure to increase the sophistication and efficiency of our back office processes, increased costs associated with the NewAlliance branches, and $43 million in restructuring charges, which includes $4 million in severance related expenses as a result of our fourth quarter 2011 branch staff realignment designed to enhance our sales capabilities in small business lending and wealth management.

The increase in operating noninterest expenses from 2010 to 2011 was due to increased expenses related to our April merger with NewAlliance and our infrastructure growth. Salaries and benefits increased $95 million, or 39%, as a result of the incremental salaries associated with the NewAlliance merger as well as the continued investment in our infrastructure, reflective of the increase in the number of full-time employees from 3,791 at December 31, 2010 to 4,827 at December 31, 2011. The increase in occupancy and equipment expense resulted from the increase in the number of branches due to the NewAlliance merger, while our technology and communications expense increased not only due to the merger but also due to the expansion of our data center capacity for future growth and other technology enhancements. The launch of our new checking account campaign, “You First,” was the primary contributing factor of the increase in our marketing and advertising expense and the increase in professional services was driven by the outsourcing of our data center. The enactment of new FDIC regulations as mandated by Dodd-Frank combined with the assets acquired from NewAlliance resulted in higher FDIC premiums during 2011.

Merger and acquisition integration expenses of $98 million for the year ended December 31, 2011 were primarily attributable to our merger with NewAlliance. However, $6 million was attributable to our pending HSBC Acquisition. Severance costs comprised more than half of the expenses related to the NewAlliance merger, which also included charitable contributions, professional services, marketing and advertising, technology and communications, occupancy and equipment, and other noninterest expenses. Of the $50 million in merger and acquisition integration expenses for the year ended December 31, 2010, $44 million was attributable to our merger with Harleysville and the remainder was attributable to our merger with NewAlliance.

Consistent with our rapid growth and focus on being more efficient, management has restructured certain aspects of our delivery channels and infrastructure. Specifically, we have adjusted the branch network in Eastern Pennsylvania by closing 14 branches; consolidated certain back office facilities; and restructured our back office and branch infrastructure and operations, including a branch staffing realignment aimed at enhancing our sales capabilities in small business lending and wealth management. This branch staffing realignment will put more small business bankers and financial advisors in our branches and will support our efforts to drive transaction account growth and greater fee income in the future.

The following table summarizes the restructuring expenses that we recognized during 2011 (in thousands).


Severance and other employee related costs	$	6,800
Lease exit costs		9,700
Other exit costs, professional services, and other		11,134
Asset write-offs and disposals		14,900


Total restructuring expenses	$	42,534

Income Taxes

Income tax expense for 2011 and 2010 was $88 million and $72 million, respectively, and the effective tax rate was 33.7% and 33.9%, respectively. The effective tax rate for 2011 decreased from 2010 primarily as a result of a decrease in state income tax and increases in tax exempt income and bank owned life insurance in 2011. This decrease was partially offset by an increase in nondeductible transaction costs and minor return to accrual adjustments.

RESULTS OF OPERATIONS FOR THE YEARS ENDED DECEMBER 31, 2010 AND DECEMBER 31, 2009

Net income for 2010 increased to $140 million from $79 million for 2009, reflecting the full year impact of our National City Bank branch acquisition and the partial year impact of our merger with Harleysville in April 2010. Our diluted earnings per share for 2010 were $0.70, compared to $0.46 for 2009, and reflected the incremental 69 million shares issued in two 2009 equity offerings as well as the 20 million shares we issued to Harleysville stockholders in 2010. Diluted earnings per share for 2009 included the effect of $12 million of preferred stock dividends and discount accretion related to our redemption in May 2009 of our preferred stock issued to the Treasury.

These results reflected the positive impact of our strategic growth initiatives, including an increase in net interest income of $233 million driven by an increase in interest-bearing assets resulting from both our merger and acquisition activity and organic growth in our loan portfolio. Our expansion into Pennsylvania also resulted in an increase in our noninterest income. Specifically, banking services, wealth management, and mortgage banking increased $31 million, $11 million and $8 million, respectively, when compared to 2009. These increases were partially offset by increased noninterest expenses. These expenses include nonrecurring items related to our merger and acquisition activity of $42 million in 2010 compared to $32 million in 2009. Recurring costs due to our acquisition driven growth as well as actions taken to strengthen our infrastructure resulted in an $85 million increase in salaries and benefits expense, a $26 million increase in occupancy and equipment expense, a $21 million increase in technology and communications expense, and a $12 million increase in professional services expense.

Net Interest Income

Throughout 2010, we worked to counter the pressure imposed by the low rate environment. The yield on our interest earning assets decreased 37 basis points to 4.52% during 2010. The yield on our loans decreased 9 basis points in 2010 as compared to 2009, including a 53 basis point reduction in our consumer loan portfolio to 7.40% and a 35 basis point reduction to 4.66% in the yield from our home equity loan portfolio. These decreases resulted from our purchase of new investments and our acquisition and origination of loans in this low rate environment. Our funding costs were aided by both the low rate environment and our initiatives to attain a more favorable mix of interest bearing liabilities by focusing on wholesale borrowing sources, core deposit growth, and runoff of higher cost certificates of deposit balances. At December 31, 2010 our core deposits amounted to 75% of our total deposits as compared to 70% of our total deposits as of December 31, 2009. Additionally, we increased our use of repurchase agreements as a source of funding during 2010, which carried a lower interest rate compared to other borrowing sources due to the pledging of collateral. The average balances of our repurchase agreements amounted to $1.8 billion for 2010, compared to $582 million for 2009. For the year ended December 31, 2010, our funding costs decreased 45 basis points to 1.04%.

Asset yields and funding costs decreased on a proportionate basis during 2010 as we positioned our balance sheet in a manner such that the changes in the interest rate environment experienced in 2010 had a minimal impact on our net interest rate spread and interest margin. Our net interest rate spread increased from 3.40% in 2009 to 3.48% in 2010 and we maintained an interest rate margin of 3.64% in 2010 compared to 3.65% in 2009.

Provision for Credit Losses

Our provision for credit losses amounted to $49 million in 2010, up $5 million from $44 million in 2009, and represented 0.52% of average loans in 2010 compared to 0.65% of average loans in 2009. Excluding $2.2 billion and $218 million of average acquired loans in 2010 and 2009, respectively, this ratio remained flat, as it was 0.67% in 2010 and 0.68% in 2009. These acquired loans were originally recorded at fair value on the date of acquisition, with no carryover of the related allowance for loan losses.

Noninterest Income

Noninterest income increased 48% from 2009 to $187 million for 2010, primarily due to our September 2009 National City Bank branch acquisition and our April 2010 merger with Harleysville. These acquisitions contributed $19 million and $14 million, respectively, of the increase in revenues from fee based banking services, where higher other service charges were partially offset by lower nonsufficient funds fee revenue resulting from new regulations. The increase in revenues during 2010 from wealth management services was also attributable to each of our new markets equally. An increase in mortgage originations resulted in an $8 million increase in revenues from mortgage banking during 2010 due to the low rate environment in 2010.

The decrease in our noninterest income as a percent of total revenues to 24% for 2010, compared to 26% for 2009, was reflective of the growth of our net interest income due to the assets acquired in our National City Bank branch acquisition in late 2009 and our merger with Harleysville in April 2010.

Noninterest Expenses

Noninterest expenses increased $197 million from 2009 to $523 million in 2010, and included $42 million in merger and acquisition integration expenses, a $10 million increase from 2009. Salaries and benefits increased substantially during 2010 as a result of our Pennsylvania acquisitions, routine merit increases, and our infrastructure growth necessary to support our increasing size. Salaries and benefits directly attributable to our Eastern and Western Pennsylvania acquisitions totaled $24 million and $31 million, respectively, in 2010. Increases in professional services, occupancy and equipment, and technology and communications expenses were also attributable to our Pennsylvania acquisitions and infrastructure growth. Excluding a $5 million special assessment in 2009, our federal deposit insurance premiums increased $8 million during 2010 due to the increase in our deposit base through organic growth and acquisition as well as an FDIC mandated industry wide increase in the assessment rate.

Merger and acquisition integration expenses of $42 million for 2010 included $9 million in salaries and benefits, $6 million in technology and communications, $1 million in occupancy and equipment, $5 million in marketing and advertising, $16 million in professional services, and $5 million in other noninterest expenses. Of these expenses, $34 million was attributable to the merger with Harleysville, and the remaining was primarily attributable to our merger with NewAlliance. We also contributed $8 million to the First Niagara Bank Foundation during 2010 in support of charitable giving in Eastern Pennsylvania where the acquired Harleysville branches are located.

Despite the significant increase in our noninterest expenses, our efficiency ratio remained nearly unchanged during 2010 at 66.7% from 66.6% during 2009, reflecting our ability to efficiently manage the costs of our recent growth. The efficiency ratio is computed by dividing noninterest expense by the sum of net interest income and noninterest income.

Income Taxes

Income tax expense for 2010 and 2009 was $72 million and $41 million, respectively, and the effective tax rate for both periods was 33.9%. Although the effective tax rate for 2010 remained unchanged from 2009, the effect was a result of two primary factors. While the effective tax rate decreased due to an increase in tax-exempt interest income from 2009, this decrease was offset by the reduction in the proportional impact of favorable permanent differences relative to the increase in pre-tax income over 2009.

