The following discussion and analysis is intended to provide greater details of our results of operations and financial condition and should be read in conjunction with our consolidated financial statements and the notes thereto included elsewhere in this document. Certain statements under this caption constitute “forward-looking statements” within the meaning of Section 27A of the Securities Act of 1933, as amended, and Section 21E of the Securities Exchange Act of 1934, as amended, which involve risks and uncertainties. These forward-looking statements relate to, among other things, expectations of the business environment in which First Niagara Financial Group, Inc. and its subsidiaries operate, projections of future performance and perceived opportunities in the market. Our actual results may differ significantly from the results, performance, and achievements expressed or implied in such forward-looking statements. Factors that might cause such a difference include, but are not limited to, economic conditions, competition in the geographic and business areas in which we conduct our operations, fluctuation in interest rates, changes in the credit quality of our borrowers and obligors on investment securities we own, increased regulation of financial institutions or other effects of recently enacted legislation, and other factors discussed under Item 1A. “Risk Factors” in both this Quarterly Report on Form 10-Q and in our Annual Report on Form 10-K for the year ended December 31, 2012 . First Niagara Financial Group, Inc. does not undertake, and specifically disclaims, any obligation to update any forward-looking statements to reflect the occurrence of events or circumstances after the date of such statements.

OVERVIEW

First Niagara Financial Group, Inc. (the “Company”) is a Delaware corporation and a bank holding company, subject to supervision and regulation by the Board of Governors of the Federal Reserve System (the “Federal Reserve”), serving both retail and commercial customers through our bank subsidiary, First Niagara Bank, N.A. (the “Bank”), a national bank subject to supervision and regulation by the Office of the Comptroller of the Currency (the “OCC”). At March 31, 2013 , we had $37 billion in assets, $28 billion in deposits, and 427 full-service branch locations across New York, Pennsylvania, Connecticut, and Western Massachusetts. The Company and the Bank are referred to collectively as “we” or “us” or “our.”

On May 18, 2012, the Bank acquired 137 full-service branches from HSBC Bank USA, National Association ("HSBC") and affiliates (the "HSBC Branch Acquisition") in the Buffalo, Rochester, Syracuse, Albany, Downstate New York and Connecticut banking markets and paid a net deposit premium of $772 million . The Bank acquired cash of $7.4 billion, performing loans with a fair value of approximately $1.6 billion, core deposit and other intangibles of $85 million, and deposits with a fair value of approximately $9.9 billion (shortly after acquisition, we allowed $0.5 billion in municipal deposits to one large customer run-off), resulting in goodwill of $769 million . The cash received was used to pay down wholesale borrowings, including those used to purchase securities in advance of the HSBC Branch Acquisition. In addition, we acquired certain wealth management relationships and approximately $2.5 billion of assets under management of such relationships. At closing, the Bank did not receive any loans greater than 60 days delinquent. Concurrent with the HSBC Branch Acquisition, we consolidated 15 existing First Niagara branches into acquired HSBC branches and, in the third quarter of 2012, we consolidated 19 of the HSBC branches into First Niagara branches, resulting in 103 net new full-service branches from the HSBC Branch Acquisition. The results of operations from the HSBC Branch Acquisition are included in our operations only since the date of acquisition.

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

BUSINESS AND INDUSTRY

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

Our profitability is primarily dependent on the difference between the interest we receive on loans and investment securities, and the interest we pay on deposits and borrowings. The rates we earn on our assets and the rates we pay on our liabilities are a function of the general level of interest rates and competition within our markets. These rates are also highly sensitive to conditions that are beyond our control, such as inflation, economic growth, and unemployment, as well as actions and policies of

the federal government and its regulatory agencies, including the Federal Reserve. We manage our interest rate risk as described in Item 3, “Quantitative and Qualitative Disclosures about Market Risk.”

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

Since the third quarter of 2011, the Federal Reserve has taken certain actions which have resulted in lower longer-term interest rates.  These actions had the impact of flattening the yield curve and reducing the yields on earning assets that are (a) adjustable rate and directly tied to longer term rates, such as certain commercial real estate loan products that we offer, and (b) fixed rate where the rate is based on longer-term rates, such as certain of our residential real estate loan products. In March 2013, the Federal Reserve stated that it will continue its third round of quantitative easing by purchasing Treasury and agency mortgage-backed securities, and employ its other policy tools as appropriate, until the outlook for the labor market has improved substantially in a context of price stability. The Federal Reserve also decided to keep the target range for the federal funds rate at 0% to 0.25% . These actions were designed to maintain downward pressure on longer-term interest rates, support mortgage markets, and help to make broader financial conditions more accommodative. However, the quantitative easing by the Federal Reserve, along with competitive pressures in the marketplace, have at times caused a disconnection in the historical spread between the 10 year Treasury rate and 30 year mortgage rates since late 2012. As a consequence, the predictive ability of the 10 year Treasury rate as a proxy for mortgage rates has recently diminished. Accordingly, future mortgage rates have become more difficult to predict, and competitive market forces could cause mortgage rates to rise, which could negatively impact mortgage origination volumes and the value of our mortgage-backed investment securities.

