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Executives

John Koelmel – CEO

Michael Harrington – CFO

Kevin O’Bryan – Chief Credit Officer

Analysts

Damon Delmonte – KBW

Bob Ramsey – FBR Capital Markets

Collyn Gilbert – Stifel Nicolaus

Mathew Kelley – Sterne, Agee

Matthew Kelley – Sterne Agee

David Darst – Guggenheim Partners

Tom Alonso – Macquarie

Bruce Harting – Barclays Capital

First Niagara Financial Group Inc. (FNFG) Q3 2010 Earnings Conference Call October 21, 2010 11:00 AM ET

Operator

Greetings and welcome to the First Niagara Financial Group Inc. Third Quarter 2010 Earnings Release Conference. At this time, all participants are in a listen-only mode. A brief question-and-answer session will follow the formal presentation.

(Operator Instructions)

As a reminder, this conference is being recorded.

It is now my pleasure to introduce your host, John Koelmel, President and CEO for First Niagara Financial Group. Thank you Mr. Koelmel, you may begin.

John Koelmel

Good morning everyone, appreciate you taking sometime to listen to our story and as always I am joined today by Mike Harrington, our CFO as well as Kevin O’Bryan, our Chief Credit Officer.

Third quarter, it’s been frankly a bit awaited and an important one from our standpoint, not just because we are able to perpetuate the continuing series of solid performances but this really is our first clean quarter in a while and one that we knew would give us all a good baseline for evaluating the business we have with the benefit of the two new Pennsylvania franchises and our ability to operate and drive good profitability. Obviously, very pleased to announce not only strong performance but the bump in the dividend and I will come back and talk about that in a couple of minutes a bit more. To hear from me consistently, it’s more than just the numbers, it’s the ability to continue to deliver predictable very positive growth. We are not out there making that on the back of lower loan loss provisions. We are continuing to take franchise, [inaudible] execute our strategy and frankly also the competition and Mike will take you through the benefits of that in a couple of minutes. But as always, I want to take a little bit of time and offer some of my reflection.

Starting with the core franchise, obviously it continues to perform very, very well and gives us an ongoing foundation for real solid growth. I would believe we aren’t missing a beat anywhere where it really matters, you see the continued growth on the loan side, strong upticks in deposit additions as well as solid performance out of our diversified fee and revenue businesses. Certainly none of that has come at the expense of compromised credit or otherwise risk management.

So I want to make sure we are still shining [inaudible] light on the core business, the legacy business that frankly probably gets overlooked a bit given everything else that we have had going and reaffirm and ensure everyone has good clarity that it’s a business that’s produced consistent double digit commercial loan growth four to five, six quarters now and have already referenced the strong deposit story and as I said, right up front, there is no question we are taking share across of state New York and whether that would be a larger or other more peers or smaller competition.

Capital, guys have long come to know that we are very active and we think very effective in managing capital. It’s a bit of confirming the obvious to say capital is king, has been certainly the key for the industry over the last couple of years and this, you are well aware and as we have talked often. We were proud of the fact that we got a bit of a jumpstart there and read the tealeaves early on and jumped in and we are able to strengthen [ph] a series of equity raises together bolster our capital raise for more than a billion dollars over 18-month period of time and has enabled us to continue to play offense [ph].

Hence we are in a really, really strong position, leverage the capital that’s been raised with the kind of profitable business that we are continuing to run and we are in a really strong position now that the dust has begun to settle in terms of what the right amount necessary amount of capital, how do we more [ph] more opportunistically play with that.

Got to admit, gotten some surprising comments over the last couple of months about in particular with the benefit of the new alliance transaction, whether we are going to have to go back to market and raise capital. It responded very directly then, want to be very [inaudible] now, nothing’s contemplated, and you will hear Mike talk, we referenced last quarter, think $250 million, $300 million of excess. We got at least, if not more today. So there is no follow-on offerings anticipated let alone necessary. In fact our focus is to ensure we effectively manage it and that includes being able to begin to return some of that excess capital to our shareholders.

Have a disappointment today, it’s that I am not able to talk to you about how much stock we bought back where our stock’s been trading, it’s more than attractive buy, but obviously with the transaction, we are locked out of the market and will be for a while. So hence all the more important that we announced the dividend bump and the penny increase, 7% quantitatively. We’ve always been more than sensitive to the returns that our shareholders are able to achieve and when you look at the market in general and where rates are, the kind of dividend return that we are providing our shareholders of where we have been trading, we are talking north of 5%, I can only smile in terms of what that really means for a company with the kind of growth prospects and earnings track record that we have and certainly when you compare a 5% yield to the top 25, 30 banks in the country that talk about an overall yield in basis points rather than 4 or 5 percentage points even in terms of the midcap that’s substantially less than half of that.

So we have got a strong company performing well with real great growth prospects providing a very, very attractive yield plus the punch line there, we are paying attention. We think we are proving we know what we are doing in managing capital over the years and [inaudible] think we have lost our way and you can count on us to continue to do that moving forward.

Turning to the new markets, said up front, clean quarter first time, where we are able to report 90 days of activity with the full business that we have today and you can clearly see we are continuing to make good things happen in both Western and Eastern Pennsylvania. Western PA, it’s been a full year; Eastern PA, not quite six months but performing very, very well on all fronts. Western portion of the state, commercial loan activity balances well above, I got 30%, 40% above day one levels, core deposits as we reported before, continue to be above the levels that with we acquired more than 12 months ago and pipeline is strong. I was just in Pittsburg 10 days ago, talking to Todd Moles [ph] and he talked to me about how much the pipeline is filling up even early on here in the month of October beyond where we sat at the end of September.