FOURTH QUARTER RESULTS

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


	Three months ended
	December 31,			September 30,			December 31,
	2011			2011			2010
Operating results (Non-GAAP):
Net interest income	$	242,513		$	235,429		$	167,548
Provision for credit losses		13,400			14,500			13,500
Noninterest income		63,685			68,655			54,112
Noninterest expense		182,526			178,537			133,429
Income taxes		38,215			37,402			25,067

Net operating income (Non-GAAP)	$	72,057		$	73,645		$	49,664


Operating earnings per diluted share (Non-GAAP)	$	0.24		$	0.25		$	0.24


Reconciliation of net operating income to net income	$	72,057		$	73,645		$	49,664
Nonoperating expenses, net of tax at GAAP effective tax rate:
Merger and acquisition integration expenses		(4,256	)		(5,925	)		(3,809	)
Restructuring charges		(9,340	)		(10,739	)		—

Total nonoperating expenses, net of tax		(13,596	)		(16,664	)		(3,809	)

Net income (GAAP)	$	58,461		$	56,981		$	45,855


Earnings per diluted share (GAAP)	$	0.19		$	0.19		$	0.22

Comparison to Prior Quarter

GAAP net income for the three months ended December 31, 2011 remained almost unchanged from the three months ended September 30, 2011 at $58 million, or $0.19 per diluted common share, from $57 million, or $0.19 per diluted share. Net operating income for the three months ended December 31, 2011, decreased modestly to $72 million, or $0.24 per diluted common share, compared to $74 million, or $0.25 per diluted common share, for the three months ended September 30, 2011. Operating income is a non-GAAP measure which provides a meaningful comparison of our underlying operational performance and we believe facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry.

Our net interest income for the fourth quarter of 2011 increased 3% from the third quarter of 2011 to $243 million, reflecting a 2% increase in our interest income complemented by a 4% decrease in our interest expense. This was primarily due to the 10% annualized increase in average interest earning assets and the shift in our deposit mix towards lower cost core deposits combined with the increased use of low cost wholesale borrowings which resulted in a five basis point decrease in the cost of interest-bearing liabilities to 0.82%. In particular, pricing actions taken in August mitigated the impact of asset yield compression from prepayments and refinancing and led to an eight basis point decline in the cost of interest bearing deposits. In addition, net interest income in the fourth quarter of 2011 benefitted from approximately $4 million in accretable yield recapture attributable to better than expected credit performance of certain loans acquired from Harleysville and National City Bank.

During the quarter ended December 31, 2011, we recorded a $13 million provision for credit losses including $2 million related to our acquired loans from Harleysvile, as compared to $15 million during the quarter ended September 30, 2011. At December 31, 2011, our total nonperforming loans increased to $90 million, or 0.55% of total loans, as compared to $82 million, or 0.50% of total loans, at September 30, 2011. Excluding acquired loans, nonperforming loans represented 0.91% of total legacy loans and 0.87% of total legacy loans as of December 31, 2011 and September 30, 2011, respectively. Net loan charge-offs decreased to $6 million, or 0.14% annualized of average loans for the quarter as compared to $8 million, or 0.20% annualized of average loans for the third quarter of 2011. Excluding acquired loans, our net loan charge-offs were 0.22% and 0.35% annualized of average legacy loans for the fourth quarter and third quarter, respectively.

Our noninterest income decreased $5 million for the three months ended December 31, 2011 from the three months ended September 30, 2011, reflecting lower banking services fees due to the $4 million impact of the Durbin Amendment and lower insurance commissions due to the seasonal nature of policy renewals. We continue to work toward offsetting the impact of the Durbin Amendment through additional revenue generating initiatives that include bringing our deposit fee schedule in line with the market and growing our debit card penetration and usage rate.

Our fourth quarter 2011 operating noninterest expenses increased to $183 million from $179 million for the third quarter of 2011, primarily due to higher occupancy and equipment expenses, technology and communications expenses, and professional services, partially offset by lower FDIC premiums. Increases in occupancy and equipment expenses, technology and communication expenses, and professional services expenses are primarily related to our investment in building out our infrastructure to increase the sophistication and efficiency of our back-office processes. Of the $4 million decrease in FDIC premiums, $2 million was attributable to a $645 million capital contribution that the Company made to the Bank in 2011 and $2 million was attributable to expense we recorded in the third quarter related to the second quarter.

Comparison to Prior Year Quarter

Net income for the quarter ended December 31, 2011 increased to $58 million, or $0.19 per diluted share, from $46 million, or $0.22 per diluted share, for the same quarter in 2010. The decrease in diluted earnings per share for the fourth quarter of 2011 reflects our issuance of 94 million common shares to NewAlliance stockholders and our issuance of 57 million shares of common stock in December 2011.

Our net interest income for the fourth quarter of 2011 increased 45% from the same period in 2010 to $243 million, primarily due to the $9.6 billion increase in average interest earning assets that resulted from our NewAlliance merger as well as organic growth. Offsetting the increase due to growth in average interest earning assets was a decline of 17 basis points in our net interest margin. The decline in our net interest margin largely reflects the impact of market conditions in the fourth quarter of 2011 resulting from the Federal Reserve’s actions taken in the third quarter of 2011, which resulted in asset yield compressions from prepayments and refinancing.

During the quarter ended December 31, 2011, we recorded a $13 million provision for credit losses, as compared to $14 million during the quarter ended December 31, 2010. At December 31, 2011, our total nonperforming loans increased to $90 million, as compared to $89 million at December 31, 2010, with higher nonperforming loans primarily in our consumer portfolio segment offset by declines in nonperforming loans in our commercial portfolio segment. Excluding acquired loans, nonperforming loans as a percentage of total loans were 0.91% and 1.14% as of December 31, 2011 and December 31, 2010, respectively. Net loan charge-offs decreased to $6 million, or 0.14% annualized of average loans for the quarter as compared to $13 million, or 0.49% annualized of average loans, for the fourth quarter of 2010. Excluding acquired loans, net loan charge-offs were 0.22% and 0.67% annualized of average loans for the fourth quarters of 2011 and 2010, respectively.

Our noninterest income increased $10 million to $64 million for the three months ended December 31, 2011 from $54 million for the three months ended December 31, 2010, reflecting the impact of our NewAlliance merger as well as higher insurance commissions attributable to our insurance agency acquisitions in Pennsylvania during 2010 and Connecticut in 2011. The increase was also driven by higher levels of revenues from our wealth management services. The majority of the increase was due to increased activity in Upstate New York and especially Eastern Pennsylvania where we experienced greater cross-selling of securities and insurance products through our branch network. Revenues from banking services essentially remained flat year over year due to the $4 million impact of the Durbin Amendment.

Our fourth quarter noninterest expenses increased to $202 million from $139 million for the fourth quarter of 2010. The increase was partially due to increased expenses related to the growth of our operations acquired in the NewAlliance merger, including $23 million in additional salaries and benefits expense compared to the fourth quarter of 2010 commensurate with the increase in our full time equivalent employees. In addition, we incurred nonoperating expenses of $13 million of restructuring charges in the fourth quarter of 2011 as we restructured certain aspects of our delivery channels and infrastructure as a result of our acquisitions. Specifically, we adjusted the branch network in Eastern Pennsylvania; consolidated certain back office facilities; and restructured our back office infrastructure and operations. In addition, we realigned our branch staffing model to enhance our sales capabilities in small business lending and wealth management. Our year over year increase also reflects targeted investments in occupancy and equipment, and technology and communications in an effort to enhance the sophistication and efficiency of our back office processes to support the NewAlliance acquisition, the HSBC Acquisition, and future growth opportunities.

ANALYSIS OF FINANCIAL CONDITION

Overview

On April 15, 2011, we completed our acquisition of NewAlliance and the results of the merger are included in our Consolidated Statement of Condition at December 31, 2011. The merger significantly impacted our balance sheet as can be seen through our comparison of December 31, 2011 balances to December 31, 2010 presented below. Total assets increased $11.7 billion to $32.8 billion at December 31, 2011 from $21.1 billion at December 31, 2010, primarily attributable to our acquisition of $9.2 billion in total assets from NewAlliance in the second quarter. To provide perspective on the impact of our acquisition on our Consolidated Statement of Condition, the table below details the balances at December 31, 2011 as well as the December 31, 2010 balances adjusted to include NewAlliance balances acquired on April 15, 2011 (in millions):


			December 31, 2010						Year over
					Balances acquired		FNFG		year change
	December 31,		FNFG		from New Alliance		Including		including
	2011		Consolidated		on April 15, 2011		NewAlliance		NewAlliance

Investment securities available for sale and held to maturity	$	12,018	$	8,315	$	2,759	$	11,074	$	944
Loans and leases:
Commercial:
Real estate		6,244		4,371		1,469		5,840		404
Business		3,772		2,623		433		3,056		716

Total commercial loans		10,016		6,994		1,902		8,896		1,120
Residential real estate		4,013		1,692		2,569		4,261		(248	)
Home equity		2,166		1,525		632		2,157		9
Other consumer		278		273		10		283		(5	)

Total loans and leases		16,473		10,484		5,113		15,597		876

Deposits:
Savings accounts		2,621		1,235		1,543		2,778		(157	)
Interest-bearing checking		2,260		1,706		421		2,127		133
Money market deposits		7,221		4,919		1,132		6,051		1,170
Noninterest-bearing deposits		3,335		1,990		694		2,684		651
Certificates of deposit		3,968		3,300		1,522		4,822		(854	)

Total deposits		19,405		13,150		5,312		18,462		943

Short-term borrowings		2,209		1,789		478		2,267		(58	)
Long-term borrowings		5,918		3,104		1,821		4,925		993

Total borrowings	$	8,127	$	4,893	$	2,299	$	7,192	$	935

Adjusting our December 31, 2010 balances for the impact of balances acquired from NewAlliance, we note the following trends:

•

Our ending loan balances at December 31, 2011 increased $876 million, or 6%, to $16.5 billion from $15.6 billion at December 31, 2010. The increase represents organic growth driven by our focus on commercial lending.

•

The growth in deposits from NewAlliance was complemented by an increase of $1.2 billion in money market deposits across our footprint. Our certificates of deposit decreased $854 million, reflecting our strategy not to renew maturing certificates.

•

Total borrowings increased by $935 million during the year to $8.1 billion due to our use of wholesale borrowings to fund our pre-buying of investment securities in anticipation of asset needs related to the HSBC Acquisition. The increase also reflects the use of borrowings to fund the run-off of certificates of deposit and loans as well as our issuance of $300 million in subordinated notes during December 2011 in conjunction with the HSBC capital raise.

Lending Activities

Our total loans and leases outstanding increased $6.0 billion from December 31, 2010 to December 31, 2011, including the $5.1 billion of loans we acquired from the merger with NewAlliance.