MARKET AREAS AND COMPETITION

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

Our primary lending and deposit gathering areas are generally concentrated in the same areas as our branches. We face significant competition in both making loans and attracting deposits in our markets as they have a high density of financial institutions, some of which are significantly larger than we are and have greater financial resources. Our competition for loans comes principally from commercial banks, savings banks, savings and loan associations, mortgage banking companies, credit unions, insurance companies, and other financial services companies. Our most direct competition for deposits has historically come from commercial banks, savings banks, and credit unions, as well as additional competition for deposits from the mutual fund industry, internet banks, securities and brokerage firms, and insurance companies, as well as nontraditional competitors such as large retailers offering bank-like products. In addition to the traditional sources of competition for loans and deposits, payment processors and other companies exploring direct peer-to-peer banking provide additional competition for our products and services. In these marketplaces, opportunities to grow and expand are primarily a function of how we are able to differentiate our product offerings and customer experience from our competitors. We offer a variety of financial services to meet the needs of the communities that we serve, functioning under a philosophy that includes a commitment to customer service and the community.

REGULATORY REFORM

We continue to monitor the potential effects on our businesses of regulatory reform, including the requirements of the Dodd-Frank Wall Street Reform and Consumer Protection Act, and the revised capital and liquidity frameworks published by the Basel Committee on Banking Supervision in December 2010, known as “Basel III,” and the notices of proposed rulemaking regarding regulatory capital requirements published by the Federal Reserve in June 2012.

Regulatory Reform is discussed in our Annual Report on Form 10-K for the year ended December 31, 2012 under Item 1, “Business—Supervision and Regulation,” and Item 1A, “Risk Factors.”

CRITICAL ACCOUNTING POLICIES AND ESTIMATES

We evaluate those accounting policies and estimates that we judge to be critical: those most important to the presentation of our financial condition and results of operations, and that require our most subjective and complex judgments. Accordingly, our accounting estimates relating to the valuation of our investment securities, prepayment assumptions on our collateralized mortgage obligations and mortgage-backed securities, the accounting treatment and valuation of our acquired loans, adequacy of our allowance for loan losses, and the analysis of the carrying value of goodwill for impairment are deemed to be critical, as our judgments could have a material effect on our results of operations. Additional accounting policies are more fully described in Note 1 in the “Notes to Consolidated Financial Statements” presented in our 2012 Annual Report on Form 10-K. A description of our current accounting policies involving significant management judgment follows:

Investment Securities

As of March 31, 2013 , our available for sale and held to maturity investment securities totaled $12.1 billion , or 33% 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 March 31, 2013 or December 31, 2012 . Where sufficient information is not available from the pricing services to produce a reliable valuation, we estimate fair value based on broker quotes, which are reviewed using the same process that is applied to our securities priced by pricing services where we are unable to obtain a secondary independent price, or based on internally developed models consider estimated prepayment speeds, losses, recoveries, default rates that are implied by the underlying performance of collateral in the structure or similar structures, and discount rates that are implied by market prices for similar securities and collateral structure types.

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

In order to compute the constant effective yield for these securities, we estimate projected loan level cash flows for each security based on a variety of factors, including historical and projected prepayment speeds, current and future interest rates, yield curve assumptions and security issuer. These loan level cash flows are then translated into security level cash flows based on the tranche we own and the unique structure and status of each security. At March 31, 2013, our portfolio of residential mortgage backed securities totaled $5.5 billion, which included $4.7 billion of collateralized mortgage obligations. In the determination of our constant effective yield, we estimate that we will receive $1.7 billion of principal cash flows on our collateralized mortgage obligations over the next 12 months.

Acquired Loans

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

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

Individual acquired loans determined to have evidence of deterioration in credit quality are accounted for individually in accordance with ASC 310-30. Any acquired loans that were not individually in the scope of ASC 310-30 because they did not meet the criteria above were either (i) pooled into groups of similar loans based on the borrower type, loan purpose, and collateral type and accounted for under ASC 310-30 by analogy or (ii) accounted for under ASC 310-20 (Nonrefundable Fees and Other Costs).