I was in Phili a couple of days ago, similar messages, outcomes there. No question, we got started a little bit later, the delayed closing and all the rest of that. So hustling to make up for some loss time relative to at least our planned start date but loan originations already exceeded $600 million, as I said in less than half a year. Depositor retention, frankly it’s even better in Eastern Pennsylvania than it was in Western PA at this point in time, it’s 95%, 96%. So incredibly proud of what we have been able to accomplish in both franchises, clearly demonstrates hopefully to all of you what we have known, that we have got the ability to handle these types of integrations, not just convert them but really embed them in our business and help us push forward profitably for the benefit of all.

Hence the confidence in putting the new alliance transaction together in this case with a very, very strong partner, spent quite a bit of time in Connecticut over the last couple of months, be rest assured that as confident as I was August 19 announcing the deals here [ph] October 21 even more so, where actually we have gotten across the market whether it be in New Haven, Hartford, Manchester, anywhere I have gone business leaders, civic leaders, others in the market, has been very, very welcoming and very excited and energized employee team and we can’t wait to get started, deepen the relationships that that organizations established, stretch the footprint across Southern and New England, competence in the process that we have in motion that’s at least on track, if not even a bit ahead of schedule there and know that we will be able to replicate the experience that you are now able to see in Pennsylvania, in New England as well and further establish us as a premier player in the Northeast region.

In terms of the region, another key message here is we feel we’re continuing to deliver on what we’ve framed over the years, and I’ve done that in a way where as we sit here for the backend of 2010 really feel as though we’ve got the foundation that we’ve framed and otherwise been pursuing substantially in place and whether you look at geographically or you look at that organizationally.

Obviously, transforming this organization to be $30 billion plus company, without the sharp and the focus and better execute on our strategy do that while we continue to deliver solid financial results, continue to build the balance sheet or able to play offense as well as make a real positive and assertive impression in all of our new markets.

With the addition in New Alliance as I said a couple of months ago, we planted another flag in a key portion of the footprint and with the investments that we’ve made and people and systems and process risk management, very, very comfortable that we’ve created and built the capacity necessary to run the business we have today, will have in six months and will have for the foreseeable future. So, simply put we’ve caught up.

Obviously, as we’ve scaled this business over the last couple of years, we’ve been climbing. As I’ve said internally the vertical wall to ensure we keep pace and otherwise put ourselves in our position to effectively manage what we are building as well as better position us for the future and I’m proud of what we’ve accomplish and happy to make sure you have good clarity that we have caught up, we’ve got ourselves in where we think is a tremendous position, framed to great franchise and have an organization, more than employees been ready to tackle that and the addition of such a strong franchise and business in New Alliance just enhances the potential that we have moving forward.

Within that context, the other head scratcher for me in the last couple months has been the serial acquirer comment. As it said it’s a real head shaker for me. So, I want to make sure on this call to respond to that as directly as I can as well.

Over the last several years, as long as Mike and I have been doing this certainly in our tenure, we’ve been incredibly transparent, clear and consistent as to what our targeted geography is. We initially had to submit of a bubble or a novel [ph] and we had it to call because of the strategic rectangle, but the footprints remained the same. We’ve talked about what we’re looking to do to further build out the business and have had the good fortune and good execution to sit here a couple of years later and be able to talk about what we’ve accomplished.

So, there shouldn’t be any surprise in what we’ve done other than maybe our ability to do it. But we’re as I said comfortable and confident in our ability to execute, so please know of any concerns about where does this take us next, we’re just doing what we told you we would do. So, we framed it, we’ve got a great footprint, excited to have the opportunity to transfer our business model and further accelerate the great growth in New Alliance has already achieved.

So, simply put we’ve got our plaque framed, the First Niagara Firm, if you will and our focus has been and will continue to be to work that for all it is and all that will be, I’m confident for years to come.

Obviously, as I always do, why does that happen? Why are we being successful? It’s about the people. We’re winning on people or we’re winning because of people and people want to be part of the story and couldn’t be more proud of the organization we have built. And as I always say, the second to none and I go to battle with them each and every day, I’m proud to do so. No question, we’re continuing to build something very, very special here, and confident, as you always hear from me, it will play very, very well in the years ahead for all of us whether it be employees, whether it be the communities we serve, our customers first and foremost or all of us as shareholders.

With that, let me have Michael to give you a little bit of a drive by on what we believe is a real nice outcome for the quarter.

Michael Harrington

All right. Thanks, John. All the effort and energy John just referenced is producing the results. We expected our $0.23 per share operating results for the quarter were driven by solid balance sheet growth, coupled with a relatively stable margin, a continuation of our solid credit performance and growth to non-interest income that was driven by an increase in our insurance revenue, with most of that attributable to our insurance agency acquisition in the Western Pennsylvania market.

Our continued growth in our wealth management and strong mortgage banking revenue, a function of a low rate environment. [Inaudible] service fees were flat relative to the last quarter, mostly due to the implementation of Reg E and of more on Reg E in a minute.

These positive trends are revenue; also more than offset the increase in expenses. The function of our continued and now mostly complete strategic investment in our business that John referenced earlier.

Additional color on the results include the following, net interest income grew and the margins held on very well despite a sharp decrease in interest rates during the quarter. This was attributable to three items.