Our commercial loan portfolio, excluding those acquired from NewAlliance, increased $1.1 billion, or 13%, resulting from our continued strategic focus on the portfolio. Our year over year results in our Upstate New York, Western Pennsylvania and Eastern Pennsylvania markets display the strong organic growth in our commercial lending activities. Our commercial loan portfolio increased $572 million, or 13%, in Upstate New York, $247 million, or 25%, in Western Pennsylvania, $109 million, or 8%, in Eastern Pennsylvania, and $200 million, or 110%, in our Capital Markets business during 2011, as a result of our continued strategic focus on the portfolio. This increase was concentrated in both commercial real estate loans and business loans. Commercial loans comprised 61% of our total loan portfolio at December 31, 2011 as compared to 67% at December 31, 2010, with the decrease attributable to composition of the loan portfolio acquired from NewAlliance, of which 50% was residential real estate loans.

Excluding residential real estate loans acquired from NewAlliance, we experienced a net decrease of $248 million in our residential real estate portfolio despite originating $1.4 billion in new residential real estate loans during 2011. The net decline reflects the net run-off in the portfolio as ongoing consumer preference is for long-term fixed rate products, which we generally sell and do not hold in our portfolio. Excluding the loans acquired from NewAlliance, our home equity and other consumer loan portfolios remained relatively flat during 2011 with a combined increase of $4 million.

Loan Portfolio Composition

The table below reflects selected information concerning the composition of our loan and lease portfolios as of December 31 (amounts in thousands):


	2011						2010						2009						2008						2007
	Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent			Amount			Percent
Commercial:
Real estate	$	5,878,618			35.7	%	$	3,964,106			37.8	%	$	2,711,411			37.1	%	$	2,209,266			34.1	%	$	1,899,818			33.2	%
Construction		365,763			2.2			406,751			3.9			347,666			4.8			340,189			5.3			292,233			5.1
Business		3,771,649			22.9			2,623,079			25.0			1,695,446			23.2			1,126,334			17.4			921,140			16.1

Total commercial		10,016,030			60.8			6,993,936			66.7			4,754,523			65.1			3,675,789			56.8			3,113,191			54.4

Consumer:
Residential real estate		4,012,267			24.4			1,692,198			16.1			1,648,440			22.6			2,000,495			31.0			1,962,731			34.3
Home equity		2,165,988			13.1			1,524,570			14.6			700,580			9.6			633,727			9.8			510,719			8.9
Other consumer		278,298			1.7			272,710			2.6			193,643			2.7			152,066			2.4			135,033			2.4

Total loans and leases		16,472,583			100.0	%		10,483,414			100.0	%		7,297,186			100.0	%		6,462,077			100.0	%		5,721,674			100.0	%


Allowance for loan losses		(120,100	)					(95,354	)					(88,303	)					(77,793	)					(70,247	)

Total loans and leases, net	$	16,352,483					$	10,388,060					$	7,208,883					$	6,384,284					$	5,651,427

Included in the table above are acquired loans with a carrying value of $6.6 billion, $2.6 billion and $660 million at December 31, 2011, 2010 and 2009 respectively. Such loans were acquired through our mergers and acquisitions and were initially recorded at fair value with no carryover of any related allowance for loan losses. To the extent that the credit quality of loans deteriorates subsequent to acquisition, an allowance for loan loss is established. Our allowance for loan loss representing our expected losses over the remaining life of our acquired loans was $2 million as of December 31, 2011 and there was no allowance for loan loss related to acquired loans as of December 31, 2010.

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):


							Connecticut
	Upstate New		Western		Eastern		and Western		Capital		Total loans
	York		Pennsylvania		Pennsylvania		Massachusetts		markets⁽¹⁾		and leases

December 31, 2011:
Commercial:
Real estate	$	3,204,416	$	544,326	$	1,066,456	$	1,429,183	$	—	$	6,244,381
Business		1,826,347		684,291		414,829		464,607		381,575		3,771,649

Total commercial		5,030,763		1,228,617		1,481,285		1,893,790		381,575		10,016,030

Consumer:
Residential real estate		1,225,529		55,410		292,573		2,438,755		—		4,012,267
Home equity		807,898		162,925		608,670		586,495		—		2,165,988
Other consumer		164,602		56,015		45,627		12,054		—		278,298

Total loans and leases	$	7,228,792	$	1,502,967	$	2,428,155	$	4,931,094	$	381,575	$	16,472,583


December 31, 2010:
Commercial:
Real estate	$	2,973,829	$	408,748	$	988,280	$	—	$	—	$	4,370,857
Business		1,484,970		572,870		383,658		—		181,581		2,623,079

Total commercial		4,458,799		981,618		1,371,938		—		181,581		6,993,936

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

Total loans and leases	$	6,786,632	$	1,184,719	$	2,330,482	$	—	$	181,581	$	10,483,414


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

New commercial loans, including line of credit advances totaled $7.8 billion in 2011. The table below provides our commercial loan originations and line advances by region for 2011 (in thousands):


Loan							Connecticut
originations and	Upstate New		Western		Eastern		and Western		Capital		Total loans
line advances	York		Pennsylvania		Pennsylvania		Massachusetts		markets⁽¹⁾		and leases
Real estate	$	815,034	$	315,799	$	369,976	$	148,152	$	185	$	1,649,146
Business		2,998,430		1,739,902		630,967		301,354		493,249		6,163,902

Total	$	3,813,464	$	2,055,701	$	1,000,943	$	449,506	$	493,434	$	7,813,048


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

We continue to expand our commercial lending activities by taking advantage of opportunities to move up market while remaining focused on our sound credit fundamentals. New commercial loans, including line of credit advances, increased 21% and 23% over 2010 in Upstate New York and Western Pennsylvania, respectively. Our Eastern Pennsylvania region, which was added to our franchise in the second quarter of 2010 through our Harleysville merger, and our Connecticut and Western Massachusetts region, which was added to our franchise in the second quarter of 2011 through our NewAlliance merger, contributed to our growth with a combined $1.5 billion in commercial loan originations and line advances in 2011.

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


	December 31, 2011				December 31, 2010
	Amount		Count		Amount		Count
Commercial real estate loans by balance size:⁽¹⁾
Greater or equal to $20 million	$	248		9	$	86		3
$10 million to $20 million		933		67		487		36
$5 million to $10 million		1,025		147		820		120
$1 million to $5 million		2,364		1,105		1,673		820
Less than $1 million⁽²⁾		1,674		7,137		1,305		6,276

Total commercial real estate loans	$	6,244		8,465	$	4,371		7,255


Commercial business loans by size:⁽¹⁾
Greater or equal to $20 million	$	224		8	$	122		5
$10 million to $20 million		462		34		195		14
$5 million to $10 million		743		105		474		65
$1 million to $5 million		1,151		518		847		375
Less than $1 million⁽²⁾		1,192		19,969		985		13,212

Total commercial business loans	$	3,772		20,634	$	2,623		13,671


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

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

71% of our commercial real estate loans are non-owner occupied. The table below provides the principal balance of our non-owner occupied commercial real estate loans by location and property type as of December 31, 2011 (in thousands):


							Connecticut
	Upstate New		Western		Eastern		and Western
	York		Pennsylvania		Pennsylvania		Massachusetts		Other		Total
Non-owner occupied commercial real estate loans:
Construction, acquisition and development	$	341,176	$	36,326	$	59,691	$	61,674	$	61,595	$	560,462
Multifamily and apartments		868,076		64,095		160,276		177,320		40,800		1,310,567
Office and professional space		487,517		48,562		84,320		320,638		78,084		1,019,121
Retail		325,909		41,613		120,088		221,610		86,080		795,300
Warehouse and industrial		138,940		40,413		43,249		110,067		19,955		352,624
Other		211,734		18,035		69,490		69,250		23,595		392,104

Total non owner occupied commercial real estate loans	$	2,373,352	$	249,044	$	537,114	$	960,559	$	310,109	$	4,430,178

Investing Activities

Securities Portfolio

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. The transferred securities consisted of mortgage-backed securities and collateralized mortgage obligations (“CMOs”), and had net unrealized gains, net of tax, of $4 million on the date of transfer, which is amortized over the remaining life of the related securities as an adjustment of yield in a manner consistent with the amortization of the premium on the same transferred debt securities. At December 31, 2011, the unamortized unrealized gains on these transferred securities, net of tax, amounted to $2.7 million.

In anticipation of receiving $9.0 billion in cash from the HSBC Acquisition, we purchased approximately $1.2 billion of securities. The purchases to date are primarily comprised of commercial mortgage-backed securities but also included agency residential mortgage-backed securities, asset-backed securities, collateralized loan obligations, corporate bonds, and U.S. Treasury bonds. The average yield of the purchases is approximately 3.4%. The purchases were funded with a combination of FHLB advances, repurchase agreements, and cash received through our capital raise in early December.

Our available for sale securities portfolio is primarily invested in residential mortgage-backed securities, which comprised 65% and 85% of our total available for sale portfolio at December 31, 2011 and December 31, 2010, respectively. At both December 31, 2011 and December 31, 2010, 98% of our residential mortgage-backed securities were issued by the Government National Mortgage Association (“GNMA”), Federal National Mortgage Association (“FNMA”), or Federal Home Loan Mortgage Corporation (“FHLMC”). GNMA, FNMA, and FHLMC guarantee the contractual cash flows of these investments. FNMA and FHLMC are government sponsored enterprises that are under the conservatorship of the U.S. government. Our GNMA mortgage-backed securities are backed by the full faith and credit of the U.S. government. Our non-agency CMO portfolio consists primarily of investment grade securities. All of our non-agency CMOs carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. While the markets for this asset class have been less active than for agency CMOs, the markets have been more active for securities that possess strong credit characteristics such as those securities in our portfolio, providing observable inputs for our valuation and liquidity should the need to sell arise.

