Signature Bank
Annual Report 2011

Plain-text annual report

2011 AnnuAl R epoRt A FoundAtion Built on SeRvice C o m pa n y P r o f i l e Signature Bank, member FDIC, is a full-service commercial bank with 25 private client offices located throughout the New York metropolitan area. The Bank primarily serves privately owned businesses, their owners and senior managers. Signature Bank offers a broad range of business and personal banking products and services as well as investment, brokerage, asset management and insurance products and services through its subsidiary, Signature Securities Group Corporation, a licensed broker-dealer, investment adviser and member FINRA/SIPC. SignAtuRe BAnk’S 25 new YoRk-AReA pRivAte client BAnking oFFiceS MAnhAttAn 261 Madison Avenue 300 Park Avenue 71 Broadway 565 Fifth Avenue 950 Third Avenue 200 Park Avenue South 1020 Madison Avenue 50 West 57th Street 2 Penn Plaza BRooklYn 26 Court Street 84 Broadway 6321 New Utrecht Avenue QueenS 36-36 33rd Street, Long Island City 78-27 37th Avenue, Jackson Heights 8936 Sutphin Boulevard, Jamaica BRonx 421 Hunts Point Avenue StAten iSlAnd 2066 Hylan Boulevard weStcheSteR 1C Quaker Ridge Road, New Rochelle 360 Hamilton Avenue, White Plains long iSlAnd 1225 Franklin Avenue, Garden City 279 Sunrise Highway, Rockville Centre 68 South Service Road, Melville 923 Broadway, Woodmere 40 Cuttermill Road, Great Neck 100 Jericho Quadrangle, Jericho Since its founding, Signature Bank’s service-based, relationship banking premise has been the hallmark of its success. In 2011, this unrelenting commitment to service led to the Bank’s strengthened market position, strong financial results, expanding private client banking team network, increased recognition among third parties and heightened awareness as one of the nation’s leading financial institutions. Financial Highlights (in thousands) Total assets Total loans Total deposits 2007 2008 2009 2010 2011 $ 5,845,172 7,192,199 9,146,112 2,025,578 3,470,542 4,376,098 11,673,089 14,666,120 6,850,726 5,244,664 4,511,890 5,387,886 7,222,546 9,441,227 11,754,138 Shareholders’ equity 425,756 698,135 803,659 944,547 1,408,116 Net interest income after provision for loan losses Non-interest income Non-interest expense 134,474 168,383 219,680 298,486 8,746 27,645 34,632 42,648 99,062 123,820 149,885 164,896 Income before income taxes 44,158 72,208 104,427 176,238 407,911 42,038 182,724 267,225 Net income available to common shareholders $ 27,279 42,969 50,523 102,051 149,526 (Left to right) Joseph J. DePaolo, President and Chief Executive Officer and Scott A. Shay, Chairman of the Board deposits (in billions) 11.8 9.4 7.2 5.4 $ 12 $ 9.6 $ 7.2 $ 4.8 4.5 $ 2.4 $ 0 07 08 09 YEAR 10 11 2 Service and safety are at the core of our culture. During 2011, the service commitment upon which Signature Bank was built led to another year of record results, solid financial performance and stability. During 2011, deposits grew 24.5 percent, loans expanded 30.6 percent, assets rose 25.6 percent, capital increased 49.1 percent and annual net income was up 46.5 percent.When we built Signature Bank from the ground up, we had the opportunity to create a banking model centered on rela-tionships and unrivaled service. There is no denying that in the world of banking, most institu-tions look to distinguish themselves by tritely claiming they deliver stellar service. However, everyone knows actions speak louder than words. While many say they pride themselves on building relationships, few institutions really make good on this promise. The ability to offer incomparable service is a goal on which so many fail to deliver. At Signature Bank, our actions have been clear since our inception. And, our pledge to provide unparalleled service has always been apparent to the thousands of clients we serve and the hundreds of bankers we call our colleagues. To our ShareholdersSignature Securities Group President and CEO William J. Maguire works on a client investment management proposal with JoAnn Rossano, Group Director and Senior Vice President, at the White Plains office. 2 0 1 1 A N N U A L R E P O R T 3 THE SIGNATURE BANK SECRET TO SUCCESSWe do not view exceptional service as a trend or a fad. In fact, we never promote our service message in any advertising campaigns or plaster it across billboards. We simply view it as the hallmark of our business, the way relationship banking should be conducted. The service platform we created 11 years ago involves the establishment of numerous private client banking teams, each of which serve as a single point of contact for our clients – primarily privately owned busi-nesses, their owners and senior managers. We are completely focused on the relationships our teams forge with their clients. Furthermore, we are highly selec-tive in the teams we bring on board and the clients to whom they cater.We attract some of the metropoli-tan New York area’s most seasoned bankers, many of whom have become frustrated with the bureau-cracy and ever-changing environ-ment found at the mega-banks which dominate today’s banking landscape. This affords Signature Bank an opportunity to recruit veteran bankers and offer them a platform from which to manage their relationships. Our bankers are the “advertise-ment” for Signature Bank through their ability to garner deposits and extend loans.Loans (in billions) 6.9 5.2 4.4 3.5 2.0 07 08 09 YEAR 10 11 $ 7 $ 6 $ 5 $ 4 $ 3 $ 2 $ 1 $ 0 SOLID AS A ROCK Signature Bank continues to outperform despite the challenging environment for the banking industry. Throughout 2011, many circumstances further negatively impacted the global economy, including the tragic tsunami that hit Japan, the debt ceiling crisis, the U.S. debt downgrade by Standard & Poor’s and the European sovereign debt crisis. All of these issues exacerbated economic uncertainty worldwide. Nonetheless, Signature Bank’s performance hit record levels once again. For the year ended December 31, 2011, net income reached a record $149.5 million, or $3.37 diluted earnings per share, an increase of 46.5 percent versus $102.1 million, or $2.46 diluted earn- ings per share, reported in 2010. The dramatic increase During 2011, many negative events occurred, which continued to cloud the global economic landscape. in net income during 2011 was mainly the result of an increase in net interest income, which was positively affected by both core deposit and loan growth. In 2011, deposits rose a record $2.31 billion or 24.5 percent since 2010, reaching $11.75 billion. Core deposits (excluding short-term escrow and brokered deposits) grew a record $2.13 billion, or 24.2 percent. This true, organic growth was achieved without making any acquisitions. Signature Bank’s loan portfolio expanded a record $1.61 billion to $6.85 billion at December 31, 2011, an increase of 30.6 percent. We continue to stay the course as it relates to our pragmatic approach of selectively lending to high-quality borrowers who share strong banking relationships with us. Signature Bank’s capital position, the cornerstone of our model, was further strengthened this past year through strong earnings and another successful public offering in July 2011, where we raised 4 $253.3 million. At year-end 2011, tier 1 leverage, tier 1 risk-based and total risk- based capital ratios were 9.67 percent, 17.08 percent and 18.17 percent, respec- tively. Our strong risk-based capital ratios are reflective of the relatively low-risk profile of the Bank’s sensibly managed balance sheet. Furthermore, the Bank’s tangible common equity ratio remains strong at 9.60 percent. It is the dedication of our Group Directors and private client banking teams that has led to the Bank’s ability to achieve these significant growth levels in both deposits and loans. Group Directors and Senior Vice Presidents Steven J. Tuchler (l.) and Steven N. Kocoris (r.) leave their offices at Signature Bank in Great Neck to head to a client meeting. teams A TEAM EFFORT 78 73 68 56 52 80 60 40 20 0 Signature Bank has secured a sound reputation among veteran bankers eager to join our growing network. We have become a sought-after destina- tion for experienced bankers seeking a platform from which to grow their business and fortify their client relationships. At Signature Bank, these professionals know their purpose here is to sustain and build relationships by offering their banking teams as the client’s single point of contact for all their financial needs. The private client banking team is the source for 07 08 09 YEAR 10 11 whatever services may be relevant to a particular client. The scope of services and levels of commitment to financial care that each of our private client banking teams bring to their clients could not be delivered without the strength and reach of our support and administrative services professionals. They make it possible for our teams to ensure they meet clients’ daily needs. 2 0 1 1 A N N U A L R E P O R T 5 Signature Bank ended the year with 78 private client banking teams headed by 106 Group Directors, all of whom have welcomed the auton- omy and enjoyed the opportunity to nurture client relationships. During 2011, seven teams joined and nine existing groups were expanded through the addition of various banking professionals. We also introduced our 25th private client banking office, marking our ninth in Manhattan. It is impor- tant to note that we are not a retail bank; you won’t find Signature John T. Myszko, Group Director and Senior Vice President, visits with Residential Lending Area Supervisor Dawn Lipiro, at his offices in the Bank’s corporate headquarters where they address a pending client loan. Bank on every corner. Instead, we open offices – mainly on higher floors in larger buildings – in areas where our seasoned bankers have already established a stable, substantial client base. RECOGNIZABLE RESULTS As we continue to gain more traction in the banking marketplace, we are proud that, based on a third-party survey of our colleagues, we were named among Crain’s 2011 Best Places to Work in NYC, where Signature Bank ranked 21 out of 50 and also was the only bank to rank on the 2011 annual list as well as in the past two years. This was truly an honor as Crain’s selected the top 50 best places to work in New York City from among thousands of employers. The commitment of our extremely productive, highly satisfied colleagues has contributed to a remarkable year of recognition for Signature Bank. Our ability to deliver stellar service, to keep depositor safety at the forefront of our banking philosophy, and demonstrate our unyielding capabilities in attracting the New York metro area’s most talented professionals, has contributed to a continually advancing market leadership position. 6 Signature Bank’s commitment to service and single-point-of-contact approach to forging lasting client relationships has reaped solid record financial results and led to significant third-party recognition. In addition to being named by Crain’s as one of the best places to work in New York City, the Bank’s extraordinary 2011 financial performance earned it many other accolades last year, including: • Receiving recognition as the fifth Best Bank in America on Forbes list of the top 100; • Obtaining the number seven slot, its highest rank ever, in the Crain’s New York Business ranking of New York’s Fastest-growing Public Companies; • Making an inaugural appearance on Fortune’s list of 100 Fastest- growing companies, occupying the 69th position; • Being named in both the Best Business Bank (ranked third) and Best Private Bank (ranked second) categories by the New York Law Group Director and Senior Vice President Paul A. Santamaria (l.), George M. Hoffman (c.), Funds Transfer Manager and Alyson L. Stone (r.), Vice President- Corporate Strategy and Assistant to the President, meet at the Bank’s midtown Manhattan office on Madison Avenue and 38th Street, to discuss the electronic banking services offered by Signature Bank. Journal, based on their annual reader opinion poll; and, • Landing on ABA Banking Journal’s list of Banking’s Top Performers, securing the 10th spot because the Bank experienced a 20 percent gain in organic loan growth, one of the highest rates among institutions in 2010. 2 0 1 1 A N N U A L R E P O R T 7 BANKING ON NEW YORK For more than a decade, Signature Bank has served clients across the metropolitan New York area, now with more than 100 Group Directors who call our 25 private client banking offices spanning the five boroughs (extending to Long Island and Westchester) home. We have built a loyal client base by serving the New York area and From their home base in the Melville, Long Island office, Eileen Dignam, Group Director and Vice President (l.), and Susan M. Duggan, Senior Lender and Vice President (c.) discuss new products with Training Specialist Allison Katz (r.). dedicating ourselves to depositor safety and the delivery of unparalleled service. We have grown to a nearly $15 billion bank by staying focused on an area where we know our unsur- passed service is needed and appreciated, and our pledge to deliver is real and recognized. We thank our devoted clients for their confidence in Signature Bank. Our commitment to you and meeting your needs is genuine. We also want to take this opportunity to express our gratitude to all our colleagues for deliver- ing on the service commitment we assure our clients; the Board of Directors, whose guidance has helped distinguish Signature Bank in a crowded banking marketplace; and, our investors for their valuable support. Respectfully, Scott A. Shay Chairman of the Board Joseph J. DePaolo President and Chief Executive Officer 8 UNITED STATES FEDERAL DEPOSIT INSURANCE CORPORATION WASHINGTON, D.C. 20429 FORM 10 K ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934 For the fiscal year ended December 31, 2011 Or TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURI- TIES EXCHANGE ACT OF 1934 For the transition period from to FDIC Certificate Number 57053 SIGNATURE BANK (Exact name of registrant as specified in its charter) NEW YORK (State or other jurisdiction of incorporation or organization) 565 Fifth Avenue, New York, New York (Address of principal executive offices) 13-4149421 (I.R.S. Employer Identification No.) 10017 (Zip Code) Registrant’s telephone number, including area code: (646) 822-1500 Securities registered pursuant to Section 12(b) of the Act: Title of each class Name of each exchange on which registered Common Stock, $0.01 par value NASDAQ Global Select Market Securities registered pursuant to Section 12(g) of the Act: NONE Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act. £Yes T No Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act. T Yes £ No Indicate by check mark whether the registrant (1) has filed all reports required to be filed by Section 13 or 15(d) of the Securities Exchange Act of 1934 during the preceding 12 months (or for such shorter period that the registrant was required to file such reports), and (2) has been subject to such filing requirements for the past 90 days. T Yes £ No Indicate by check mark whether the registrant has submitted electronically and posted on its corporate Web site, if any, every Interactive Data File required to be submitted and posted pursuant to Rule 405 of Regulation S-T (§232.405 of this chapter) during the preceding 12 months (or for such shorter period that the registrant was required to submit and post such files). Yes £ No £ Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K (§229.405 of this chapter) is not contained herein, and will not be contained, to the best of registrant’s knowledge, in definitive proxy or information statements incorporated by reference in Part III of this Form 10 K or any amendment to this Form 10 K. T Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, a non-accelerated filer, or a smaller reporting company. See definition of “large accelerated filer,” “accelerated filer” and “smaller reporting company” in Rule 12b 2 of the Exchange Act. (Check one): Large accelerated filer T Accelerated filer £ Non-accelerated filer £ Smaller reporting company £ Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b 2 of the Exchange Act). £ Yes T No The aggregate market value of the voting stock held by non-affiliates of the registrant, based on the closing sales price of the registrant’s Common Stock as quoted on the NASDAQ Global Select Market on June 30, 2011 was $2.30 billion. As of February 27 2012, the Registrant had outstanding 46,182,040 shares of Common Stock. Portions of the registrant’s definitive Proxy Statement for Annual Meeting of Stockholders to be held April 25, 2012. (Part III) DOCUMENTS INCORPORATED BY REFERENCE SIGNATURE BANK ANNUAL REPORT ON FORM 10-K FOR THE FISCAL YEAR ENDED DECEMBER 31, 2011 INDEX PART I Item 1. Item 1A. Item 1B. Item 2. Item 3. Item 4. Business . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Risk Factors . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Unresolved Staff Comments . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Properties . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Legal Proceedings . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . (Removed and Reserved) . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART II Item 5. Market for Registrant’s Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Item 6. Item 7. Item 7A. Item 8. Item 9. Item 9A. Item 9B. Item 10. Item 11. Item 12. Item 13. Selected Financial Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Management’s Discussion and Analysis of Financial Condition and Results of Operations . Quantitative and Qualitative Disclosures About Market Risk . . . . . . . . . . . . . . . . . . . . . . . . . . Financial Statements and Supplementary Data . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Changes in and Disagreements with Accountants on Accounting and Financial Disclosure . Controls and Procedures . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Other Information . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART III Directors, Executive Officers and Corporate Governance . . . . . . . . . . . . . . . . . . . . . . . . . . . . Executive Compensation . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Certain Relationships and Related Transactions, and Director Independence . . . . . . . . . . . . Item 14. Principal Accountant Fees and Services . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . PART IV Item 15. Exhibits, Financial Statement Schedules . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . SIGNATURES . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Index to Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Page 5 21 34 35 36 36 37 39 41 77 78 78 78 81 81 81 81 81 81 82 84 F-1 2 PRIVATE SECURITIES LITIGATION REFORM ACT SAFE HARBOR STATEMENT This Annual Report on Form 10-K and oral statements made from time-to-time by our representatives contain “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995. You should not place undue reliance on those statements because they are subject to numerous risks and uncertainties relating to our operations and business environment, all of which are difficult to predict and many are beyond our control. Forward-looking statements include information concerning our possible or assumed future results of operations, including descriptions of our business strategy, expectations, beliefs, projections, anticipated events or trends, growth prospects, financial performance, and similar expressions concerning matters that are not historical facts. These statements often include words such as “may,” “believe,” “expect,” “anticipate,” “potential,” “opportunity,” “intend,” “plan,” “estimate,” “could,” “project,” “seek,” “should,” “will,” or “would,” or the negative of these words and phrases or similar words and phrases. All forward-looking statements may be impacted by a number of risks and uncertainties. These statements are based on assumptions that we have made in light of our experience in the industry as well as our perception of historical trends, current conditions, expected future developments and other factors we believe are appropriate under the circumstances including, without limitation, those related to: • earnings growth; • revenue growth; • deposit growth, including short-term escrow deposits and off-balance sheet deposits; • future acquisitions; • performance, credit quality and liquidity of investments made by us, including our investments in certain mortgage- backed and similar securities; • loan origination volume; • the interest rate environment; • non-interest income levels, including fees from product sales; • credit performance on loans made by us; • monetary and fiscal policies of the U.S. Government, including policies of the U.S. Treasury and the Board of Governors of the Federal Reserve System; • our ability to maintain, generate and/or raise capital; • changes in the regulatory environment and government intervention in the banking industry; including the impact of the Dodd-Frank Wall Street Reform and Consumer Protection Act; • Federal Deposit Insurance Corporation insurance assessments; • margins on sales or securitizations of loans; • market share; • expense levels; • hiring of new private client banking teams; • results from new business initiatives; • other business operations and strategies; and • impact of new accounting pronouncements. As you read and consider forward-looking statements, you should understand that these statements are not guarantees of performance or results. They involve risks, uncertainties and assumptions and can change as a result of many possible events or factors, not all of which are known to us or in our control. Although we believe that these forward-looking statements are based on reasonable assumptions, beliefs and expectations, if a change occurs or our beliefs, assumptions or expectations were incorrect, our business, financial condition, liquidity or results of operations may vary materially from those expressed in our forward-looking statements. You should be aware that many factors could affect our actual financial results or results of operations and could cause actual results to differ materially from those in the forward-looking statements. See “Part I, Item 1A. – Risk Factors” for a discussion of the most significant risks that we face, including, without limitation, the following factors: • disruption and volatility in global financial markets; • difficult market conditions adversely affecting our industry; • our inability to successfully implement our business strategy; • our vulnerability to changes in interest rates; 3 • competition with many larger financial institutions which have substantially greater financial and other resources than we have; • government intervention in the banking industry, new legislation and government regulation; • illiquid market conditions and downgrades in credit ratings; • continued adverse developments in the residential mortgage market; • inability of U.S. agencies or U.S. government-sponsored enterprises to pay or to guarantee payments on their securities in which we invest; • material risks involved in commercial lending; • a downturn in the economy of the New York metropolitan area; • under-collateralization of our loan portfolio due to a material decline in the value of real estate; • risks associated with our loan portfolio growth; • our failure to effectively manage our credit risk; • lack of seasoning of our loan portfolio and mortgage loans underlying our investment portfolio; • our allowance for loan losses may not be sufficient to absorb actual losses; • our reliance on the Federal Home Loan Bank of New York for secondary and contingent liquidity sources; • our dependence upon key personnel; • our inability to acquire suitable client relationship groups or manage our growth; • our charter documents and regulatory limitations may delay or prevent our acquisition by a third party; • curtailment of government guaranteed loan programs could affect our SBA business; • our extensive reliance on outsourcing to provide cost-effective operational support; • system failures or breaches of our network security; • decreases in trading volumes or prices; • potential responsibility for environmental claims; • our inability to raise additional funding needed for our operations; • misconduct of employees or their failure to abide by regulatory requirements; • fraudulent or negligent acts on the part of our clients or third parties; • failure of our brokerage clients to meet their margin requirements; • acts of war or terrorism; • changes in the federal or state tax laws; • changes in accounting standards or interpretation in new or existing standards; • increases in FDIC insurance premiums; and • regulatory net capital requirements that constrain our brokerage business. See “Part I, Item 1A. – Risk Factors” for a full discussion of these risks. You should keep in mind that any forward-looking statement made by us speaks only as of the date on which we make it. New risks and uncertainties come up from time to time, and it is impossible for us to predict these events or how they may affect us. We have no duty to, and do not intend to, update or revise the forward-looking statements after the date on which they are made. In light of these risks and uncertainties, you should keep in mind that any forward-looking statement made in this document or elsewhere might not reflect actual results. 4 ITEM 1. BUSINESS PART I In this annual report filed on Form 10-K, except where the context otherwise requires, the “Bank,” the “Company,” “Signature,” “we,” “us,” and “our” refer to Signature Bank and its subsidiaries, including Signature Securities Group Corporation (“Signature Securities”). Introduction We are a New York-based full-service commercial bank with 25 private client offices located in the New York metropolitan area serving the needs of privately-owned business clients and their owners and senior managers. We offer a wide variety of business and personal banking products and services through the Bank as well as investment, brokerage, asset management and insurance products and services through our wholly-owned subsidiary, Signature Securities Group Corporation (“Signature Securities”), a licensed broker-dealer and investment adviser. Through Signature Securities, we also purchase, securitize and sell the guaranteed portions of U.S. Small Business Administration (“SBA”) loans. For financial information by segment, see Note 21 to the “Notes to Consolidated Financial Statements,” included elsewhere in this annual report on Form 10-K. Signature Bank’s Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all amendments to those reports, Proxy Statement for its Annual Meeting of Stockholders and Annual Report to Stockholders are made available, free of charge, on our website at www.signatureny.com as soon as reasonably practicable after such reports have been filed with or furnished to the Federal Deposit Insurance Corporation (“FDIC”). You may also obtain any materials that we file with the FDIC at the Federal Deposit Insurance Corporation’s offices located at 550 17th Street N.W., Washington, DC 20429. We do not file reports with the Securities and Exchange Commission. Since commencing operations in May 2001, we have grown to $14.67 billion in assets, $11.75 billion in deposits, $6.85 billion in loans, $1.41 billion in equity capital and $1.67 billion in other assets under management as of December 31, 2011. We intend to continue our growth and maintain our position as a premier relationship-based financial services organization in the New York metropolitan area. This growth will be guided by our Chairman and senior management team who have extensive experience developing, managing and growing financial service organizations. Our Chairman, Scott Shay, has been a Managing Director of Ranieri & Co. Inc. since its formation in 1988. Most of our senior management, including our President and Chief Executive Officer, Joseph DePaolo, and our Vice-Chairman, John Tamberlane, were formerly senior officers of Republic National Bank of New York, an institution that successfully employed a deposit gathering strategy and private client focus similar to ours. Recent Highlights Common Stock Offering On July 11, 2011, we completed a public offering of 4,715,000 shares of our common stock. The net proceeds from this offering added approximately $253.3 million to our shareholders’ equity and will be used to support private client banking team growth, fund the opening of new offices and permit us to originate and retain loans of a size and type that will allow us to accommodate the needs of our targeted clients. Dodd-Frank Act The Dodd-Frank Wall Street Reform and Consumer Protection Act (the “Dodd-Frank Act”), signed into law on July 21, 2010, makes extensive changes to the laws regulating financial services firms. The Dodd-Frank Act also requires significant rulemaking and mandates multiple studies that have resulted and are likely to continue to result in additional legislative and regulatory actions that will impact the operations of the Bank. Under the Dodd-Frank Act, federal bank regulatory agencies are required to draft and implement enhanced supervision, examination and capital and liquidity standards for depository institutions and their holding 5 companies. The capital provisions of the Dodd-Frank Act include, among other things, changes to capital, leverage limits and limitations on the use of hybrid capital instruments. The Dodd-Frank Act also imposes new restrictions on investments and other activities by depository institutions, particularly with respect to derivatives activities and proprietary trading. The Bank has not historically made significant investments in derivatives or engaged in proprietary trading. The Dodd-Frank Act also gives federal bank regulatory agencies, such as the Federal Reserve and the FDIC, additional latitude to monitor the systemic safety of the financial system and take responsive action, which could include imposing restrictions on the business activities of the Bank. In addition, the Dodd-Frank Act authorizes the federal regulators to impose various new assessments and fees, which could increase the Bank’s operational costs. In February 2011, the FDIC approved a new regulation to implement provisions of the Dodd-Frank Act that require deposit insurance assessments to be calculated based on assets rather than the amount of domestic deposits held by insured institutions. Those regulations took effect on April 1, 2011 and are intended, among other things, to increase the aggregate share of assessments paid by institutions with assets of $10 billion or more. All federal prohibitions on the ability of financial institutions to pay interest on demand deposit accounts were repealed as part of the Dodd-Frank Act. As a result, beginning on July 21, 2011, financial institutions could commence offering interest on demand deposits to compete for clients. As of December 31, 2011, $3.15 billion, or 26.8%, of our total deposits were held in non-interest bearing demand deposit accounts. Our interest expense will increase and our net interest margin will decrease if we have to offer higher rates of interest than we currently offer on demand deposits to attract additional clients or maintain current clients, which could have a material adverse effect on our business, financial condition and results of operations. Thus far, the change has not had a meaningful effect on our business. The Dodd-Frank Act also established the new federal Consumer Financial Protection Bureau (“CFPB”). This agency will be responsible for interpreting and enforcing a broad range of consumer protection laws governing the provision of deposit accounts and the making of loans, including the regulation of mortgage lending and servicing. This includes laws such as the Equal Credit Opportunity Act, the Truth-in-Lending Act and the Truth in Savings Act. Additionally the CFPB will have the authority to take enforcement action against banks and other financial services companies that fail to satisfy the standards imposed by it. The Dodd-Frank Act also permits states to adopt stricter consumer protection laws and state attorneys general to enforce consumer protection rules issued by the CFPB. As a result of these aspects of the Dodd-Frank Act, the Bank will be operating in a consumer compliance environment that will be far less certain. Therefore, the Bank is likely to incur additional costs related to consumer protection compliance, including but not limited to potential costs associated with CFPB regulatory and enforcement actions and consumer-oriented litigation, which is likely to increase as a result of the consumer protection provisions of the Dodd-Frank Act. At this time, it is difficult to predict the full extent to which the Dodd-Frank Act or the resulting regulations will impact the Bank’s business. However, compliance with certain of these new laws and regulations could result in restraints on, and additional costs to, our business. It is also difficult to predict the impact the Dodd-Frank Act will have on our competitors and on the financial services industry as a whole. In addition to the recent legislative and regulatory initiatives described above, competitive and industry factors could also adversely impact our results, the cost of our operations, our financial condition and our liquidity. Core Deposit Growth From December 31, 2010 through December 31, 2011, our deposits grew $2.31 billion, or 24.5%, to $11.75 billion. Deposits at December 31, 2011 include $57.8 million of brokered deposits and approximately $774.0 million of short-term escrow deposits, which due to their nature and as expected, have been or will be released in early 2012. At year end 2010, deposits included $26.7 million of brokered deposits and approximately $619.4 million of short-term escrow deposits. Core deposits, which exclude brokered deposits and short-term escrow deposits, increased $2.13 billion, or 24.2%, for the year. This growth in our core deposits can be attributed to the addition of new private client banking groups, who assist us in growing our client base, and additional deposits by our current clients. We primarily focus our deposit gathering efforts in the greater New York metropolitan area market with money center banks, regional banks and community banks as our primary competitors. We distinguish ourselves from competitors by focusing on our target market: privately-owned businesses and their owners and senior managers. This niche approach, coupled with our relationship-banking model, provides our clients with a personalized service, which we believe gives us a competitive advantage. Our deposit mix has remained favorable, with non-interest-bearing and NOW deposits accounting for 32.3% of our total deposits and time deposits accounting for only 7.6% of our total deposits as of December 31, 2011. Our average cost for total 6 deposits was 0.84% for the year ended December 31, 2011 and 0.76% for the three months ended December 31, 2011. Escrow Deposits At December 31, 2011 and 2010, approximately $774.0 million and $619.4 million, respectively, of short-term escrow deposits were included in the Bank’s deposits. We have developed a core competency in catering to the needs of law firms, claims administrators, accounting firms, and title companies, which allows us to obtain from our clients short-term escrow deposits. Strategic Hires During 2011, we added seven new private client banking groups and 13 new banking group directors to increase our network of seasoned banking professionals. Our full-time equivalent number of employees grew from 660 to 720 during 2011. Private Client Banking Groups and Offices As of December 31, 2011, we had 78 private client banking groups and 106 banking group directors throughout the New York metropolitan area. With the on-going consolidation of financial institutions in our marketplace and market segmentation by our competitors, we continue to actively recruit experienced private client banking groups with established client relationships that fit our niche market of privately-owned businesses, their owners and their senior managers. Our typical group director joins us with 20 years of experience in financial services, a seasoned book of business and an established team of two to four additional professionals to assist with business development and client services. Each additional private client group brings client relationships that allow us to grow our core deposits as well as expand our lending opportunities. We are actively recruiting several additional private client banking groups that we believe will fit our strategy and enhance our franchise. To facilitate our growth, we opened one additional private client office during 2011 located in Manhattan, New York. We currently operate 25 private client offices located in the New York metropolitan area. While our strategy does not call for us to have an expansive office presence, we will continue to add offices to meet the needs of the private client banking groups that we recruit. Our Business Strategy We intend to increase our presence as a premier relationship-based financial services organization serving the needs of privately-owned business clients, their owners and senior managers in the New York metropolitan area by continuing to: Focus on our niche market of privately-owned businesses, their owners and their senior managers We generally target closely held commercial clients with revenues of less than $50 million and fewer than 1,000 employees. Our business clients are representative of the New York metropolitan area economy and include real estate owners/operators, real estate management companies, law firms, accounting firms, entertainment business managers, medical professionals, retail establishments, money management firms and not-for-profit philanthropic organizations. We also target the owners and senior management of these businesses who typically have a net worth of between $500,000 and $20 million. Provide our clients a wide array of high quality banking, brokerage and insurance products and services through our private client group structure and a seamless financial services solution We offer a broad array of financial products and services with a seamless financial services solution through our private client group structure. Most of our competitors that sell banking products as well as investment and insurance products do so based on a “silo” approach. In this approach, different sales people from different profit centers within the bank, brokerage firm or insurance company separately offer their particular products to the client. This approach creates client confusion as to who is servicing the relationship. Because no single relationship manager considers all of the needs of a client in the “silo” approach, some products and services may not be presented at all to the client. We market our banking, investment and insurance services seamlessly, thus avoiding the “silo” approach of many of our competitors in the New York metropolitan area. Our cash management, investment and insurance products 7 and services are presented to clients by the private client group professional but provided or underwritten by others. Our business is built around banking and investment private client groups. We believe that our ability to hire and retain top-performing relationship group directors is our major competitive advantage. Our group directors have primary responsibility for attracting client relationships and, on an on-going basis, through them and their groups, servicing those relationships. Our group directors are experienced financial service professionals who come from the following disciplines: private banking, middle market banking, high-end retail banking, investment and insurance and institutional brokerage. Our group directors each have their own private client team (typically two to four professionals) who assists the group director in business development and client service. Recruit experienced, talented and motivated private client group directors who are top producers and who believe in our banking model A key to our success in developing a relationship-based bank is our ability to recruit and retain experienced and motivated financial services professionals. We recruit group directors and private client groups who we believe are top performers. While recruitment channels differ and our recruitment efforts are largely opportunistic in nature, the continuing merger and acquisition activity in the New York financial services marketplace provides an opportunity to selectively target and recruit qualified groups. We believe the current market to be a favorable environment for locating and recruiting qualified private client groups. Our experience has been that such displacement and change leads select private client groups to smaller, less bureaucratic organizations. Offer progressive incentive-based compensation that rewards private client groups for developing their business and retaining their clients Our private client group variable compensation model adds to the foundation for our relationship-based banking discipline. A key part of our strategy for growing our business is the progressive incentive-based compensation that we employ to help us retain our group directors while ensuring that they continue to develop their business and retain their clients. Under our private client group variable compensation model, annual bonuses are paid to members of the client relationship team based upon the profit generated from their business. In order to mitigate the inherent risk in our incentive-based compensation model, we have in place an internal control structure that includes segregation of duties. For example, the underwriting and ultimate approval of any loan is performed by loan officers who are separate from the private client groups and report to our Chief Credit Officer. Maintain a flat organization structure that allows our clients and group directors to interface with, and our group directors to report directly to, senior management Another key element of our strategy is our organizational structure. We operate with a flat organizational and reporting structure, which allows our group directors to interface with, and report directly to, senior management. More importantly, it gives our clients direct access to senior management. Develop and maintain operations support that is client-centric and service oriented We have made a significant investment in our infrastructure, including our support staff. We have centralized many of our critical operations, such as finance, information technology, client services, cash management services, loan administration and human resources. Although we have centralized many of our operations, we have located some functions within the private client offices so they are closer to the group directors and our clients. For example, most of our private client offices have a senior lender on location, who is part of our credit group, to assist the private client groups with the lending process. In addition, most of our private client offices have an investment group director or group that provides brokerage and/or insurance services, as necessary. We believe that our existing infrastructure (physical and systems infrastructure, as well as people) can accommodate additional growth without substantial additional support area personnel or significant spending on technology and operations in the medium term. Be committed to a sound risk management process while focusing on profitability Risk management is an important element of our business. We evaluate the inherent risks that affect our business, including interest rate risk, credit risk, operational risk, regulatory risk, and reputation risk. We have a Director of Risk Management whose responsibility is the oversight of our risk management processes. Additionally, members of our senior management group have significant experience in risk management. In addition, they have extensive backgrounds in credit, operations, finance and auditing. We have put internal 8 controls in place that help to mitigate the risks that affect our business. In addition, we have policies and procedures that further help mitigate risk and regulatory requirements that mandate that we evaluate, test and opine on the effectiveness of internal controls. No system of internal control or policies and procedures will ever totally eliminate risk, however, we believe that our risk management processes will help keep our risks to a manageable level. Maintain an appropriate balance between cost control, incentive compensation and business expansion initiatives We have established an internal approval process for capital and operating expenses. We maintain cost control practices and policies to increase efficiency of operations. A key expense for financial service companies is compensation. Controlling this expense is an important element in keeping overall expenses down. A member of senior management and our President and Chief Executive Officer must approve all new hires. Our group directors and their groups receive base salaries and benefits; however, a significant portion of their compensation is variable and based upon the profit generated from the business they create. This variable compensation model helps us control expenses as employees do not receive variable compensation unless revenue is generated. Virtually all expenditures (both current and capital) in excess of certain thresholds must be approved by a member of senior management, and are reviewed and approved by our Purchasing and Capital Expenditures Committee, which includes our Chief Operating Officer and our Chief Financial Officer. We make extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large-bank operations. We focus on our financial services business and have outsourced many of our key banking and brokerage systems to third-party providers. This has several advantages for an institution like ours, including the ability to cost-effectively utilize the latest technology to better serve, and stay focused on, the needs of our clients. Some of our key outsourcing partners include Fidelity Information Services and National Financial Services (the brokerage and investments systems division of Fidelity Investments). We maintain management oversight of these providers. Each of these providers was the subject of a due diligence investigation prior to their selection and continues to be reviewed on an on-going basis. Historical Development We were incorporated as a New York State-chartered bank in September 2000. On April 5, 2001, our date of inception, we received approval to commence operations from the New York State Banking Department (known as the New York State Department of Financial Services as of October 3, 2011). Since commencing operations on May 1, 2011, the following subsequent historical developments have occurred in relation to our ownership and capital structure: • We completed our initial public offering in March 2004 and a follow-on offering in September 2004. Our common stock trades on the Nasdaq National Market under the symbol “SBNY.” • • • • • • In March 2005, Bank Hapoalim B.M. sold its controlling stake in us in a secondary offering. After the offering, Bank Hapoalim beneficially owned 5.7% of our common stock on a fully diluted basis. Bank Hapoalim no longer owns any shares of our stock. In September 2008, we completed a public offering of 5,400,000 shares of our common stock generating net proceeds of $148.1 million. In December 2008, we issued 120,000 shares of senior preferred stock (with an aggregate liquidation preference of $120.0 million) and a warrant to purchase 595,829 common shares to the U.S. Treasury in the Troubled Asset Relief Program Capital Purchase Program (the “TARP Capital Purchase Program”), for an aggregate purchase price of $120.0 million. In light of the restrictions of the American Recovery and Reinvestment Act of 2009, on March 31, 2009, we repurchased the 120,000 shares of preferred stock we issued to the U.S. Treasury for $120.0 million plus accrued and unpaid dividends of $767,000. In June 2009, we completed a public offering of 5,175,000 shares of our common stock generating net proceeds of $127.3 million. In March 2010, the U.S. Treasury sold, in a public offering, a warrant to purchase 595,829 shares of our common stock that was received from us in the TARP Capital Purchase Program. 9 • In July 2011, we completed a public offering of 4,715,000 shares of our common stock generating net proceeds of approximately $253.3 million. Signature Securities Signature Securities is a registered broker-dealer in securities under the Securities Exchange Act of 1934 (the “Exchange Act”) and a member of the National Association of Securities Dealers, Inc. (“NASD”). It formally opened for full business operations on May 1, 2001. Signature Securities provides our clients with comprehensive investment, brokerage, wealth management, and other non-banking financial products and services. Signature Securities delivers these products and services to its clients through experienced investment group directors, located in our private client offices, who work directly with our banking group directors to bring these services to clients. Products and Services We offer a wide variety of deposit, escrow deposit, credit, cash management, investment and insurance products and services to our clients. At December 31, 2011, we maintained approximately 78,000 deposit accounts, 6,900 investment accounts, 8,600 loan accounts and 14,300 client relationships. Business Clients We offer a full range of products and services oriented to the needs of our business clients, including: • Deposit products such as non-interest-bearing checking accounts, money market accounts and time deposits; • Escrow deposit services; • Cash management services; • Commercial loans and lines of credit for working capital and to finance internal growth, acquisitions and leveraged buyouts; • Permanent real estate loans; • Letters of credit; • Investment products to help better manage idle cash balances, including money market mutual funds and short-term money market instruments; • Business retirement accounts such as 401(k) plans; and • Business insurance products, including group health and group life products. Personal Clients We offer a full range of products and services oriented to the needs of our high net worth personal clients, including: • Interest-bearing and non-interest-bearing checking accounts, with optional features such as debit/ATM cards and overdraft protection and, for our top clients, rebates of certain charges, including ATM fees; • Money market accounts and money market mutual funds; • Time deposits; • Personal loans, both secured and unsecured; • Mortgages, home equity loans and credit card accounts; • Investment and asset management services; and • Personal insurance products, including health, life and disability. Deposit Products The market for deposits continues to be very competitive. We primarily focus our deposit gathering efforts in the greater New York metropolitan area with money center banks, regional banks and community banks as our primary competitors. We distinguish ourselves from competitors by focusing on our target market: privately-owned businesses and their owners and senior managers. This niche approach, coupled with our relationship-banking model, provides our clients with a personalized service, which we believe gives us a competitive advantage. 10 We offer a variety of deposit products to our clients at interest rates that are competitive with other banks. Our business deposit products include commercial checking accounts, money market accounts, escrow deposit accounts, lockbox accounts, cash concentration accounts and other cash management products. Our personal deposit products include checking accounts, money market accounts and certificates of deposit. We also allow our personal and business deposit clients to access their accounts, transfer funds, pay bills and perform other account functions over the internet and through ATM machines. At December 31, 2011, we maintained approximately 78,000 deposit accounts representing $11.70 billion in client deposits, excluding brokered deposits. The following table presents the mix of our deposits and deposit products as of December 31, 2011 and 2010. (dollars in thousands) Amount Percentage Amount Percentage December 31, 2011 2010 Personal demand (1) Business demand (1) Rent security Personal NOW Business NOW and interest-bearing demand Personal money market Business money market Personal time deposits Business time deposits Brokered time deposits Total Demand (1) NOW and interest-bearing demand Money market Time deposits Brokered time deposits Total Personal Business Brokered time deposits Total (1) Non-interest bearing. Lending Activities $ 331,268 2,817,168 75,139 37,094 606,036 2,314,369 4,677,424 492,060 345,782 57,798 11,754,138 3,148,436 643,130 7,066,932 837,842 57,798 11,754,138 3,174,791 8,521,549 57,798 11,754,138 $ $ $ $ $ 2.82% 23.97% 0.64% 0.32% 5.16% 19.68% 39.79% 4.19% 2.94% 0.49% 100.00% 26.79% 5.48% 60.11% 7.13% 0.49% 100.00% 27.01% 72.50% 0.49% 100.00% 286,166 2,163,802 47,062 70,215 630,336 1,654,597 3,660,446 501,296 400,641 26,666 9,441,227 2,449,968 700,551 5,362,105 901,937 26,666 9,441,227 2,512,274 6,902,287 26,666 9,441,227 3.03% 22.92% 0.50% 0.74% 6.68% 17.53% 38.77% 5.31% 4.24% 0.28% 100.00% 25.95% 7.42% 56.80% 9.55% 0.28% 100.00% 26.61% 73.11% 0.28% 100.00% Our traditional commercial and industrial lending is generally limited to existing clients with whom we have or expect to have deposit and/or brokerage relationships in order to assist in monitoring and controlling credit risk. We target our lending to privately-owned businesses, their owners and senior managers, generally high net worth individuals who meet our credit standards. The credit standards are set by the Credit Committee of our Board of Directors (the “Credit Committee”) with the assistance of our Chief Credit Officer, who is charged with ensuring that credit standards are met by loans in our portfolio. In addition, we have a credit authorization policy under which no single individual is authorized to approve a loan regardless of dollar amount. Smaller loans may be approved by concurring authorized officers. Larger loans require the approval of the Credit Committee. Our largest loan category requires the approval of our Board of Directors. Our credit standards for commercial borrowers reference numerous criteria with respect to the borrower, including historical and projected financial information, the strength of management, acceptable collateral and associated advance rates, and market conditions and trends in the borrower’s industry. In addition, prospective loans are analyzed based on current industry concentrations in our loan portfolio to prevent an unacceptable concentration of loans in any particular industry. We believe our credit standards are similar to the standards generally employed by large nationwide banks in the markets we serve. We seek to differentiate ourselves from our competitors by focusing on and 11 aggressively marketing to our core clients and accommodating, to the extent permitted by our credit standards, their individual needs. We generally limit unsecured lending for consumer loans to private banking clients who we believe demonstrate ample net worth, liquidity and repayment capacity. We make loans that are appropriately collateralized under our credit standards. Approximately 97% of our funded loans are secured by collateral. Unsecured loans are typically made to individuals with substantial net worth. Commercial and Industrial Loans Our commercial and industrial (“C&I”) loan portfolio is comprised of lines of credit for working capital and term loans to finance equipment, company-owned real estate and other business assets, along with commercial overdrafts. Our lines of credit for working capital are generally renewed on an annual basis and our term loans generally have terms of two to five years. Our lines of credit and term loans typically have floating interest rates, and as of December 31, 2011, approximately 61% of our outstanding C&I loans were variable rate loans. C&I loans can be subject to risk factors unique to the business of each client. In order to mitigate these risks and better serve our clients, we seek to gain an understanding of the business of each client and the reliability of their cash flow, so that we can place appropriate value on collateral taken and structure the loan to maintain collateral values at appropriate levels. In analyzing credit risk, we generally focus on the business experience of our borrowers’ management. We prefer to lend to borrowers with an established track record of loan repayment and predictable growth and cash flow. We also rely on the experience of our bankers and their relationships with our clients to aid our understanding of the client and its business. Our lines of credit typically are limited to a percentage of the value of the assets securing the line. Lines of credit are generally reviewed annually and are typically supported by accounts receivable, inventory and equipment. Depending on the risk profile of the borrower, we may require periodic aging of receivables, as well as borrowing base certificates representing current levels of inventory, equipment, and accounts receivable. Our term loans are typically also secured by the assets of our clients’ businesses. Commercial borrowers are required to provide updated personal and corporate financial statements at least annually. At December 31, 2011, funded C&I loans totaled approximately 15% of our total funded loans. Loans extended to borrowers within the services industries include loans to finance working capital and equipment, as well as loans to finance investment and owner-occupied real estate. 12 The following table presents information regarding the distribution of our C&I loans among select industries in which we had the largest concentration of loans outstanding at December 31, 2011. “Other Industries” include a diverse range of industries, as determined by Sector Information Code (“SIC”), including service-oriented firms that provide introductions to new client relationships and private households. Industry by SIC Designation (dollars in thousands) Taxi Medallions Real Estate and Real Estate Management Wholesale Trade Manufacturing Special Trade Contractors Legal Services Retail Trade Financial Services Health Services Membership Organizations Professional Services Building and Construction Contractors Business Services Recreational Services Motion Pictures Educational Services Transportation Services Other Industries Total December 31, 2011 Loan Amount 294,668 $ 201,761 97,195 55,456 43,777 43,277 37,300 31,354 25,554 24,283 23,775 18,936 14,636 9,820 7,981 6,041 4,923 158,068 1,098,805 $ Percentage 26.82% 18.36% 8.85% 5.05% 3.98% 3.94% 3.39% 2.85% 2.33% 2.21% 2.16% 1.72% 1.33% 0.89% 0.73% 0.55% 0.45% 14.39% 100.00% Real Estate Loans Our real estate loan portfolio includes loans secured by commercial and residential properties. We also provide temporary financing for commercial and residential property. Our permanent real estate loans generally have fixed terms of five years. We generally avoid longer term loans for commercial real estate held for investment. Our permanent real estate loans have both floating and fixed rates. Depending on the financial status of the borrower, we may require periodic appraisals of the property to verify the ongoing adequacy of the collateral. At December 31, 2011, funded real estate loans totaled approximately $5.74 billion, representing approximately 80% of our total funded loans. 13 The following table shows the distribution of our real estate loans as of December 31, 2011 by collateral type: Loans Secured by Real Estate (dollars in thousands) Multi-family residential property Commercial property 1-4 family residential property Home equity lines of credit Construction and land Total December 31, 2011 Loan Amount Percentage $ $ 3,003,428 2,218,053 259,418 198,375 63,775 5,743,049 52.30% 38.62% 4.52% 3.45% 1.11% 100.00% We occasionally make personal residential real estate loans. These loans consist of first and second mortgage loans for residential properties. These loans are typically made to high net worth individuals as part of our private client services. We generally do not retain long-term, fixed rate residential real estate loans in our portfolio due to interest rate and collateral risks and low levels of profitability. We do not consider personal residential real estate loans a core part of our business. Substantially all of the collateral for our real estate loans is located within the New York metropolitan area. As a result, our financial condition and results of operations may be affected by changes in the economy and the real estate market of the New York metropolitan area. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an increase in our allowance for loan losses. Letters of Credit We issue standby or performance letters of credit, and can service the international needs of our clients through correspondent banks. At December 31, 2011, our commitments under letters of credit totaled approximately $235.7 million. Consumer Loans Our personal loan portfolio consists of personal lines of credit and loans to acquire personal assets. Our personal lines of credit generally have terms of one year and our term loans usually have terms of three to five years. Our lines of credit typically have floating interest rates. If the financial situation of the client is sufficient, we will grant unsecured lines of credit. We also examine the personal liquidity of our individual borrowers, in some cases requiring agreements to maintain a minimum level of liquidity, to insure that the borrower has sufficient liquidity to repay the loan. Due to low levels of profitability, interest rate risks and collateral risks, we do not consider secured personal loans, such as automobile loans, a core part of our business. At December 31, 2011, our consumer loans totaled $11.8 million, representing less than 1% of our total funded loans. Investment and Asset Management Products and Services Investment and asset management products and services are provided through our subsidiary, Signature Securities. Signature Securities is a licensed broker-dealer and is a member of the NASD and the Securities Investor Protection Corporation (“SIPC”). Signature Securities is an introducing firm and, as such, clears its trades through National Financial Services, Inc., a wholly-owned subsidiary of Fidelity Investments. Signature Securities is also registered as an investment adviser in New York, New Jersey, Pennsylvania and Florida. Our investment group directors work with our clients to define objectives, goals and strategies for their investment portfolios, whether our clients are looking for a relationship based provider or are looking for assistance with a particular transaction. We offer a wide array of asset management and investment products, including the ability to purchase and sell all types of individual securities such as equities, options, fixed income securities, mutual funds and annuities. We offer transactional, “cash management” type brokerage accounts with check writing and daily sweep capabilities. We offer our clients an asset management program whereby we work with our clients to tailor their asset allocation 14 according to their risk profile and then invest the client’s assets either directly with a select group of high quality money managers, no load mutual funds or a combination of both. We contract with a third party to perform investment manager due diligence for us on these money managers and mutual funds. We have entered into an agreement and strategic alliance with American Stock Transfer & Trust Company and utilize this firm to provide our corporate and personal clients with trust, custody and estate planning products and services. We offer no proprietary products or services. We do not perform and we do not provide our clients with our own branded investment research. Instead, we have contracted with a number of third-party research providers and are able to provide our clients with traditional Wall Street research from a number of sources. We also offer retirement products such as individual retirement accounts (“IRAs”) and administrative services for retirement vehicles such as pension, profit sharing, and 401(k) plans to our clients. These products are not proprietary products. Signature Securities offers wealth management services to our high net worth personal clients. Together with our client and their other professional advisors, including attorneys and certified public accountants, we develop a sophisticated financial plan that can include estate planning, business succession planning, asset protection, investment management, family office advisory services, bill payment, art and collectible advisory services and concentrated stock services. SBA Loans and Pools We are an active participant in the SBA loan and SBA pool secondary market by purchasing, securitizing, and selling the guaranteed portions of SBA Section 7(a) loans. Most SBA Section 7(a) loans have adjustable rates and float at a spread to the prime rate and reset monthly or quarterly. SBA loans consist of a guaranteed portion of the loan and an un-guaranteed balance, which typically represents 10% of the original balance that is retained by the originating lender. The guaranteed portions of SBA loans are backed by the full faith and credit of the U.S. government and, therefore, have no credit risk and carry a 0% risk weight for capital purposes. At December 31, 2011, we had $392.0 million in SBA loans held for sale, representing approximately 5% of our total funded loans, compared to $382.2 million at December 31, 2010. The increased inventory has been used to fill increased client demand for this product. Signature Securities acts as an agent and as a consultant to the Bank on the purchase, sale and assembly of SBA loans and pools. Signature Securities is one of the largest SBA pool assemblers in the United States. The primary business of the group is to be an active market maker in the SBA loan and pool secondary market by purchasing, securitizing and selling the government guaranteed portions of the SBA loans. Signature Bank is approved by the SBA as a pool assembler and is approved by the FDIC to engage in government securities dealer activities. We purchase the guaranteed portion of SBA loans from various SBA lender clients. Once purchased, we typically warehouse the guaranteed loan for approximately 30 to 180 days. From this warehouse, we aggregate like SBA loans by similar characteristics into pools for securitization and sale to the secondary market. In order to meet the SBA’s rate requirement, we may strip excess servicing from loans with different coupons to create a pool at a common rate. This has resulted in the creation of two assets: a par pool and excess servicing strips. Excess servicing represents the portion of the coupon stripped from a loan. At December 31, 2011, the carrying amount of our SBA excess servicing strip assets was $70.1 million. Colson Services Corp. is the government appointed fiscal and transfer agent for the SBA’s Secondary Market Program. As the designated servicer, it provides transaction processing, record keeping and loan servicing functions, including document review and custody, payment collection and disbursement, and data collection and exchange for us. Insurance Services We offer our business and private clients a wide array of individual and group insurance products, including health, life, disability and long-term care insurance products through our subsidiary, Signature Securities. We do not underwrite insurance policies. We only act as an agent in offering insurance products and services underwritten by insurers that we believe are the best for our clients in each category. 15 Competition There is significant competition among commercial banking institutions in the New York metropolitan area. We compete with other bank holding companies, national and state-chartered commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerage firms, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders, and other financial institutions. Many of these competitors have substantially greater financial resources, lending limits and larger office networks than we do and are able to offer a broader range of products and services than we can. Because we compete against larger institutions, our failure to compete effectively for deposit, loan, and other clients in our markets could cause us to lose market share, slow our growth rate and may have an adverse effect on our financial condition and results of operations. The market for banking and brokerage services is extremely competitive and allows consumers to access financial products and compare interest rates and services from numerous financial institutions located across the United States. As a result, clients of all financial institutions, including those within our target market, are sensitive to competitive interest rate levels and services. Our future success in attracting and retaining client deposits depends, in part, on our ability to offer competitive rates and services. Our clients are particularly attracted to the level of personalized service we can provide. Our business could be impaired if our clients believe other banks provide better service or if they come to believe that higher rates are more important to them than better service. Finally, over the past three years there has been significant government intervention in the banking industry, including equity investments, liquidity facilities and guarantees. These actions have changed and have the potential to change the competitive landscape significantly. For example, clients may view some of our competitors as “too big to fail” and such competitors may thereby benefit from an implicit U.S. government guarantee beyond those provided to all banks and their clients. In addition, some of these government programs have, or may have, the ability to give rise to new competitors. For instance, the FDIC has introduced a bidding process for institutions that have been or will be placed into receivership by federal or state regulators. This process is open to existing financial institutions, as well as groups without pre-existing operations. The impact of ongoing government intervention is difficult to predict and could adversely affect our competitive standing and profitability. The New York Market Substantially all of our business is located in the New York metropolitan area. We believe the New York metropolitan area economy presents an attractive opportunity to further grow an independent financial services company oriented to the needs of the New York metropolitan area economic marketplace. The New York Metropolitan Statistical Area (“MSA”) is, by far, the largest market in the United States for bank deposits. The MSA of New York, Long Island and Northern New Jersey is – with approximately $1.1 trillion in total deposits, as of June 30, 2011 – more than two and a half times larger than the second largest MSA in the U.S. (Philadelphia, Camden, Wilmington). The New York MSA is also home to the largest number of businesses with fewer than 500 employees in the nation. The economy of the New York metropolitan area has diversified substantially over the past several decades and includes a greater variety of industries such as services, technology and real estate. The New York metropolitan area financial services marketplace is served by many large, diverse financial services companies, including large, multi-national financial services companies, regional banks and brokerage firms, mid- size commercial banks and brokerage firms and mutual and stock savings banks. As of December 31, 2011, we operated 25 private client offices located in the New York metropolitan area. These 25 offices housed a total of 78 private client banking groups. As part of the continuing development of our business strategy, we expect to open additional offices in 2012. We believe these private client offices will allow us to expand our current operations in the New York metropolitan area. Information Technology and System Security We rely on industry leading technology companies to deliver software, support and disaster recovery services. Our core banking application software (DDA, Savings, Compliance, General Ledger, Teller, and Internet Banking) is provided by Fidelity Information Services. Our core brokerage systems are provided by and run at our clearing firm, National Financial Services, a subsidiary of Fidelity Financial Services Corp. Our personnel connect to the 16 system via both dedicated and Internet based connections to Fidelity Financial Services in Boston, Massachusetts. Our information technology environment uses Fidelity Information Services’ technology center in Little Rock, Arkansas. This technology center includes dedicated “lights out” computer raised-floor space, as well as designated office space for information technology support personnel. A combination of backup power generation, uninterruptible power systems and 24 hour a day monitoring of the facility perimeters, hardware, operating system software, network connectivity, and building environmental systems minimizes the risk of any serious outage or security breach. Employees As of December 31, 2011, we had 720 full-time equivalent employees, 437 of whom were officers. None of our employees is represented by a collective bargaining agreement. We consider our relations with our employees to be good. Regulation and Supervision As a state-chartered bank, the deposits of which are insured by the FDIC, we and our subsidiaries are subject to a comprehensive system of bank supervision administered by federal and state banking agencies. Because we are chartered under the laws of the State of New York, the New York State Department of Financial Services is our primary regulator. The FDIC is our primary federal banking regulator because we are not a member of the Federal Reserve System. These regulators oversee our compliance with applicable federal and New York laws and regulations governing our activities, operations, and business. The primary purpose of the U.S. system of bank supervision is to ensure the safety and soundness of banks in order to protect depositors, the FDIC insurance fund, and the financial system generally. It is not primarily intended to protect the interest of shareholders. Thus, if we were to violate banking law and regulations, including engaging in unsafe or unsound practices, we could be subject to enforcement actions and other sanctions that could be detrimental to shareholders. The federal government has recently implemented and announced programs designed to bolster the capital of U.S. banks. Some of these programs have, and any future programs may, impose additional rules and regulations on us, some of which may affect the way we conduct our business and/or limit our ability to compete effectively. See “Risk Factors – We are subject to significant government regulation.” Safety and Soundness Regulation New York law governs our authority to engage in deposit-taking, lending, investing, and other activities. New York law also imposes restrictions intended to ensure our safety and soundness, including limitations on the amount of money we can lend to a single borrower (generally, 15% of capital; 25% if the loan is secured by certain types of collateral), prohibitions on engaging in activities such as investing in equity securities or non-financial commodities, and prohibitions on making loans secured by our own capital stock. We are subject to comprehensive capital adequacy requirements intended to protect against losses that we may incur. FDIC regulations require that we maintain a minimum ratio of qualifying total capital to total risk-weighted assets (including off-balance sheet items) of 8.0%, at least one-half of which must be in the form of Tier 1 capital, and a ratio of Tier 1 capital to total risk-weighted assets of 4.0%. Tier 1 capital is generally defined as the sum of core capital elements less goodwill and certain other deductions. Core capital includes common shareholders’ equity, non-cumulative perpetual preferred stock, and minority interests in equity accounts of consolidated subsidiaries. Supplementary capital, which qualifies as Tier 2 capital and counts towards total capital subject to certain limits, includes allowances for loan losses, perpetual preferred stock, subordinated debt, and certain hybrid instruments. At December 31, 2011, our total risk-based capital ratio was 18.17%, and our Tier 1 risk-based capital ratio was 17.08%. We are also required to maintain a minimum leverage capital ratio - the ratio of Tier 1 capital (net of intangibles) to adjusted total assets. Banks that have received the highest rating of five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a leverage capital ratio of at 17 least 3.0%. All other institutions must maintain a leverage capital ratio of 4.0%. At December 31, 2011, our leverage capital ratio was 9.67%. In addition, payments of dividends on our common stock may be subject to the prior approval of the New York State Department of Financial Services, and the FDIC. Under New York law, we are prohibited from declaring a dividend so long as there is any impairment of our capital stock. In addition, we would be required to obtain the approval of the New York State Department of Financial Services if the total of all our dividends declared in any calendar year would exceed the total of our net profits for that year combined with retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. We would also be required to obtain the approval of the FDIC prior to declaring a dividend if after paying the dividend we would be undercapitalized, significantly undercapitalized, or critically undercapitalized. The federal banking regulators are currently working on significant revisions to the capital adequacy regulations to implement the new capital accord being drafted by the Basel Committee on Bank Supervision. We cannot at this time predict whether the new requirements will apply to us or the effect that they may have on our business. However, if the new capital adequacy regulations were to lower the capital requirements for large money center banks but not for smaller banks like Signature Bank, we could be put at a competitive disadvantage. The federal banking agencies have also adopted guidelines establishing safety and soundness standards for all insured depository institutions. The safety and soundness guidelines relate to our internal controls, information systems, internal audit systems, loan underwriting and documentation, compensation, and interest rate exposure. The standards assist the federal banking agencies with early identification and resolution of problems at insured depository institutions. If we were to fail to meet these standards, the FDIC could require us to submit a compliance plan and take enforcement action if an acceptable compliance plan were not submitted. Prompt Corrective Action and Enforcement Powers We are also subject to FDIC regulations that apply to every FDIC-insured commercial bank and thrift institution a system of mandatory and discretionary supervisory actions, and which generally become more severe as the capital levels of an individual institution decline. The regulations establish five capital categories for purposes of determining our treatment under these prompt corrective action provisions. We would be categorized as “well capitalized” under the regulations if (i) we have a total risk-based capital ratio of at least 10.0%; (ii) we have a Tier 1 risk-based capital ratio of at least 6.0%; (iii) we have a leverage capital ratio of at least 5.0%; and (iv) we are not subject to any written agreement, order, capital directive, or prompt corrective action directive issued by the FDIC to meet and maintain a specific capital level. We would be categorized as “adequately capitalized” if (i) we have a total risk-based capital ratio of at least 8.0%; (ii) we have a Tier 1 risk-based capital ratio of at least 4.0%; and (iii) we have a leverage capital ratio of at least 4.0% (3.0% if we are rated in the highest supervisory category). We would be categorized as “undercapitalized” if (i) we have a total risk-based capital ratio that is less than 8.0%; (ii) we have a Tier 1 risk-based capital ratio that is less than 4.0%; or (iii) we have a leverage capital ratio that is less than 4.0% (3.0% if we are rated in the highest supervisory category). We would be categorized as “significantly undercapitalized” if (i) we have a total risk-based capital ratio that is less than 6.0%; (ii) we have a Tier 1 risk-based capital ratio that is less than 3.0%; or (iii) we have a leverage capital ratio that is less than 3.0%. We would be categorized as “critically undercapitalized” and subject to provisions mandating appointment of a conservator or receiver if we have a ratio of “tangible equity” to total assets that is 2.0% or less. “Tangible equity” generally includes core capital plus cumulative perpetual preferred stock. At December 31, 2011, our total risk-based capital ratio was 18.17%; our Tier 1 risk-based capital ratio was 17.08%; and our leverage capital ratio was 9.67%. Each of these ratios exceeds the minimum ratio established for a “well capitalized” institution. In addition to measures taken under the prompt corrective action provisions, insured banks may be subject to potential actions by the federal regulators for unsafe or unsound practices in conducting their businesses or for violations of any law, rule, regulation or any condition imposed in writing by the agency or any written agreement 18 with the agency. Enforcement actions may include the issuance of cease and desist orders, the imposition of civil money penalties, the issuance of directives to increase capital, formal and informal agreements, or removal and prohibition orders against “institution-affiliated” parties, and termination of insurance of deposits. The New York State Department of Financial Services also has broad powers to enforce compliance with New York laws and regulations. The New York State Department of Financial Services and/or the FDIC examine us periodically for safety and soundness and for compliance with applicable laws. Other Regulatory Requirements We are subject to certain requirements and reporting obligations under the Community Reinvestment Act (“CRA”). The CRA generally requires federal banking agencies to evaluate the record of a financial institution in meeting the credit needs of its local communities, including low- and moderate-income neighborhoods. The CRA further requires the agencies to take into account our record of meeting community credit needs when evaluating applications for, among other things, new branches or mergers. The performance standards and examination frequency of CRA evaluations differ depending on whether a bank falls into the small or large bank categories. The FDIC’s most recent CRA examination concluded as of August 24, 2009 and the New York State Department of Financial Services’ most recent examination concluded on December 31, 2008. Signature Bank was evaluated under the large bank standards. In measuring our compliance with these CRA obligations, the regulators rely on a performance-based evaluation system that bases our CRA rating on our actual lending service and investment performance. In connection with their assessments of CRA performance, the FDIC and NYSBD assign a rating of “outstanding,” “satisfactory,” “needs to improve,” or “substantial noncompliance.” Signature Bank received a “satisfactory” CRA Assessment Rating from both regulatory agencies. Federal and state banking laws also require us to take steps to protect consumers. Bank regulatory agencies are increasingly focusing attention on compliance with consumer protection laws and regulations. These laws include disclosures regarding truth in lending, truth in savings, funds availability, privacy protection under the Gramm-Leach-Bliley Act of 1999, and prohibitions on discrimination in the provision of banking services. In addition, the newly-established CFPB will be responsible for interpreting and enforcing a broad range of consumer protection laws governing the provision of deposit accounts and the making of loans, including the regulation of mortgage lending and servicing. We have incurred and may in the future incur additional costs in complying with these requirements. We must also comply with the anti-money laundering provisions of the Bank Secrecy Act, as amended by the USA PATRIOT Act, and implementing regulations issued by the FDIC and the U.S. Department of the Treasury. As a result, we must obtain and maintain certain records when opening accounts, monitor account activity for suspicious transactions, impose a heightened level of review on private banking accounts opened by non-U.S. persons and, when necessary, make certain reports to law enforcement or regulatory officials that are designed to assist in the detection and prevention of money laundering and terrorist financing activities. To this end, we are also required to maintain an anti-money laundering compliance program that includes policies, procedures, and internal controls; the appointment of an anti-money laundering compliance officer; an internal training program; and internal audits. Under FDIC regulations, we are required to pay premiums to the Bank Insurance Fund to insure our deposit accounts. The FDIC utilizes a risk-based premium system in which an institution pays premiums for deposit insurance on the institution’s average consolidated total assets minus average tangible equity. For large insured depository institutions, generally defined as those with at least $10 billion in total assets, the assessment rate schedules combine regulatory ratings and financial measures into two scorecards, one for most large insured depository institutions and another for highly complex insured depository institutions, to calculate assessment rates. A highly complex institution is generally defined as an insured depository institution with more than $50 billion in total assets that is controlled by a parent company with more than $500 billion in total assets. Under the assessment rate schedules, the total base assessment rates range from two and one-half to forty-five basis points. We must maintain reserves on transaction accounts. The maintenance of reserves increases our cost of funds because reserves must generally be maintained in cash or non-interest-bearing balances maintained directly or indirectly with a Federal Reserve Bank. The Riegle-Neal Interstate Banking and Branching Efficiency Act of 1994 regulates interstate banking activities by establishing a framework for nationwide interstate banking and branching. This interstate banking and branching authority generally permits a bank in one state to merge with a bank in another unless the state prohibits all out-of- 19 state banks from doing so and permits a bank in one state to establish de novo branches in another state in which it does not maintain a branch, if that state expressly permits all out-of-state banks to establish branches. The Gramm-Leach-Bliley Act of 1999 eliminated most of the barriers to affiliations among banks, securities firms, insurance companies, and other financial companies previously imposed under federal banking laws if certain criteria are satisfied. Certain subsidiaries of well-capitalized and well-managed banks may be treated as “financial subsidiaries,” which are generally permitted to engage in activities that are financial in nature, including securities underwriting, dealing, and market making; sponsoring mutual funds and investment companies; and activities that the Federal Reserve has determined to be closely related to banking. Signature Securities is registered as a broker-dealer with and subject to supervision by the SEC. The SEC is the federal agency primarily responsible for the regulation of broker-dealers. Signature Securities is also subject to regulation by one of the brokerage industry’s self-regulatory organizations, the Financial Industry Regulatory Authority (“FINRA”). As a registered broker-dealer, Signature Securities is subject to the SEC’s uniform net capital rule. The purpose of the net capital rule is to require broker-dealers to have at all times enough liquid assets to satisfy promptly the claims of clients if the broker-dealer goes out of business. If Signature Securities fails to maintain the required net capital, the SEC and NASD may impose regulatory sanctions including suspension or revocation of its broker-dealer license. A change in the net capital rules, the imposition of new rules, or any unusually large charge against Signature Securities’ net capital could limit its operations. As a subsidiary of Signature Bank, Signature Securities is also subject to regulation and supervision by the New York State Department of Financial Services. Signature Securities currently is permitted to act as a broker and as a dealer in certain bank eligible securities. Signature Securities is also subject to state insurance regulation. In July 2004, Signature Securities received approval from the New York State Banking Department and the New York State Department of Insurance (collectively known as the New York State Department of Financial Services as of October 3, 2011) to act as an agent in the sale of insurance products. Signature Securities’ insurance activities are subject to extensive regulation under the laws of the various states where its clients are located. The applicable laws and regulations vary from state to state, and, in every state of the United States, an insurance broker or agent is required to have a license from that state. These licenses may be denied or revoked by the appropriate governmental agency for various reasons, including the violation of state regulations and conviction for crimes. Change in Control The approval of the New York State Banking Board is required before any person may acquire “control” of a banking institution, which includes Signature Bank and any company controlling Signature Bank. “Control” is defined as the possession, directly or indirectly, of the power to direct or cause the direction of management and policies of a banking institution through ownership of stock or otherwise and is presumed to exist if, among other things, any company owns, controls, or holds the power to vote 10% or more of the voting stock of a banking institution. As a result, any person or company that seeks to acquire 10% or more of our outstanding common stock must obtain prior regulatory approval. In addition to the New York requirements, the Bank Holding Company Act prohibits a company from, directly or indirectly, acquiring 25% or more (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise directing the management or policies of our company without prior application to and the approval of the Federal Reserve. Moreover, under the Change in Bank Control Act, any individual who intends to acquire 10% or more of any class of our voting stock or otherwise obtain control over us could be required to provide prior notice to and obtain the non-objection of the FDIC. 20 ITEM 1A. RISK FACTORS If any of the following risks actually occur, our business, financial condition or operating results could be materially adversely affected. Additional risks and uncertainties not presently known to us or that we currently deem immaterial may also impair our business operations. As a result, we cannot predict every risk factor, nor can we assess the impact of all of the risk factors on our businesses or to the extent to which any factor, or combination of factors, may impact our financial condition and results of operation. Risks Relating to Our Business Current disruption and volatility in global financial markets might continue and the federal government has and may continue to take measures to intervene. Since late 2007, global financial markets have experienced periods of extraordinary disruption and volatility following adverse changes in the global economy and, in particular, the credit markets. The federal government has taken significant measures in response to these events, such as enactment of the Emergency Economic Stabilization Act of 2008 and other regulatory actions applicable to financial institutions. We cannot predict the federal government’s responses to any further dislocation and instability and potential future government responses and changes in law or regulation, may affect our business, results of operations and financial conditions. Recently, economic conditions in Europe have become increasingly uncertain, particularly with respect to the sovereign debt of certain countries within the European Union. Although we are not directly exposed to risk associated with European sovereign debt and are not materially exposed to risk associated with European non- sovereign debt, we do hold a material amount of corporate debt of U.S. financial institutions that have material exposure to European sovereign and non-sovereign debt. As such, further deterioration of the economic conditions in Europe could have a material adverse effect on the issuers of corporate debt that we hold. If such an effect were to negatively impact the ability of such issuers to pay their debts, it could have a material adverse effect on our results of operations and financial condition. Difficult market conditions have adversely affected our industry. Dramatic declines in the housing market over the past four years, together with falling home prices, increasing foreclosures, unemployment and under-employment, have negatively impacted the credit performance of mortgage loans and resulted in significant write-downs of asset values by financial institutions. The market for commercial loans (including commercial and industrial loans and loans secured by commercial real estate) and multi-family mortgage loans has also been adversely affected. A worsening of these conditions could exacerbate the adverse effects of these difficult market conditions on us. In particular, we may face the following risks in connection with these events: • Commercial loans (including commercial and industrial loans and loans secured by commercial real estate) and multi-family mortgage loans constitute a substantial portion of our loan activity and loan portfolio. If the difficult market conditions that we have faced over the last four years continue, losses on such loans could increase significantly, which could adversely affect our financial condition and results of operations. • Market developments may affect confidence levels and may cause declines in credit usage and adverse changes in payment patterns, causing increases in delinquencies and default rates, which we expect would impact our provision for loan losses. • The process we use to estimate losses inherent in our credit exposure requires difficult, subjective, and complex judgments, including forecasts of economic conditions and how these economic predictions might impair the ability of our borrowers to repay their loans, which may no longer be capable of accurate estimation which may, in turn, impact the reliability of the process. We may be unable to successfully implement our business strategy. We intend to continue to pursue our strategy for growth. In order to execute this strategy successfully, we must, among other things: • assess market conditions for growth; • build our client base; 21 • maintain credit quality; • properly manage risks, including operational risks, credit risks and interest rate risks; • attract sufficient core deposits to fund our anticipated loan growth; • identify and attract new banking group directors; • identify and pursue suitable opportunities for opening new banking locations; and • maintain sufficient capital to satisfy regulatory requirements. Failure to manage our growth effectively could have a material adverse effect on our business, future prospects, financial condition or results of operations and could adversely affect our ability to successfully implement our growth strategy. Our operations are significantly affected by interest rate levels and we are especially vulnerable to changes in interest rates. We incur interest rate risk. Our income and cash flows and the value of our assets depend to a great extent on the difference between the interest rates we earn on interest-earning assets, such as loans and investment securities, and the interest rates we pay on interest-bearing liabilities such as deposits and borrowings. These rates are highly sensitive to many factors which are beyond our control, including general economic conditions and policies of various governmental and regulatory agencies, in particular, the Federal Reserve. Changes in monetary policy, including changes in interest rates, significantly influence the interest we earn on our loans and investment securities and the amount of interest we pay on deposits. In addition, such changes can significantly affect our ability to originate loans and obtain deposits and our costs in doing so. If the rate of interest we pay on our deposits and other borrowings increases more than the rate of interest we earn on our loans and other investments, our net interest income and, therefore, our earnings could be materially adversely affected. Our earnings could also be materially adversely affected if the interest rates on our loans and other investments fall more quickly than those on our deposits and other borrowings. Furthermore, an increase in interest rates may negatively affect the market value of securities in our investment portfolio. Our fixed-rate securities, generally, are more negatively affected by these increases. A reduction in the market value of our portfolio will increase the unrealized loss position of our available-for-sale investments. Any of these events could materially adversely affect our results of operations or financial condition. We compete with many larger financial institutions which have substantially greater financial and other resources than we have. There is significant competition among commercial banking institutions in the New York metropolitan area. We compete with bank holding companies, national and state-chartered commercial banks, savings and loan associations, consumer finance companies, credit unions, securities brokerage firms, insurance companies, mortgage banking companies, money market mutual funds, asset-based non-bank lenders, and other financial institutions. Many of these competitors have substantially greater financial resources, lending limits and larger office networks than we do, and are able to offer a broader range of products and services than we can. Because we compete against larger institutions, our failure to compete effectively for deposit, loan and other clients in our markets could cause us to lose market share or slow our growth rate and could have a material adverse effect on our financial condition and results of operations. The market for banking and brokerage services is extremely competitive and allows consumers to access financial products and compare interest rates and services from numerous financial institutions located across the United States. As a result, clients of all financial institutions, including those within our target market, are sensitive to competitive interest rate levels and services. Our future success in attracting and retaining client deposits depends, in part, on our ability to offer competitive rates and services. Our clients are particularly attracted to the level of personalized service we can provide. Our business could be impaired if our clients believe other banks provide better service or if they come to believe that higher rates are more important to them than better service. In addition, the financial services industry is undergoing rapid technological changes, with frequent introductions of new technology-driven products and services. In addition to improving the ability to serve clients, the effective use of technology increases efficiency and enables financial institutions to reduce costs. In addition, these technological advancements have made it possible for non-financial institutions to offer products and services that have traditionally been offered by financial institutions. Our future success will depend, in part, upon our ability to address the needs of our clients by using technology, including the use of the Internet, to provide products and 22 services that will satisfy client demands for convenience, as well as to create additional efficiencies in our operations. Because many of our competitors have substantially greater resources to invest in technological improvements than we do, these institutions could pose a significant competitive threat to us. Government intervention in the banking industry has the potential to change the competitive landscape. There has been significant government intervention in the banking industry recently, including equity investments, liquidity facilities and guarantees. Given the recent state of the global economy, it is possible that the government will take further steps to intervene in the banking industry. These actions have changed and have the potential to further change the competitive landscape significantly. For example, clients may view some of our competitors as being “too big to fail” and such competitors may thereby benefit from an implicit U.S. government guarantee beyond that provided to banks generally. Any such intervention could adversely affect our competitive standing and profitability. In addition, certain government programs introduced during the economic crisis may give rise to new competitors. For instance, the FDIC has introduced a bidding process for institutions that have been or will be placed into receivership by federal or state regulators. This process is open to existing financial institutions, as well as groups without pre-existing operations. This program and others like it that exist now or that may be developed in the future could give rise to a significant number of new competitors, which could have a material adverse effect on our business and results of operations. We are vulnerable to downgrades in credit ratings for securities within our investment portfolio. Although over 97% of our portfolio of investment securities was rated investment grade as of December 31, 2011, we remain exposed to potential investment rating downgrades by credit rating agencies of the issuers and guarantors of securities in our investment portfolio. A significant volume of downgrades would negatively impact the fair value of our securities portfolio, resulting in a potential increase in the unrealized loss in our investment portfolio, which could negatively affect our earnings. Rating downgrades of securities below investment grade level and other events may result in impairment of such securities, requiring recognition of the credit component of the other-than-temporary impairment as a charge to current earnings. We are vulnerable to illiquid market conditions, resulting in potential significant declines in the fair value of our investment portfolio. In cases of illiquid or dislocated marketplaces, there may not be an available market for certain securities in our portfolio. For example, mortgage-related assets have experienced, and likely to continue to experience, periods of illiquidity, caused by, among other things, an absence of a willing buyer or an established market for these assets, or legal or contractual restrictions on sale. In addition, recent market conditions have created dislocations in the market for bank-collateralized pooled trust preferred securities and limited other securities in which we invest. Continued adverse market conditions, including continued bank failures, could result in a significant decline in the fair value of these securities. We have in the past, and depending on the probability of a near-term market recovery, may in the future be required to recognize the credit component of the additional other-than-temporary impairments as a charge to current earnings resulting from the decline in the fair value of these securities. We primarily invest in mortgage-backed obligations and such obligations have been, and are likely to continue to be, impacted by market dislocations, declining home values and prepayment risk, which may lead to volatility in cash flow and market risk and declines in the value of our investment portfolio. Our investment portfolio largely consists of mortgage-backed obligations primarily secured by pools of mortgages on single-family residences. The value of mortgage-backed obligations in our investment portfolio may fluctuate for several reasons, including (i) delinquencies and defaults on the mortgages underlying such obligations, due in part to high unemployment rates, (ii) increases in interest rates resulting from expiration of the fixed rate portion of adjustable rate mortgages (“ARMs”), (iii) falling home prices, (iv) lack of a liquid market for such obligations, (v) uncertainties in respect of government-sponsored enterprises such as the Federal National Mortgage Association (“Fannie Mae”) or the Federal Home Loan Mortgage Corporation (“Freddie Mac”), which guarantee such obligations, and (vi) the expiration of government stimulus initiatives. Home values have declined significantly over the last four years. Although home prices appear to have leveled off, if the value of homes were to further materially decline, the fair value of the mortgage-backed obligations in which we invest may also decline. Any such decline in the fair value of mortgage-backed obligations, or perceived market uncertainty about their fair value, could adversely affect our financial position and results of operations. 23 In addition, when we acquire a mortgage-backed security, we anticipate that the underlying mortgages will prepay at a projected rate, thereby generating an expected yield. Prepayment rates generally increase as interest rates fall and decrease when rates rise, but changes in prepayment rates are difficult to predict. In light of historically low interest rates, many of our mortgage-backed securities have a higher interest rate than prevailing market rates, resulting in a premium purchase price. In accordance with applicable accounting standards, we amortize the premium over the expected life of the mortgage-backed security. If the mortgage loans securing the mortgage-backed security prepay more rapidly than anticipated, we would have to amortize the premium on an accelerated basis, which would thereby adversely affect our profitability. Continued adverse developments in the residential mortgage market may adversely affect the value of our investment portfolio. Over the last four years, the residential mortgage market in the United States has experienced a variety of difficulties resulting from changed economic conditions, including increased unemployment rates, heightened defaults, credit losses and liquidity concerns. These disruptions have adversely affected the performance and fair value of many of the types of financial instruments in which we invest and may continue to do so. Many residential mortgage-backed securities have been downgraded by rating agencies over the past four years, and rating agencies may further downgrade these securities in the future if conditions do not improve. As a result of these difficulties and changed economic conditions, many companies operating in the mortgage sector have failed and others are facing serious operating and financial challenges. While the Federal Reserve has taken certain actions in an effort to ameliorate the current market conditions, its efforts may be ineffective. As a result of these factors, among others, the market for these securities may be adversely affected for a significant period of time. Adverse conditions in the residential mortgage market have also negatively impacted other sectors in which the issuers of securities in which we invest operate, which has adversely affected, and may continue to adversely affect, the fair value of such securities, including private collateralized mortgage obligations and bank- collateralized pooled trust preferred securities, in our investment portfolio. If the U.S. agencies or U.S. government-sponsored enterprises were unable to pay or to guarantee payments on their securities in which we invest, our results of operations would be adversely affected. A large portion of our investment portfolio consists of mortgage-backed securities and collateralized mortgage obligations issued or guaranteed by Fannie Mae or Freddie Mac and debentures issued by the Federal Home Loan Banks, Fannie Mae, and Freddie Mac. Fannie Mae, Freddie Mac, and the Federal Home Loan Banks are U.S. government-sponsored enterprises but their guarantees and debt obligations are not backed by the full faith and credit of the United States. The economic crisis, especially as it relates to the residential mortgage market, adversely affected the financial results and stock values of Fannie Mae and Freddie Mac and resulted in the value of the debt securities issued or guaranteed by Fannie Mae and Freddie Mac becoming unstable and relatively illiquid compared to prior periods. Fannie Mae and Freddie Mac have reported substantial losses in recent years and continue to experience significant difficulties stemming from recent market disruptions, including significant increases in credit-related expenses and credit losses. If Fannie Mae and Freddie Mac continue to suffer significant losses and their stock values continue to decline, investors may perceive these entities as financially unstable, which may decrease the liquidity of debt securities issued or guaranteed by them, further exacerbate declines in the fair value of such securities, threaten such entities’ financial stability, and adversely affect their ability to honor their respective guarantees and debt obligations. Further, any actual or perceived financial challenges at either Fannie Mae or Freddie Mac could cause rating agencies to downgrade the corporate credit ratings of Fannie Mae or Freddie Mac. Moody’s Investor Services (“Moody’s”) Bank Financial Strength Rating (“BFSR”), measures the likelihood that a financial institution will require financial assistance. In 2008, Fannie Mae’s and Freddie Mac’s BFSRs were downgraded substantially. While both the Federal Reserve and the federal regulator of Fannie Mae and Freddie Mac have taken actions to back the safety and soundness of these entities and to improve liquidity in the financial markets, there is still much concern in the marketplace about these entities. In July 2008, the U.S. Congress enacted a law granting the U.S. Treasury Department the authority to extend additional credit to Fannie Mae and Freddie Mac in order to prevent their failure and creating the Federal Housing Finance Agency to regulate the government-sponsored enterprises. On September 7, 2008, the U.S. Treasury Department announced that the U.S. government would place Fannie Mae and Freddie Mac into conservatorship, purchase senior preferred equity shares in each entity, establish a new secured lending credit facility available to both entities and purchase mortgage-backed securities of Fannie Mae and Freddie Mac. On August 8, 2011, Standard and Poor’s downgraded the credit rating of Fannie Mae and Freddie Mac citing the downgrade of the federal government’s 24 AAA status, and there is no guarantee that these entities will not suffer further downgrades and negative results in the future. Should the U.S. government contain, reduce or eliminate support for the financial stability of Fannie Mae, Freddie Mac and the Federal Home Loan Banks, the ability for those entities to operate as independent entities is questionable. Any failure by Fannie Mae, Freddie Mac, or the Federal Home Loan Banks to honor their guarantees of mortgage-backed securities, debt or other obligations will have severe ramifications for the capital markets and financial industry. Any failure by Fannie Mae, Freddie Mac, or the Federal Home Loan Banks to pay principal or interest on their mortgage guarantee and debentures when due could also materially adversely affect our results of operations and financial condition. In February 2011, the U.S. Treasury released a proposal to gradually dissolve Fannie Mae and Freddie Mac and reduce the government’s involvement in the mortgage system. We are unable to predict whether this or another proposal will be adopted, and, if so, what the effect of such proposal may be. There are material risks involved in commercial lending that could adversely affect our business. Commercial loans represented approximately 90% of our total loan portfolio as of December 31, 2011 and primarily consist of loans to our privately-owned business clients. Our credit-rated commercial loans include commercial and industrial loans along with loans to commercial borrowers that are secured by real estate (commercial property, multi-family residential property, 1-4 family residential property, and construction and land). Commercial loans generally involve a higher degree of credit risk than residential mortgage loans due, in part, to their larger average size and less readily-marketable collateral. In addition, unlike residential mortgage loans, commercial loans generally depend on the cash flow of the borrower’s business to service the debt. A significant portion of our commercial loans depend primarily on the liquidation of assets securing the loan for repayment, such as inventory and accounts receivable. These loans carry incrementally higher risk, because their repayment is often dependent solely on the financial performance of the borrower’s business. Adverse economic conditions or other factors adversely affecting our target market segment may have a greater adverse effect on us than on other financial institutions that have a more diversified client base. Our business plan calls for continued efforts to increase our assets invested in commercial loans. For all of these reasons, increases in non-performing commercial loans could result in operating losses, impaired liquidity and the erosion of our capital, and could have a material adverse effect on our financial condition and results of operations. Credit market tightening could adversely affect our commercial borrowers through declines in their business activities and adversely impact their overall liquidity through the diminished availability of other borrowing sources or otherwise. Our business and a large portion of our real estate collateral is concentrated in the New York metropolitan area and a downturn in the economy of the New York metropolitan area may adversely affect our business. Substantially all of our business is located in the New York metropolitan area. In addition, as of December 31, 2011, substantially all of the real estate collateral for the loans in our portfolio was located within the New York metropolitan area. As a result, our financial condition and results of operations may be affected by changes in the economy and the real estate market of the New York metropolitan area. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an increase in our allowance for loan losses. In addition, our geographic concentration in the New York metropolitan area heightens our exposure to future terrorist attacks, which may adversely affect our business and that of our clients and result in a material decrease in our revenues. Future terrorist attacks cannot be predicted, and their occurrence can be expected to further negatively affect the U.S. economy generally and specifically the regional market in which we operate. If the value of real estate were to decline materially, a significant portion of our loan portfolio could become under-collateralized, which would have a material adverse effect on us. As of December 31, 2011, approximately 80% of the collateral for the loans in our portfolio consisted of real estate. The market value of real estate, particularly real estate held for investment, can fluctuate significantly in a short period of time as a result of market conditions in the geographic area in which the real estate is located. If the value of the real estate serving as collateral for our loan portfolio were to decline materially, a portion of our loan portfolio could become under-collateralized. If the loans that are collateralized by real estate become troubled during a time when market conditions are declining or have declined, we may not be able to realize the 25 value of the collateral that we anticipated at the time of originating the loan, which could have a material adverse effect on our provision for loan losses and our financial condition and results of operations. As the size of our loan portfolio grows, the risks associated with our loan portfolio may be exacerbated. As we grow our business and hire additional banking teams, the size of our loan portfolio grows, which can exacerbate the risks associated with that portfolio. Although we attempt to minimize our credit risk through certain procedures, including monitoring the concentration of our loans within specific industries, we cannot assure you that these procedures will remain as effective when the size of our loan portfolio increases. This may result in an increase in charge-offs or underperforming loans, which could adversely affect our business. Our failure to effectively manage our credit risk could have a material adverse effect on our financial condition and results of operations. There are risks inherent in making any loan, including repayment risks associated with, among other things, the period of time over which the loan may be repaid, changes in economic and industry conditions, dealings with individual borrowers and uncertainties as to the future value of collateral. Although we attempt to minimize our credit risk by monitoring the concentration of our loans within specific industries and through what we believe to be prudent loan application approval procedures, we cannot assure you that such monitoring and approval procedures will reduce these lending risks. In addition, we are subject to credit risk in our investment portfolio. Our investments include debentures, mortgage-backed securities and collateralized mortgage obligations issued or guaranteed by U.S. government- sponsored enterprises, such as Fannie Mae, Freddie Mac and the Federal Home Loan Banks, as well as collateralized mortgage obligations, bank-collateralized pooled trust preferred securities and other debt securities issued by private issuers. The issuers of our trust preferred securities include several depositary institutions that have suffered significant losses since the onset of the economic crisis. We are exposed to credit risks associated with the issuers of the debt securities in which we invest. Further, with respect to the mortgage-backed securities in which we invest, we also are affected by the credit risk associated with the borrowers of the loans underlying these securities. Lack of seasoning of our loan portfolio and mortgage loans underlying our investment portfolio may increase the risk of credit defaults in the future. In general, loans do not begin to show signs of credit deterioration or default until they have been outstanding for some period of time, a process referred to as “seasoning.” As a result, a portfolio of older loans will usually behave more predictably than a newer portfolio. Because our loan portfolio is relatively new compared to the portfolio of many of our competitors, the current level of delinquencies and defaults may not be representative of the level that will prevail when the portfolio becomes more seasoned, which is likely to be somewhat higher than current levels. Because over 91% of the loans in our loan portfolio were originated over the last four years, our loan portfolio does not provide a long-term history of loan losses for our management to consider in establishing our allowance for loan losses. We therefore also consider other financial institutions’ histories of loan losses and their allowance for loan losses, as well as our management’s estimates based on their experience in the banking industry, when determining our allowance for loan losses. There is no assurance that these considerations and our management’s judgment will result in an allowance for loan losses that will, at all times, be adequate for our business and operations. In addition, the mortgage loans underlying certain mortgage-backed obligations in which we invest also may not begin to show signs of credit deterioration until they have been outstanding for some period of time. Because the mortgage loans underlying certain of the mortgage-backed obligations in our investment portfolio are relatively new, the level of delinquencies and defaults on such loans may increase in the future, thus adversely affecting the mortgage-backed obligations we hold. Our allowance for loan losses may not be sufficient to absorb actual losses. Experience in the banking industry indicates that a portion of our loans will become delinquent, and that some of these loans may be only partially repaid or may never be repaid at all. Despite our underwriting criteria, we experience losses for reasons beyond our control, including general economic conditions. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an 26 increase in our allowance for loan losses. Although we believe that our allowance for loan losses is maintained at a level adequate to absorb any inherent losses in our loan portfolio, these estimates of loan losses are necessarily subjective and their accuracy depends on the outcome of future events, some of which are beyond our control. We may need to make significant and unanticipated increases in our loss allowances in the future, which would materially adversely affect our financial condition and results of operations. In addition, bank regulators, as an integral part of their supervisory functions, periodically review our loan portfolio and related allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. An increase in the allowance for loan losses required by these regulatory agencies could materially adversely affect our financial condition and results of operations. We rely on the Federal Home Loan Bank of New York for secondary and contingent liquidity sources. We utilize the Federal Home Loan Bank (or “FHLB”) of New York for secondary and contingent sources of liquidity. Also, from time to time, we utilize this borrowing source to capitalize on market opportunities to fund investment and loan initiatives. Our FHLB borrowings were approximately $675.0 million at December 31, 2011. Because we rely on the FHLB for liquidity, if we were unable to borrow from the FHLB, we would need to find alternative sources of liquidity, which may be available only at a higher cost and on terms that do not match the structure of our liabilities as well as FHLB borrowings do. As a member of the FHLB, we are required to purchase capital stock of the FHLB as partial collateral and to pledge marketable securities or loans for this borrowing. At December 31, 2011, we held $48.2 million of FHLB stock. We are dependent upon key personnel. Our success depends to a significant extent upon the performance of certain key executive officers and employees, the loss of any of whom could have a material adverse effect on our business. Our key executive officers and employees include our Chairman, Scott Shay, our President and Chief Executive Officer, Joseph DePaolo, and our Vice-Chairman, John Tamberlane. Although we have entered into agreements with Messrs. Shay and DePaolo, we have not entered into an agreement with Mr. Tamberlane and we generally do not have employment agreements with our key personnel. We adopted an equity incentive plan and a change of control plan for key personnel in connection with the consummation of our initial public offering. Even though we are party to these agreements and sponsor these plans, we cannot assure you that we will be successful in retaining any of our key executive officers and employees. Our business is built around group directors, who are principally responsible for our client relationships. A principal component of our strategy is to increase market penetration by recruiting and retaining experienced group directors, their groups, loan officers and other management professionals. Competition for experienced personnel within the commercial banking, brokerage and insurance industries is strong and we may not be successful in attracting and retaining the personnel we require. We cannot assure you that our recruiting efforts will be successful or that they will enhance our business, results of operations or financial condition. In addition, our group directors may leave us at any time for any reason. They are not under contractual restrictions to remain with us and would not be bound by non-competition agreements or non-solicitation agreements if they were to leave us. If even a small number of our key group directors were to leave, our business could be materially adversely affected. We cannot assure you that such losses of group directors or other professionals will not occur. Our SBA division is also dependent upon relationships our SBA professionals have developed with clients from whom we purchase loans and upon relationships with investors in pooled securities. The loss of a key member of our SBA division team may lead to the loss of existing clients. We cannot assure you that we will be able to recruit qualified replacements with a comparable level of expertise and relationship base. We may not be able to acquire suitable client relationship groups or manage our growth. A principal component of our growth strategy is to increase market penetration and product diversification by recruiting group directors and their groups. However, we believe that there are a limited number of potential group directors and groups that will meet our development strategy and other recruiting criteria. As a result, we cannot assure you that we will identify potential group directors and groups that will contribute to our growth. Even if 27 suitable candidates are identified, we cannot assure you that we will be successful in attracting them, as they may opt instead to join our competitors. Even if we are successful in attracting these group directors and groups, we cannot assure you that they will be successful in bringing additional clients and business to us. Furthermore, the addition of new groups involves several risks including risks relating to the quality of the book of business that may be contributed, adverse personnel relations and loss of clients because of a change of institutional identity. In addition, the process of integrating new groups could divert management time and resources from attention to existing clients. We cannot assure you that we will be able to successfully integrate any new group that we may acquire or that any new group that we acquire will enhance our business, results of operations, cash flows or financial condition. Provisions in our charter documents may delay or prevent our acquisition by a third party. Our restated Certificate of Organization (as amended) and By-laws contain provisions that may make it more difficult for a third party to acquire control of us without the approval of our Board of Directors. For example, our Certificate of Organization authorizes our Board of Directors to determine the rights, preferences, privileges and restrictions of unissued series of common stock and preferred stock, without any vote or action by our stockholders. As a result, our Board of Directors can authorize and issue shares of preferred stock with voting or conversion rights that could adversely affect the voting or other rights of holders of our common stock. Additionally, our By-laws contain provisions that separate our Board of Directors into three separate classes with staggered terms of office and provisions that restrict the ability of shareholders to take action without a meeting. These provisions could delay, prevent or deter a merger, acquisition, tender offer, proxy contest or other transaction that might otherwise result in our stockholders receiving a premium over the market price for their common stock. There are substantial regulatory limitations on changes of control. Federal law prohibits a company or a group of persons deemed to be “acting in concert” from, directly or indirectly, acquiring 25% or more (5% if the acquirer is a bank holding company) of any class of our voting stock or obtaining the ability to control in any manner the election of a majority of our directors or otherwise to direct the management or policies of our company without prior application to and the approval of the Board of Governors of the Federal Reserve System. Moreover, any individual who acquires 10% or more of our voting stock or otherwise obtains control over Signature Bank would be required to notify, and could be required to obtain the non-objection of, the FDIC. Finally, any person acquiring 10% or more of our voting stock would be required to obtain approval of the New York State Department of Financial Services. Accordingly, prospective investors need to be aware of and comply with these requirements, if applicable, in connection with any purchase of shares of our common stock. This may effectively reduce the number of investors who might be interested in investing in our stock and also limits the ability of investors to purchase us or cause a change in control. Curtailment of government guaranteed loan programs could affect our SBA business. Our SBA business relies on the purchasing, pooling and selling of government guaranteed loans, in particular those guaranteed by the SBA. From time to time, the government agencies that guarantee these loans reach their internal limits and cease to guarantee loans for a period of time. In addition, these agencies may change their rules for loans or Congress may adopt legislation that would have the effect of discontinuing or changing the programs. If changes occur, the volumes of loans that qualify for government guarantees could decline. Lower volumes of origination of government guaranteed loans may reduce the profitability of our SBA business. We rely extensively on outsourcing to provide cost-effective operational support. We make extensive use of outsourcing to provide cost-effective operational support with service levels consistent with large bank operations, including key banking, brokerage and insurance systems. For example, under the clearing agreement Signature Securities has entered into with National Financial Services (a Fidelity Investments company), National Financial Services processes all securities transactions for the account of Signature Securities and the accounts of its clients. Services of the clearing firm include billing and credit extension and control, receipt, custody and delivery of securities. Signature Securities is dependent on the ability of its clearing firm to process securities transactions in an orderly fashion. In addition, Fidelity Information Services provides us with all our core banking applications. Our outsourcing agreements can generally be terminated by either party upon notice. The termination of some of our outsourcing agreements, including the agreements with National Financial Services and Fidelity Information Services, could result in a disruption of service that could have a material adverse effect on our financial condition and results of operations. 28 System failures or breaches of our network security could subject us to increased operating costs as well as litigation and other liabilities. The computer systems and network infrastructure we use could be vulnerable to unforeseen problems. Our operations are dependent upon our ability to protect our computer equipment against damage from fire, power loss, telecommunications failure or other similar catastrophic events. Any damage or failure that causes an interruption in our operations could have a material adverse effect on our financial condition and results of operations. In addition, our operations are dependent upon our ability to protect our computer systems and network infrastructure against damage from physical break-ins, security breaches, hackers, viruses and other malware and other disruptive problems. Such computer break-ins, whether physical or electronic, and other disruptions could jeopardize the security of information stored in and transmitted through our computer systems and network infrastructure, which may result in significant liability to us and deter potential clients. Although we, with the help of third-party service providers, have and intend to continue to implement security technology and establish operational procedures to prevent such damage, there can be no assurance that these security measures will be successful. In addition, advances in computer capabilities, new discoveries in the field of cryptography or other developments could result in a compromise or breach of the algorithms we and our third- party service providers use to protect client transaction data. A failure of such security measures could have a material adverse effect on our financial condition and results of operations. Although we carry specific “cyber” insurance coverage, which would apply in the event of various breach scenarios, the amount of coverage may not be adequate in any particular case. In addition, cyber threat scenarios are inherently difficult to predict and can take many forms, some of which may not be covered under our cyber insurance coverage. Furthermore, the occurrence of a cyber threat scenario could cause interruptions in our operations, which could in turn have a material adverse effect on our financial condition and results of operations. Decreases in trading volumes or prices could harm the business and profitability of Signature Securities. Declines in the volume of securities trading and in market liquidity generally result in lower revenues from our brokerage and related activities. The profitability of our Signature Securities business would be adversely affected by a decline in revenues because a significant portion of its costs are fixed. For these reasons, decreases in trading volume or securities prices could have a material adverse effect on our business, financial condition and results of operations. We have not historically paid, and do not presently intend to pay, cash dividends. Furthermore, our ability to pay cash dividends is restricted. We have not paid any cash dividends on our common stock to date and do not intend to pay cash dividends on our common stock in the foreseeable future. We intend to retain earnings to finance operations and the expansion of our business. Therefore, any return on your investment in our common stock must come from an increase in its market price. In addition, payments of dividends will be subject to the prior approval by the FDIC if, after having paid a dividend, we would be undercapitalized, significantly undercapitalized or critically undercapitalized, and by the New York State Department of Financial Services under certain conditions. Our ability to pay dividends will also depend upon the amount of cash available to us from our subsidiaries. Restrictions on our subsidiaries’ ability to make dividends or advances to us will tend to limit our ability to pay dividends to our shareholders. We may be responsible for environmental claims. There is a risk that hazardous or toxic waste could be found on the properties that secure our loans. In such event, we could be held responsible for the cost of cleaning up or removing such waste, and such cost could significantly exceed the value of the underlying properties and adversely affect our profitability. Additionally, even if we are not held responsible for these cleanup and removal costs, the value of the collateralized property could be significantly lower than originally projected, thus adversely affecting the value of our security interest. Although we have policies and procedures that require us to perform environmental due diligence prior to accepting a property as collateral and an environmental review before initiating any foreclosure action on real property, there can be no assurance that this will be sufficient to protect us from all potential environmental liabilities associated with collateralized properties. 29 We may not be able to raise the additional funding needed for our operations. If we are unable to generate profits and cash flow on a consistent basis, we may need to arrange for additional financing to support our business. Although we have completed a number of successful capital raising transactions, including the July 2011 public offering of 4,715,000 shares of our common stock, we cannot assure you that, if needed or desired, we would be able to obtain additional capital or financing on commercially reasonable terms or at all, especially in light of current capital and credit market conditions. Our failure to obtain sufficient capital or financing could have a material adverse effect on our growth, on our ability to compete effectively and on our financial condition and results of operations. The misconduct of employees or their failure to abide by regulatory requirements are difficult to detect and deter. Employee misconduct could subject us to financial losses or regulatory sanctions and seriously harm our reputation. It is not always possible to deter employee misconduct, and the precautions we take to prevent and detect this activity may not be effective in all cases. Misconduct by our employees could include hiding unauthorized activities from us, improper or unauthorized activities on behalf of clients or improper use of confidential information. Employee errors in recording or executing transactions for clients could cause us to enter into transactions that clients may disavow and refuse to settle. These transactions expose us to risks of loss, which can be material, until we detect the errors in question and unwind or reverse the transactions. As with any unsettled transaction, adverse movements in the prices of the securities involved in these transactions before we unwind or reverse them can increase these risks. All of our securities professionals are required by law to be licensed with our subsidiary, Signature Securities, a licensed securities broker-dealer. Under these requirements, these securities professionals are subject to our supervision in the area of compliance with federal and applicable state securities laws, rules and regulations, as well as the rules and regulations of self-regulatory organizations such as FINRA. The violation of any regulatory requirements by us or our securities professionals could jeopardize Signature Securities’ broker-dealer license or other licenses and could subject us to liability to clients. We are subject to losses resulting from fraudulent or negligent acts on the part of our clients or other third parties. We rely heavily upon information supplied by our clients and by third parties, including the information included in loan applications, property appraisals, title information, and employment and income documentation, in deciding which loans we will originate, as well as the terms of those loans. If any of the information upon which we rely is misrepresented, either fraudulently or inadvertently, and the misrepresentation is not detected prior to loan funding, the value of the loan may be significantly lower than we had expected, or we may fund a loan that we would not have funded or on terms that we would not have extended. Whether a misrepresentation is made by the loan applicant, a mortgage broker, or another third party, we generally bear the risk of loss associated with the misrepresentation. A loan subject to a material misrepresentation is typically unable to be sold or subject to repurchase if sold prior to the detection of the misrepresentation. The sources of the misrepresentation are often difficult to locate and it is often difficult to recover any of the monetary losses we have suffered. Although we maintain a system of internal controls to mitigate against such occurrences and maintain insurance coverage for such risks that are insurable, we cannot assure you that we have detected or will detect all misrepresented information in our loan originations operations. The failure of our brokerage clients to meet their margin requirements may cause us to incur significant liabilities. The brokerage business of Signature Securities, by its nature, is subject to risks related to potential defaults by our clients in paying for securities they have agreed to purchase and for securities they have agreed to sell and deliver. National Financial Services provides clearing services to our brokerage business, including the confirmation, receipt, execution, settlement, and delivery functions involved in securities transactions, as well as the safekeeping of clients’ securities and assets and certain client record keeping, data processing, and reporting functions. National Financial Services makes margin loans to our clients to purchase securities with funds they borrow from National Financial Services. We must indemnify National Financial Services for, among other things, any loss or expense incurred due to defaults by our clients in failing to repay margin loans or to maintain adequate collateral for those loans. We are subject to risks inherent in extending margin credit, especially during periods of rapidly declining markets. 30 Our business may be adversely impacted by acts of war or terrorism. Acts of war or terrorism could have a significant impact on our ability to conduct our business. Such events could affect the ability of our borrowers to repay their loans, could impair the value of the collateral securing our loans, and could cause significant property damage, thus increasing our expenses and/or reducing our revenues. In addition, such events could affect the ability of our depositors to maintain their deposits with us. Although we have established disaster recovery policies and procedures, the occurrence of any such event could have a material adverse effect on our business which, in turn, could have a material adverse effect on our financial condition and results of operations. Changes in the federal or state tax laws may negatively impact our financial performance. We are subject to changes in tax law that could increase the effective tax rate payable to the state or federal government. These law changes may be retroactive to previous periods and as a result could negatively affect our current and future financial performance. Changes in accounting standards or interpretation in new or existing standards could materially affect our financial results. From time to time the Financial Accounting Standards Board (“FASB”) and the SEC change accounting regulations and reporting standards that govern our preparation of financial statements. In addition, the FASB, SEC, bank regulators and the outside independent auditors may revise their previous interpretations regarding existing accounting regulations and the application of these accounting standards. These revisions in their interpretations are out of our control and may have a material impact on our financial statements Risks Related to Our Industry We are subject to regulatory capital requirements. As a state-chartered bank, we are subject to various regulatory capital requirements administered by state and federal regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct material adverse effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off-balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings and other factors. We are required by FDIC regulations to maintain a minimum ratio of qualifying total capital to total risk-weighted assets (including off-balance sheet items) of 8.0%, at least one-half of which must be in the form of Tier 1 capital, and a ratio of Tier 1 capital to total risk-weighted assets of 4.0%. We are also required to maintain a minimum leverage capital ratio—the ratio of Tier 1 capital (net of intangibles) to adjusted total assets. Banks that have received the highest rating of five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a leverage capital ratio of at least 3.0%. All other institutions must maintain a minimum leverage capital ratio of 4.0%. In addition, we are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991, which imposes a number of mandatory supervisory measures. Among other matters, this Act established five capital categories ranging from “well capitalized” to “critically under capitalized.” Such classifications are used by regulatory agencies to determine a bank’s deposit insurance premium and the approval of applications authorizing institutions to increase their asset size or otherwise expand their business activities or acquire other institutions. To be categorized as “well capitalized” under the Act and, thus, subject to the fewest restrictions, a bank must have a leverage capital ratio of at least 5.0%, a Tier 1 risk-based capital ratio of at least 6.0%, and a total risk- based capital ratio of at least 10.0%, and must not be subject to any written agreement, order, capital directive or prompt corrective action directive issued by the FDIC to meet and maintain a specific capital level. These capital requirements may limit asset growth opportunities and restrict our ability to increase earnings. Our failure to comply with our minimum capital requirements would have a material adverse effect on our financial condition and results of operations. 31 Increases in FDIC insurance premiums may affect our earnings. The significant number of bank failures over the past four years has increased resolution costs of the FDIC and caused a significant decrease in the FDIC’s deposit insurance fund. In addition, the FDIC instituted two temporary programs to further insure customer deposits at FDIC-member banks, including fully insuring non-interest bearing transactional accounts. Our FDIC deposit insurance assessment rate for 2008 was five basis points. Effective January 1, 2009, the FDIC increased assessment rates and, as a result, our initial base assessment rate for 2009 was raised by seven basis points to 12 basis points resulting in additional FDIC insurance assessments of $5.9 million and $4.3 million for the years ended December 31, 2010 and 2009, respectively. In addition, effective April 1, 2009, the FDIC further modified its risk-based assessment system resulting in higher assessment rates for riskier institutions, which did not have a material impact on our assessment. During 2011, the FDIC established a new assessment rate schedule, as further discussed below. The FDIC also established the Temporary Liquidity Guarantee Program, which includes a Transaction Account Guarantee Program to temporarily provide a full guarantee above the existing $250,000 deposit insurance limit for funds held at participating FDIC-insured depository institutions in non-interest-bearing transaction accounts and certain NOW accounts. Coverage became effective on October 14, 2008 and was extended through December 31, 2010. As a participant in the Transaction Account Guarantee Program, our related assessments for the years ended December 31, 2010 and 2009 totaled $2.2 million and $1.1 million, respectively. The Dodd-Frank Act provides all banks with new or additional deposit insurance coverage, including unlimited FDIC insurance coverage for non-interest-bearing transaction checking accounts through December 31, 2012. This coverage took effect on December 31, 2010. During the fourth quarter of 2009, the FDIC adopted a rule that required FDIC-insured depository institutions to prepay their quarterly risk-based assessments for the fourth quarter of 2009, and for all of 2010, 2011, and 2012, on December 30, 2009. Our total prepaid assessment was $31.4 million, which we recorded as a prepaid expense (asset) as of December 31, 2009. In accordance with the Dodd-Frank Act, on February 7, 2011, the FDIC adopted a final rule that redefined the assessment base for deposit insurance assessments as average consolidated total assets minus average tangible equity, rather than average deposits. The final rule also established a new assessment rate schedule, as well as alternative rate schedules, that become effective when the insurance fund’s reserve ratio reaches certain levels. The final rule also makes conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates, eliminates the secured liability adjustment and creates a new assessment rate adjustment for unsecured debt held that is issued by another insured depository institution. The new rate schedule and other revisions to the assessment rules became effective April 1, 2011. Our base FDIC assessment for the year ended December 31, 2011 decreased $1.9 million when compared to 2010, largely due to the new assessment rules. For large insured depository institutions, generally defined as those with at least $10 billion in total assets, the final rule also eliminates risk categories and the use of long-term debt issuer ratings when calculating the initial base assessment rates and combines regulatory ratings and financial measures into two scorecards, one for most large insured depository institutions and another for highly complex insured depository institutions, to calculate assessment rates. A highly complex institution is generally defined as an insured depository institution with more than $50 billion in total assets that is controlled by a parent company with more than $500 billion in total assets. Under the new assessment rate schedule, effective April 1, 2011, the initial base assessment rate for large and highly complex insured depository institutions range from five to thirty-five basis points, and total base assessment rates, after applying all the unsecured debt and brokered deposit adjustments, range from two and one-half to forty-five basis points. As the new assessment rules currently stand, we expect the rules will have a continued positive impact on our future FDIC deposit insurance assessment fees compared to the assessment rules in effect prior to the recent changes. If there are additional bank or financial institution failures or the government or FDIC develop new programs to stimulate the economy and restore investor confidence, we may be required to pay even higher FDIC premiums than the recently increased levels. Any increase in assessment fees could have a materially adverse effect on our results of operations and financial condition. 32 We are subject to significant government regulation. We operate in a highly regulated environment and are subject to supervision and regulation by a number of governmental regulatory agencies, including, among others, the FDIC, the New York State Department of Financial Services, the Federal Reserve, the New York State Insurance Department, and FINRA. Regulations adopted by these agencies, which are generally intended to provide protection for depositors and clients rather than shareholders, govern a comprehensive range of matters relating to ownership and control of our shares, our acquisition of other companies and businesses, the activities in which we are permitted to engage, maintenance of adequate capital levels, and other aspects of our operations. These regulatory agencies possess broad authority to prevent or remedy unsafe or unsound practices or violations of law. For example, bank regulators view certain types of clients as “high risk” clients under the Bank Secrecy Act, and other laws and regulations, and require enhanced due diligence and enhanced monitoring with respect to such clients. While we believe that we adequately perform such enhanced due diligence and monitoring with respect to our clients that fall within this category, if the regulators believe that our efforts are not adequate or that we have failed to identify suspicious transactions in such accounts, they could bring an enforcement action against us, which could result in bad publicity, fines and other penalties, and could have a material adverse effect on our business. In addition, laws and regulations enacted over the last several years have had, and are expected to continue to have, a significant impact on the financial services industry. Some of these laws and regulations, including the Dodd-Frank Act, the Sarbanes-Oxley Act of 2002 and the USA PATRIOT Act of 2001, have increased and may in the future further increase our costs of doing business, particularly personnel and technology expenses necessary to maintain compliance with the expanded regulatory requirements. Future legislation and government policy could adversely affect the banking industry as a whole, including our results of operations. The securities markets and the brokerage industry in which Signature Securities operates are also highly regulated. Signature Securities is subject to regulation as a securities broker and investment adviser, and many of the regulations applicable to Signature Securities may have the effect of limiting its activities, including activities that might be profitable. Signature Securities is registered with and subject to supervision by the SEC and FINRA and is also subject to state insurance regulation. As a subsidiary of Signature Bank, Signature Securities is also subject to regulation and supervision by the New York State Department of Financial Services. The securities industry has been subject to several fundamental regulatory changes, including changes in the rules of self- regulatory organizations such as the NYSE and FINRA. In the future, the industry may become subject to new regulations or changes in the interpretation or enforcement of existing regulations. We cannot predict the extent to which any future regulatory changes may adversely affect our business. In addition, we are subject to periodic examination by the FDIC, the New York State Department of Financial Services, the SEC, self-regulatory organizations, and various state authorities. Our banking operations, sales practice operations, trading operations, record-keeping, supervisory procedures, and financial position may be reviewed during such examinations to determine if they comply with the rules and regulations designed to protect clients and protect the solvency of banks and broker-dealers. Examinations may result in the issuance of a letter to us noting perceived deficiencies and requesting us to take corrective action. Deficiencies could lead to further investigation and the possible institution of administrative proceedings, which may result in the issuance of an order imposing sanctions upon us and/or our personnel, including our investment professionals. Sanctions against us may include a censure, cease and desist order, monetary penalties, or an order suspending us for a period of time from conducting certain or all of our operations. Sanctions against individuals may include a censure, cease and desist order, monetary penalties, or an order restricting the individual’s activities or suspending the individual from association with us. In egregious cases, either we, our personnel, or both, could be expelled from a self-regulatory organization or barred from the banking industry or the securities industry. The Dodd-Frank Act may affect our results of operations, financial condition or liquidity. The Dodd-Frank Act, signed into law on July 21, 2010, makes extensive changes to the laws regulating financial services firms. The Dodd-Frank Act also requires significant rulemaking and mandates multiple studies which could result in additional legislative or regulatory action. Under the Dodd-Frank Act, federal banking regulatory agencies are required to draft and implement enhanced supervision, examination and capital standards for depository institutions and their holding companies. The enhanced requirements include, among other things, changes to capital, leverage and liquidity standards and numerous other requirements. For example, the Dodd-Frank Act (i) requires the establishment of minimum leverage and risk-based capital requirements for insured depository institutions such as us, (ii) places restrictions on investment and other activities by depository institutions, including significant increases in the regulation of mortgage lending and servicing, (iii) provides for a new risk-based approach to financial services regulation giving 33 federal bank regulatory agencies new authority to monitor the systemic safety of the financial system and (iv) authorizes various new assessments and fees. The Dodd-Frank Act also establishes a new federal Consumer Financial Protection Bureau with broad authority and permits states to adopt stricter consumer protection laws and enforce consumer protection rules issued by the Consumer Financial Protection Bureau. At this time, it is difficult to predict the extent to which the Dodd-Frank Act or the resulting regulations will impact our business. However, compliance with these new laws and regulations will likely result in additional costs to our business. It is also difficult to predict the impact of the Dodd-Frank Act on our competitors and on the financial services industry as a whole. Competitive and industry factors could also adversely impact our results of operations, financial condition or liquidity. The financial services industry may be subject to new legislation. The regulatory environment in which we operate is constantly undergoing change. Legislation is pending before Congress that would further increase regulation of the financial services industry and impose restrictions on the ability of firms within the industry to conduct business consistent with historical practices, including aspects such as compensation, consumer protection regulations and mortgage regulation, among others. Federal and state regulatory agencies also propose and adopt changes to their regulations or change the manner in which existing regulations are applied. We cannot predict the substance or impact of pending or future legislation or regulation, or the application thereof, and any such future regulation can adversely affect our business. Regulatory net capital requirements significantly affect and often constrain our brokerage business. The SEC, FINRA, and various other regulatory bodies in the United States have rules with respect to net capital requirements for broker-dealers that affect Signature Securities. These rules require that at least a substantial portion of a broker-dealer’s assets be kept in cash or highly liquid investments. Signature Securities must comply with these net capital requirements, which limit operations that require intensive use of capital, such as trading activities. These rules could also restrict our ability to withdraw capital from our broker-dealer subsidiary, even in circumstances where this subsidiary has more than the minimum amount of required capital. This, in turn, could limit our ability to pay dividends, implement our business strategies and pay interest on and repay the principal of our debt. A change in these rules, or the imposition of new rules, affecting the scope, coverage, calculation, or amount of net capital requirements could have material adverse effects. Significant operating losses or any unusually large charge against net capital could also have a material negative impact on our business. ITEM 1B. UNRESOLVED STAFF COMMENTS None. 34 ITEM 2. PROPERTIES We conduct business in 25 full-service private client offices, one SBA location and three operations centers. All current offices are leased with term expirations ranging from 2014 to 2024. Lease terms and rates vary by property. Many of the lease contracts include modest annual escalation agreements. Our offices and lease expiration dates are described below: Location Type Expiration 26 Court Street Brooklyn, NY 11242 279 Sunrise Highway Rockville Centre, NY 11570 923 Broadway Woodmere, NY 11598 300 Park Avenue New York, NY 10022 71 Broadway New York, NY 10006 360 Hamilton Plaza White Plains, NY 10601 36-36 33rd Street Long Island City, NY 11102 200 Park Avenue South New York, NY 10003 1020 Madison Avenue New York, NY 10021 950 Third Avenue New York, NY 10022 78-27 37th Avenue Jackson Heights, NY 11372 1177 Avenue of the Americas New York, NY 10019 1C Quaker Ridge Road New Rochelle, NY 10804 9 Greenway Plaza Houston, TX 77046 1225 Franklin Avenue Garden City, NY 11530 Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Private Client Office Bank Operations Center Private Client Office SBA & Institutional Trading Center (Signature Securities office) Private Client Office 2014 2014 2014 2015 2015 2015 2015 2015 2015 2016 2016 2016 2016 2017 2017 35 Location Type Expiration 40 Cuttermill Road Great Neck, NY 11021 6321 New Utrecht Avenue Brooklyn, NY 10004 111 Broadway New York, NY 10006 261 Madison Avenue New York, NY 10016 68 South Service Road Melville, NY 11747 100 Jericho Quadrangle Jericho, NY 11753 50 West 57th Street New York, NY 10019 29 West 38th Street New York, NY 10018 89-36 Sutphin Boulevard Jamaica, NY 11435 84 Broadway Brooklyn, NY 11242 565 Fifth Avenue New York, NY 10017 421 Hunts Point Avenue Bronx, NY 10474 2 Pennsylvania Plaza New York, NY 10121 2066 Hylan Blvd. Staten Island, NY 10306 Private Client Office Private Client Office Private Client Accommodation Office 2017 2017 2017 Private Client Office 2015 & 2018 Private Client Office Private Client Office Private Client Office Bank and Brokerage Operations Center Private Client Office Private Client Office Executive Offices, Bank Administration Center and Private Client Office Private Client Office Private Client Office Private Client Office 2018 2018 2019 2020 2020 2021 2021 2021 2021 2024 ITEM 3. LEGAL PROCEEDINGS We are subject to various pending and threatened legal actions relating to the conduct of our normal business activities. In the opinion of management, the ultimate aggregate liability, if any, arising out of any such pending or threatened legal actions will not be material to our Consolidated Financial Statements. ITEM 4. (Removed and Reserved) 36 PART II ITEM 5. MARKET FOR REGISTRANT’S COMMON EQUITY, RELATED STOCKHOLDER MATTERS AND ISSUER PURCHASES OF EQUITY SECURITIES Our common stock is listed on the NASDAQ Global Select Market under the symbol “SBNY.” As of December 31, 2011, 46,181,900 shares of our common stock were issued and outstanding. The following table lists, on a quarterly basis, the range of high and low intra-day sale prices per share of our common stock in U.S. dollars: 2011 Fourth quarter Third quarter Second quarter First quarter 2010 Fourth quarter Third quarter Second quarter First quarter Common Stock High Low $ 61.98 61.54 58.66 56.99 $ 51.71 40.50 43.12 39.20 44.07 45.39 53.02 47.23 38.19 36.01 35.85 31.01 On December 31, 2011, the last reported sale price of our common stock was $59.99 and there were 20 holders of record of our common stock, including record holders on behalf of an indeterminate number of beneficial holders. 37 Performance Graph The following graph compares the performance of our common stock with the performance of the Standard & Poor’s 500 Index and the Nasdaq Bank Stocks Index: 200 180 160 140 120 100 80 60 40 20 December 31, 2006 December 31, 2007 December 31, 2008 December 31, 2009 December 31, 2010 December 31, 2011 Signature Bank Standard & Poor's 500 Index Nasdaq Bank Stocks Index The performance period reflected below assumes that $100 was invested in our common stock and each of the indexes listed below on December 31, 2006. The performance of our common stock reflected below is not indicative of our future performance. Company Name/Index Signature Bank Standard & Poor's 500 Index Nasdaq Bank Stocks Index 2006 2007 2008 2009 2010 2011 $ 100.00 100.00 100.00 108.94 103.53 79.26 92.61 63.69 57.79 102.97 78.62 48.42 161.59 88.67 57.29 193.64 88.67 51.19 December 31, The Performance Graph does not constitute soliciting material and should not be deemed filed or incorporated by reference into any Signature Bank filing under the Securities Exchange Act of 1934, except to the extent we specifically incorporate the Performance Graph therein by reference. DIVIDEND POLICY We have never declared or paid any cash dividends on our common stock. For the foreseeable future, we intend to retain any earnings to finance our operations and the expansion of our business and we do not anticipate paying any cash dividends on our common stock. Any future determination to pay dividends will be at the discretion of our Board of Directors and will be dependent upon then existing conditions, including our financial condition and results of operations, capital requirements, contractual restrictions, business prospects and other factors that the Board of Directors considers relevant. In addition, payments of dividends may be subject to the prior approval of the New York State Department of Financial Services and the FDIC. Under New York law, we are prohibited from declaring a dividend so long as there is any impairment of our capital stock. In addition, we would be required to obtain the approval of the New York State Department of Financial Services if the total of all our dividends declared in any calendar year would exceed the total of our net profits for that year combined with retained net profits of the preceding two years, less any required transfer to surplus or a fund for the retirement of any preferred stock. We would also be required to obtain the approval of the FDIC prior to declaring a dividend if after paying the dividend we would be undercapitalized, significantly undercapitalized or critically undercapitalized. Our ability to pay dividends also depends upon the amount of cash available to us from our subsidiaries. Restrictions on our subsidiaries’ ability to make dividends and advances to us will tend to limit our ability to pay dividends to our shareholders. 38 ITEM 6. SELECTED FINANCIAL DATA The information set forth below should be read in conjunction with our Consolidated Financial Statements and related notes and “Management’s Discussion and Analysis of Financial Condition and Results of Operations,” each of which is included elsewhere in this Annual Report on Form 10-K. (dollars in thousands, except per share amounts) 2011 At or for the years ended December 31, 2008 2009 2010 SELECTED OPERATING DATA Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income: Non-interest income excluding net other-than-temporary impairment of securities recognized in earnings Net other-than-temporary impairment of securities recognized in earnings (1) Total non-interest income Non-interest expense Income before taxes Income tax expense Net income $ 580,516 120,729 459,787 51,876 407,911 466,530 121,672 344,858 46,372 386,135 123,740 262,395 42,715 323,464 128,193 195,271 26,888 298,486 219,680 168,383 134,474 44,127 56,824 35,954 44,188 30,150 (14,176) (1,322) (16,543) (21,404) (2,089) 42,038 182,724 267,225 117,699 149,526 42,648 164,896 176,238 74,187 102,051 34,632 149,885 104,427 41,701 62,726 27,645 123,820 72,208 28,849 43,359 Dividends on preferred stock and related discount accretion - - Net income available to common shareholders $ 149,526 102,051 12,203 50,523 390 42,969 2007 301,605 154,815 146,790 12,316 8,746 99,062 44,158 16,879 27,279 - 27,279 0.92 0.91 $ 3.43 $ 3.37 2.49 2.46 1.32 1.30 1.37 1.35 $ 14,666,120 11,673,089 9,146,112 7,192,199 5,845,172 6,512,855 5,249,286 3,837,583 2,906,059 2,805,711 556,044 392,025 447,896 382,463 295,984 293,207 236,531 217,680 339,441 172,367 PER COMMON SHARE DATA Earnings per share - basic (2) Earnings per share - diluted (2) BALANCE SHEET DATA Total assets Securities available-for-sale Securities held-to-maturity Loans held for sale Loans, net of allowance for loan losses 6,764,564 5,177,268 4,320,978 3,433,555 2,007,342 Allowance for loan losses Deposits Borrowings Shareholders' equity 86,162 67,396 55,120 36,987 18,236 11,754,138 9,441,227 7,222,546 5,387,886 4,511,890 1,425,800 1,222,200 1,008,900 1,049,900 1,408,116 944,547 803,659 698,135 816,932 425,756 (1) (2) On April 1, 2009, we adopted new accounting requirements related to other-than-temporary impairment of debt securities. As a result of this change in accounting, for the years ended December 31, 2011, 2010 and 2009 other-than-temporary impairment losses of $10.2 million, $24.4 million and $22.4 million ($5.7 million, $13.7 million and $12.5 million, net of tax), respectively, were recognized in other comprehensive income rather than in net income. Refer to Note 4 to our Consolidated Financial Statements for further discussion. The year ended December 31, 2009 includes the negative effect of the $10.2 million deemed dividend associated with the difference between the redemption payment and the carrying value of the preferred stock repurchased from the United States Department of the Treasury. Refer to Note 20 to our Consolidated Financial Statements for further discussion. (Continued on the next page) 39 (dollars in thousands, except per share amounts) 2011 At or for the years ended December 31, 2008 2009 2010 2007 OTHER DATA Assets under management Average interest-earning assets Full-time employee equivalents Private client offices SELECTED FINANCIAL RATIOS Performance Ratios: Return on average assets Return on average shareholders' equity Return on average common shareholders' equity Yield on average interest-earning assets Average rate on deposits and borrowings Net interest margin Efficiency ratio (1) Efficiency ratio excluding net other-than-temporary impairment of securities recognized in earnings (1) (2) Efficiency ratio excluding net gains on sales of securities and net impairment losses on securities recognized in earnings (1) (2) Asset Quality Ratios: Net charge-offs to average loans Allowance for loan losses to total loans $ 1,674,206 $ 1,856,653 $ 1,911,811 $ 2,716,556 $ 2,849,541 $ 12,889,784 $ 10,000,270 $ 7,692,249 $ 6,016,680 $ 5,119,208 720 25 660 24 614 23 553 22 501 20 1.14% 12.71% 12.71% 4.50% 1.01% 3.57% 0.99% 11.67% 11.67% 4.67% 1.30% 3.45% 0.79% 8.35% 7.26% 5.02% 1.71% 3.41% 0.68% 7.72% 8.56% 5.38% 2.20% 3.25% 0.50% 6.67% 6.67% 5.89% 3.12% 2.87% 36.41% 42.55% 50.46% 55.55% 63.69% 36.26% 41.05% 50.24% 51.71% 55.99% 37.33% 43.82% 51.74% 53.57% 56.88% 0.55% 1.26% 0.73% 1.29% 0.64% 1.26% 0.30% 1.07% 0.44% 0.90% Allowance for loans losses to non-accrual loans 204.09% 197.45% 118.27% 116.00% 98.26% Non-accrual loans to total loans Non-performing assets to total assets Capital and Liquidity Ratios: Tier 1 Leverage Capital Ratio Tier 1 Risk-Based Capital Ratio Total Risk-Based Capital Ratio Average equity to average assets Average tangible equity to average assets Per common share data: Number of weighted average common shares outstanding Book value per common share 0.62% 0.33% 9.67% 17.08% 18.17% 8.94% 8.94% 0.65% 0.34% 8.62% 14.21% 15.21% 8.47% 8.47% 1.07% 0.61% 9.39% 13.57% 14.47% 9.40% 9.40% 0.92% 0.46% 10.61% 17.00% 17.83% 8.81% 8.81% 0.92% 0.32% 7.75% 14.82% 15.43% 7.55% 7.55% 43,622 40,923 38,306 31,390 29,672 $ 30.49 $ 22.84 $ 19.79 $ 16.71 $ 14.34 (1) (2) The efficiency ratio is calculated by dividing non-interest expense by the sum of net interest income before provision for loan losses and non-interest income. On April 1, 2009, we adopted new accounting requirements related to other-than-temporary impairment of debt securities. As a result of this change in accounting, for the years ended December 31, 2011, 2010 and 2009 other-than-temporary impairment losses of $10.2 million, $24.4 million and $22.4 million ($5.7 million, $13.7 million and $12.5 million, net of tax), respectively, were recognized in other comprehensive income rather than in net income. Refer to Note 4 to our Consolidated Financial Statements for further discussion. 40 ITEM 7. MANAGEMENT’S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS OF OPERATIONS You should read the following discussion in conjunction with “Selected Financial Data” and our Consolidated Financial Statements and related notes, each of which is included elsewhere in this Annual Report on Form 10-K. Some of the statements in the following discussion are forward-looking statements. See “Cautionary Note Regarding Forward-Looking Statements.” Overview We have grown to $14.67 billion in assets, $11.75 billion in deposits, $6.85 billion in loans, $1.41 billion in equity capital and $1.67 billion in other assets under management as of December 31, 2011. We believe the growth in our profitability is based on several key factors, including: • the significant growth of our interest-earning asset base each year; • our ability to maintain and grow core deposits, a key funding source, which has resulted in increased net interest income from 2001 onward; and • our ability to control non-interest expense, which has contributed to a substantial improvement of our efficiency ratio to 36.4% for the year ended December 31, 2011, our lowest efficiency ratio since we opened the Bank. An important aspect of our growth strategy is the ability to provide personalized, high quality service and to effectively manage a large number of client relationships throughout the New York metropolitan area. Since the commencement of our operations, we have successfully recruited and retained more than 330 experienced private client group professionals. We believe that our existing operations infrastructure will allow us to grow our business over the next few years both geographically within the New York metropolitan area and with respect to the size and number of client relationships without substantial additional capital expenditures. Critical Accounting Policies We follow financial accounting and reporting policies that are in accordance with U.S. generally accepted accounting principles (“GAAP”). Some of these significant accounting policies require management to make difficult, subjective or complex judgments. The policies noted below, however, are deemed to be our “critical accounting policies” under the definition given to this term by the Securities and Exchange Commission (“SEC”) - those policies that are most important to the presentation of a company’s financial condition and results of operations and require management’s most difficult, subjective or complex judgments, often as a result of the need to make estimates about the effect of matters that are inherently uncertain. The judgments used by management in applying the critical accounting policies may be affected by a further and prolonged deterioration in the economic environment, which may result in changes to future financial results. Specifically, subsequent evaluations of the loan portfolio, in light of the factors then prevailing, may result in significant changes in the allowance for loan losses in future periods, and the inability to collect on outstanding loans could result in increased loan losses. In addition, the valuation of and management’s projected cash flows for certain securities in our investment portfolio could be negatively impacted by illiquidity or dislocation in marketplaces resulting in significantly depressed market prices thus leading to further impairments. Allowance for Loan Losses We consider our policies related to the allowance for loan losses as critical to our financial statement presentation. The allowance for loan losses is established through a provision for loan losses charged to current earnings. The allowance for loan losses is maintained at a level estimated by management to absorb probable losses inherent in the loan portfolio and is based on management’s continuing evaluation of the portfolio, the related risk characteristics, and the overall economic conditions affecting the loan portfolio. This estimation is inherently 41 subjective as it requires measures that are susceptible to significant revision as more information becomes available. Our methodology to determine the allowance for loan losses includes segmenting the loan portfolio into various components and applying various loss factors to estimate the amount of probable losses. The largest segment of our loan portfolio is comprised of credit-rated commercial loans, comprising 93.6% of our total loan portfolio, excluding loans held for sale, as of December 31, 2011. Our credit-rated commercial loans include commercial and industrial loans along with loans to commercial borrowers that are secured by real estate (commercial property, multi-family residential property, 1-4 family residential property, and construction and land). For each loan within this segment, a credit rating is assigned based on a review of specific risk factors including (i) historical and projected financial results of the borrower, (ii) market conditions of the borrower’s industry that may affect the borrower’s future financial performance, (iii) business experience of the borrower’s management, (iv) nature of the underlying collateral, if any, and (v) borrower’s history of payment performance. When assigning a credit rating to a loan, we use an internal nine-level rating system in which a rating of one carries the lowest level of credit risk and is used for borrowers exhibiting the strongest financial condition. Loans rated one through six are deemed to be acceptable quality and are considered “Pass.” Loans that are deemed to be of questionable quality are rated seven (special mention). Loans with adverse classifications (substandard or doubtful) are rated eight or nine, respectively. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower, or of the collateral pledged. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The outstanding amounts of credit-rated commercial loans are aggregated by credit rating, and we estimate the allowance for losses for each credit rating using loss factors based on historical loss experience and qualitative adjustments reflecting the current economic conditions and outlook for housing, employment, manufacturing, and consumer spending. The economic adjustments reflect the imprecision that is inherent in the estimates of probable loan losses, and are intended to ensure adequacy of the overall allowance amount. The loss factors assigned to each credit rating are adjusted based on management’s judgment, along with certain qualitative factors such as the trend and severity of problem loans that can cause the estimation of inherent losses to differ from historical experience. Any change to an individual credit rating affects the amount of the related allowance. Our internal review process results in the periodic review of assigned credit ratings to reflect changes in specific risk factors. Commercial lines of credit are generally issued with terms of one year, and upon annual renewal our lenders perform a full review of the specific risk factors to assess the appropriateness of the assigned credit ratings. Furthermore, loans classified as special mention, substandard or doubtful are placed on our internal watch list, and our lenders perform a credit rating review on a quarterly basis (special mention loans) or monthly basis (substandard and doubtful loans). In addition, our Risk Management function, which reports directly to the Risk Committee of our Board of Directors, performs periodic credit reviews that provide an independent evaluation of the assigned credit ratings. These reviews generally cover, in aggregate, between 40-50% of the commercial loan portfolio, including all commercial loans over $500,000 with adverse credit ratings, on an annual basis. Additionally, our Risk Management function focuses its reviews on those loans with higher-risk attributes, such as lines of credit with higher utilization percentages and loan facilities with delinquencies. Our methodology to determine the allowance for loan losses for the non-rated segments of our loan portfolio is based on historical loss experience and qualitative factors. Non-rated loans generally include commercial loans with outstanding principal balances below $100,000, overdrafts, residential mortgages, and consumer loans. The outstanding amounts of loans in each of these segments are aggregated, and we apply percentages based on historical losses and qualitative factors by segment to estimate the required allowance for loan losses. Non-rated loans comprise 6.4% of our total loan portfolio, excluding loans held for sale, as of December 31, 2011. We consider all non-accrual loans to be impaired loans, and the related specific allowances for loan losses are determined on an individual (non-homogeneous) basis. Factors contributing to the determination of specific allowances on impaired loans include the creditworthiness of the borrower and, more specifically, changes in the expected future receipt of principal and interest payments or, for collateral-dependent loans, the value of pledged collateral. For impaired loans in excess of $300,000, a specific allowance is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or, for 42 collateral-dependent loans, the fair value of collateral. For smaller impaired loans, in the absence of other factors affecting the collectability of the loan, we generally determine the amount of specific allowance using estimated loss percentages based on the amount of time the loan has been delinquent. For economic reasons and to maximize the recovery of loans, we may work with borrowers experiencing financial difficulties, and will consider modifications to a borrower’s existing loan terms and conditions that we would not otherwise consider, commonly referred to as troubled debt restructurings (“TDRs”). We record an impairment loss associated with TDRs, if any, based on the present value of expected future cash flows discounted at the original loan’s effective interest rate or, if the loan is collateral dependent, based on the fair value of the collateral less costs to sell. At the time of restructuring, we determine whether a TDR loan should accrue interest based on the accrual status of the loan immediately prior to modification. A non-accrual TDR loan will be returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Additionally, there should be a sustained period of repayment performance (generally a period of six months) by the borrower in accordance with the modified contractual terms. In years after the year of restructuring, the loan is not reported as a TDR loan if it was restructured at a market interest rate and it is performing in accordance with its modified terms. Other TDRs are reported as such for as long as the loan remains outstanding. In addition, bank regulators, as an integral part of their supervisory functions, periodically review our loan portfolio and related allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. An increase in the allowance for loan losses required by these regulatory agencies could materially adversely affect our financial condition and results of operations. Impairment of Investment Securities We consider our policies related to the evaluation of investments for other-than-temporary impairment to be critical to our financial statement presentation. We regularly evaluate our securities to identify declines in fair value that are considered other-than-temporary. Our evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties. If the amortized cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than amortized cost, the probability of a near-term recovery in value, whether we intend to sell the security and whether it is more likely than not that we will be required to sell the security before full recovery of our investment or maturity. We also consider specific adverse conditions related to the financial health, projected cash flow and business outlook for the investee, including industry and sector performance, operational and financing cash flow factors and rating agency actions. Once a decline in fair value is determined to be other-than-temporary, for equity securities, an impairment charge is recorded through current earnings based upon the estimated fair value of the security at time of impairment and a new cost basis in the investment is established. For debt investment securities deemed to be other-than-temporarily impaired on or after April 1, 2009, the investment is written down to fair value with the estimated credit loss charged to current earnings and the noncredit-related impairment loss charged to other comprehensive income. Prior to April 1, 2009, the full amount of other-than-temporary impairment on debt securities was charged to current earnings. We changed our accounting policy beginning April 1, 2009 in order to adopt new accounting requirements issued by the Financial Accounting Standards Board (“FASB”). If market, industry and/or investee conditions deteriorate, we may incur future impairments. Securities, other than securitized financial assets that are in an unrealized loss position, are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether a decline in value for these securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating, and future prospects of the issuer, (c) whether the debtor is current on contractually-obligated interest and principal payments, and (d) whether we intend to sell or whether we will be required to sell these instruments before recovery of their cost basis. In performing our other-than-temporary impairment analysis for securitized financial assets with contractual cash flows (asset-backed securities, collateralized debt obligations, commercial mortgage-backed securities and mortgage-backed securities), we estimate future cash flows for each security based upon our best estimate of future delinquencies, estimated defaults, loss severity, and prepayments. We review the estimated cash flows to determine whether we expect to receive all originally expected cash flows. Projected credit losses are compared 43 to the current level of credit enhancement to assess whether the security is expected to incur losses in any future period and therefore would be deemed other-than-temporarily impaired. New Accounting Standards In July 2010, the FASB issued ASU 2010-20, which amends ASC Topic 310 (Receivables) to require significant new disclosures about the credit quality of financing receivables and the allowance for credit losses. The objective of the new disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables, and (2) the entity’s assessment of that risk in estimating its allowance for credit losses, as well as changes in the allowance and the reasons for those changes. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance (by portfolio segment). The required disclosures include, among other things, a rollforward of the allowance for credit losses by portfolio segment, as well as information about credit quality indicators and modified, impaired, non-accrual, and past due loans. The disclosures related to period-end information (e.g., credit-quality information and the ending financing receivables balance segregated by impairment method) are required in all interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Bank). Disclosures of activity that occurs during a reporting period (e.g., the rollforward of the allowance for credit losses by portfolio segment) will be required in interim or annual periods beginning on or after December 15, 2010; disclosures of activity related to TDRs are anticipated to be required in interim or annual periods ending after June 15, 2011 based on ASU 2011-01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. We adopted the applicable requirements for the period-ended December 31, 2010 and have provided the related disclosures as required. In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which amends the provisions of ASC Topic 860 (Transfers and Servicing) related to whether or not the transferor has maintained effective control over the transferred assets that affects the determination of whether the transaction is accounted for as a sale or a secured borrowing. In the assessment of effective control, ASU 2011- 03 removed the criterion that requires transferors to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. Other criteria applicable to the assessment of effective control have not been changed. This guidance is effective for prospective periods beginning on or after December 15, 2011, or January 1, 2012 for the Bank. Early adoption is prohibited. We do not expect the adoption of ASU 2011-03 to have a material impact on our Consolidated Financial Statements. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which expands existing disclosure requirements found in ASC Topic 820 (Fair Value Measurement and Disclosures). This ASU is the result of efforts to converge GAAP and International Financial Reporting Standards (“IFRSs”), and provides guidance on how fair value should be measured and disclosed. This guidance is effective for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. We do not expect the adoption of ASU 2011-04 to have a material impact on our Consolidated Financial Statements. In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which amends ASC Topic 220 (Comprehensive Income). The new guidance requires entities to report components of comprehensive income in either (1) a single financial statement, where total net income and its components, total other comprehensive income (OCI) and its components, and total comprehensive income are presented in a continuous format, or (2) in two consecutive financial statements, where net income is reported in one statement, immediately followed by a statement presenting OCI and its components and a total for comprehensive income. The earnings per share computation is not affected by the new guidance. This guidance is effective for annual and interim periods beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted. We do not expect the adoption of ASU 2011-05 to have a material impact on our Consolidated Financial Statements. Lines of Business We operate two principal lines of business, the Bank and Signature Securities. The Bank offers a wide variety of business and personal banking products and services. Signature Securities offers investment, brokerage, asset management and insurance products and services. 44 Management’s approach to evaluating the operating performance of each line of business recognizes that these business lines both serve our target market, and a key part of our business strategy is seamless integration of banking and brokerage services for the client. Certain synergies and operational overlap exist between the two lines, where feasible and as allowed within regulatory guidelines. The development of our business and the value of overall client relationships to us, as a whole, are also considered. We measure and report results for both the banking and broker-dealer lines of business. The following table presents certain information regarding our reportable segments: (in thousands) The Bank Interest income Interest expense Non-interest income Non-interest expense (1) Income tax expense Net income Total assets Signature Securities Interest income Interest expense Non-interest income (2) Fee income from the Bank Non-interest expense Income tax (benefit) expense Net income Total assets At or for the years ended December 31, 2011 2009 2010 $ 580,449 120,728 33,786 227,878 116,976 148,653 14,659,603 $ $ $ 67 1 8,252 8,112 14,834 723 873 11,885 $ $ 466,512 121,671 34,579 205,442 75,946 98,032 11,667,286 18 1 8,069 8,019 13,845 (1,759) 4,019 10,005 386,113 123,739 28,104 186,616 41,649 62,213 9,145,760 22 1 6,528 5,392 11,376 52 513 4,996 (1) For purposes of this disclosure, non-interest expense includes the provision for loan losses of $51.9 million, $46.4 million and $42.7 million for the years ended December 31, 2011, 2010 and 2009, respectively. (2) Includes fee and other income from external clients. Signature Securities’ assets predominantly consist of cash and short-term investments to support its operational needs. Signature Securities’ assets under management were $1.30 billion, as of December 31, 2011, and represented fixed income securities, equity securities, money market mutual funds, mutual funds and other assets of its clients. See Note 21 to our audited Consolidated Financial Statements for further information regarding our lines of business. 45 Results of Operations The following is a discussion and analysis of our results of operations for the year ended December 31, 2011 compared to the year ended December 31, 2010 and for the year ended December 31, 2010 compared to the year ended December 31, 2009. Year Ended December 31, 2011 Compared to Year Ended December 31, 2010 Net Income Net income for the year ended December 31, 2011 was $149.5 million, or $3.37 diluted earnings per share, compared to $102.1 million, or $2.46 diluted earnings per share, for year ended December 31, 2010. Net income for the years ended December 31, 2011 and 2010 includes net other-than-temporary impairment losses on securities totaling $2.1 million and $14.2 million, respectively. Excluding the after tax effect of the net other-than- temporary impairment losses on securities, net income for 2011 was $150.7 million, or $3.39 diluted earnings per share, compared to $110.0 million or $2.65 diluted earnings per share for 2010. The return on average shareholders’ equity for the year ended December 31, 2011 was 12.7% compared to 11.7% for the year ended December 31, 2010. The return on average assets was 1.14% for the year ended December 31, 2011 compared to 0.99% for the year ended December 31, 2010. (in thousands) Interest income Interest expense Net interest income Provision for loan losses Non-interest income: Non-interest income excluding other-than-temporary impairment of securities recognized in earnings Net other-than-temporary impairment of securities recognized in earnings Total non-interest income Non-interest expense Income tax expense Net income Years ended December 31, 2011 2010 $ 580,516 120,729 459,787 51,876 466,530 121,672 344,858 46,372 44,127 56,824 (2,089) 42,038 182,724 117,699 149,526 (14,176) 42,648 164,896 74,187 102,051 46 Net Interest Income Net interest income is the difference between interest earned on assets and interest incurred on liabilities. The following table presents an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2011 and 2010: Years ended December 31, 2011 2010 Average Balance Interest Income/ Expense Average Yield/ Rate Average Balance Interest Income/ Expense Average Yield/ Rate $ 119,393 6,455,877 355 242,994 310,044 8,326 15,025 3,772 580,516 5,674,616 179,987 198,264 261,647 12,889,784 273,106 13,162,890 $ 632,804 6,611,992 916,992 2,702,236 10,864,024 1,073,430 11,937,454 3,269 71,557 16,274 - 91,100 29,629 120,729 0.30% 3.76% 5.46% 4.63% 7.58% 1.44% 4.50% 0.52% 1.08% 1.77% - 0.84% 2.76% 1.01% 194,864 4,875,482 519 197,093 241,885 9,336 13,677 4,020 466,530 4,319,014 182,995 194,407 233,508 10,000,270 315,051 10,315,321 724,458 4,816,609 892,186 2,020,265 8,453,518 913,199 9,366,717 4,014 65,279 18,670 - 87,963 33,709 121,672 0.27% 4.04% 5.60% 5.10% 7.04% 1.72% 4.67% 0.55% 1.36% 2.09% - 1.04% 3.69% 1.30% (dollars in thousands) INTEREST-EARNING ASSETS Short-term investments Investment securities Commercial loans and commercial mortgages (1) (2) Residential mortgages (1) (2) Consumer loans (1) (2) Loans held for sale Total interest-earning assets Non-interest-earning assets Total assets INTEREST-BEARING LIABILITIES Interest-bearing deposits NOW and interest-bearing demand Money market Time deposits Non-interest-bearing demand deposits Total deposits Borrowings Total deposits and borrowings Other non-interest-bearing liabilities and shareholders' equity Total liabilities and shareholders' equity 1,225,436 13,162,890 $ 948,604 10,315,321 OTHER DATA Net interest income / interest rate spread Net interest margin Ratio of average interest-earning assets to average interest-bearing liabilities 459,787 3.49% 3.57% 107.98% 344,858 3.37% 3.45% 106.76% (1) Non-accrual loans are included in average loan balances. (2) Loan interest income includes net accretion of deferred fees and costs of approximately $4.6 million and $3.3 million for the years ended December 31, 2011 and 2010, respectively. 47 Interest income and interest expense are affected both by changes in the volume of interest-earning assets and interest-bearing liabilities and by changes in yields and interest rates. The table below analyzes the impact of changes in volume (changes in average outstanding balances multiplied by the prior period’s rate) and changes in interest rate (changes in interest rates multiplied by the current period’s average balance). Changes that are caused by a combination of interest rate and volume changes are allocated proportionately to both changes in volume and changes in interest rate. For purposes of calculating the changes in our net interest income, the effect of non-performing assets is included in the change due to rate. (in thousands) INTEREST INCOME Short-term investments Investment securities Commercial loans and commercial mortgages Residential mortgages Consumer loans Loans held for sale Total interest income INTEREST EXPENSE NOW accounts Money market accounts Time deposits Total deposits Borrowings Total interest expense Net interest income Year ended December 31, 2011 vs. 2010 Change Due to Rate Change Due to Volume Total Change $ 37 (17,987) (7,761) (857) 1,077 (732) (26,223) (237) (18,055) (2,915) (21,207) (9,995) (31,202) 4,979 $ (201) 63,888 75,920 (153) 271 484 140,209 (508) 24,333 519 24,344 5,915 30,259 109,950 (164) 45,901 68,159 (1,010) 1,348 (248) 113,986 (745) 6,278 (2,396) 3,137 (4,080) (943) 114,929 Net interest income for the year ended December 31, 2011 was $459.8 million, an increase of $114.9 million, or 33.3%, over the year ended December 31, 2010. The increase in net interest income over the twelve month period was largely driven by increases in average earning assets and average deposits of $2.89 billion and $2.41 billion, respectively, as well as an increase in net interest margin of 12 basis points to 3.57% primarily due to lower rates paid on deposits. Total investment securities averaged $6.46 billion for the year ended December 31, 2011, compared to $4.88 billion for the year ended December 31, 2010. The overall yield on the securities portfolio for the year ended December 31, 2011 was 3.76%, down 28 basis points from the previous year. The decline in yield was predominantly due to the reinvestment of principal pay-downs from higher-yielding securities in a low interest rate environment. Our portfolio primarily consists of high quality and highly-rated mortgage-backed securities, commercial mortgage-backed securities, and collateralized mortgage obligations issued by government agencies, government-sponsored enterprises, and private issuers. We mitigate extension risk through our overall strategy of purchasing relatively stable duration securities that, by their nature, have lower yields. At December 31, 2011, the baseline average duration of our investment securities portfolio was approximately 3.13 years, compared to 2.84 years at December 31, 2010. Total commercial loans and commercial mortgages averaged $5.67 billion for the year ended December 31, 2011, an increase of $1.36 billion or 31.4% over the year ended December 31, 2010. The average yield on this portfolio decreased 14 basis points to 5.46% when compared to the year ended December 31, 2010. The decrease in 48 average yield reflects the impact of the low prevailing interest rate environment on recent loan originations. This decrease, however, was partially offset by a $8.3 million increase in prepayment penalty income, which added eight basis points to the yield of our commercial loans and commercial mortgages portfolio. Our commercial real estate loans (including multi-family loans) normally have a term of ten years, with a fixed rate of interest in years one through five and a rate that either adjusts annually or is fixed for the five years that follow. Loans that prepay in the first five years generate prepayment penalties ranging from five percentage points to one percentage point of the then-current loan balance, depending on the remaining term of the loan. If a loan is still outstanding in the sixth year and the borrower selects the fixed rate option, the prepayment penalties typically reset to a range of five points to one point over years six through ten. During 2011, the low prevailing interest rate environment, coupled with borrowers’ expectation of higher rates in future periods, contributed to the increase in prepayment activity. It is difficult to predict the level of prepayment activity in future periods as it depends on market conditions, real estate values, the actual or perceived direction of market interest rates and the contractual repricing and maturity dates of commercial real estate loans. We are an active participant in the SBA loan and SBA pool secondary market by purchasing, securitizing, and selling the guaranteed portions of SBA loans, most of which have adjustable rates and float at a spread to the prime rate. Once purchased, we typically warehouse the guaranteed loan for approximately 30 to 180 days and classify them as loans held for sale. From this warehouse we aggregate like SBA loans by similar characteristics into pools for securitization to the secondary market. The timing of the purchase and sale of such loan pools drives the quarter-to-quarter fluctuations in average balances of loans held for sale, which averaged $261.6 million and $233.2 million for the years ended December 31, 2011 and 2010, respectively. The increased inventory has been used to fill increased client demand for this product. Average total deposits and borrowings grew $2.57 billion, or 27.4%, to $11.94 billion during the year ended December 31, 2011 from $9.37 billion for the year ended December 31, 2010. Overall cost of funding was 1.01% during 2011, decreasing 29 basis points from 1.30% in 2010. For the year ended December 31, 2011, average non-interest-bearing demand deposits were $2.70 billion as compared to $2.02 billion for the year ended December 31, 2010, an increase of $682.0 million, or 33.8%. Non- interest-bearing demand deposits continue to comprise a significant component of our deposit mix, representing 26.8% of all deposits at December 31, 2011. Additionally, average NOW and interest-bearing checking and money market accounts totaled $7.24 billion for the year ended December 31, 2011, an increase of $1.70 billion, or 30.7%, over the year ended December 31, 2010. Core deposits have provided us with a source of stable, low cost funding, which has positively affected our net interest margin and income. Additionally, short-term escrow deposits have provided us with low cost funding and have assisted in net interest margin expansion. As a result of lower short-term interest rates as well as a continued decrease in competitive pricing, our funding cost for money market accounts decreased to 1.08% for the year ended December 31, 2010 compared to 1.36% for the prior year. Our funding cost for NOW accounts decreased to 0.52% for the year ended December 31, 2011 compared to 0.55% for the prior year. Average time deposits, which are relatively short-term in nature and totaled $917.0 million for the year ended December 31, 2011, carried an average cost of 1.77% in 2011, down 32 basis points from 2.09% in 2010. Time deposits are offered to supplement our core deposit operations for existing or new client relationships, and are not marketed through retail channels. For the year ended December 31, 2011, average total borrowings were $1.07 billion compared to $913.2 million for the previous year, an increase of $160.2 million, or 17.5%. The average cost of total borrowings was 2.76% and 3.69% for the years ended December 31, 2011 and 2010, respectively. At December 31, 2011, total borrowings represent approximately 10.8% of all funding compared to 11.5% at December 31, 2010. The decrease in the average cost of borrowings reflects the replacement of matured borrowings with lower cost short- term borrowing positions. Provision and Allowance for Loan Losses Our allowance for loan losses increased $18.8 million to $86.2 million at December 31, 2011 from $67.4 million at December 31, 2010. The provision for loan losses was $51.9 million for the year ended December 31, 2011 compared to $46.4 million for the prior year, an increase of $5.5 million, or 11.9%. The increases in the provision 49 and allowance for loan losses were primarily driven by growth in the loan portfolio and provisions to recognize the continued effect of the weak economic environment on our portfolio. The following table allocates the allowance for loan losses based on our judgment of inherent losses in each respective lending area according to our methodology for allocating reserves. 2011 2010 December 31, Loan Amount Allowance Amount Allowance as a % of Loan Amount Loan Amount Allowance Amount Allowance as a % of Loan Amount (dollars in thousands) Mortgage loans: Multi-family residential property Commercial property 1-4 family residential property Home equity lines of credit Construction and land $ 3,003,428 2,218,053 259,418 198,375 63,775 Other loans: Commercial and industrial loans Consumer loans Total 1,098,805 11,837 6,853,691 $ 25,160 23,844 3,096 818 4,836 27,622 786 86,162 0.84% 1.07% 1.19% 0.41% 7.58% 2.51% 6.64% 1.26% 1,716,248 1,799,162 266,011 192,027 115,195 1,146,110 13,086 5,247,839 7,401 14,521 3,352 831 2,386 37,545 1,360 67,396 0.43% 0.81% 1.26% 0.43% 2.07% 3.28% 10.39% 1.29% In determining the allowance for loan losses, management considers the imprecision inherent in the process of estimating credit losses. A portion of the allowance is based on management’s review of factors affecting the determination of probable losses inherent in the portfolio that are not necessarily captured by the application of historical loss experience factors, such as the current regional economic environment. Commercial loans (including commercial and industrial loans along with loans to commercial borrowers that are secured real estate) constitute a substantial portion of our loan activity and loan portfolio. Substantially all of the real estate collateral for the loans in our portfolio is located within the New York metropolitan area. As a result, our financial condition and results of operations may be affected by changes in the economy and the real estate market of the New York metropolitan area. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an increase in our allowance for loan losses. For additional information about the provision and allowance for loan losses, see the related discussions of asset quality later in this report. Non-Interest Income For the year ended December 31, 2011, non-interest income was $42.0 million, a decrease of $610,000, or 1.4%, when compared with 2010. Net gains on sales of securities totaled $14.4 million for the year ended December 31, 2011, a decrease of $11.0 million when compared to the prior year. During the first quarter of 2010, with the Federal Reserve’s announcement that it would end the easing program on March 31, 2010, together with overall tight credit spreads, the Bank subsequently set out to capitalize on gains in its securities portfolio with the expectation of more advantageous reinvestment opportunities. During 2011, we recognized through earnings net other-than-temporary impairment losses on securities totaling $2.1 million, compared to $14.2 million of net other-than-temporary impairment losses on securities recognized through earnings during 2010. During 2011, ten securities were determined to be other-than-temporarily impaired, including seven private collateralized mortgage obligations, one collateralized debt obligation, and two securities classified as other. During 2010, fifteen securities were determined to be other-than-temporarily impaired, including six bank-collateralized pooled trust preferred securities, five private collateralized mortgage obligations, and four collateralized debt obligations. The securities were determined to be other-than-temporarily impaired based on the extent and duration of the decline in fair value below amortized cost, giving consideration to market 50 liquidity, the uncertainty of a near-term recovery in value and the decline in expected cash flows. For further discussion of our other-than-temporary impairment losses, see Note 4 to our Consolidated Financial Statements. Non-Interest Expense Non-interest expense increased $17.8 million, or 10.8%, to $182.7 million for the year ended December 31, 2011 from $164.9 million for the year ended December 31, 2010. This increase was primarily driven by a $14.8 million increase in salaries and benefits mostly attributable to the addition of seven private client banking teams and other personnel during the year, combined with a $1.4 million increase in occupancy and equipment primarily resulting from additional private client offices and expanded operation centers. The increase also reflects a $638,000 increase in other general and administrative expenses, reflecting increased expenses due to additional client activity, which were partially offset by a reduction in FDIC deposit insurance assessment fees. For the year-ended December 31, 2011, our FDIC deposit insurance assessment totaled $9.5 million compared, to $13.5 million for 2010. This decrease reflects a reduction of $2.2 million due to the elimination of assessments charged for participation in the Transaction Account Guarantee Program, which was in effect through December 31, 2010. In addition, our base FDIC assessment for the year ended December 31, 2011 decreased $1.9 million when compared to 2010, largely due to new assessment rules (as further discussed below). In accordance with the Dodd-Frank Act, on February 7, 2011, the FDIC adopted a final rule that redefined the assessment base for deposit insurance assessments as average consolidated total assets minus average tangible equity, rather than average deposits. The final rule also established a new assessment rate schedule, as well as alternative rate schedules, that become effective when the insurance fund’s reserve ratio reaches certain levels. The final rule also makes conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates, eliminates the secured liability adjustment and creates a new assessment rate adjustment for unsecured debt held that is issued by another insured depository institution. The new rate schedule and other revisions to the assessment rules became effective April 1, 2011. For large insured depository institutions, generally defined as those with at least $10 billion in total assets, the final rule also eliminates risk categories and the use of long-term debt issuer ratings when calculating the initial base assessment rates and combines regulatory ratings and financial measures into two scorecards, one for most large insured depository institutions and another for highly complex insured depository institutions, to calculate assessment rates. A highly complex institution is generally defined as an insured depository institution with more than $50 billion in total assets that is controlled by a parent company with more than $500 billion in total assets. Under the new assessment rate schedule, effective April 1, 2011, the initial base assessment rate for large and highly complex insured depository institutions range from five to thirty-five basis points, and total base assessment rates, after applying all the unsecured debt and brokered deposit adjustments, range from two and one-half to forty-five basis points. As the new assessment rules currently stand, we expect the rules will have a continued positive impact on our future FDIC deposit insurance assessment fees compared to the assessment rules in effect prior to the recent changes. Stock-Based Compensation We recognize compensation expense in our statement of operations for all stock-based compensation awards over the requisite service period with a corresponding credit to equity, specifically additional paid-in capital. Compensation expense is measured based on grant date fair value and is included in salaries and benefits (non- interest expense). As of December 31, 2011, there was $22.8 million of total unrecognized compensation cost related to unvested restricted shares that is expected to be recognized over a weighted-average period of 3.76 years. During the years ended December 31, 2011 and 2010, we recognized compensation expense of $8.5 million and $9.3 million, respectively, for restricted shares. Included in compensation expense for the year ended December 31, 2010 was $1.6 million from the December 13, 2010 accelerated vesting of 214,330 restricted shares originally scheduled to vest on March 22, 2011. No restricted shares vested during the year ended December 31, 2011. The total fair value of restricted shares that vested during the year ended December 31, 2010 was $16.7 million. 51 Income Taxes We recognized income tax expenses for the years ended December 31, 2011 and 2010 of $117.7 million and $74.2 million, respectively. The components of income tax expense for the years ended December 31, 2011 and 2010 are reflected in the following table: (in thousands) Current expense Deferred income tax benefit Total income tax expense Years ended December 31, 2011 2010 $ $ 128,831 (11,132) 117,699 87,276 (13,089) 74,187 The increase in current income tax expense was primarily driven by an increase in our pre-tax income, combined with the elimination of tax benefits received on income from our real estate investment trust (“REIT”) subsidiary. In April 2007, the State of New York enacted tax legislation that included, for companies with average assets in excess of $8 billion, a four-year phase out of the tax benefit received on income from REIT subsidiaries. Since our average assets are in excess of $8 billion, the income tax benefit on income from our REIT subsidiary was completely eliminated beginning January 1, 2011. Accordingly, our effective tax rate for the year ended December 31, 2011 increased to 44.0%, compared to 42.1% for the prior year. 52 Year Ended December 31, 2010 Compared to Year Ended December 31, 2009 Net Income Net income available to common shareholders for the year ended December 31, 2010 was $102.1 million, or $2.46 diluted earnings per share, compared to $50.5 million, or $1.30 diluted earnings per share, for the year ended December 31, 2009. The Bank recorded a $10.2 million non-cash accelerated deemed dividend in the first quarter of 2009 to account for the difference between the redemption payment and the carrying value of the preferred stock repurchased from the U.S. Treasury. The difference between net income and net income available to common shareholders in 2009 is attributable to the recognition of the $10.2 million non-cash accelerated deemed dividend, combined with the previously scheduled preferred dividend of $1.5 million and the accretion of $454,000 of the discount, resulting in a total dividend and related costs of $12.2 million during the first quarter and full year 2009. Excluding the effect of the non-cash accelerated deemed dividend of $10.2 million, net income available to common shareholders for the year ended December 31, 2009 was $60.8 million or $1.57 diluted earnings per share. Net income for the years ended December 31, 2010 and 2009 includes net other-than-temporary impairment losses on securities totaling $14.2 million and $1.3 million, respectively. Excluding the after tax effect of the net other-than-temporary impairment losses on securities, net income for 2010 was $110.0 million, or $2.65 diluted earnings per share, compared to $63.5 million or $1.64 diluted earnings per share for 2009. The return on average shareholders’ equity for the year ended December 31, 2010 was 11.7% compared to 8.35% for the year ended December 31, 2009. The return on average assets was 0.99% for the year ended December 31, 2010 compared to 0.79% for the year ended December 31, 2009. (in thousands) Interest income Interest expense Net interest income Provision for loan losses Non-interest income: Non-interest income excluding other-than-temporary impairment of securities recognized in earnings Net other-than-temporary impairment of securities recognized in earnings Total non-interest income Non-interest expense Income tax expense Net income Dividends on preferred stock and related adjustments Net income available to common shareholders Years ended December 31, 2010 2009 $ 466,530 121,672 344,858 46,372 386,135 123,740 262,395 42,715 56,824 35,954 (14,176) 42,648 164,896 74,187 102,051 $ - $ 102,051 (1,322) 34,632 149,885 41,701 62,726 12,203 50,523 53 Net Interest Income Net interest income is the difference between interest earned on assets and interest incurred on liabilities. The following table presents an analysis of net interest income by each major category of interest-earning assets and interest-bearing liabilities for the years ended December 31, 2010 and 2009: (dollars in thousands) INTEREST-EARNING ASSETS Short-term investments Investment securities Commercial loans and commercial mortgages (1) (2) (3) Residential mortgages (1) (2) Consumer loans (1) (2) Loans held for sale Total interest-earning assets Non-interest-earning assets Total assets INTEREST-BEARING LIABILITIES Interest-bearing deposits NOW and interest-bearing demand Money market Time deposits Non-interest-bearing demand deposits Total deposits Borrowings Total deposits and borrowings Other non-interest-bearing liabilities Years ended December 31, 2010 Interest Income/ Expense Average Yield/ Rate 2009 Interest Income/ Expense Average Yield/ Rate Average Balance Average Balance $ 194,864 4,875,482 519 197,093 241,886 9,336 13,677 4,020 466,531 4,319,014 182,995 194,407 233,508 10,000,270 315,051 10,315,321 $ 724,458 4,816,609 892,186 2,020,265 8,453,518 913,199 9,366,717 4,014 65,279 18,670 - 87,963 33,709 121,672 0.27% 4.04% 5.60% 5.10% 7.04% 1.72% 4.67% 0.55% 1.36% 2.09% - 1.04% 3.69% 1.30% 0.19% 4.76% 5.50% 5.43% 6.84% 1.90% 5.02% 0.83% 1.86% 2.54% - 1.36% 4.06% 1.71% 136,350 3,567,812 260 169,732 192,445 9,819 11,214 2,786 386,256 4,924 59,122 21,352 - 85,398 38,342 123,740 3,496,846 180,789 164,004 146,448 7,692,249 296,305 7,988,554 594,455 3,187,039 840,529 1,668,753 6,290,776 944,144 7,234,920 753,634 7,988,554 and shareholders' equity Total liabilities and shareholders' equity 948,604 10,315,321 $ OTHER DATA Tax-equivalent basis Net interest income / interest rate spread 344,859 Net interest margin Tax-equivalent adjustment / effect Net interest income / interest rate spread Net interest margin As reported Net interest income / interest rate spread Net interest margin Ratio of average interest-earning assets to average interest-bearing liabilities 3.37% 3.45% 262,516 3.31% 3.41% (1) (0.00)% (0.00)% 344,858 3.37% 3.45% 106.76% (121) (0.00)% (0.00)% 262,395 3.31% 3.41% 106.32% (1) Non-accrual loans are included in average loan balances. (2) Loan interest income includes net accretion of deferred fees and costs of approximately $3.3 million and $3.1 million for the years ended December 31, 2010 and 2009, respectively. (3) Includes interest income on certain tax-exempt assets presented on a tax-equivalent basis using a 35 percent federal tax rate. 54 Interest income and interest expense are affected both by changes in the volume of interest-earning assets and interest-bearing liabilities and by changes in yields and interest rates. The table below analyzes the impact of changes in volume (changes in average outstanding balances multiplied by the prior period’s rate) and changes in interest rate (changes in interest rates multiplied by the current period’s average balance). Changes that are caused by a combination of interest rate and volume changes are allocated proportionately to both changes in volume and changes in interest rate. For purposes of calculating the changes in our net interest income, non- performing assets are included in the appropriate balance and shown as a change due to rate. (in thousands) INTEREST INCOME Short-term investments Investment securities Commercial loans and commercial mortgages Residential mortgages Consumer loans Loans held for sale Total interest income INTEREST EXPENSE NOW accounts Money market accounts Time deposits Total deposits Borrowings Total interest expense Net interest income Year ended December 31, 2010 vs. 2009 Change Due to Rate Change Due to Volume Total Change $ 147 (34,849) 4,194 (603) 384 (422) (31,149) (1,987) (24,073) (3,994) (30,054) (3,376) (33,430) 2,281 $ 112 62,210 45,247 120 2,079 1,656 111,424 1,077 30,230 1,312 32,619 (1,257) 31,362 80,062 259 27,361 49,441 (483) 2,463 1,234 80,275 (910) 6,157 (2,682) 2,565 (4,633) (2,068) 82,343 Net interest income for the year ended December 31, 2010 was $344.9 million, an increase of $82.5 million, or 31.4%, over the year ended December 31, 2009. The increase in net interest income over the twelve month period was largely driven by increases in average earning assets and average deposits of $2.31 billion and $2.16 billion, respectively, as well as an increase in net interest margin on a tax-equivalent basis of four basis points to 3.45% primarily due to lower rates paid on deposits. Total average investment securities for the year ended December 31, 2010 were $4.88 billion compared to $3.57 billion for the year ended December 31, 2009. The overall yield on the securities portfolio for the year ended December 31, 2010 was 4.04%, down 72 basis points from the comparable period a year ago. The decline in yield was predominantly due to the reinvestment of principal pay-downs from higher-yielding securities in a low interest rate environment. Additionally, yields were negatively affected by increased premium amortization associated with principal reductions due to Freddie Mac’s repurchase of delinquent underlying mortgages in securities issued by them. Our portfolio primarily consists of high quality and highly-rated mortgage-backed securities, commercial mortgage-backed securities, and collateralized mortgage obligations issued by government agencies, government-sponsored enterprises, and private issuers. We mitigate extension risk through our overall strategy of purchasing relatively short duration securities that, by their nature, have lower yields. At December 31, 2010, the baseline average duration of our investment securities portfolio was approximately 2.84 years, compared to 2.25 years at December 31, 2009. 55 Total commercial loans and commercial mortgages averaged $4.32 billion for the year ended December 31, 2010, an increase of $822.2 million or 23.5% over the year ended December 31, 2009. The average yield on this portfolio increased to 5.60%, up ten basis points from the prior year. The increase in average yield is primarily due to wider credit spreads and less competitive pricing pressures brought on by reduced lending competition. In order to assist in monitoring and controlling credit risk, we primarily lend to existing clients of our Bank with whom we have or expect to have deposit and/or brokerage relationships. We target our lending to privately-owned businesses, their owners and senior managers who are generally high net worth individuals who meet our credit standards. We are an active participant in the SBA loan and SBA pool secondary market by purchasing, securitizing, and selling the guaranteed portions of SBA loans, most of which have adjustable rates and float at a spread to the prime rate. Once purchased, we typically warehouse the guaranteed loan for approximately 30 to 180 days and classify them as loans held for sale. From this warehouse we aggregate like SBA loans by similar characteristics into pools for securitization to the secondary market. The timing of the purchase and sale of such loan pools drives the quarter-to-quarter fluctuations in average balances of loans held for sale, which averaged $233.2 million and $146.1 million for the years ended December 31, 2010 and 2009, respectively. The increased inventory has been used to fill increased client demand for this product. Average total deposits and borrowings grew $2.13 billion, or 29.5%, to $9.37 billion during the year ended December 31, 2010 from $7.23 billion for the year ended December 31, 2009. Overall cost of funding was 1.30% during 2010, decreasing 41 basis points from 1.71% in 2009. For the year ended December 31, 2010, average non-interest-bearing demand deposits were $2.02 billion as compared to $1.67 billion for the year ended December 31, 2009, an increase of $351.5 million, or 21.1%. Non- interest-bearing demand deposits continue to comprise a significant component of our deposit mix, representing 25.9% of all deposits at December 31, 2010. Additionally, average NOW and interest-bearing checking and money market accounts totaled $5.54 billion for the year ended December 31, 2010, an increase of $1.76 billion, or 46.5%, over the year ended December 31, 2009. Core deposits have provided us with a source of stable, low cost funding, which has positively affected our net interest margin and income. Additionally, short-term escrow deposits have provided us with low cost funding and have assisted in net interest margin expansion. As a result of lower short-term interest rates as well as a significant decrease in competitive pricing, our funding cost for NOW accounts decreased to 0.55% for the year ended December 31, 2010 compared to 0.83% for the prior year, and our funding cost for money market accounts decreased to 1.36% for the year ended December 31, 2010 compared to 1.86% for the prior year. Average time deposits, which are relatively short-term in nature and totaled $892.2 million for the year ended December 31, 2010, carried an average cost of 2.09% in 2010, down 45 basis points from 2.54% in 2009. Time deposits are offered to supplement our core deposit operations for existing or new client relationships, and are not marketed through retail channels. For the year ended December 31, 2010, average total borrowings were $913.2 million compared to $944.1 million for the previous year, a decrease of $30.9 million or 3.3%. The average cost of total borrowings was 3.69% and 4.06% for the years ended December 31, 2010 and 2009, respectively. At December 31, 2010, total borrowings represent approximately 11.5% of all funding compared to 12.3% at December 31, 2009. The decrease in average borrowings was driven by the increase in average deposits, while the decrease in the average cost of borrowings reflects the replacement of matured borrowings with lower cost short-term borrowing positions. Provision and Allowance for Loan Losses Our allowance for loan losses increased $12.3 million to $67.4 million at December 31, 2010 from $55.1 million at December 31, 2009. This increase was primarily driven by growth in the loan portfolio and an increase in charge- offs, along with provisions for the continued effect of the weak economic environment on our portfolio. 56 The following table allocates the allowance for loan losses based on our judgment of inherent losses in each respective lending area according to our methodology for allocating reserves. 2010 2009 December 31, Loan Amount Allowance Amount Allowance as a % of Loan Amount Loan Amount Allowance Amount Allowance as a % of Loan Amount (dollars in thousands) Mortgage loans: Multi-family residential property Commercial property 1-4 family residential property Home equity lines of credit Construction and land $ 1,716,248 1,799,162 266,011 192,027 115,195 Other loans: Commercial and industrial loans Consumer loans Total 1,146,110 13,086 5,247,839 $ 7,401 14,521 3,352 831 2,386 37,545 1,360 67,396 0.43% 0.81% 1.26% 0.43% 2.07% 3.28% 10.39% 1.29% 1,153,610 1,492,877 260,986 170,891 178,740 1,107,850 14,208 4,379,162 5,088 10,778 1,576 631 4,027 32,279 741 55,120 0.44% 0.72% 0.60% 0.37% 2.25% 2.91% 5.22% 1.26% The provision for loan losses was $46.4 million for the year ended December 31, 2010 compared to $42.7 million for the prior year, an increase of $3.7 million, or 8.6%. The increase was predominantly driven by loan portfolio growth, an increase in charge-offs during 2010 and an increase in provisions to recognize the continued effect of the weak economic environment on our portfolio. In determining the allowance for loan losses, management considers the imprecision inherent in the process of estimating credit losses. A portion of the allowance is based on management’s review of factors affecting the determination of probable losses inherent in the portfolio that are not necessarily captured by the application of historical loss experience factors, such as the current regional economic environment. Commercial loans (including commercial and industrial loans along with loans to commercial borrowers that are secured real estate) constitute a substantial portion of our loan activity and loan portfolio. Substantially all of the real estate collateral for the loans in our portfolio is located within the New York metropolitan area. As a result, our financial condition and results of operations may be affected by changes in the economy and the real estate market of the New York metropolitan area. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an increase in our allowance for loan losses. Non-Interest Income For the year ended December 31, 2010, non-interest income was $42.6 million, an increase of $8.0 million, or 23.1%, when compared with 2009. The increase for the year was predominantly due to increases in net gains on sales of securities and loans as well as trading income, which were partially offset by the recognition of net other- than-temporary impairment losses. Net gains on sales of securities totaled $25.4 million for the year ended December 31, 2010, an increase of $16.7 million when compared to the prior year. Due to the prolonged low interest rate environment and narrower credit spreads, fair values of the bank’s securities portfolio improved in 2010. The increase in gains on sales of securities was predominantly due to the sale of securities whose average life shortened due to the increased mortgage loan buyback activity of the Federal National Mortgage Association (“FNMA”) and the Federal Home Loan Mortgage Corporation (“FHLMC”). For the year ended December 31, 2010, net gains on sales of loans totaled $6.1 million, compared to $3.6 million for 2009. The increase in gains on sales of loans is predominantly due to an increase in client demand for SBA loan and pool products driven by stabilization in this marketplace from government interaction as part of the Small Business Jobs Act of 2010. Trading income totaled $124,000 for the year ended December 31, 2010, compared to a trading loss of $1.0 57 million for 2009. The increase in trading income was predominantly driven by increases in the fair values of credit default swaps used to economically hedge debt securities. During the year ended December 31, 2010, we recorded unrealized mark-to-market gains on credit default swaps totaling $423,000, respectively, compared to unrealized mark-to-market losses of $417,000 recorded during the prior year. During 2010, we recognized through earnings net other-than-temporary impairment losses on securities totaling $14.2 million, compared to $1.3 million of net other-than-temporary impairment losses on securities recognized through earnings during 2009. During 2010, fifteen securities were determined to be other-than-temporarily impaired, including six bank-collateralized pooled trust preferred securities, five private collateralized mortgage obligations, and four collateralized debt obligations. During 2009, ten securities were determined to be other-than- temporarily impaired, including three bank-collateralized pooled trust preferred securities and seven private collateralized mortgage obligations. The securities were determined to be other-than-temporarily impaired based on the extent and duration of the decline in fair value below amortized cost, giving consideration to market liquidity, the uncertainty of a near-term recovery in value and the decline in expected cash flows. For further discussion of our other-than-temporary impairment losses, see Note 4 to our Consolidated Financial Statements. Additionally, non-interest income for 2010 was also impacted by a decrease in commissions, which decreased $509,000 to $9.1 million when compared to the prior year. The decrease in commissions was predominantly driven by a decrease in commissions that we earn on off-balance sheet money market funds. Given the prolonged low interest rate environment, commissions on off-balance sheet money market funds have been reduced and, for some funds, eliminated in order to maintain positive yields on those funds. Should the low interest rate environment continue for an extended period of time, we may experience a further decline in our commission income. Non-Interest Expense Non-interest expense increased $15.0 million, or 10.0%, to $164.9 million for the year ended December 31, 2010 from $149.9 million for the year ended December 31, 2009. This increase was primarily driven by a $12.9 million increase in salaries and benefits mostly attributable to the addition of five private client banking teams and other personnel during the year. Also included in 2010 salaries and benefits expense was $1.6 million from the December 13, 2010 accelerated vesting of 214,330 restricted shares originally scheduled to vest on March 22, 2011. The accelerated vesting, which was approved by the Compensation Committee of the Bank’s Board of Directors, was determined to be in the best interest of the Bank and its employees due to the potential expiration at the end of 2010 of the lower personal income tax rates enacted during the Bush Administration. Additionally, other general and administrative expenses increased $1.3 million, reflecting increased expenses due to additional client activity and additional FDIC deposit insurance assessment fees (as further described below), which were partially offset by the one-time $3.5 million FDIC special assessment fee recorded in the second quarter of 2009. For the year-ended December 31, 2010, our base FDIC deposit insurance assessment totaled $11.3 million, an increase of $3.1 million when compared to the prior year as a result of our increased level of deposits. In addition, effective January 1, 2010, the FDIC increased the assessment rates for participation in the Transaction Account Guarantee Program, which provides a full guarantee above the existing $250,000 deposit insurance limit for funds held at participating FDIC-insured depository institutions in non-interest-bearing transaction accounts and certain NOW accounts. As a participant in this program, the increased assessment rate combined with increased deposits resulted in an additional expense of $1.1 million for the year-ended December 31, 2010, when compared to prior year. The Transaction Account Guarantee Program was in effect through December 31, 2010, after which date the Dodd-Frank Act provides all banks with new or additional coverage, including unlimited FDIC insurance coverage for noninterest-bearing transaction checking accounts and interest on lawyer transaction accounts through December 31, 2012. In accordance with the Dodd-Frank Act, on February 7, 2011, the FDIC adopted a final rule that redefines the assessment base for deposit insurance assessments as average consolidated total assets minus average tangible equity, rather than on deposit bases, and adopts a new assessment rate schedule, as well as alternative rate schedules that become effective when the reserve ratio reaches certain levels. The final rule also makes conforming changes to the unsecured debt and brokered deposit adjustments to assessment rates, eliminates the secured liability adjustment and creates a new assessment rate adjustment for unsecured debt held that is issued by another insured depository institution. The new rate schedule and other revisions to the assessment rules 58 become effective April 1, 2011 and will be used to calculate our June 30, 2011 invoices for assessments due September 30, 2011. For large insured depository institutions, generally defined as those with at least $10 billion in total assets, the final rule also eliminates risk categories and the use of long-term debt issuer ratings when calculating the initial base assessment rates and combines regulatory ratings and financial measures into two scorecards, one for most large insured depository institutions and another for highly complex insured depository institutions, to calculate assessment rates. A highly complex institution is generally defined as an insured depository institution with more than $50 billion in total assets that is controlled by a parent company with more than $500 billion in total assets. Each scorecard would have two components - a performance score and loss severity score, which will be combined and converted to an initial assessment rate. The FDIC will have the ability to adjust a large or highly complex insured depository institution’s total score by a maximum of 15 points up or down based upon significant risk factors that are not captured by the scorecard. Under the new assessment rate schedule, effective April 1, 2011, the initial base assessment rate for large and highly complex insured depository institutions will range from five to thirty-five basis points, and total base assessment rates, after applying all the unsecured debt and brokered deposit adjustments, will range from two and one-half to forty-five basis points. While the impact of the new assessment rules is not yet determinable, we do not expect the rules will have a material impact on our FDIC deposit insurance assessment fees. Stock-Based Compensation We recognize compensation expense in our statement of operations for all stock-based compensation awards over the requisite service period with a corresponding credit to equity, specifically additional paid-in capital. Compensation expense is measured based on grant date fair value and is included in salaries and benefits (non- interest expense). As of December 31, 2010, there was $15.8 million of total unrecognized compensation cost related to unvested restricted shares that is expected to be recognized over a weighted-average period of 5.30 years. During the years ended December 31, 2010 and 2009, we recognized compensation expense of $9.3 million and $5.5 million, respectively, for restricted shares. Included in compensation expense for the year ended December 31, 2010 was $1.6 million from the December 13, 2010 accelerated vesting of 214,330 restricted shares originally scheduled to vest on March 22, 2011. The total fair value of restricted shares that vested during the years ended December 31, 2010 and 2009 was $16.7 million and $3.6 million, respectively. Income Taxes We recognized income tax expenses for the years ended December 31, 2010 and 2009 of $74.2 million and $41.7 million, respectively. The components of income tax expense for the years ended December 31, 2010 and 2009 are reflected in the following table: (in thousands) Current expense Deferred income tax benefit Total income tax expense Years ended December 31, 2010 2009 $ $ 87,276 (13,089) 74,187 50,161 (8,460) 41,701 The increase in current income tax expense was primarily driven by an increase in our pre-tax income, combined with reduced tax benefits received on income from our real estate investment trust (“REIT”) subsidiary. In April 2007, the State of New York enacted tax legislation that included, for companies with average assets in excess of $8 billion, a four-year phase out of the tax benefit received on income from REIT subsidiaries. Our average assets for 2010 exceeded $8 billion, and as a result, the income tax benefit we receive on income from our REIT subsidiary was limited beginning with the first quarter of 2010. Accordingly, our effective tax rate for the year ended December 31, 2010 increased to 42.1%, compared to 39.9% for the prior year. In 2011, we will receive no tax benefits from our REIT subsidiary, and as a result, we expect our effective tax rate will increase to approximately 43%. 