First, the yield on the investment portfolio was fairly steady due to the nature and structure of the securities we purchased over the last year, dropping only four basis points in the quarter despite the increase in pre-payments generally.

We continue to grow our commercial loan books, which is up 12% on an annualized basis during the quarter. This growth helped to offset the lower yields caused by the decrease in the general market interest rates. Furthermore, we expect this growth to continue as pipelines are up 36% over the last quarter and 56% over the last year.

We offset the asset repricing for the most part, but the lower cost of funds as we continue to leverage our excess liquidity by allowing higher cost CDs [ph] to run off and replacing this funding with borrowings.

Looking ahead, with rates at these levels, assets will continue to reprice lower, which could put some modest pressure, a few basis points near-term on our net interest margin. Longer term, rates of these levels or less, if that becomes a reality will be negative for the industry.

On fee income, banking revenue was better than expected as often for overdraft customers or the Reg E impact was higher than predicted. If you’ll recall that last quarter, we stated that 2010 impact would be about $0.02 to 0.03 per share. We now expect that figure to be at the low end of that range.

This pressure on banking revenues should be offset by a continuation of above average mortgage banking results. As noted earlier, we expect a trajectory of our expense growth to level of as most strategic infrastructures near completion and importantly reflected in our run rate expenses. As evidence that we are in the latter stages of the strategic build, I note that the FTE count was relatively unchanged from the prior quarter end.

As we look ahead to 2011 and beyond, with the inclusion of New Alliance, the efficiency ratio should begin to migrate below 60% as we leverage the synergies of the combined organizations.

As for the credit picture, overall credit quality remains very good that charge-offs to 27 basis points for lower than the previous quarter, good news. MTLs reflect the continuing stresses in the economy, but as a percentage of the portfolios are consistent with the last six quarters would you need our metrics as indicative of a trend.

Going forward, we expect MTLs and net charge-offs will continue to be lumpy due to the environment as evidenced by this quarter’s activity. We expect net charge-offs to track in the 40 to 50-basis point range and MTLs to total loans settling in a range close to what we reported this quarter or around 90 to 100 basis points.

One other quick note related to the topic that has received a lot of press this week, foreclosures. Not a surprise that this is not an issue for us. Year-to-date, we have had a total of 14 foreclosures and we currently have only 80 at process. We follow a very rigorous procedures related to these actions and make every effort to mitigate the losses for the customer and the bank.

Needless to say, [inaudible] signers are relevant to First Niagara. People sign to this challenging task are knowledgeable of every borrower and sign off on all actions associated with the process after a very careful review.

On the subject of capital, I’d echo John’s comments that we have more than enough capital under today’s regulatory guidelines and those proposed under Basel III. Similar to what we have message – similar to what we have messaged in previous quarters, we have at least $250 to 300 million in excess capital, if not more.

As we think about capital going forward, we will continue to return excess capital in the form of dividends and as we have done in the past, stock 5X [ph] one time in circumstances permit us to do so.

As the funding organic growth, our go forward earnings is couple with our current position should be sufficient to allow us to aggressively execute our business strategy without racing additional equity.

Wrapping things up for the quarter and for the rest of the year, we would expect some modest revenue growth potentially limited by factors I have noted previously, combined with the credit costs that are consistent with the past few quarters, and little to no growth in net interest expense to produce results it should be in line with mean estimates for the fourth quarter.

With that, I’ll turn it back to John, for some closing commentary.

John Koelmel

Thanks a bunch, Michael. Now, how do I wrap all of that up? Obviously, we’re pleased and proud of the outcomes. The team continues to push hard on all fronts. That’s a reality in today’s environment for our industry, given the fact that the operating environment isn’t getting any easier, isn’t substantively getting any better.

And whether you look at it economically and whether or not there’s really lengths to the recovery, all the politics aside, whether you look at the politically charged environment we’re all dealing with, witness the foreclosure commentary, and form driven versus substantive driven, frenzy around all of that, whether you look at just the whole regulatory environment in general and the transitions that are continuing to occur there, yes, this is a tough business to make it buck a tough business, to make an extra buck and certainly that [inaudible] are probably for us.

You’ve long heard me, us, we continue to be bearish. And so what do we do? We do our best to stay focus on that which we can’t control, which is how well we run our business a better we can align our business model with the opportunities that are there, how best we deploy our capital, whether that be financial, intellectual, or otherwise against the best opportunities, how we stay nimble, how we out hustle our position ourselves relative to the competition.

So that means we’re working real hard to roll our boat and do that a little bit better than others. Many boats are waiting for a rising tide to list all boats, the tide is still way out, it’s yet to come in. And hence, we’re excited of our prospects to get ahead of – in fact stay ahead of the pack, not to be deterred and let alone saddle by some of the challenges the industry continues to confront.

Mike gave you his thoughts on the next 90 days or the rest of this year, quick look ahead to 2011. Well, we have more to say about all of that come January is we just play-off of what I just said. There is no big pop, there is no big benefit coming to the industry in 2011. Sitting look at where we are taking the $0.23 we just reported annualized that, you’re $0.92, $0.93. Street’s got us at a $1.03, $1.04 next year, that’s double digit growth.

The industry, my view, they’ll do well to do half of that in terms of real earnings growth and all the rest of them. I’m not sure when the industry is able to burn through the provision cutbacks and all the rest of that. There is no question the industry is going to be challenged. And again, our position continues to differentiate us.

Am I confident in our ability to continue to perform and grow? No question. Double-digit earnings growth continues to raise the bar to a high level you know that we do that to ourselves. But I want all of us to be realistic, not overly optimistic as I already said the headwinds are incredibly strong for the industry in total and while we’re progressively taken a bigger slice of the pie. And I’m confident we’ll distinguish ourselves, please don’t dilute yourself into thinking that the industry, greener pastors are around the corner, the challenges are real and it’s going to take some incremental time for the industry to see better days.

But with us it couldn’t be more proud of how we’re executing, how we’re performing, how we’re delivering on the promise over the last couple of years in particular with the reach into Pennsylvania, how we haven’t lost our way with the legacy business, how we’re managing our capital position in total, how we’re keeping our eye on the interest of our customers, our communities and our shareholders, and the most importantly the position we’re into ensure are best days remain in front of us.

With that, Chris, why don’t you open it up, and we’ll be happy to take questions from the group.

Question-and-Answer Session

Operator

Thank you. We will now be conducting a question-and-answer session. (Operator Instructions). Our first question comes from the line of Damon Delmonte with KBW. Please proceed with your question. Your mic is now live.

Damon Delmonte – KBW

Hi, good morning, guys. How are you?

Michael Harrington

Good morning, Damon.

John Koelmel

Good morning, Damon. How are you?

Damon Delmonte – KBW

Great, thanks. Mike, I was wondering if you could comment a little bit more on the uptick in the nonperforming this quarter? I know on an absolute basis you’re still at a very favorable level compared to most peers. But I think the commercial bucket went from somewhere in the $9 million range up to $24 million, $25 million. Can you just bolt-in on that a little bit?

John Koelmel

I’ll let Kevin answer that question, Damon.

Kevin O’Bryan

Yes. Damon, I’ll take that. I thought Mike’s commentary covered it pretty well. We measure ourselves on a pattern of consistency. I’m not going to get giddy about a 27-basis point charge-off ratio or pay anything more than the appropriate degree of attention to a movement in nonperformers.

If things fall within a pattern that is consistent with our performance over the last six quarters, that’s how we look at things. This was a lumpy quarter. Not to make too much of John’s nautical metaphor, but we’re sailing through stormy seas now. And we’ve tried to attack a pretty consistent course. And so the ranges that Mike gave in his commentary I think we’re going to find to be appropriate going forward.

John Koelmel

As you already referenced, we continue to be really proud Damon of what we’re able to put together and the numbers we’re able to post as we continue to grow the portfolio further validates, we’re not picking up anybody as leftovers, we’re cherry picking real top notch high-quality credits and the portfolio performs accordingly.

Damon Delmonte – KBW

Yes, no doubt that the portfolio continues to perform great. But I was just curious, is it made up of a handful of credits? One relationship was that from legacy of First Niagara portfolio or the new markets you entered. Just trying to get a little bit more color on it?

Kevin O’Bryan

It’s not a trend Damon. We don’t see it as a trend and it’s not any one relationship either.

Damon Delmonte – KBW

Okay, great. And then, Mike, could you circle back on your comments on the margin as far as your expectation in the next couple of quarters?

Michael Harrington

Well, just given the general level of interest rates, the reinvestment of the cash flows we’re getting from repayments, just in the next quarter, at least in the near term, there is potential there for a couple basis points of additional and interest margin. Compression, we might – we may be able to manage through that or offset it with some additional decreases in our funding cost, but I don’t want to promise that. So that’s – so that’s the near-term outlook, Damon.

My comments generally are longer-term outlook if we get another quantitative easing here and that push rates even lower, we’re going to continue to see prepayments and repayments and repricing increase and it’s just that one that the industry is going to run out of room on the funding side. So if that – we’re at a lower environment and it persists for a long time here another year. I think margins are going to come under pressure just a general comment about the industry.

John Koelmel

And just on balance there and reaffirm, I mean, if you look at our numbers all in deposits, 56 basis points. There is just not a whole lot of room to go with that. We actively manage it, but don’t want to be insensitive to the realities of our customers.

So this is really going to be driven as Mike said, as you all know Damon, by where the overall environment goes, frankly how funky the competition gets. I have said to regulators and others are already starting to see signs of the industry getting a bit over the edge again.

Everybody I believe is feeling some pressure to perform better and so we’re starting to see some funky pricing on the loan sides. And I’m hoping the industry doesn’t backslide, doesn’t get stupid on itself again. I assure you we won’t. And we’re going to say disciplined.

We’ll be competitive, particular for the high-quality credits. But if the industries play cats and dogs again and start competing on price, it’s going to be a slippery slope. That’s not going to be advantageous here. So I’m hoping the industry doesn’t lose its bearings. I assure you we won’t. And how we continue to rotate that excess liquidity is what we’re really focused on and doing that opportunistically.

Damon Delmonte – KBW

Okay. That’s all I have for now. Thank you very much, guys.

John Koelmel

Thank you.

Kevin O’Bryan

Thank you, Damon.

Operator

Thank you. Our next question comes from the line of Bob Ramsey with FBR Capital Markets. Please proceed with our question. Your line is now live.

Bob Ramsey – FBR Capital Markets

Hi, good morning, guys.

Kevin O’Bryan

Good morning, Bob.

John Koelmel

How are you?