Based on the guidance included in the December 18, 2009 letter from the AICPA Depository Institutions Panel to the Office of the Chief Accountant of the SEC, we have made an accounting policy election to apply ASC 310-30 by analogy to qualifying acquired pools of loans that (i) were acquired in a business combination or asset purchase, (ii) resulted in recognition of a discount attributable, at least in part, to credit quality; and (iii) were not subsequently accounted for at fair value.

Acquired loans accounted for under ASC 310-30

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

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

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

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

Allowance for Loan Losses

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

Originated loans

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

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

For our originated loans, when current information and events indicate that it is probable that we will be unable to collect all amounts of principal and interest due under the original terms of a business or commercial real estate loan greater than $200 thousand, such loan will be classified as impaired. Additionally, all loans modified in a 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.

Commercial loan portfolio segment

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

Consumer loan portfolio segment

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

Acquired Loans

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

For our acquired loans accounted for under ASC 310-30, our allowance for loan losses is estimated based upon our expected cash flows for these loans. To the extent that we experience a deterioration in borrower credit quality resulting in a decrease in our expected cash flows subsequent to the acquisition of the loans, an allowance for loan losses would be established based on our estimate of future credit losses over the remaining life of the loans.

Acquired loans accounted for under ASC 310-20

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

Goodwill

We 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 and we review it for impairment at our reporting unit level on an annual basis, as of November 1, and when events or changes in circumstances indicate that the carrying amounts may be impaired. We define a reporting unit as a distinct, separately identifiable component of one of our operating segments for which complete, discrete financial information is available and reviewed regularly by that segment's management. We have two reporting units: Banking and Financial Services.

The goodwill impairment review is a multi-step process that begins with determining whether or not each reporting unit's fair value is less than its carrying amount. We have the option to first assess qualitative factors to determine whether there are events or circumstances that exist that make it more likely than not that the fair value of the reporting unit is less than its carrying amount (Step 0). If it is more likely than not that the fair value of the reporting unit is less than its carrying amount, or if we choose to bypass the qualitative assessment, we proceed to a quantitative analysis where we compare each reporting unit’s fair value to its carrying value to identify potential impairment (Step 1). If the estimated fair value of a reporting unit exceeds its carrying amount, goodwill of the reporting unit is not considered impaired. Determining the fair value of a reporting unit as part of the Step 1 analysis involves significant judgment. Inputs and assumptions, such as future cash flows and earnings, discount rates, the assessment of relevant market transactions for comparability and the resulting control premium assumption, and multiples of relevant financial statement metrics, such as tangible book value and estimated earnings are all estimates involving significant judgment. We are also required to assess the reasonableness of the overall combined fair value of our reporting units by reference to our market capitalization over time.

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

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

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

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

 

N/M Not meaningful

RESULTS OF OPERATIONS

Overview

The following table summarizes our results of operations for the periods indicated on a GAAP basis and on an operating (non-GAAP) basis for the periods indicated. Our operating results exclude merger and acquisition integration expenses, restructuring charges, and the fourth quarter 2012 retroactive premium amortization on investment securities portfolio. We believe this non-GAAP measure provides a meaningful comparison of our underlying operational performance and facilitates management’s and investors’ assessments of business and performance trends in comparison to others in the financial services industry and period over period analysis of our fundamental results. In addition, we believe the exclusion of the nonoperating items from our performance enables management and investors to perform a more effective evaluation and comparison of our results and to assess performance in relation to our ongoing operations (in thousands). 

During the first quarter of 2013, our focus on managing our operating expenses resulted in positive operating leverage as well as protection from the downside of the industry-wide decline in mortgage banking revenues, competitive loan pricing environment, and other typical seasonal weaknesses. A key focus throughout the remainder of the year will be expense management with selective hiring and investments that support maximizing revenue potential and enhancing shareholder value while driving our efficiency ratio lower.

Comparison to Prior Quarter

Our first quarter 2013 GAAP net income was $67 million , or $0.17 per diluted share, compared to $61 million , or $0.15 per diluted share, for the fourth quarter of 2012. Results for the first quarter of 2013 include the impact of a pretax $6.3 million, or $0.01 per diluted share, charge related to two executive departures. A special committee comprised of independent members of our Board of Directors has been formed to initiate a search for a permanent President and Chief Executive Officer.

Non-GAAP operating net income was $75 million , or $0.19 per diluted share, in the fourth quarter of 2012.

Our net interest margin declined three basis points during the first quarter of 2013 to 3.39% from 3.42% in the fourth quarter 2012 levels, adjusted to exclude the $16 million collateralized mortgage obligations ("CMO") retroactive premium amortization. Net interest income in the first quarter declined 1% annualized compared to adjusted fourth quarter levels. Noninterest income

decreased $2.5 million , or 3.0% , from the prior quarter primarily due to lower deposit service charges, mortgage banking, and capital markets revenues. These declines were partially offset by higher wealth management fees and insurance commissions.