Our portfolio of residential mortgage-backed securities is directly impacted by the interest rate environment and yield curve. Recent developments, including the announcement by the Federal Reserve of its actions designed to lower longer term interest rates, have directly affected the interest income earned on our residential mortgage backed securities by accelerating prepayments and, consequently, the timing of our premium amortization due to the retroactive catch up adjustment required under the application of the interest method. In addition to the negative impact of the increased premium amortization, such market developments also decrease the yield earned upon reinvestment of the repayment proceeds. Subsequent changes to the interest rate environment will continue to impact our yield earned on these securities. The duration of the current low interest rate environment, coupled with high loan and investment prepayments, will determine the impact on our net interest income and margin. That said, our residential mortgage-backed securities portfolio, as explained below, offers some protection from higher prepayment rates and less cash flow volatility in this low interest rate environment.

Within our CMOs, we own a combination of first pay and second pay sequential securities as well as planned amortization class (“PAC”) securities. We invested in these types of bonds because they provide us with more stable and consistent cash flows in various interest rate environments. Second pay sequential securities are protected from prepayments by the first pay tranche. A PAC security is also protected with a principal payment rate that is stabilized by support tranches in the structure. These support tranches, which we do not own, absorb excess prepayments when rates fall, and receive fewer prepayments to prevent extension of average life as rates rise. However, when prepayments fully repay the principal of the support security, the PAC security is no longer protected from prepayment fluctuations.

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 modestly to 3.95 years at December 31, 2011 from 3.73 years at December 31, 2010 as a result of the implementation of a change in portfolio strategy shifting our asset allocation to securities that are less subject to prepayment risk resulting from interest rate shifts to assets which are nonamortizing and more bullet-like in structure. This reallocation to longer but more stable duration products is the primary cause of the increase in the duration of the securities available for sale portfolio.

At December 31, 2011, the pre-tax net unrealized gains on our available for sale investment securities increased to $170 million from $114 million at December 31, 2010. The unrealized gain represents the difference between the fair value and the amortized cost of our securities. Generally, the value of our investment securities fluctuates in response to changes in market interest rates, changes in credit spreads, or levels of liquidity in the market. Interest rates have decreased during the year ended December 31, 2011, thereby causing the fair values of our fixed rate securities to increase.

Our investment in FHLB stock consists of $101 million, $27 million, and $121 million of FHLB of New York common stock, FHLB of Pittsburgh common stock, and FHLB of Boston common stock, respectively, at December 31, 2011 and of $86 million and $30 million of FHLB of New York common stock and FHLB of Pittsburgh common stock, respectively, at December 31, 2010. Our investment in FRB stock amounted to $109 million and $68 million at December 31, 2011 and 2010, respectively.

The following table shows certain information with respect to the amortized cost and fair values of our portfolio as of December 31 (amounts in thousands):


	2011				2010				2009
	Amortized		Fair		Amortized		Fair		Amortized		Fair
	cost		value		cost		value		cost		value
Investment securities available for sale:
Debt securities:
States and political subdivisions	$	681,713	$	703,178	$	595,978	$	597,434	$	416,847	$	422,844
U.S. Treasury		19,929		20,643		—		—		—		—
U.S. government agencies		5,430		5,437		—		—		—		—
U.S. government sponsored enterprises		377,468		390,136		184,569		187,207		340,806		339,832
Corporate		349,170		336,010		123,475		121,116		3,395		2,213
Trust preferred securities		29,791		25,032		—		—		—		—

Total debt securities		1,463,501		1,480,436		904,022		905,757		761,048		764,889
Other		30,849		31,169		22,277		22,337		3,651		3,664

Total debt and other securities	$	1,494,350	$	1,511,605	$	926,299	$	928,094	$	764,699	$	768,553

Average remaining life of debt securities⁽¹⁾	4.2 years				4.8 years				2.8 years


Mortgage-backed securities:
Residential mortgage-backed securities:
GNMA	$	88,386	$	91,693	$	75,874	$	77,790	$	30,906	$	30,833
FNMA		741,487		763,850		167,355		173,139		101,578		105,039
FHLMC		644,730		659,347		121,785		126,159		59,527		62,746

Collateralized mortgage obligations:
GNMA		2,329,040		2,392,497		4,462,585		4,548,917		1,977,458		1,976,881
FNMA		936,768		949,355		561,430		573,030		692,614		705,257
FHLMC		1,091,128		1,105,033		544,447		546,152		590,172		602,023
Non-agency issued		93,329		93,794		150,243		150,774		173,080		167,279

Total collateralized mortgage obligations		4,450,265		4,540,679		5,718,705		5,818,873		3,433,324		3,451,440

Total residential mortgage-backed securities		5,924,868		6,055,569		6,083,719		6,195,961		3,625,335		3,650,058

Commercial mortgage-backed securities		1,504,241		1,529,310		162,669		162,669		—		—

Total mortgage-backed securities	$	7,429,109	$	7,584,879	$	6,246,388	$	6,358,630	$	3,625,335	$	3,650,058

Average remaining life of mortgage-backed securities⁽¹⁾	4.7 years				4.3 years				2.9 years

Collateralized loan obligations:
Non-agency issued	$	158,091	$	157,999	$	—	$	—	$	—	$	—

Average remaining life of collateralized loan obligations⁽¹⁾	3.0 years					—				—


Asset-backed securities collateralized by:
Student loans	$	43,279	$	40,718	$	—	$	—	$	—	$	—
Credit cards		32,641		32,693		—		—		—		—
Auto loans		20,413		20,293		—		—		—		—
Other		118		109		2,755		2,731		3,165		3,067

	$	96,451	$	93,813	$	2,755	$	2,731	$	3,165	$	3,067


Average remaining life of asset-backed securities⁽¹⁾	4.9 years				9.6 years				10.1 years


Total securities available for sale	$	9,178,001	$	9,348,296	$	7,175,442	$	7,289,455	$	4,393,199	$	4,421,678

Average remaining life of investment securities available for sale⁽¹⁾	4.5 years				4.3 years				2.9 years


Investment securities held to maturity:
Residential mortgage-backed securities:
GNMA	$	6,421	$	6,678	$	—	$	—	$	—	$	—
FNMA		14,926		15,306		—		—		—		—
FHLMC		11,882		12,321		—		—		—		—

Collateralized mortgage obligations:
GNMA		1,883,105		1,931,463		497,310		505,658		467,473		471,810
FNMA		196,357		201,157		244,664		249,561		319,190		323,278
FHLMC		556,939		585,798		283,750		288,584		306,889		311,562


Total collateralized mortgage obligations		2,636,401		2,718,418		1,025,724		1,043,803		1,093,552		1,106,650

Total residential mortgage-backed securities	$	2,669,630	$	2,752,723	$	1,025,724	$	1,043,803	$	1,093,552	$	1,106,650

Average remaining life of investment securities held to maturity⁽¹⁾	5.7 years				4.0 years				2.9 years


⁽¹⁾		Average remaining life is computed utilizing estimated maturities and prepayment assumptions.

Deposits

At December 31, 2011, our total deposits increased $6.3 billion from December 31, 2010 to $19.4 billion, and core deposits increased to 80% of total deposits from 75% at December 31, 2010. While the balance increases are largely a factor of our NewAlliance merger in the second quarter, each of our other markets have also contributed to the growth. We continue to focus on reducing our weighted average rate paid on deposits by increasing our noninterest bearing accounts and converting higher priced certificates of deposit to money market accounts. Deposit pricing reductions in the third quarter of 2011 helped funding costs by driving changes in our deposit mix through the attraction of new money market deposit balances as well as funds from maturing higher priced certificates of deposit.

Excluding the deposits acquired from NewAlliance, money market deposit accounts across our footprint increased $1.2 billion, or 19%, and noninterest bearing accounts increased $651 million, or 24% during 2011. The growth in money market accounts was partially driven by deposit pricing as well as our participation in a program whereby we receive money market deposits through a financial intermediary. In line with our broader initiative to allow higher cost certificates of deposit to runoff, certificate of deposits in the Connecticut and Western Massachusetts region have declined by $209 million since the time of acquisition. Overall, core deposits in Connecticut and Western Massachusetts have increased $146 million since acquisition. Municipal deposits, predominantly consisting of money market deposits, increased $355 million from $1.4 billion at December 31, 2010 to $1.7 billion at December 31, 2011.

The table below contains selected information on the composition of our deposits as of December 31 (amounts in thousands):


	2011								2010								2009
						Weighted								Weighted								Weighted
	Amount		Percent			average rate			Amount		Percent			average rate			Amount		Percent			average rate
Core deposits:
Savings	$	2,621,016		13.5	%		0.20	%	$	1,235,004		9.4	%		0.11	%	$	916,854		9.4	%		0.14	%
Interest-bearing checking		2,259,576		11.6			0.12			1,705,537		13.0			0.11			1,063,065		10.9			0.13
Money market deposits		7,220,902		37.3			0.56			4,919,014		37.4			0.49			3,535,736		36.4			0.72
Noninterest-bearing		3,335,356		17.2			—			1,989,505		15.1			—			1,256,537		12.9			—

Total core deposits		15,436,850		79.6			0.33			9,849,060		74.9			0.28			6,772,192		69.6			0.41
Certificates		3,968,265		20.4			0.98			3,299,784		25.1			1.18			2,957,332		30.4			1.52

Total deposits	$	19,405,115		100.0	%		0.48	%	$	13,148,844		100.0	%		0.50	%	$	9,729,524		100.0	%		0.75	%

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


							Connecticut
	Upstate New		Western		Eastern		and Western
	York		Pennsylvania		Pennsylvania		Massachusetts		Total deposits

December 31, 2011
Core deposits:
Savings	$	862,354	$	136,984	$	238,766	$	1,382,912	$	2,621,016
Interest-bearing checking		743,536		486,150		565,212		464,678		2,259,576
Money market deposits		3,372,154		1,295,675		1,158,837		1,394,236		7,220,902
Noninterest-bearing		1,417,374		699,234		523,656		695,092		3,335,356

Total core deposits		6,395,418		2,618,043		2,486,471		3,936,918		15,436,850
Certificates		1,105,717		839,983		709,810		1,312,755		3,968,265

Total deposits	$	7,501,135	$	3,458,026	$	3,196,281	$	5,249,673	$	19,405,115


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

The following table shows maturities of outstanding certificates of deposit and other time deposits in denominations of $100,000 and greater and $250,000 and greater at December 31, 2011 (in thousands):


	Over		Over
	$100,000		$250,000
Less than three months	$	138,867	$	120,349
Over three months to six months		236,834		66,204
Over six months to 12 months		189,811		96,332
Over 12 months		333,469		84,130

Total	$	898,981	$	367,015

Borrowings

On December 13, 2011, the Company issued $300 million of 7.25% subordinated notes due December 15, 2021 (the “Subordinated Notes”), the proceeds of which will be used to consummate our previously announced HSBC Acquisition of branches of HSBC Bank, USA, National Association. The Subordinated Notes are not redeemable at any time prior to the maturity date.

Our junior subordinated debentures include amounts related to First Niagara Financial Group Statutory Trust I as well as junior subordinated debentures associated with six statutory trust affiliates that were acquired from our merger with Harleysville and three statutory trusts acquired from NewAlliance (the “Trusts”). The Trusts qualify as variable interest entities and were formed to issue mandatorily redeemable trust preferred securities to investors and loan the proceeds to us for general corporate purposes. The Trusts hold, as their sole assets, junior subordinated debentures of the Company with face amounts totaling $142 million at December 31, 2011. The carrying value of the trust preferred junior subordinated debentures, net of the unamortized purchase accounting fair value adjustment of approximately $31 million, is $111 million at December 31, 2011. We own all of the common securities of the Trusts and have accordingly recorded $4 million in equity method investments classified as other assets in our Consolidated Statement of Condition at December 31, 2011 representing our investment in those common securities. As the shareholders of the trust preferred securities are the primary beneficiaries of these trusts, the Trusts are not consolidated in our financial statements.

Our junior subordinated debentures are redeemable prior to the maturity date at our option upon each trust’s stated option repurchase dates, and from time to time thereafter. These debentures are also redeemable in whole at any time upon the occurrence of specific events defined within the trust indenture. Our obligations under the debentures and related documents, taken together, constitute a full and unconditional guarantee by the Company of the issuers’ obligations under the trust preferred securities.

Borrowings increased to $8.1 billion at December 31, 2011, including $2.3 billion assumed from our NewAlliance merger in the second quarter, from $4.9 billion at December 31, 2010. Short-term borrowings increased by $420 million from December 31, 2010 to $2.2 billion, and long-term borrowings increased by $2.8 billion during that same period to $5.9 billion as we worked to extend the duration of our funding. Wholesale borrowings were used to fund the run-off of certificates and provide an additional funding source for loans, which helped us to effectively manage our borrowing costs. During 2012, we intend to use the cash received in the HSBC Acquisition to pay down borrowings.

The following table shows certain information about our borrowings for the dates indicated (amounts in thousands):


	At or for the year ended December 31,
	2011			2010			2009
Period-end balance:
FHLB advances	$	3,525,953		$	1,865,585		$	631,703
Repurchase agreements		3,864,800			2,638,257			1,458,205
Senior notes		296,979			296,733			150,000
Subordinated notes		297,577			—			—
Junior subordinated debentures		111,284			92,899			12,372
Other borrowings		30,528			—			50,000

Total borrowings	$	8,127,121		$	4,893,474		$	2,302,280

Maximum balance at any month end:
FHLB advances	$	3,932,171		$	1,865,585		$	3,435,825
Repurchase agreements		3,864,800			2,764,874			1,458,205
Senior notes		296,979			447,720			150,000
Subordinated notes		297,577			—			—
Junior subordinated debentures		111,284			93,131			12,372
Other borrowings		31,720			50,000			50,000

Average balance:
FHLB advances	$	2,903,919		$	1,225,735		$	1,267,342
Repurchase agreements		3,419,346			1,847,765			582,151
Senior notes		296,869			274,109			48,904
Subordinated notes		14,692			—			—
Junior subordinated debentures		105,752			71,291			12,365
Other borrowings		21,298			11,315			50,411

Period-end weighted average interest rate:
FHLB advances		1.90	%		1.76	%		3.53	%
Repurchase agreements		1.27			1.27			1.18
Senior notes		6.75			6.75			12.00
Subordinated notes		7.25			—			—
Junior subordinated debentures		3.65			3.40			2.95
Other		3.98			—			1.74

Weighted average maturity (years):
FHLB advances		1.3			1.4			0.8
Repurchase agreements		1.2			2.2			1.5
Senior notes		8.2			9.2			4.7
Subordinated notes		9.9			—			—
Junior subordinated debentures		21.8			23.8			24.5
Other		13.3			—			—

Capital

Our stockholders’ equity increased $2.0 billion to $4.8 billion at December 31, 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, and our underwritten public offering in December whereby we issued 57 million shares and net proceeds totaled $468 million.

Additionally, in December 2011, we issued 14 million shares of fixed-to-floating rate noncumulative preferred stock, series B, with a par value of $0.01 and a liquidation preference of $25 per share, in an underwritten stock offering. Net proceeds totaled $338 million.

The preferred stock pays dividends quarterly beginning February 2012, when, as and if declared by our board of directors, at a rate per annum of 8.625% until February 15, 2017, and thereafter at a floating rate per annum equal to three month LIBOR plus 7.327%. Additionally, the preferred stock has no maturity date. We may redeem the preferred stock, in whole or in part, from time to time, on any dividend payment date on or after February 15, 2017, at a redemption price of $25 per share, plus any declared and unpaid dividends.

Other factors contributing to the increase in our stockholders’ equity included net income of $174 million and net unrealized gains, net of taxes, of $35 million on our securities available for sale arising during 2011. These amounts were offset by $127 million in treasury stock purchases, common stock dividends of $175 million, or $0.64 per share, $11 million in pension and post-retirement actuarial losses, and $16 million in unrealized losses, net of tax, on interest rate swaps designated as cash flow hedges.

In January 2012, we adjusted our quarterly dividend to $0.08 commencing the first quarter of 2012. If dividends are paid at this rate in 2012, this reduction will serve to preserve approximately $110 million of capital in 2012, accelerating the build of our capital ratios following the consummation of the HSBC Acquisition. In addition, the Company contributed $645 million of capital to the Bank in order to provide capital for the upcoming HSBC Acquisition and to reduce our FDIC expense.

At December 31, 2011, we held over 14 million shares of our common stock as treasury shares. During the second and third quarters of 2011 we repurchased 9.1 million shares of our common stock at an average price of $13.93 per share and we currently have authorization from our Board of Directors to repurchase an additional 12 million shares as part of our capital management initiatives. We issued 0.9 million shares from treasury stock in connection with the exercise of stock options and grants of restricted stock awards during 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.

As of December 31, 2011, we met all capital adequacy requirements to which we were subject and both First Niagara Financial Group, Inc. and First Niagara Bank, N.A. were considered well-capitalized under the Federal Reserve’s Regulation Y (in the case of First Niagara Financial Group, Inc.) and the OCC’s prompt corrective action regulations (in the case of First Niagara Bank, N.A.).

Our ability to pay dividends to our stockholders is substantially dependent upon the ability of the Bank to pay dividends to the Company. Subject to First Niagara Bank, N.A. meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by First Niagara Bank, N.A. in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. Under the foregoing dividend restrictions, and while maintaining its “well-capitalized” status, First Niagara Bank, N.A. could pay aggregate dividends of approximately $319 million to the Company, without obtaining affirmative regulatory approvals, as of December 31, 2011. The Bank paid dividends of $75 million and $60 million to the Company, during 2011 and 2010, respectively.

The current requirements and our actual capital levels are detailed in Note 11 of “Notes to Consolidated Financial Statements” in Part II, Item 8, “Financial Statements and Supplementary Data.”

RISK MANAGEMENT

Credit Risk

Allowance for Loan Losses and Nonperforming Assets

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

A detailed description of our methodology for calculating our allowance for loan losses is included in “Critical Accounting Policies and Estimates” in Part II, Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations.”

The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. We place 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 nine categories of loan grades used in evaluating our business and commercial real estate loans. In our loan grading system, pass loans are graded 1 through 5, special mention loans are graded 6, substandard loans are graded 7, doubtful loans are graded 8 and loss loans (which are fully charged off) are graded 9. Our definition of special mention, substandard, doubtful and loss are consistent with regulatory definitions.

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

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

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

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

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

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

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

The following table details our allocation of our allowance for loan losses by loan category at December 31 (amounts in thousands):


	2011						2010						2009						2008						2007
	Amount of						Amount of						Amount of						Amount of						Amount of
	allowance			Percent of			allowance			Percent of			allowance			Percent of			allowance			Percent of			allowance			Percent of
	for loan			loans to			for loan			loans to			for loan			loans to			for loan			loans to			for loan			loans to
	losses			toal loans			losses			toal loans			losses			toal loans			losses			toal loans			losses			toal loans
Commercial:
Real estate and construction	$	50,007			37.9	%	$	46,967			41.8	%	$	44,497			42.1	%	$	32,789			39.7	%	$	24,886			38.5	%
Business		57,348			22.9			42,034			25.0			38,324			23.2			35,954			17.4			27,812			16.1

Total commercial		107,355			60.8			89,001			66.8			82,821			65.3			68,743			57.1			52,698			54.6

Consumer:
Residential real estate		4,101			24.4			1,754			16.1			1,825			22.6			1,663			30.9			3,384			34.3
Home equity		4,374			13.1			1,859			14.5			1,216			9.5			775			9.7			1,344			8.9
Other consumer		4,270			1.7			2,740			2.6			2,441			2.6			2,524			2.3			2,974			2.2
General		—			—			—			—			—			—			4,088			—			9,847			—


Total	$	120,100			100.0	%	$	95,354			100.0	%	$	88,303			100.0	%	$	77,793			100.0	%	$	70,247			100.0	%


Allowance for loan losses to total loans		0.73	%					0.91	%					1.20	%					1.20	%					1.23	%

The following table presents the activity in our legacy allowance for loan losses and related recorded investment of the associated loans by portfolio segment for the years ended December 31 (in thousands):


							Consumer
	Commercial												Other
	Business			Real Estate			Residential			Home Equity			Consumer			Total
*2011*
Allowance for loan losses:
Balance at beginning of year	$	42,034		$	46,967		$	1,754		$	1,859		$	2,740		$	95,354
Provision for loan losses		29,586			12,395			3,333			4,616			1,212			51,142
Charge-offs		(17,182	)		(12,020	)		(1,601	)		(2,411	)		(2,918	)		(36,132	)
Recoveries		2,910			2,665			615			310			1,328			7,828

Balance at end of year	$	57,348		$	50,007		$	4,101		$	4,374		$	2,362		$	118,192


Allowance for loan losses:
Individually evaluated for impairment	$	1,826		$	2,890		$	2,151		$	431		$	25		$	7,323
Collectively evaluated for impairment		55,522			47,117			1,950			3,943			2,337			110,869

Total	$	57,348		$	50,007		$	4,101		$	4,374		$	2,362		$	118,192


Loans receivable:
Balance at end of year
Individually evaluated for impairment	$	28,911		$	60,384		$	12,911		$	1,800		$	81		$	104,087
Collectively evaluated for impairment		2,922,896			3,920,758			1,630,754			1,130,573			166,937			9,771,918

Total	$	2,951,807		$	3,981,142		$	1,643,665		$	1,132,373		$	167,018		$	9,876,005


*2010*
Allowance for loan losses:
Balance at beginning of year	$	38,324		$	44,497		$	1,825		$	1,216		$	2,441		$	88,303
Provision for credit losses		20,771			23,437			593			2,168			1,662			48,631
Charge-offs		(18,917	)		(21,271	)		(695	)		(1,704	)		(2,645	)		(45,232	)
Recoveries		1,856			304			31			179			1,282			3,652

Balance at end of year	$	42,034		$	46,967		$	1,754		$	1,859		$	2,740		$	95,354


Allowance for loan losses:
Individually evaluated for impairment	$	1,594		$	3,726		$	173		$	—		$	—		$	5,493
Collectively evaluated for impairment		40,440			43,241			1,581			1,859			2,740			89,861

Total	$	42,034		$	46,967		$	1,754		$	1,859		$	2,740		$	95,354


Loans receivable:
Balance at end of year
Individually evaluated for impairment	$	23,542		$	48,199		$	11,125		$	—		$	—		$	82,866
Collectively evaluated for impairment		1,947,827			3,315,605			1,415,948			923,717			147,732			7,750,829

Total	$	1,971,369		$	3,363,804		$	1,427,073		$	923,717		$	147,732		$	7,833,695

For the year ended December 31, 2010, we did not have any activity in our allowance for loan losses for acquired commercial or consumer loans. The following table presents the activity in our acquired allowance for loan losses and related recorded investment of the associated loans by portfolio segment for 2011:


	Commercial						Consumer
											Other
	Business			Real Estate			Residential		Home Equity		Consumer			Total
Allowance for loan losses:
Balance at beginning of year	$	—		$	—		$	—	$	—	$	—		$	—
Provision for loan losses		346			806			—		—		2,077			3,229
Charge-offs		(346	)		(806	)		—		—		(169	)		(1,321	)
Recoveries		—			—			—		—		—			—

Balance at end of year	$	—		$	—		$	—	$	—	$	1,908		$	1,908


Allowance for loan losses:
Collectively evaluated for impairment	$	—		$	—		$	—	$	—	$	1,908		$	1,908


Loans receivable:
Balance at end of year
Loans acquired with deteriorated credit quality ⁽¹⁾	$	819,842		$	2,623,239		$	2,368,602	$	1,033,615	$	111,280		$	6,596,578


⁽¹⁾		Includes all acquired loans. See Item 7, “Management’s Discussion and Analysis of Financial Condition and Results of Operations”, under heading “Critical Accounting Policies and Estimates “, subheading “Acquired Loans”.

As of December 31, 2011, we had a liability for unfunded commitments of $7 million. For the year ending December 31, 2011, we recognized a provision for credit loss related to our unfunded commitments of $4 million. Our total unfunded commitments were $5.1 billion as of December 31, 2011.

Our net charge-offs of $30 million in 2011 were $12 million lower than our net charge-offs of $42 million in 2010, driven by improved commercial credit quality, most notably in real estate lending. The following table details our net charge-offs by loan category for the years ended December 31 (amounts in thousands):


	2011			2010			2009			2008			2007
Net charge-offs
Commercial:
Real estate	$	10,161		$	20,967		$	9,679		$	5,295		$	4,729
Business		14,618			17,061			20,821			10,992			3,511

Total commercial		24,779			38,028			30,500			16,287			8,240

Consumer:
Residential real estate		986			664			157			77			219
Home equity		2,101			1,525			871			187			98
Other consumer		1,759			1,363			1,612			1,293			1,527

Total	$	29,625		$	41,580		$	33,140		$	17,844		$	10,084


Net charge-off rates
Commercial:
Real estate		0.18	%		0.53	%		0.35	%		0.22	%		0.23	%
Business		0.46			0.81			1.61			1.03			0.43

Total commercial		0.28			0.63			0.76			0.47			0.28

Consumer:
Residential real estate		0.03			0.04			0.01			0.00			0.01
Home equity		0.11			0.12			0.13			0.03			0.02
Other consumer		0.64			0.55			1.04			0.80			1.05

Total		0.20	%		0.44	%		0.50	%		0.28	%		0.18	%

As of December 31, 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 remained relatively flat at $90 million at December 31, 2011 compared to $89 million at December 31, 2010. The increase of $1 million from December 31, 2010 to December 31, 2011 reflected the net impact of $53 million in additional nonaccruals offset by the removal of $21 million due to charge-offs, $13 million that was returned to accrual status, and $19 million due to transfers to real estate owned or paydowns. The composition of our nonaccruing loans from our legacy portfolio segment and total nonperforming assets consisted of the following at December 31 (amounts in thousands):


	2011			2010			2009			2008			2007
Nonaccruing loans:
Commercial:
Real estate	$	43,119		$	44,065		$	37,687		$	26,546		$	16,229
Business		20,173			25,819			17,566			11,765			6,350

Total commercial		63,292			69,884			55,253			38,311			22,579
Consumer:
Residential real estate		18,668			14,461			9,468			5,516			3,741
Home equity		6,790			4,605			2,330			2,076			849
Other consumer		1,048			373			1,510			514			885

Total nonaccruing loans		89,798			89,323			68,561			46,417			28,054
Real estate owned		4,482			8,647			7,057			2,001			237

Total nonperforming assets ⁽¹⁾	$	94,280		$	97,970		$	75,618		$	48,418		$	28,291


Loans 90 days past due and still accruing interest ⁽²⁾	$	143,237		$	58,097		$	—		$	—		$	—


Total nonperforming assets as a percentage of total assets		0.29	%		0.46	%		0.52	%		0.52	%		0.35	%


Total nonaccruing loans as a percentage of total loans		0.55	%		0.85	%		0.94	%		0.72	%		0.49	%

Total nonaccruing loans as a percentage of total legacy loans		0.91	%		1.14	%		1.03	%		0.72	%		0.49	%

Allowance for loan losses to nonaccruing loans		133.7	%		106.8	%		128.8	%		167.6	%		250.4	%


⁽¹⁾		Nonperforming assets do not include $44 million, $22 million, $12 million, $7 million, and $6 million of performing renegotiated loans that are accruing interest at December 31, 2011, 2010, 2009, 2008, and 2007 respectively.

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

The primary indicators of credit quality are delinquency status and our internal loan gradings for our commercial loan portfolio segment and delinquency status and current FICO scores for our consumer loan portfolio segment. The following table contains a percentage breakout of the delinquency composition of our loan portfolio segments as of December 31:


	Percent of loans						Percent of loans 60-89						Percent of loans 90 or
	30-59 days past due						days past due						more days past due						Percent of loans past due
	2011			2010			2011			2010			2011			2010			2011			2010
Legacy loans
Commercial:
Real estate		0.2	%		—	%		—	%		—	%		0.6	%		0.9	%		0.8	%		1.0	%
Business		0.2			0.1			—			0.1			0.4			0.4			0.5			0.5

Total commercial		0.2			0.1			0.0			—			0.5			0.7			0.7			0.8


Consumer:
Residential real estate		0.6			0.4			0.3			0.3			0.9			1.0			1.8			1.6
Home equity		0.2			0.3			0.2			0.1			0.6			0.5			1.0			0.9
Other consumer		0.9			0.9			0.4			0.3			0.5			0.2			1.8			1.3

Total consumer		0.5			0.4			0.3			0.2			0.8			0.8			1.5			1.3

Total		0.3	%		0.2	%		0.1	%		0.1	%		0.6	%		0.7	%		0.9	%		1.0	%


Acquired loans
Commercial:
Real estate		1.1	%		0.7	%		0.1	%		0.2	%		2.1	%		3.2	%		3.2	%		4.2	%
Business		0.6			0.2			0.1			0.2			1.1			1.0			1.8			1.4

Total commercial		0.9			0.5			0.1			0.2			1.8			2.4			2.8			3.1


Consumer:
Residential real estate		0.8			0.9			0.4			0.8			2.8			2.1			4.0			3.8
Home equity		0.7			1.2			0.4			0.5			1.8			2.0			2.9			3.7
Other consumer		1.6			2.1			1.0			0.6			2.0			1.1			4.7			3.8

Total consumer		0.8			1.2			0.4			0.6			2.5			1.9			3.7			3.7

Total		0.9	%		0.8	%		0.3	%		0.3	%		2.2	%		2.2	%		3.3	%		3.3	%

Our internal loan gradings provide information about the financial health of our commercial borrowers and our risk of potential loss. The following table presents a breakout of our commercial loans by loan grade at December 31:


	Percent of Total
	2011			2010

Legacy loans:
Pass		90.4	%		88.9	%
Pass watch⁽¹⁾		1.0			—

Total pass		91.4			88.9

Criticized:⁽²⁾
Accrual		7.7			9.8
Nonaccrual		0.9			1.3

Total criticized		8.6			11.1

Total		100.0	%		100.0	%


Acquired loans:
Pass		85.5	%		81.9	%
Pass watch⁽¹⁾		0.3			—

Total pass		85.8			81.9

Criticized:⁽²⁾
Accrual		14.2			18.1
Nonaccrual⁽³⁾		0.0			—

Total criticized		14.2			18.1

Total		100.0	%		100.0	%


⁽¹⁾		Beginning in the fourth quarter of 2011, we established a watch-list for loans that are performing and are considered pass, but warrant greater attention than those loans in other pass grades. While the loans warrant more attention than other pass grades, they do not exhibit characteristics of a special mention loan.

⁽²⁾		Includes special mention, substandard, doubtful, and loss, which are consistent with regulatory definitions, and as described in Item 1, “Business”, under the heading “Asset Quality Review.”

⁽³⁾		Acquired loans were originally recorded at fair value upon acquisition. These loans are considered to be accruing as we can reasonably estimate future cash flows on these acquired loans and we expect to fully collect the carrying value of these loans. Therefore, we are accreting the difference between the carrying value of these loans and their expected cash flows into interest income.

Borrower FICO scores provide information about the credit quality of our consumer loan portfolio as they provide an indication as to the likelihood that debtors will repay their debts. We obtain the scores from a nationally recognized consumer rating agency on a quarterly basis and trends are evaluated for consideration as a qualitative adjustment to the allowance. The composition of our consumer portfolio segment is presented in the table below at December 31:


	Percent of Total
	2011			2010

Legacy loans by refreshed FICO score:
Over 700		76.5	%		74.8	%
660-700		11.0			10.9
620-660		4.9			5.3
580-620		2.4			2.7
Less than 580		3.5			4.5
No score⁽¹⁾		1.7			1.8

Total		100.0	%		100.0	%


Acquired loans by refreshed FICO score:
Over 700		70.4	%		60.0	%
660-700		8.1			11.4
620-660		4.4			5.9
580-620		2.6			5.0
Less than 580		4.6			8.2
No score⁽¹⁾		9.9			9.5

Total		100.0	%		100.0	%


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

We maintain an allowance for loan losses for our legacy portfolio segment, which is concentrated in the Upstate New York region and includes to a lesser degree, loan balances from organic growth in our acquired markets of Eastern Pennsylvania, Western Pennsylvania, Connecticut and Western Massachusetts. The Upstate New York region, while challenged by the slower real estate market in 2010, showed some signs of improvement during 2011 including improvement in home price appreciation in the Buffalo, Rochester and Syracuse Metropolitan Statistical Areas (MSAs). Despite the challenging market conditions, our asset quality continues to perform well when compared to industry averages.

As part of our determination of the fair value of our acquired loans at time of acquisition, we established a credit mark to provide for future 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 for our acquired loans. Our credit mark, which represents the remaining principal balance on acquired loans that we do not expect to collect, was $209 million and $122 million as of December 31, 2011 and December 31, 2010, respectively. In general, these loans performed in line with our expectations at acquisition during 2010 and as a result there was no allowance for loan losses associated with our acquired loan portfolio at December 31, 2010. During 2011, our expected cash flows associated with our acquired loan portfolio indicated that most of our acquired pools had improvement in credit quality, but we also noted deterioration in the credit quality of our other consumer loans acquired from Harleysville. As a result of the improvement in expected cash flows, we reclassified $34 million from our credit mark to accretable yield, which will be recognized into interest income as an adjustment to yield over the remaining life of the loans. We also established an allowance for loan losses representing our expected losses over the remaining life of our other consumer loans acquired from Harleysville for $2 million at December 31, 2011.

Total net charge-offs for 2011 declined $12 million to $30 million, or 0.20% of average total loans, compared with $42 million, or 0.44% of average total loans, in 2010 with the year over year decrease due to the lower level of charge-offs and our higher average loan balances driven by our NewAlliance merger. Excluding our acquired loans, our net charge-off ratio for legacy loans was 0.32% for 2011 compared to 0.58% for 2010. Nonperforming loans of $90 million at December 31, 2011 remained relatively in line with December 31, 2010, but improved as a percentage of both reported and legacy loans. They comprised 0.55% of total loans at December 31, 2011 compared to 0.85% at December 31, 2010, primarily due to the increase in total loans from the NewAlliance merger. Excluding our acquired loans, our nonaccruing loans improved to 0.91% of legacy loans at December 31, 2011 compared to 1.14% of legacy loans at December 31, 2010.

Our total allowance for loan losses related to both our legacy and acquired loans increased $24 million from December 31, 2010 to $120 million at December 31, 2011 as our total provision for loan losses of $54 million exceeded our total net charge-offs of $30 million. The ratio of our total allowance for loan losses to total loans of 0.73% at December 31, 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 legacy allowance for loan losses to total loans was 1.20% of legacy loans at December 31, 2011 and 1.22% of legacy loans at December 31, 2010.

Of the $2.2 billion home equity portfolio at December 31, 2011, $0.9 billion is in a first lien position. We hold or service the first lien loan for approximately 10% of the remainder of the home equity portfolio that is in a second lien position. For those loans that we do not hold or service the first lien loan, we are unable to monitor whether or not the first lien position is in default, although we will be notified when the collateral is in the process of foreclosure. Lien position is reflected in loss history and is captured as part of the historical loss experience utilized in the determination of the allowance for loan losses.

As part of our credit risk management, we enter into modification agreements with troubled borrowers in order to mitigate our credit losses. Our aggregate recorded investment in impaired loans modified through troubled debt restructurings (“TDRs”) increased to $77 million at December 31, 2011 from $55 million at December 31, 2010. The modifications made to these restructured loans typically consist of an extension of the payment terms, providing for a period with interest-only payments with deferred principal payments, or a rate reduction. We generally do not forgive principal when restructuring loans. These modifications were considered to be concessions provided to the respective borrower due to the borrower’s financial distress. Our aggregate recorded investment in TDRs does not include modifications to acquired loans that are accounted for as part of a pool. We accrue interest on a TDR once the borrower has demonstrated the ability to perform in accordance with the restructured terms, either immediately before or after the restructuring, for six consecutive payments. TDRs accruing interest totaled $44 million and $22 million at December 31, 2011 and December 31, 2010, respectively.

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

Residential Mortgage Banking

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

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

At December 31, 2011, our liability for estimated repuchase obligations on our serviced loan portfolio was $8 million compared to $4 million at December 31, 2010 and is included in other liabilities in our Consolidated Statements of Condition. The year over year increase includes $4 million of repurchase obligations assumed in April 2011 from our merger with NewAlliance that was recognized through purchase accounting. Total losses recognized against the liability in 2011 were less than $1 million.

The delinquencies in our serviced loan portfolio were as follows at December 31 for the year indicated:


	2011			2010
30 to 59 days past due		0.42	%		0.66	%
60 to 89 days past due		0.17	%		0.26	%
Greater than 90 days past due		0.81	%		0.48	%

Total past due loans		1.40	%		1.40	%

Investments Impairment Analysis

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

Our investment securities portfolio amounted to $12.0 billion at December 31, 2011. As of December 31, 2011, 99% of the fair value of our investment securities portfolio was rated A- or higher. Our investment securities portfolio included securities issued by FHLMC, FNMA and GNMA with a fair value of $2.4 billion, $2.0 billion, and $4.4 billion, respectively, at December 31, 2011. We had no other investments in securities of a single issuer that exceeded 10% of our stockholders’ equity.

We have assessed our securities that were in an unrealized loss position at December 31, 2011 and 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.

All of our non-agency collateralized mortgage obligations carry various amounts of credit enhancement and none are collateralized with loans that were considered to be sub-prime at origination. These securities were purchased based on the underlying loan characteristics such as LTV ratio, credit scores, property type, location, and the level of credit enhancement. Current characteristics of each security such as credit rating, delinquency and foreclosure levels, credit enhancement, projected collateral losses, and the level of credit loss and coverage are reviewed regularly by management. If the level of credit enhancement is sufficient based on our expectations of future collateral losses, we conclude that we will receive all of the originally scheduled cash flows. When the level of credit loss coverage for an individual security significantly deteriorates, we expand our analysis of the security to include detailed cash flow projections based upon loan level credit characteristics and prepayment assumptions. If the present value of the cash flows indicates that we should not expect to recover the amortized cost basis of the security, we would consider the security to be other than temporarily impaired and write down the credit component of the unrealized loss through a charge to current period earnings.

As of December 31, 2011, the unrealized losses on our corporate debt securities were due to a general widening of credit spreads for the types of these securities, causing their fair values to decrease. We have assessed these securities in an unrealized loss position at December 31, 2011 and December 31, 2010 and determined that the declines in fair value below amortized cost were temporary.

As of December 31, 2011, we have no direct exposure to the sovereign debt crisis resulting from the downgrading of government debt of certain European countries.

Liquidity Risk

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

Liquidity refers to our ability to obtain cash, or to convert assets into cash timely, efficiently, and economically. Our Asset and Liability Committee 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,

	•		Provide for repayments of deposits and borrowings, and

	•		To fulfill contract obligations.

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

Sources of Liquidity

We obtain our liquidity from multiple sources, including gathering deposit balances, cash generated by principal and interest repayments on our investment and loan portfolios, short and long-term borrowings, as well as short-term federal funds, internally generated capital, and other credit facilities. The primary sources of our non-deposit borrowings are repurchase agreements and FHLB advances, of which we had $3.9 billion and $3.5 billion outstanding, respectively, at December 31, 2011.

In addition to cash flow from operations, deposits and borrowings, our funding is provided from the principal and interest payments that we receive from our loans and investment securities. While maturities and scheduled amortization of loans and securities are predictable sources of funds, our deposit balances and loan prepayments are greatly influenced by the level of interest rates, the economic environment and local competitive conditions.