Bob Ramsey – FBR Capital Markets

Good thank you. I was hoping you can give a little bit more color around. I know you mentioned a Reg E overdraft impact and it’s coming in at the low end of sort of what you were thinking, which is great. There really didn’t seem to be much impact this quarter. Will there be more coming in the fourth?

Kevin O’Bryan

Yes, we were – did a good job. The group and the folks at retail did a really good job of mitigating the impact in Q3. And, but, there was only half a quarter, we only saw half a quarter of that impact embedded in the run rate numbers. So we would expect some decrease in the banking services line in the fourth quarter.

John Koelmel

I think my prospect Bob is think of it more in terms of the lift that has been going to come versus deterioration. Obviously as we continue to take a bigger slice of that deposit and customer pie, you would expect the ancillary fee income to grow, the impact of Reg E is going to mute that. So it isn’t so much a deterioration as it is the inerrability to grow that line commensurate with the market share we’re taking.

Bob Ramsey – FBR Capital Markets

Okay, great. And then, can you also maybe could provide a little bit of color around the growth in the securities portfolio this quarter, hence where what the plans are for that going forward?

Michael Harrington

Sure. A lot of that growth was related to just the averages last quarter. We – when we closed on Harleysville, a lot of their dollars were in cash. And we didn’t invest that cash until late in the quarter.

So the growth on an average basis is really related to the timing of when we invested in the second quarter, because if you look at the total balances they’re up only a few hundred million quarter-to-quarter on an ending basis. And we continue to buy the similar type of product we bought in the past, three to four-year type of duration.

Mostly at this point in time, mortgage-backed securities and/or CMOs backed by mortgage-backed securities. So we’re – but we’re exploring other alternatives there as well to diversify the portfolio.

Bob Ramsey – FBR Capital Markets

And going forward, would you expect the securities portfolio to be relatively constant size?

Kevin O’Bryan

Yes, they would.

Bob Ramsey – FBR Capital Markets

Okay, great. Thank you very much.

John Koelmel

Obviously Bob, we’re focused on rotating that into the loan book. But, right now, not inconsistent with the industry at large, but certainly were a bit of a victim of our own reality of not success and the deposit inflows are significant, so we’re pushing good dollars out the door growing the loan book, but not able to meaningfully move that loan to deposit ratio, given the environments that translates to relatively stable securities portfolio.

Bob Ramsey – FBR Capital Markets

Okay, thank you.

John Koelmel

Thank you.

Operator

Thank you. Our next question comes from the line of Collyn Gilbert with Stifel Nicolaus. Please proceed with your question. Your mic is now live.

Collyn Gilbert – Stifel Nicolaus

Great, thanks. Good morning, guys.

Kevin O’Bryan

Hi Collyn.

John Koelmel

Hi Collyn, how are you?

Collyn Gilbert – Stifel Nicolaus

Good, thanks. Mike, could you just expand a little bit on I mean you kind of alluded to it in some of your comments, but the dynamic of the loan yield going forward especially kind of on the commercial side, there was compression this quarter, do we expect that in the coming quarters? Is that a function of just what’s paying off, is it a higher yield than what’s going on, maybe just talk a little bit about that, and then kind of tying in I think John to your bigger picture comments about being mindful of not going after the asset generation at the stake of price?

Michael Harrington

Well, I think to the first part of your question, all the above are applicable. One thing I have to remind you though, in the second quarter, our loan yields in the commercial book were elevated because of the – we’re holding on to those –

Collyn Gilbert – Stifel Nicolaus

Yes, that’s right.

Michael Harrington

Underperforming loans, some of that change from quarter-to-quarter is related to that.

Collyn Gilbert – Stifel Nicolaus

Okay.

Michael Harrington

But there’s going to be some pressure, it’s hard to quantify that on a go-forward basis. But so anything it’s LIBOR base has pretty much been repriced. But the assets that are coming due and that we’re refinancing and/or new assets originating, the incremental yield is lower than the portfolio yield right now.

So depending on how much renews in the given quarter, how much new business we put on, that’s going to have an effect on the quarter-over-quarter basis. But it’s pretty hard to pinpoint what that is, although I think it’s safe to say that there’s going to be some pressure for yields to move downward.

Collyn Gilbert – Stifel Nicolaus

Okay.

John Koelmel

I mean there is no question, spreads are tightening Collyn and we’ve seen that for a while. Hence my editorial that as an industry we got to be careful here, the risk reward equation needs to continue to prevail. Those were the fundamentals that got out of last year’s back.

You can only reduce your loan provision so long, so a lot of banks are trying to figure out how they put footings up on the balance sheet. There’s political pressure to do that. There’s broader based expectations if that’s what the industry does, well, surprise, surprise. They’re cutting prices and they’re competing on price.

Collyn Gilbert – Stifel Nicolaus

Right.

John Koelmel

And it’s very, very slippery. And I’ve expressed my concerns to the Fed, to the OCC have had opportunities to do that at the top of the house in both cases. And this is just where the political, economic, regulatory dynamic are in gridlock. They’re leaning and pushing on too many buttons, and they’re putting things more at risk, and there’s going to be unintended consequences here to investors, for a lot of equity industry year, year-and-a-half ago, looking for some returns and tracking of loan provision isn’t a sustainable business model.

So we see the big guys coming back, moving down market, as well as getting much more aggressive on pricing. But as I repeat, trust, we haven’t lost our way yet, we’re certainly not about to do so now. We didn’t wake up stupid in the last week or two and we’re going to start to do the wrong things in terms of probably price loans and relative business. But it is concerning to see some of what’s beginning to happen from an industry trend standpoint and then I hope we don’t see the bigger picture going the wrong direction.

Collyn Gilbert – Stifel Nicolaus

Okay, okay, that’s helpful. And then, just finally, Mike on the expense growth commentary that you had mentioned, expecting expenses to level off, can you just comment a little bit on the salary line. I mean what would – what would drive that growth going forward and maybe as differently what would be the growth rate of that line assuming kind of a normal course of business? You had mentioned FTEs have now sort of flattened a bit. I mean what can we expense out of that line?

Michael Harrington

Well, the growth rate you saw quarter-over-quarter, some of that’s function, the timing of the build and timing of the hiring that we did. So you can see on the spot bases somewhere to the securities portfolio comment. The average – when we hire people, we saw the full effect of that growth in the third quarter on the salary line. And also within the salary line you see some improvement in commission based revenue.

So that improvement in commission based revenue also drives that line higher as well. On a go-forward basis, it will be a function of – as we look into 2011, some a normal type of increase, inflationary type of increase, and normal year-over-year expansion of our workforce, but nowhere near the type of trajectory we’ve been on, and then a function of other commission based revenue and any type of growth we get there.

Collyn Gilbert – Stifel Nicolaus

Okay, okay, that’s helpful. That’s all I had. Thanks.

Michael Harrington

Thanks Collyn.

John Koelmel

Thank you.

Operator

Thank you. (Operator Instructions). Our next question comes from the line of Mathew Kelley with Sterne, Agee. Please proceed with your question. Your line is now live.

Mathew Kelley – Sterne, Agee

Yes, hi guys.

John Koelmel

Hi Matthew.

Mathew Kelley – Sterne, Agee

Can you just talk about loan growths expectations, kind of dynamics going forward over the next year. I mean one of the things just looking at here is that it required loan portfolio shrinking at as close to 23% annualized rate in the third quarter and how do you offset that with kind of growth elsewhere and what’s the net effect in terms of growth you’re expecting over the next year?

Michael Harrington

Well, our – as I mentioned in my commentary, our pipelines are very strong. The business activity is very good. I mean what you’re seeing, I think we’re recapturing some of that pay downs, so some of what you – we’re tracking that to acquire loan portfolio for a number of reasons from an accounting perspective. So we’re recapturing if some of that’s getting refinanced then we want to stay in that portfolio balance. So we’re recapturing a lot of that acquired portfolio, so I’m not really concerned with the pay-offs in that area. And, again, our business continues to be very strong, pipelines continued to be very strong. And we would expect the commercial area that continued to move forward as it has in the past.

John Koelmel

But bigger picture Matt, I reiterate what I’ve said a few times already. What you read, what you see is real. Demand continues to soften. People are playing it close to the vest, then they’re paying it down, and not necessarily refinancing it if they don’t have to.

And so the ability to take share of maybe not even stagnant, but the shrinking demand pie, what competition being a bit overzealous as to how they’re working it, it’s going to be a challenge. I don’t say that will suggest we won’t be successful in growing share. But I just say that to be realistic about today’s realities.

We all thought, hoped, wanted to believe it by the end of 2010, we find ourselves at a better place, not First Niagara, all of us. So it isn’t there. And the pressure is in the push and [inaudible]. So we’ve got the team, the products, the services, the profile, the credibility, the capacity. So confident we’ll continue to prevail. But it gets a little tougher to predict frankly where it’s going to go given the softer demand, and the dialed up competition as everybody is scrambled to get back in the game at a time when there is a set that lies in tide as yet to come.

Matthew Kelley – Sterne Agee

Right. And again you mentioned John if you annualized the current quarter, it gets you about $0.96 new alliance is supposed to be 4% to 5% accretive, so that gets you another $0.04 to $0.96.

John Koelmel

Right.

Matthew Kelley – Sterne Agee

Consensus of $1.03, it implies 7% growth in the core bank. Are you comfortable with that, and it sounds like you’re not.

John Koelmel

No I’m not just using it, I’m leveraging them all into to frame our positive reality versus the industry challenge in total. I’m always confident nursing our ability to deliver and perform. I just want to make sure it’s not taken for granted and everybody listening puts it in perspective and context versus in industry that I’m confident I can’t deliver that kind of growth, I can’t deliver that kind of performance. So at a time when the headwinds are strong for the industry and at large, I’m confident we’ll continue to differentiate. So I’m not backing off that but I’m just affirming.

Matthew Kelley – Sterne Agee

Right.

John Koelmel

The realities that we’re all chasing and dealing with and that will definitely make an incremental progress.

Matthew Kelley – Sterne Agee

Okay, and can you just expand a little bit more on some of your industry concerns and policy concerns. I wanted to make sure I was clear on what you were thinking about that?

John Koelmel

Well you can come back at me a little bit, I mean my overall concern is take the foreclosure issue, I mean its form over substance created frenzy, I mean this is the whole robo-signing. I’m not saying the industry is perfect and all the rest of it, I’m sure we’re not. But there wasn’t a whole lot of substance to the noise, that’s consumer efficacy, want to bid them up as far as I’m concerned. And the industry is back on its heels unfortunately and the politics are too thick, so I give the big guys credit for coming back to the table as quickly as they did and stand enough and pulling back to address the issue but coming back real quickly in an assertive fashion that foreclosure processes are appropriate and needed to move forward.