Balance sheet growth remained strong as average interest-earning assets increased 8% annualized from to the prior quarter. Average total loans increased 11% annualized over the prior quarter and average commercial loans increased 17% annualized over the prior quarter, the 13th consecutive quarter of double digit growth. Average indirect auto loan balances increased $197 million while other consumer loan categories declined modestly compared to the prior quarter. Average interest-bearing checking deposits increased 19% annualized from the prior quarter driven by greater account acquisition activity as well as increases in balances held by customers.

The provision for loan losses on originated loans totaled $19 million in the first quarter of 2013, including $10 million to support loan growth and $9 million to cover net charge-offs during the quarter. At March 31, 2013, nonperforming originated loans were flat compared to prior quarter levels and as a percentage of originated loans decreased four basis points to 1.03% at March 31, 2013 from 1.07% at December 31, 2012. Net charge-offs equaled 27 basis points of average originated loans, compared to 35 basis points in the full year 2012.

First quarter 2013 noninterest expenses, excluding the $6 million charge related to executive departures which is reflected in other noninterest expenses, declined $3.7 million, or 2%, compared to the fourth quarter of 2012. Seasonal increases in salaries and benefits expense driven by payroll taxes and employee merit increases were more than offset by expense management.

Comparison to Prior Year Quarter

Our first quarter 2013 GAAP net income was $67 million , or $0.17 per diluted share, compared to $60 million , or $0.16 per diluted share, for the first quarter of 2012. Non-GAAP operating net income was $70 million , or $0.19 per diluted share, in the first quarter of 2012.

Our net interest margin increased five basis points in the first quarter of 2013 to 3.39%, from 3.34% for the first quarter of 2012, as the benefits of a $0.4 billion increase in net interest earning assets and 35 basis point decrease in rates paid on liabilities were partially offset by a 23 basis decrease in yields on interest earning assets. Noninterest income in the first quarter of 2013 increased $19 million , or 28% , from the prior year primarily due to our HSBC Branch Acquisition as well new checking account openings and the expansion of our credit card business.

The provision for loan losses on originated loans increased to $19 million in the first quarter of 2013 from $16 million in the same quarter in 2012, as a result of loan growth. Nonperforming originated loans as a percentage of originated loans decreased six basis points to 1.03% at March 31, 2013 from 1.09% at March 31, 2012. Net charge-offs decreased to 27 basis points of average originated loans from 34 basis points of average originated loans in the first quarter of 2012.

First quarter 2013 noninterest expenses, excluding the $6 million charge related to executive departures, increased $31 million , or 16% , compared to the first quarter of 2012 as a result of the costs to operate the HSBC branches and an $8 million increase in amortization of intangibles stemming from the intangible assets acquired in the HSBC Branch Acquisition.

Net Interest Income

Excluding the $16 million retroactive premium amortization adjustment related to the CMO portfolio in the fourth quarter of 2012, first quarter 2013 net interest income of $266 million decreased modestly from the prior quarter. Compared to the prior quarter, the benefits of an 8% annualized increase in average interest-earning assets were offset by a three basis point decline in the net interest margin adjusted to exclude the $16 million CMO charge in the prior quarter.

Increases in mortgage rates from the low levels reported in the fourth quarter of 2012 resulted in lower than expected cash flows from our CMO portfolio, which modestly reduced premium amortization expense on that portfolio. In the first quarter of 2013, total premium amortization on the CMO portfolio was $10 million compared to an adjusted $15 million in the prior quarter, which excludes the $16 million CMO charge. The modest benefits from slower CMO cash flows together with a four basis point decline in cost of interest bearing deposits were offset by continued compression of loan yields from elevated prepayments and reinvestments at lower spreads.

⁽³⁾ Our quarter ended December 31, 2012 operating (non-GAAP) results excluded $16 million of accelerated CMO adjustments from our net interest income. Had these adjustments been excluded from the table above, our yields for the quarter ended December 31, 2012 would have been:

Average balance sheet	Quarter ended December 31, 2012
Residential mortgage-backed securities	2.50	%
Total interest-earning assets	3.81
Net interest rate spread	3.33
Net interest rate margin	3.42

Our taxable equivalent net interest income of $270 million for the quarter ended March 31, 2013 increased by $14 million, on a GAAP basis from the quarter ended December 31, 2012 . Overall, the yield on earning assets increased 15 basis points quarter over quarter as a result of the combined effects of last quarter's accelerated premium amortization charge and lower premium amortization on our residential mortgage-backed securities partially negated by continued yield compression on our loan portfolio.  Net interest income was also assisted by lower interest expense from deposit pricing and wholesale funding strategies. Specifically: