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									                                                                     EQUITY RESEARCH
                                                                    INDUSTRY UPDATE

                                                                                  December 3, 2009

Mid-Cap Banks:
Takeaways from Maxim’s 2nd NYC Multi-Family Property
Experts Dinner
Christopher Nolan, CFA                                     (212) 895-3894

Wave of distressed asset sales forestalled by an accommodating bank policy
   NYC multi-family property market has exhibited relatively strong credit quality metrics for
   lenders. While credit metrics in recent quarters have deteriorated they continue to remain solid relative
   to other areas of commercial real estate. To discuss this sector last night were three speakers: Mr.
   Robert Knakal, Chairman of Massey Knakal, the leading multi-family commercial real estate broker
   firm in the metropolitan New York market; Mr. Ofer Yardeni, Managing Partner of Stonehenge
   Partners; and Mr. Andrew Hoffman, Chief Operating Officer of Stonehenge Partners.

   Looming refinance crisis forestalled – It was estimated that $90B worth of NYC multi-family
   commercial properties in the city (15,000 properties) are now worth less than their mortgages.
   However, area banks and CMBS special servicers have exhibited more leniency in extending the term
   of underwater mortgages to forestall a wave of foreclosures. A wave of underwater maturing loans is
   likely to begin accelerating in 2010-2011 timeframe, as five year commercial mortgages with loan-to-
   values of up to 85% made during the peak market of 2005-2007 begin to mature.

   Operating margins continue to be under pressure While vacancies have improved, this has been via
   10%-15% discounts on apartment rents in Manhattan. However, operating expenses continue to rise
   driven by continual 10%-15% rise in rising property taxes, which account for 30% of operating
   expenses. Some relief is found from sustained low interest rates.

   We continue to rate Sell on those banks which, in our view, have premium valuations, relatively low
   levels of loan loss reserves and tangible equity levels and high commercial real estate exposures. We
   believe that banks with exposure to the NYC multi-family market are likely to experience a moderating
   rate of credit quality decline in their multi-family portfolios in near-term of 1H10, due to eased
   constraints on banks recognizing non-performing loans and extending the terms of underwater
   performing loans.

   Reiterate investment ratings. We are reiterate our Sell rating for New York Community Bancorp
   (NYB- Sell- pt $8), Astoria Financial (AF- Sell- pt $6) and maintaining our Hold ratings on M&T Bank
   Corp (MTB- Hold). We are Signature Bank (SBNY- Hold).

               Maxim Group LLC, 405 Lexington Avenue, New York, NY 10174

                                                                                      Mid-Cap Banks

3 Experts on NYC multi-family housing market
  Leading NYC commercial real estate broker and two major Manhattan rental apartment
  building investors/ operators. Robert Knakal, chairman of Massey Knakal, the leading multi-family
  commercial real estate brokerage firm in the metro NYC region brought a perspective of trends
  affecting valuations and transaction volume. Speaking from Stonehenge Partners was Managing
  Partner, Ofer Yardeni, and Chief Operating Officer, Andrew Hoffman, who both provided their
  operating perspective on the market. Stonehenge Partners invests and manages a $1.5B commercial
  property portfolio, with a significant exposure to rental apartment buildings in Manhattan.

  Property valuations are currently being supported by banks being reluctant to foreclose on
  properties – which has resulted in a lack of supply of commercial multi-family properties on the
  market to meet existing demand. Normally, 2.6% of building stock turns over annually, but in 2009
  the turnover rate could be 1.1%-1.2% primarily due to a lack of supply on the market. Investor
  demand is robust (often 25 bids for properties that come on to market), and the low transaction
  volumes reflect a wide bid-ask spread as investors are waiting for a correction in valuations.

                  •   Lack of transaction volume is impacting valuation comparisons – On average,
                      valuations are off 15%-25% from the peak, depending on the borough and the
                      property type (elevator vs. walk up building). However, comparable valuation
                      data is scarce (due to low transaction activity) which creates uncertainty in terms
                      of valuation appraisals.

          o   Banks are loathing foreclosure on properties to buy time to build capital and reserves
              while temporarily keeping their credit costs low, foreclosure costs low, and to avoid
              depressing property market valuations further by forcing a wave of distressed asset sales.
              The bank practice of extending existing problematic loans (aka ‘extend and pretend’) has
              been aided by recent rule changes as regulators ease the criteria of when a bank needs to
              recognize a non-performing loan.

                  •   Delay in foreclosures by banks only forestalls eventual write downs, barring a
                      major recovery in the economy, since underwater commercial borrowers who
                      have little chance of recovery are less likely to make further investments in the

                  •   The wave of distressed properties are primarily driven by over-leveraged
                      properties financed at loan-to value ratios as high as 85% unable to refinance in
                      current market conditions of 50% LTVs. Expectations are for cap rates to the
                      11%-12% range, above expectations of 8%-9% mortgage costs, and thus
                      returning positive investment leverage to the sector.

  Surge in distressed properties was expected to start in 2010- Given that most commercial
  mortgages have five-year terms, and the more aggressive lending started in 2005, a surge in distressed
  multi-family loans expected to hit market beginning in 2010 and peak in 2011-2012 timeframe.
  However, with banks ‘extending and pretending’ on underwater loans, the effect has been to delay
  distressed assets reaching the market.

          o   An estimated 15,000 properties have negative equity- In the period of 2005-2007 NYC
              multi-family property sales totaled approximately $109 billion. An estimated $90 billion
              of these properties (or 15,000 properties) have negative equity. It is estimated that the
              properties with negative equity could result in $30b-$40b in losses as they are eventually

Maxim Group LLC                                                                                        2
                                                                                      Mid-Cap Banks

  Pressures for lower NYC multi-family property valuations are driven by 3 factors:

         o   Persistent Unemployment –is an underlying driver of the direction in NYC apartment
             rents. We believe it is unlikely for there to be a bottoming and then recovery in
             commercial and residential real estate valuations until unemployment stabilizes. The
             current 10.8% unemployment rate in NYC is likely to be optimistic since this rate is
             lower than the NYC unemployment during the S&L crisis of the 1990s.

         o   Likelihood of rising interest rates in the future – Given the rapid expansion of the money
             supply in the last year, expectations are for interest rates to rise at some point. When they
             do, property valuations should likely decline and expectations for financings costs could
             rise given the risk for inflation. Based on past experience, when rates do rise, mortgage
             spreads are likely to compress somewhat at that time (estimated 50bps-60bps).

         o   Lack of available refinancing capital to fully refinance maturing mortgage obligations-
             given the absence of the shadow banking sector, in the form of the shuttered Commercial
             Mortgage Backed Securities (CMBS) market. REITS are likely best positioned to benefit
             from expected correction in valuations since they can access the public capital markets
             while most property owners are limited to bank financing.

     When distressed properties reach the market, valuations could decline 30% by our estimate,
     based on expectations that cap rates could increase to 10% (the peak level of past down economic
     cycles), from the current 7% level.

     Property owner operating margins are being squeezed, as rents are cut to maintain
     occupancy – According to Stonehenge Partners, in their experience with their portfolio of
     Manhattan rental apartments, building demand remains good. However, demand is quite elastic
     with price, and thus good demand has been achieved via lowering rents 10%-15% on average.
     However revenue declines have stabilized and have begun to show modest improvements.

         o   Vacancy rates average 2%, lower than the 3% earlier in the year. Vacancies are more
             likely in higher end properties or properties in the outer boroughs (i.e. outside

         o   Operating expenses are estimated to be 50%-60% of gross revenues – and should
             continue to rise driven by:

                 •   Rising property taxes - Property and water taxes (approximately 30% of
                     operating expenses), which have been growing at 10%-15% annually in recent
                     years. Properties are taxed at 13.053% of assessed values and are re-evaluated
                     every five years.

                 •   Unionized payroll expenses (30% of operating expenses) are expected to increase
                     materially in 2010 when the primary building service union to all NYC multi-
                     family buildings renegotiates its contract to address an underfunded union
                     pension. The union pension fund has been impacted by investment losses and it is
                     expected that surcharges to building owners will be sought to address this.

                 •   Operating expense relief has been found in persistently low financing costs
                     reflecting low interest rate. Financing costs (13% of operating expenses) remain
                     low, particularly for loans indexed on LIBOR. However more of these loans are
                     approaching either a balloon payment or an amortization phase which is likely to
                     squeeze cash flows further.

Maxim Group LLC                                                                                         3
                                Mid-Cap Banks


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                                          Mid-Cap Banks


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                                                                                                                   Mid-Cap Banks

    Maxim Group LLC Stock Rating System                                                               As of:        12/3/2009
                                                                                            % of Cover age         % of Ratings
                                                                                             Universe            that Firm received
                   Expected Performance*                                                      with Rating           Banking fees
         Buy       Expected total return of 15% or more over next 12 months                      60.4%                 34.5%
        Hold       Expected total return of plus or minus 14% over next 12 months                33.0%                  0.0%
         Sell      Expected total negative return of at least 15% over next 12 months            6.6%                   0.0%
    * Relative to Nasdaq Composite.
    An Unde r Review (UR) rating represents a stock that the Firm has temporarily placed under review due to a material change.

                                      Maxim Group makes a market in Signature Bank (SBNY)

I, Christopher Nolan, attest that the views expressed in this research report accurately reflect my
personal views about the subject security and issuer. Furthermore, no part of my compensation was, is, or
will be directly or indirectly related to the specific recommendation or views expressed in this research
The research analyst(s) primarily responsible for the preparation of this research report have received
compensation based upon various factors, including the firm’s total revenues, a portion of which is
generated by investment banking activities.
Valuation Methods: One or more of the following valuation methods are used by Maxim Group
analysts in making a ratings or price projection: Analysis of companies P/E ratio, price/book ratio,
earnings expectations or sales growth as they relate within an industry group or to the broader market,
enterprise value/sales, Individual sector analysis, sum of the parts analysis and discounted cash flow.
Price Target Risks: Investment risks associated with the achievement of the price target include, but are
not limited to, the company’s failure to achieve our earnings and revenue estimates, unforeseen
macroeconomic and/or industry events that adversely impact demand for the company’s products and
services, product obsolescence, the company’s ability to recruit and retain competent personnel, changes
in investor sentiment regarding the specific company or industry, changing competitive pressures and
adverse market conditions. For a complete discussion of the risk factors that could affect the market price
of the company’s shares, refer to the most recent form 10-Q or 10-K that the company has filed with the

Investment Risks:
    •   Aside from general market and other economic risks, risks particular to Astoria Financial include:
        1) Credit Quality risk; 2) Interest rate risk; 3) Exposure to real estate valuations; 4) Geographic
        concentration; 5) Credit market risk; 6) Regulatory risk; 7)Acquisition risk and dilution risk; and
        8) Operational risk.
    •   Aside from general market and other economic risks, risks particular to New York Community
        Bancorp rating include: 1) loan exposure to clients in metropolitan NYC market; 2) credit quality
        risks; 3) interest rate risks; and 4) regulatory risk. 5) dilution risk 6) acquisition risk
    •   Aside from general market and other economic risks, risks particular to our Signature Bank rating
        include: 1) loan exposure to client in metropolitan NYC market; 2) credit quality risks; 3) interest
        rate risks; 4) equity dilution risk; 5) regulatory risk; and 6) acquisition risk.
    •   Aside from general market and other economic risks, risks particular to our M&T Bank rating
        include: 1) loan exposure to client in metropolitan NYC market; 2) credit quality risks; 3) interest
        rate risks; 4) equity dilution risk; 5) regulatory risk; and 6) acquisition risk.

Maxim Group LLC                                                                                                                       6
                                                                                         Mid-Cap Banks

                                            RISK RATINGS

Risk ratings take into account both fundamental criteria and price volatility.
Speculative –
Fundamental Criteria: This is a risk rating assigned to early-stage companies with minimal to no
revenues, lack of earnings, balance sheet concerns, and/or a short operating history. Accordingly,
fundamental risk is expected to be significantly above the industry.
Price Volatility: Because of the inherent fundamental criteria of the companies falling within this risk
category, the price volatility is expected to be significant with the possibility that the investment could
eventually be worthless.
Speculative stocks may not be suitable for a significant class of individual investors.
High – Fundamental Criteria: This is a risk rating assigned to companies having below-average revenue
and earnings visibility, negative cash flow, and low market cap or public float. Accordingly, fundamental
risk is expected to be above the industry.
Price volatility: The price volatility of companies falling within this category is expected to be above the
High-risk stocks may not be suitable for a significant class of individual investors.
Medium –
Fundamental Criteria: This is a risk rating assigned to companies that may have average revenue and
earnings visibility, positive cash flow, and is fairly liquid.
Accordingly, both price volatility and fundamental risk are expected to approximate the industry average.
Low –
Fundamental Criteria: This is a risk rating assigned to companies that may have above-average revenue
and earnings visibility, positive cash flow, and is fairly liquid.
Accordingly, both price volatility and fundamental risk are expected to be below the industry.


Some companies that Maxim Group LLC follows are emerging growth companies whose securities
typically involve a higher degree of risk and more volatility than the securities of more established
companies. The securities discussed in Maxim Group LLC research reports may not be suitable for some
investors. Investors must make their own determination as to the appropriateness of an investment in any
securities referred to herein, based on their specific investment objectives, financial status and risk
This communication is neither an offer to sell nor a solicitation of an offer to buy any securities
mentioned herein. This publication is confidential for the information of the addressee only and may not
be reproduced in whole or in part, copies circulated, or disclosed to another party, without the prior
written consent of Maxim Group, LLC (“Maxim”).
Information and opinions presented in this report have been obtained or derived from sources believed by
Maxim to be reliable, but Maxim makes no representation as to their accuracy or completeness. Maxim
accepts no liability for loss arising from the use of the material presented in this report, except that this
exclusion of liability does not apply to the extent that such liability arises under specific statutes or
regulations applicable to Maxim. This report is not to be relied upon in substitution for the exercise of
independent judgment. Maxim may have issued, and may in the future issue, other reports that are
inconsistent with, and reach different conclusions from, the information presented in this report. Those
reports reflect the different assumptions, views and analytical methods of the analysts who prepared them
and Maxim is under no obligation to ensure that such other reports are brought to the attention of any
recipient of this report.

Maxim Group LLC                                                                                            7
                                                                                         Mid-Cap Banks

Past performance should not be taken as an indication or guarantee of future performance, and no
representation or warranty, express or implied, is made regarding future performance. Information,
opinions and estimates contained in this report reflect a judgment at its original date of publication by
Maxim and are subject to change without notice. The price, value of and income from any of the
securities mentioned in this report can fall as well as rise. The value of securities is subject to exchange
rate fluctuation that may have a positive or adverse effect on the price or income of such securities.
Investors in securities such as ADRs, the values of which are influenced by currency volatility, effectively
assume this risk. Securities recommended, offered or sold by Maxim: (1) are not insured by the Federal
Deposit Insurance Company; (2) are not deposits or other obligations of any insured depository
institution; and (2) are subject to investment risks, including the possible loss of principal invested.
Indeed, in the case of some investments, the potential losses may exceed the amount of initial investment
and, in such circumstances; you may be required to pay more money to support these losses.

Maxim Group LLC                                                                                           8

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