It’s just indicative of the challenges that we face as an industry. And we didn’t get here for lack of regulation, we got here because of some spotty, if not lousy execution. So don’t continue to saddle us. So as an industry with more regulation and in fact frankly better enable us to really stimulate and supporting our economies. So we’re all anticipating the next round of quantitative easing and what that does to rates and all the rest of that. It just continues to burden the industry and that’s where the unintended consequences, that’s where I’m not sure people are really pulling back and trying to connect with that in terms of who is setting policy and how we’re trying to manage our way through all this. So that’s almost continuing stump speech as the industry versus regulation, politic in general, how we need to better collaborate and better align rather than trying to operate in a series of vacuums.

Matthew Kelley – Sterne Agee

Okay, and then one last question. Tax rate is still going to be 35%, 36% going forward?

Michael Harrington

Yes, they were running in 33%, 34% range.

Matthew Kelley – Sterne Agee

Okay that’s where you see going forward?

Michael Harrington

Yes. Yes, 34%, 35%.

Matthew Kelley – Sterne Agee

34%, 35%. Okay, all right. Thank you.

John Koelmel

Yes, thanks a lot Matt.

Operator

Thank you. Our next question comes from the line of David Darst with Guggenheim Partners. Please proceed with your question. Your line is now live.

John Koelmel

Hi David

David Darst – Guggenheim Partners

Good morning.

John Koelmel

Good morning.

David Darst – Guggenheim Partners

Could you give us the NIM [ph], total NIM amount throughout geography. And also it appears that maybe the – I guess it maybe up into the Eastern Pennsylvania commercial loans did declined during the quarter?

John Koelmel

I don’t have – we don’t have off the top of our head, its slide and dice by geography.

Michael Harrington

Yes if you want to, I’d be glad to Tony or I’d give you call back.

John Koelmel

We’d really core deeper dive on some of that versus when I’ll turn another presentation. David, your second question ran to what about Eastern Pennsylvania?

David Darst – Guggenheim Partners

That you indicated that the commercial loans were $1.3 billion and they were closer to $1.4 billion at the end of the second quarter.

Michael Harrington

Yes, I mean are we talking average balances?

David Darst – Guggenheim Partners

It looks me this is war period in but I guess maybe you could just quantify the growth and the originations and.

Michael Harrington

Yes, I mean what we’re focused on is the increase in the activity. So what we wanted to message in the press release was how the activities continuing to increase that those – that activity hasn’t translated into balance growth yet in Eastern Pennsylvania but we’re confident that we’ll as we move forward here especially given the pipeline activity we see down the line.

John Koelmel

We appreciate in Eastern Pennsylvania, we sold off $100 million of that portfolio and all of the rest of that. So we’re replacing what we sold at the tail end of the second quarter. Frankly, we’re really pleased with the early origination volume and know that we can do even better than that and will. So we took the portfolio, burned it down if you will, so the starting point was other than the acquired balance in reality.

David Darst – Guggenheim Partners

Okay, and then back to your comments on the securities growth, I mean it looks like total assets increased $350 million and there was a similar securities go during this quarter. Should we expect to see some decline in the balance sheet as you have the opportunity to let some of CDs run off in these liquidity to fund that?

Michael Harrington

Well we might do that, I mean this will really depend on what’s maybe the best alternative for us but, we have ample liquidity in order to fund change in our funding mix from CDs to borrowings without de-leveraging the balance sheet overall.

David Darst – Guggenheim Partners

Okay, and what duration in borrowings are you adding?

Michael Harrington

I think the last one, I mean we’re adding – we’re going longer term here. I know we did a trade a week or two ago where we locked in three year money at less than a 100 basis points.

David Darst – Guggenheim Partners

Okay, great. Thank you.

John Koelmel

Thanks David.

Operator

Thank you. Our next question comes from the line of Tom Alonso with Macquarie. Please proceed with your question. Your line is now live.

Tom Alonso – Macquarie

Good morning guys.

John Koelmel

Hey Tom.

Tom Alonso – Macquarie

Most of my questions have been answered. So you said you just lock in through year borrowings at [indiscernible]. I assume weights on stuff that’s shorter its much lower and that’s what drove the borrowing cost down out in the quarter?

Michael Harrington

Right and that’s why we’re willing to let the CD move front of not trying to retain it. It’s something that’s through this wholesale rates.

Tom Alonso – Macquarie

Okay, okay that’s fair enough. And then I just want to make sure, your commentary on the operating costs. Should we look at this quarter as a fairly good run rate than on a go-forward basis?

Michael Harrington

Yes, yes.

Tom Alonso – Macquarie

Okay, all right. Perfect.

John Koelmel

If you talk about our comments baseline quarter, a really one that all of us to look at going forward give us a much better starting point.

Tom Alonso – Macquarie

Okay, and so then I mean, the way we should look at your growth going forward. It’s basically operating leverage from this point on.

John Koelmel

Substantially correct.

Tom Alonso – Macquarie

Okay, okay fair enough. You guys talked about that. And then just when you said the pipeline was up, you gave percentages, plus 36% linked quarter. Can you just give us a dollar amount?

Michael Harrington

Don’t know if I have dollar amounts with me. I’d like to get back to you on that.

Tom Alonso – Macquarie

Okay, that’s fair enough. All right, thanks guys.

John Koelmel

Thank you.

Operator

Thank you. Our next question comes from the line of Bruce Harting with Barclays Capital. Please proceed with your question. Your line is now live.