Our primary investing activities are the origination of loans and the purchase of investment securities. Our loan originations totaled $5.0 billion and $3.6 billion during 2011 and 2010, respectively. In addition, we made advances on business lines of credit totaling $4.5 billion in 2011 and $3.2 billion in 2010, reflecting our continued focus on growing our higher yielding commercial loan portfolio. Our purchases of investment securities amounted to $3.9 billion for 2011, and included $1.2 billion of securities purchased in anticipation of asset needs related to the HSBC Acquisition. Purchases of investment securities amounted to $4.0 billion for 2010. Principal payments on and proceeds from sales and maturities of our investment securities amounted to $2.9 billion and $2.2 billion, for 2011 and 2010 respectively, reflecting increased prepayments and a larger mortgage-backed securities portfolio.

Net cash provided by our financing activities totaled $2.3 billion and $1.1 billion for 2011 and 2010, respectively. In anticipation of liquidity needs for the 2012 HSBC Acquisition, in 2011, we raised $1.1 billion of capital in the form of common stock, preferred stock, and 7.25% subordinated notes due December 15, 2021. We have a total borrowing capacity of up to $10.8 billion available from various funding sources which include the Federal Home Loan Bank, Federal Reserve Bank, and commercial banks that we may use to fund our lending activities, liquidity needs and/or to adjust and manage our asset and liability position, of which $4.1 billion was available at December 31, 2011. We paid dividends of $175 million, or $0.16 per quarter, to stockholders during 2011. In the first quarter of 2012, we adjusted our quarterly dividend to $0.08. This reduction will provide additional liquidity and will serve to preserve approximately $110 million of capital in 2012.

In addition to our financial performance and condition, our liquidity may be impacted by our structure as a bank holding company that is a separate legal entity from our banking and other subsidiaries. We rely on the dividends we receive from the Bank as our principal source of cash flow for the Company. Subject to the Bank meeting or exceeding regulatory capital requirements, the prior approval of the OCC is required if the total of all dividends declared by the Bank in any calendar year would exceed the sum of the Bank’s net profits for that year and its retained net profits for the preceding two calendar years, less any required transfers to surplus. Federal law also prohibits the Bank from paying dividends that would be greater than its undivided profits after deducting statutory bad debt in excess of its allowance for loan losses. If the Bank is unable to make dividend payments to us and sufficient capital is not otherwise available, we may not be able to make dividend payments to our common or preferred stockholders or make required principal and interest payments on the Company’s outstanding debt.

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.

Contractual Obligations and Other Commitments⁽¹⁾

The following table indicates certain of our funding obligations by time remaining until maturity as of December 31, 2011 (in thousands):


	Less than 1		Over 1 to 3		Over 3 to 5		Over 5
	year		years		years		years		Total
Certificates of deposit	$	2,651,997	$	799,334	$	322,548	$	194,386	$	3,968,265
Borrowings		4,222,676		2,699,155		224,134		981,156		8,127,121
Commitments to extend credit ⁽²⁾		4,906,919		—		—		—		4,906,919
Standby letters of credit ⁽²⁾		278,363		—		—		—		278,363
Operating leases		25,725		49,169		43,029		93,513		211,436
Purchase obligations		14,567		31,245		11,507		—		57,319
Capital leases		1,919		4,726		5,148		24,008		35,801
Partnership investment commitments		6,453		—		183		3,129		9,765
Other		2,050		5,010		9,832		29,437		46,329


Total contractual obligations	$	12,110,669	$	3,588,639	$	616,381	$	1,325,629	$	17,641,318


⁽¹⁾		Amounts do not include contractual interest.

⁽²⁾		We do not expect all of our commitments to extend credit and standby letters of credit to be fully funded. Thus, the total commitment amounts do not necessarily represent our future cash requirements. Our commitments to extend credit include $4.5 billion available under lines of credit.

Loan Commitments

In the ordinary course of business, we extend commitments to originate commercial and consumer loans. Commitments to extend credit are agreements to lend to a customer as long as there is no violation of any condition established in the contract. Our commitments generally have fixed expiration dates or other termination clauses and may require our customer to pay us a fee. Since we do not expect all of our commitments to be funded, the total commitment amounts do not necessarily represent our future cash requirements. We evaluate each customer’s creditworthiness on a case-by-case basis. We may obtain collateral based upon our assessment of the customer’s creditworthiness. We may write a commitment to extend credit on a fixed rate basis exposing us to interest rate risk given the possibility that market rates may change between the commitment date and the actual extension of credit. We had outstanding commitments to originate residential real estate, commercial real estate and business, and consumer loans of approximately $4.9 billion and $3.4 billion at December 31, 2011 and 2010, respectively.

Included in these commitments are lines of credit to both consumer and commercial customers. The borrowers are able to draw on these lines as needed, making our funding requirements generally difficult to predict. Indicative of our strategic focus on commercial lending and relationship based home equity lending, at December 31, 2011 our unused commercial lines of credit increased to $2.8 billion from $2.0 billion at December 31, 2010, and our unused home equity and other consumer lines of credit increased to $1.5 billion at December 31, 2011 from $942 million at the end of 2010. Our commercial business lines of credit generally possess an expiration period of less than one year and our home equity and other consumer lines of credit have an expiration period of up to ten years.

In addition to the commitments discussed above, we issue standby letters of credit to third parties that guarantee payments on behalf of our commercial customers in the event the customer fails to perform under the terms of the contract between our customer and the third party. Our standby letters of credit, which generally have an expiration period of less than two years, amounted to $278 million and $225 million at December 31, 2011 and 2010, respectively. Since the majority of our unused lines of credit and outstanding standby letters of credit expire without being fully funded, our actual funding requirements may be substantially less than the amounts above. We anticipate that we will have sufficient funds available to meet our current loan commitments and other obligations through our normal business operations. The credit risk involved in our issuance of these commitments is essentially the same as that involved in extending loans to customers and is limited to the contractual notional amount of those instruments.

Given the current interest rate environment and current customer preference for long-term fixed rate mortgages, coupled with our desire to not hold these assets in our portfolio, we generally sell newly originated fixed rate conventional, 20 to 30 year and most FHA and VA loans in the secondary market to government sponsored enterprises such as FNMA and FHLMC or to wholesale lenders. We generally retain the servicing rights on residential mortgage loans sold which results in monthly service fee income. We will, however, sell select loans with servicing released on a nonrecourse basis. Not reflected in the table above, our commitments to sell residential mortgages amounted to $275 million and $88 million at December 31, 2011 and 2010, respectively.

Security Yields, Maturities and Repricing Schedule

The following table sets forth certain information as of December 31, 2011 regarding the carrying value, weighted average yields and contractual maturities of our investment securities portfolio. Our adjustable-rate securities are included in the period in which interest rates are next scheduled to adjust and fixed-rate securities are included in the period in which the final contractual repayment is due. We have made no adjustments for prepayment of principal. Actual maturities are expected to be significantly shorter as a result of loan repayments underlying mortgage-backed securities. The tax benefits of certain of our tax exempt investment securities have not been factored into the yield calculations in this table (amounts in thousands):


						More than one					More than five
	One year or less					year to five years					years to ten years					After ten years					Total
			Weighted					Weighted					Weighted					Weighted					Weighted
	Carrying		average			Carrying		average			Carrying		average			Carrying		average			Carrying		average
	value		yield			value		yield			value		yield			value		yield			value		yield
Investment securities available for sale
Debt securities:
States and political subdivisions	$	147,033		2.26	%	$	426,633		2.48	%	$	126,543		2.59	%	$	2,969		6.06	%	$	703,178		2.47	%
U.S. Treasury		—		—			20,643		1.58			—		—			—		—			20,643		1.58
U.S. government agencies		—		—			620		0.79			399		0.97			4,418		0.65			5,437		0.69


Document		Part
Proxy Statement for the 2012 Annual Meeting of Stockholders		Part III, Item 10
Proxy Statement for the 2012 Annual Meeting of Stockholders		“Directors, Executive Officers, and Corporate Governance”

		Part III, Item 11
		“Executive Compensation”

		Part III, Item 12
		“Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters”

		Part III, Item 13
		“Certain Relationships and Related Transactions, and Director Independence”

		Part III, Item 14
		“Principal Accountant Fees and Services”


ITEM		PAGE
NUMBER		NUMBER

	PART I

1	Business		4

1A	Risk Factors		24

1B	Unresolved Staff Comments		30

2	Properties		31

3	Legal Proceedings		31

4	Mine Safety Disclosures		31

	PART II

5	Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities		31

6	Selected Financial Data		33

7	Management’s Discussion and Analysis of Financial Condition and Results of Operations		37

7A	Quantitative and Qualitative Disclosures About Market Risk		82

8	Financial Statements and Supplementary Data		84

9	Changes in and Disagreements With Accountants on Accounting and Financial Disclosure		153

9A	Controls and Procedures		153

9B	Other Information		153

	PART III

10	Directors, Executive Officers, and Corporate Governance		153

11	Executive Compensation		153

12	Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters		154

13	Certain Relationships and Related Transactions, and Director Independence		154

14	Principal Accountant Fees and Services		154

	PART IV

15	Exhibits and Financial Statement Schedules		154

	Signatures		157

EX-12
EX-21
EX-23
EX-24
EX-31.1
EX-31.2
EX-32
EX-101 INSTANCE DOCUMENT
EX-101 SCHEMA DOCUMENT
EX-101 CALCULATION LINKBASE DOCUMENT
EX-101 LABELS LINKBASE DOCUMENT
EX-101 PRESENTATION LINKBASE DOCUMENT
EX-101 DEFINITION LINKBASE DOCUMENT


	*Period Ended*
*Index*	12/31/06		12/31/07		12/31/08		12/31/09		12/31/10		12/31/11
First Niagara Financial Group, Inc.	$	100.00	$	84.31	$	117.84	$	105.77	$	111.12	$	72.45
NASDAQ Composite Index		100.00		110.66		66.42		96.54		114.06		113.16
KBW Regional Bank Index		100.00		78.01		63.52		49.47		59.55		56.49