Bruce Harting – Barclays Capital

Yes, good morning. At a sort of a local level, any news or did I miss any more granularity on expenses with new alliances, obviously the CEO has announced retirement. And then pulling back 40,000 footage [ph], can you just explain what structure are you going to use between the various markets here in Pittsburg, Philadelphia and now the Connecticut, New England market in terms of regional presence – precedence and perhaps compare your legal loan limit, lot bigger size on a performance basis versus house limits and will you be going after larger credits. How will those credit decisions be made in the various regions. Will it all come back to headquarters and then maybe you can comment on your retail – how the various franchises that you’ve acquired compare from a retail product offerings perspective and overtime will you make those uniform? Thanks.

John Koelmel

Okay, that’s going to have half hours worth Bruce. In terms of maintain some price and get us through all of that. Let me start with the business model. It’s consistent with how we run the legacy business. We’ve got regional presence, precedence as well as presence in Western Penn [ph], Eastern Penn. We’ll do the same in Connecticut and New England. More than just presence of that precedence that local team has decision making authority significantly serves outside in Connecticut, that have been around the last couple of months. My number at least 95% of the credit decisions get made in market durability, make credit decisions in market will be even greater than it is today for them.

That’s translated into the type of growth and outcomes and results that you see. Obviously, the capacity to lend that we have as an organization is meaningfully greater than it was for us meaningfully greater than it is today for undue reliance, greater than it was for Harleysville. Then that city crew was certainly used to flying at a higher level. So if anything our challenge/opportunity was to ensure we were prepared to – enable them to continue to step up and step in and play at the kind of level that they had grown accustom.

The retail product offerings, either some gaps shore as we’re moving up market. We’ve been working to further round out the suite of products and services and ensure that we bring the right level of sophistication to all of our markets and best enable the people or our team to be successful, compete against the big boys and girls and comfortable with the progress we’re making.

We’re all the way there. If the new alliance transaction give us an opportunity to leverage what they do well, they’ve been very effective frankly what their product development, management and they’re able to bring him up to our table, leverage that across our franchise that’ll further accelerate our growth there. Specific to new alliance, we’re right on track with our process and excited to move forward very confident and comfortable with our ability to achieve the kind of synergies that we talked about when we announced the deal a couple of months ago.

There is a strong bench, strong team in terms of being able to continue to accurately manage the market they have and we’re looking at how we best leverage and build out and build up that presence on a more regional basis. I think I’ve at least touched and hopefully had been responsive to your list of questions.

Bruce Harting – Barclays Capital

Yes and between regions, do you see any difference right now in terms of utilization?

John Koelmel

Lean a little closer there, Bruce I’m sorry I can’t hear you.

Bruce Harting – Barclays Capital

Yes, I think I might had, here we go, okay. Can you hear me now?

John Koelmel

Hi [Erano] I can definitely hear you now.

Bruce Harting – Barclays Capital

Okay.

John Koelmel

Maybe [indiscernible] for sure.

Bruce Harting – Barclays Capital

Yes, between the various regions, are you seeing any real differentiation and utilization of credit lines on the C&I side, or is it pretty uniform across markets?

Michael Harrington

No, it’s pretty uniform across the markets that have that product. And it’s more prevalent in the legacy footprint and the what’s the upstate you are, standing by that and the Western Pennsylvania and yes it’s pretty consistent.

Bruce Harting – Barclays Capital

Okay, all right. So what I hear you saying is you’re going to – you’ve got much more legal house, legal limit now but you’ll probably move into a larger credits very gradually.

Michael Harrington

That’s a fair, that’s a fair statement. We’re doing that presently as we approach not only our legacy market but the new markets as well.

John Koelmel

Yes, we’re certainly.

Kevin O’Bryan

Measured, fairly measured pace.

John Koelmel

We haven’t thinking drunken sailor approach at all Bruce. Clearly moving up market within the legacy footprint is part of what we’re doing as the bigger guys have pulled back and we treated. And as we’ve developed the capacity to better serve the needs of the larger more sophisticated customer for the last couple of three years, it’s enabled us to really step up and step in and that’s clearly help drive some of our growth. But as these guys have said, it’s measured, it’s focused, its cherry picked in terms of the right credits, as Kevin always says our largest credits need to be our best credits. That’s how we look at the business.

We’re going to be able to accelerate a term that new alliance was making from thrift to the commercial model, leverage the momentum we’ve gotten we’re able to revitalize that focus in Eastern Pennsylvania. And as I said really we’ve been able to, they’re all in the city crew to where sustain the momentum of the bay in otherwise build in Western bay. So it’s a great combination across the footprint and we’re comfortable with the opportunities to continue to grow it, albeit in a less than ideal broader based environment.

Bruce Harting – Barclays Capital

Very good, thanks.

Michael Harrington

Thank you.

John Koelmel

Thank you.

Operator

Thank you. There are no further questions at this time. I’d like to turn the floor back over to management for any closing comments you may have.

John Koelmel

Thanks very much Chris. Thanks for hosting and coordinating. As always appreciate everyone’s time and interest in our story. And look forward to discussing the next chapter in another 90 days. Happy Halloween everyone. Hope there is a lot more treats and tricks. Have a good day and we’ll talk soon.

Operator

Ladies and gentlemen, this does conclude today’s conference. You may disconnect your lines at this time. And we thank you all for your participation. Good day.

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