59 Financial Condition Securities Portfolio Securities in our investment portfolio are designated as either held-to-maturity (“HTM”) or available-for-sale (“AFS”) based upon various factors, including asset/liability management strategies, liquidity and profitability objectives and regulatory requirements. HTM securities are carried at cost and adjusted for amortization of premiums or accretion of discounts. AFS securities may be sold prior to maturity, based upon asset/liability management decisions and are carried at fair value. Unrealized gains or losses on AFS securities are recorded in accumulated other comprehensive income (loss), net of tax, in shareholders’ equity. Other-than-temporary impairment losses on AFS and HTM debt securities attributable to credit losses are recorded in current earnings, while losses attributable to noncredit factors are recorded in accumulated other comprehensive income. Amortization of premiums and accretion of discounts on mortgage-backed securities are periodically adjusted for estimated prepayments. At December 31, 2011, our total securities portfolio was $7.07 billion compared to $5.70 billion at December 31, 2010. Our portfolio primarily consists of mortgage-backed securities (“MBSs”) and collateralized mortgage obligations (“CMOs”) issued by U.S. Government agencies ($862.0 million), government-sponsored enterprises ($4.49 billion), and private issuers ($803.9 million). Overall, our securities portfolio had a weighted average duration of 3.13 years and a weighted average life of 4.68 years as of December 31, 2011. As of December 31, 2011, 84.9% of our securities portfolio had a AAA credit rating and 94.3% had a credit rating of A or better. In addition, 97.3% of our securities portfolio was rated investment grade or better at December 31, 2011, compared to 96.6% at December 31, 2010. Also, at December 31, 2011, we did not hold sovereign debt of Greece or other Euro-zone countries currently experiencing financial difficulty. For further discussion of our investment securities and the related determination of fair value, see Notes 3 and 4 to our Consolidated Financial Statements. The agency MBS portfolio primarily consists of adjustable rate hybrid securities, fixed rate balloon, and seasoned 15-year structures. The agency CMO portion of our portfolio primarily consists of short duration planned amortization and sequential structures, collateralized by conforming first lien residential mortgages. The private CMO portfolio consists of prime borrowers with seasoned underlying mortgages and supportive credit enhancement. The weighted average age of the underlying collateral is approximately 89 months with a weighted average loan to value ratio of approximately 57% of original appraised values. The weighted average FICO score of the borrowers was approximately 722 at origination of the loan. The Private CMO sector is diversified with an average holding of $2.3 million per issue. Our asset-backed portfolio primarily consists of intermediate term fixed rate AAA and floating rate AA/A rated credit card, auto and home equity collateralized securities and collateralized debt obligations. At December 31, 2011, the net unrealized gain on AFS securities, net of tax effect, was $29.8 million as reflected in accumulated other comprehensive income, compared to a net unrealized loss of $18.4 million at December 31, 2010. The fair value of our AFS securities is affected by several factors including, credit spreads, interest rate environment, unemployment rates, delinquencies and defaults on the mortgages underlying such obligations, changes in interest rates resulting from expiration of the fixed rate portion of adjustable rate mortgages (“ARMs”), changing home prices, market liquidity for such obligations, and uncertainties in respect of government-sponsored enterprises such as Fannie Mae and Freddie Mac, which guarantee many of the debt securities we own. The estimated effect of possible changes in interest rates on our earnings and equity is discussed in “Item 7A. Quantitative and Qualitative Disclosures About Market Risk.” We continue to closely monitor these securities and, other than those securities for which we have previously recorded other-than-temporary impairment losses, we believe the declines in fair value are temporary. We have no intent to sell these securities and we believe it is not more likely than not that we will be required to sell these investments before recovery of their amortized cost basis. In the event these securities demonstrate an adverse change in expected cash flows and we no longer expect to recover the amortized cost basis, we would recognize additional other-than-temporary impairment losses through earnings. 60 The following table summarizes the components of our AFS and HTM securities portfolios at the dates indicated: (in thousands) AVAILABLE-FOR-SALE Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: 2011 December 31, 2010 2009 Amortized Cost Fair Value Amortized Cost Fair Value Amortized Cost Fair Value $ 36,437 1,103,380 38,649 1,141,619 24,764 1,048,591 25,538 1,065,450 39,392 848,967 40,467 875,552 681,869 2,902,349 818,904 697,542 2,968,904 792,514 642,741 2,060,430 825,674 646,627 2,084,165 797,478 126,064 1,508,496 833,446 127,326 1,532,955 778,702 Commercial mortgage-backed securities 315,573 322,026 191,293 191,063 151,492 151,838 Single issuer trust preferred & corporate debt securities Pooled trust preferred securities Collateralized debt obligations Other Equity securities (1) Total available-for-sale HELD-TO-MATURITY Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: Commercial mortgage-backed securities Collateralized debt obligations Other Total held-to-maturity 345,324 28,216 6,487 204,002 15,708 6,458,249 $ 336,623 7,116 2,757 189,506 15,599 6,512,855 207,363 28,608 6,992 228,949 15,475 5,280,880 203,416 4,562 4,874 210,946 15,167 5,249,286 97,772 32,502 15,854 233,389 14,757 3,902,131 88,874 11,149 9,858 206,577 14,285 3,837,583 $ 3,286 20,013 3,431 20,859 3,796 9,465 3,920 9,998 4,954 12,657 5,015 13,159 122,560 358,859 11,419 358 5,309 34,240 556,044 $ 128,185 375,661 7,972 359 2,710 32,803 571,980 83,858 279,497 12,838 12,495 6,342 39,605 447,896 85,958 286,176 10,358 12,495 3,688 37,722 450,315 25,706 169,806 14,213 17,419 8,137 43,092 295,984 25,732 174,024 11,315 17,326 7,947 36,090 290,608 (1) Equity securities represent Community Reinvestment Act (“CRA”) qualifying closed-end bond fund investments. The following table presents the credit rating distribution of our securities portfolio at December 31, 2011: Credit Rating AAA AA A BBB Below BBB Total Percentage of Portfolio 84.93% 2.64% 6.75% 2.99% 2.69% 100.00% 61 The following table provides the estimated change in fair value of our debt securities for various interest rate shocks at December 31, 2011: Interest Rate Shock +100 basis points +200 basis points +300 basis points Estimated Fair Value Change (0.34%) (3.77%) (8.24%) The following table presents the contractual maturity distribution and the weighted average yields of our combined available-for-sale and held-to-maturity securities portfolio as of December 31, 2011. Due to prepayments of collateral underlying the securities, actual maturity may differ from contractual maturity. (dollars in thousands) Less than one year Collateralized mortgage obligations Other securities (1) Total One year to less than five years Mortgage-backed securities Collateralized mortgage obligations Other securities Total Five years to less than 10 years Mortgage-backed securities Collateralized mortgage obligations Other securities Total 10 years and longer Mortgage-backed securities Collateralized mortgage obligations Other securities Total All maturities Mortgage-backed securities Collateralized mortgage obligations Other securities Total Amortized Cost Fair Value Average Yield $ 661 87,344 88,005 $ $ 1,782 8,209 29,087 39,078 $ $ 13,746 150,202 237,440 401,388 $ $ $ 1,147,588 4,736,888 585,638 6,470,114 $ $ 1,163,116 4,895,960 939,509 6,998,585 667 95,191 95,858 1,873 8,636 29,854 40,363 14,806 153,055 232,172 400,033 1,187,879 4,808,420 536,683 6,532,982 1,204,558 4,970,778 893,900 7,069,236 3.90% 15.57% 15.48% 5.00% 5.05% 3.59% 3.96% 4.47% 3.99% 4.55% 4.34% 3.39% 3.42% 3.69% 3.44% 3.40% 3.44% 5.01% 3.64% (1) Excludes equity securities, which do not have maturities. 62 Loan Portfolio The following table presents information regarding the composition of our loan portfolio, including loans held for sale, as of the dates indicated: (dollars in thousands) Amount % Amount % Amount % Amount % Amount % 2011 2010 December 31, 2009 2008 2007 Mortgage loans: Multi-family residential property $ 3,003,428 41.68% 1,716,248 30.68% 1,153,610 24.78% 721,166 19.59% 135,834 6.20% Commercial property 2,218,053 30.78% 1,799,162 32.16% 1,492,877 32.06% 1,156,315 31.40% 441,759 20.16% 1-4 family residential property Home equity lines of credit Construction and land 259,418 198,375 63,775 3.60% 2.75% 0.88% 266,011 192,027 115,195 4.76% 3.43% 2.06% 260,986 170,891 178,740 5.61% 3.67% 3.84% 245,892 129,202 168,890 6.68% 3.51% 4.59% 209,489 90,023 116,040 9.56% 4.11% 5.30% Other loans: Commercial and industrial 1,098,805 15.24% 1,146,110 20.49% 1,107,850 23.79% 1,033,119 28.06% 1,008,655 46.03% Commercial - SBA guaranteed portion Consumer Sub-total / Total Premiums, deferred fees and costs Total 354,060 11,837 4.91% 0.16% 346,454 13,086 6.19% 0.23% 276,802 14,208 5.95% 0.31% 208,977 18,504 5.68% 0.50% 165,613 23,984 7.56% 1.09% 7,207,751 100.00% 5,594,293 100.00% 4,655,964 100.00% 3,682,065 100.00% 2,191,397 100.00% 35,000 $ 7,242,751 32,834 5,627,127 13,341 4,669,305 6,157 3,688,222 6,548 2,197,945 Total loans increased by $1.62 billion, or 28.7%, to $7.24 billion at December 31, 2011, from $5.63 billion at December 31, 2010. Our total loan-to-deposit ratio, excluding loans held for sale, increased to 58.3% at December 31, 2011from 55.6% at December 31, 2010. We continue to predominantly restrict lending to existing clients in our market area with whom we have or expect to have deposit and/or brokerage relationships to assist us in monitoring and controlling credit risk. As of December 31, 2011, substantially all of the real estate collateral for the loans in our portfolio was located within the New York metropolitan area. As a result, our financial condition and results of operations may be affected by changes in the economy and the real estate market of the New York metropolitan area. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an increase in our allowance for loan losses. We only securitize the U.S. government guaranteed portion of SBA loans, and we have not securitized any of our loans secured by real estate. As a result, we have not made any representations to, and do not have obligations to, third-party purchasers regarding these loans. At December 31, 2011, loans fully secured by cash and marketable securities represented 1.6% of outstanding loan balances. The SBA portfolio, consisting only of the guaranteed portion of the SBA loans, represented 4.8% of outstanding loan balances. Our fully unsecured loan portfolio represented 3.1% of our total outstanding loan portfolio at December 31, 2011. We generally limit unsecured lending for consumer loans to private clients who we believe possess ample net worth, liquidity and repayment capacity. The remainder of our loans is secured by real estate, company assets, personal assets and other forms of collateral. In order to assist us in managing credit quality, management views the loan portfolio by various segments and classes of loans. For commercial loans, we assign individual credit ratings ranging from 1 (lowest risk) to 9 (highest risk) as an indicator of credit quality. These ratings are based on specific risk factors including (i) historical and projected financial results of the borrower, (ii) market conditions of the borrower’s industry that may affect the borrower’s future financial performance, (iii) business experience of the borrower’s management, (iv) nature of the underlying collateral, if any, and (v) borrower’s history of payment performance. 63 The following table summarizes the recorded investment of our portfolio of commercial loans by credit rating as of the dates indicated: (in thousands) December 31, 2011 Commercial loans secured by real estate: Multi-family residential property Commercial property 1-4 family residential property Construction and land Commercial and industrial loans Total commercial loans December 31, 2010 Commercial loans secured by real estate: Multi-family residential property Commercial property 1-4 family residential property Construction and land Commercial and industrial loans Total commercial loans pass pass Rating 1-4 Rating 5-6 special mention Rating 7 substandard Rating 8 doubtful Rating 9 Non-rated Total $ 2,436,175 1,393,854 37,121 5,166 512,767 755,644 40,905 43,250 441,753 4,314,069 $ 540,329 1,892,895 $ 1,282,318 1,041,618 25,956 429,789 709,110 47,767 463 102,939 410,587 2,760,942 $ 604,184 1,893,789 32,838 26,140 6,800 597 20,576 86,951 1,593 34,918 476 3,988 25,525 66,500 19,573 39,876 1,269 14,762 34,807 110,287 369 11,746 7,852 7,805 39,690 67,462 - 2,500 - - 7,707 10,207 - 3,001,353 39 2,218,053 - - 86,095 63,775 53,633 53,672 1,098,805 6,468,081 - - - - - - - - 1,714,069 1,797,392 82,051 115,195 9,201 9,201 56,923 56,923 1,146,110 4,854,817 For consumer loans, including residential mortgages and home equity lines of credit, we consider the borrower’s payment history and current payment performance as lead indicators of credit quality. A consumer loan is considered non-performing generally when it becomes 90 days delinquent based on contractual terms, at which time the accrual of interest income is discontinued. In the case of residential mortgages and home equity lines of credit, exceptions may be made if the loan has sufficient collateral value, based on a current appraisal, and is in process of collection. The following table summarizes the recorded investment of our portfolio of consumer loans by performance status as of the dates indicated: (in thousands) December 31, 2011 Residential mortgages Home equity lines of credit Other consumer loans Total consumer loans December 31, 2010 Residential mortgages Home equity lines of credit Other consumer loans Total consumer loans Performing Nonperforming Total $ $ $ $ 172,792 198,026 11,501 382,319 187,909 191,576 12,567 392,052 2,606 349 336 3,291 - 451 519 970 175,398 198,375 11,837 385,610 187,909 192,027 13,086 393,022 64 The following table presents commercial and industrial loans and construction and land loans at fixed and variable rates, by maturity for the periods indicated: As of December 31, 2011 Within One Year One to Five Years After Five Years $ $ 616,804 56,655 673,459 473,596 6,209 479,805 333,657 146,148 479,805 8,405 911 9,316 9,316 - 9,316 Total 1,098,805 63,775 1,162,580 (in thousands) Loan Type Commercial and Industrial Construction and Land Total Loans at fixed interest rates Loans at variable interest rates Total Asset Quality Non-performing Assets Non-performing assets include non-accrual loans and investment securities and other real estate owned. Loans are generally placed on non-accrual status upon becoming 90 days past due as to interest or principal. Single family property loans are considered for non-accrual status after becoming three payments past due as to interest or principal. We generally do not place loans on non-accrual status if there is sufficient collateral value, based on a current appraisal, and the loan is in process of collection. Consumer loans that are not secured by real estate, however, are generally placed on non-accrual status when deemed uncollectible; such loans are generally charged off when they reach 180 days past due. At the time a loan is placed on non-accrual status, the accrued but uncollected interest receivable is reversed and accounted for on a cash basis or cost recovery basis, until qualifying for return to accrual status. Management’s classification of a loan as non-accrual does not necessarily indicate that the principal of the loan is uncollectible in whole or in part. The following table summarizes our non-performing assets, accruing loans that were 90 days past due as to principal or interest, and certain asset quality indicators as of the dates indicated: (dollars in thousands) Non-accrual assets: Loans Troubled debt restructured loans Investment securities, at fair value Other real estate owned Total non-performing assets Accruing troubled debt restructured loans Accruing loans past due 90 days or more: Loans Loans held for sale Asset Quality Ratios: 2011 2010 December 31, 2009 2008 2007 46,606 31,885 18,559 $ 40,432 1,786 5,772 566 48,556 $ $ 44,685 $ 9,000 $ 1,307 31,155 2,979 4,445 1,667 40,246 8,530 15,740 1,778 - 8,216 700 55,522 - 12,494 3,883 - 975 - 32,860 - 1,902 4,183 0.92% 0.46% - - - 18,559 - 2,001 1,990 0.92% 0.32% 98.26% 0.90% 0.47% Total non-accrual loans to total loans Total non-performing assets to total assets 0.62% 0.33% 0.65% 0.34% 1.07% 0.61% Allowance for loan losses to non-accrual loans 204.09% 197.45% 118.27% 116.00% Allowance for loan losses to total loans Quarterly net charge-offs to average loans (annualized) 1.26% 0.71% 1.29% 1.16% 1.26% 0.61% 1.07% 0.32% 65 The following table summarizes the delinquency and accrual status of our loan portfolio, excluding loans held for sale, as of the dates indicated: (in thousands) December 31, 2011 Commercial loans Past Due 30-89 Days Past Due 90+ Days Total Past Due Current Total Loans Accruing Loans Past Due 90+ Days Non-accruing Loans Loans secured by real estate: Multi-family residential property $ 34,780 Commercial property 1-4 family residential property Construction and land Commercial and industrial loans Consumer loans Residential mortgages Home equity lines of credit Consumer loans Total December 31, 2010 Commercial loans 3,589 6,755 - 8,100 1,547 1,635 62 56,468 $ Loans secured by real estate: Multi-family residential property $ 15,149 Commercial property 1-4 family residential property Construction and land 15,797 6,226 - 369 14,608 - 4,762 23,271 5,797 2,075 336 51,218 3,169 6,901 830 6,571 35,149 18,197 6,755 4,762 2,966,204 3,001,353 2,199,856 2,218,053 79,340 59,013 86,095 63,775 - 699 - - 31,371 1,067,434 1,098,805 3,384 7,344 3,710 398 107,686 168,054 194,665 11,439 6,746,005 175,398 198,375 11,837 6,853,691 18,318 22,698 7,056 6,571 1,695,751 1,714,069 1,774,694 1,797,392 74,995 108,624 82,051 115,195 369 13,909 - 4,762 19,887 2,606 349 336 42,218 369 4,711 - 6,571 21,513 - 451 519 34,134 3,191 1,726 - 9,000 2,800 2,190 830 - 3,440 4,602 1,851 27 15,740 Commercial and industrial loans 13,635 24,953 38,588 1,107,522 1,146,110 Consumer loans Residential mortgages Home equity lines of credit Consumer loans Total 5,868 156 240 57,071 $ 4,602 2,302 546 49,874 10,470 2,458 786 106,945 177,174 189,569 12,300 5,140,629 187,644 192,027 13,086 5,247,574 Significant non-accrual loans at December 31, 2011, consisted of four commercial real estate loans totaling $12.5 million, five commercial and industrial loans totaling $10.2 million, two construction loans totaling $4.8 million, and one residential mortgage for $1.4 million. Each of these non-accrual loans is being actively managed by the Bank, and the allowance for loan losses includes a specific allocation for each of them. If all non-accrual loans outstanding at December 31, 2011, 2010, and 2009 had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of approximately $4.2 million, $4.1 million, and $3.8 million for the years then ended, respectively. This compares to actual payments recorded as interest income realized, with respect to such loans, of $363,000, $765,000, and $603,000 for the years ended December 31, 2011, 2010, and 2009, respectively. Non-accrual investment securities at December 31, 2011 and 2010 consisted of eight bank-collateralized pooled trust preferred securities and one collateralized debt obligation, which were classified as non-performing because of a deferral of their interest payments. At December 31, 2011 and 2010, the fair value of our non-accrual pooled trust preferred securities totaled $4.5 million and $3.0 million, respectively, and the fair value of our non-accrual collateralized debt obligation was $1.3 million and $1.5 million, respectively. Non-accrual investment securities at December 31, 2009, consisted of six bank-collateralized pooled trust preferred securities with fair value totaling $6.3 million, which were classified as non-performing given their deferral of interest payments, and one Lehman Brothers senior debenture with a fair value of $1.9 million classified as non-performing based on the issuer’s default. The non-accrual investment securities at December 31, 2008 consisted solely of the Lehman Brothers senior debenture. Accruing loans past due 90 days or more, which are not included in the non-performing category, are presented in the above tables. At December 31, 2011, accruing loans past due 90 days or more include $3.8 million of 1-4 family real estate loans that are well secured and in process of collection and a $1.9 million C&I loan that was paid 66 in full during January 2012. At December 31, 2010, accruing loans past due 90 days or more include matured performing loans in the normal process of renewal ($519,000) and real estate loans that are well secured and in process of collection ($3.7 million of 1-4 family, $2.8 million of multi-family, and $1.4 million of commercial real estate). Accruing loans held for sale at December 31, 2011 and 2010 are comprised of U.S. Government guaranteed SBA loans. For economic reasons and to maximize the recovery of loans, we may work with borrowers experiencing financial difficulties, and will consider modifications to a borrower’s existing loan terms and conditions that we would not otherwise consider, commonly referred to as troubled debt restructurings (“TDRs”). Our TDR loans consist of those loans where we modify the contractual terms of the loan, such as (i) a deferral of the loan’s principal amortization through either interest-only or reduced principal payments, (ii) a reduction in the loan’s contractual interest rate or (iii) an extension of loan’s contractual term. At the time of restructuring, we determine whether a TDR loan should accrue interest based on the accrual status of the loan immediately prior to modification. A non-accrual TDR loan will be returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Additionally, there should be a sustained period of repayment performance (generally a period of six months) by the borrower in accordance with the modified contractual terms. In years after the year of restructuring, the loan is not reported as a TDR loan if it was restructured at a market interest rate and it is performing in accordance with its modified terms. For further discussion of our TDR loans and the related financial effects, see Note 8 to our Consolidated Financial Statements. Allowance for Loan Losses The allowance for loan losses is maintained at a level estimated by management to absorb probable losses inherent in the loan portfolio and is based on management’s continuing evaluation of the portfolio, the related risk characteristics, and the overall economic conditions affecting the loan portfolio. The estimation is inherently subjective as it requires measurements that are susceptible to significant revision as more information becomes available. At December 31, 2011, 2010, and 2009, our allowance for loan losses totaled $86.2 million, $67.4 million, and $55.1 million, respectively, which represents 1.26%, 1.29%, and 1.26% of total loans (excluding loans held for sale) at December 31, 2011, 2010, and 2009, respectively. The provision for loan losses is a charge to earnings to maintain the allowance for loan losses at a level consistent with management’s assessment of the loan portfolio in light of current economic conditions and market trends. For the years ended December 31, 2011, 2010, and 2009, we recorded provisions of $51.9 million, $46.4 million, and $42.7 million, respectively. These provisions were made to reflect management’s assessment of the inherent and specific risk of loan losses relative to the growth of the portfolio. Our methodology to determine the allowance for loan losses includes segmenting the loan portfolio into various components and applying various loss factors to estimate the amount of probable losses. The largest segment of our loan portfolio is comprised of credit-rated commercial loans, comprising 93.6% of our total loan portfolio, excluding loans held for sale, as of December 31, 2011. Our credit-rated commercial loans include commercial and industrial loans along with loans to commercial borrowers that are secured by real estate (commercial property, multi-family residential property, 1-4 family residential property, and construction and land). For each loan within this segment, a credit rating is assigned based on a review of specific risk factors including (i) historical and projected financial results of the borrower, (ii) market conditions of the borrower’s industry that may affect the borrower’s future financial performance, (iii) business experience of the borrower’s management, (iv) nature of the underlying collateral, if any, and (v) borrower’s history of payment performance. When assigning a credit rating to a loan, we use an internal nine-level rating system in which a rating of one carries the lowest level of credit risk and is used for borrowers exhibiting the strongest financial condition. Loans rated one through six are deemed to be acceptable quality and are considered “Pass.” Loans that are deemed to be of questionable quality are rated seven (special mention). Loans with adverse classifications (substandard or doubtful) are rated eight or nine, respectively. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower, or of the collateral pledged. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added 67 characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The outstanding amounts of credit-rated commercial loans are aggregated by credit rating, and we estimate the allowance for losses for each credit rating using loss factors based on historical loss experience and qualitative adjustments reflecting the current economic conditions and outlook for housing, employment, manufacturing, and consumer spending. The economic adjustments reflect the imprecision that is inherent in the estimates of probable loan losses, and are intended to ensure adequacy of the overall allowance amount. The loss factors assigned to each credit rating are adjusted based on management’s judgment, along with certain qualitative factors such as the trend and severity of problem loans that can cause the estimation of inherent losses to differ from historical experience. Any change to an individual credit rating affects the amount of the related allowance. Our internal review process results in the periodic review of assigned credit ratings to reflect changes in specific risk factors. Commercial lines of credit are generally issued with terms of one year, and upon annual renewal our lenders perform a full review of the specific risk factors to assess the appropriateness of the assigned credit ratings. Furthermore, loans classified as special mention, substandard, or doubtful are placed on our internal watch list and our lenders perform a credit rating review on a quarterly basis (special mention loans) or monthly basis (substandard and doubtful loans). In addition, our Risk Management function, which reports directly to the Risk Committee of our Board of Directors, performs periodic credit reviews that provide an independent evaluation of the assigned credit ratings. These reviews generally cover, in aggregate, between 40-50% of the commercial loan portfolio, including all commercial loans over $500,000 with adverse credit ratings on an annual basis. Additionally, our Risk Management function focuses its reviews on those loans with higher-risk attributes, such as lines of credit with higher utilization percentages and loan facilities with delinquencies. Our methodology to determine the allowance for loan losses for the non-rated segments of our loan portfolio is based on historical loss experience and qualitative factors. Non-rated loans generally include commercial loans with outstanding principal balances below $100,000, commercial overdrafts, residential mortgages, and consumer loans. The outstanding amounts of loans in each of these segments are aggregated, and we apply percentages based on historical losses and qualitative factors by segment to estimate the required allowance for loan losses. Non-rated loans comprise 6.4% of our total loan portfolio as of December 31, 2011. We consider all non-accrual loans to be impaired loans, and the related specific allowances for loan losses are determined on an individual (non-homogeneous) basis. Factors contributing to the determination of specific allowances on impaired loans include the creditworthiness of the borrower and, more specifically, changes in the expected future receipt of principal and interest payments and/or in the value of pledged collateral. For impaired loans in excess of $300,000, a specific allowance is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or, for collateral-dependent loans, the fair value of collateral. For smaller impaired loans, in the absence of other factors affecting the collectability of the loan, we generally determine the amount of specific allowance using estimated loss percentages based on the amount of time the loan has been delinquent. The methodology used in the periodic review of reserve adequacy, which is performed at least quarterly, is designed to be responsive to changes in portfolio credit quality and inherent credit losses. The changes are reflected in both the pooled formula reserve and in specific reserves as the collectability of larger classified loans is regularly recalculated with new information as it becomes available. As our portfolio matures, historical loss ratios are closely monitored. Currently, the review of reserve adequacy is performed by our senior management, assessed by a credit review function, and presented to our Board of Directors for their review and consideration on a quarterly basis. 68 The following table presents our allowance for loan losses and outstanding loan balances by segment of our loan portfolio, based on the methodology followed in determining the allowance for loan losses: (in thousands) As of December 31, 2011 Allowance for loan losses: Credit-rated commercial loans Commercial loans Non-rated Residential mortgages Consumer loans Total Individually evaluated for impairment $ 4,651 Collectively evaluated for impairment 74,202 Recorded investment in loans: Individually evaluated for impairment Collectively evaluated for impairment 56,216 6,358,193 As of December 31, 2010 Allowance for loan losses: Individually evaluated for impairment $ 8,011 Collectively evaluated for impairment 48,201 Recorded investment in loans: Individually evaluated for impairment Collectively evaluated for impairment 30,249 4,767,645 991 3,963 2,190 51,482 1,445 6,907 2,915 54,008 291 1,278 4,817 368,956 130 1,342 451 379,485 168 618 6,101 80,061 336 11,501 63,559 6,790,132 256 1,104 519 12,567 9,842 57,554 34,134 5,213,705 The following table allocates our allowance for loan losses to the respective portfolio categories: (dollars in thousands) Amount % Amount % Amount % Amount % Amount % 2011 2010 2009 2008 2007 December 31, Mortgage Loans: Commercial property $ 23,844 27.67% 14,521 21.55% 10,778 19.55% 8,689 23.49% 3,347 18.35% Multi-family residential property 25,160 29.20% 7,401 10.98% Construction and land 1-4 family residential property Home equity lines of credit 4,836 3,096 818 5.61% 3.59% 0.95% 2,386 3,352 831 3.54% 4.97% 1.23% 5,088 4,027 1,576 631 9.23% 7.31% 2.86% 1.14% 4,136 11.18% 2,116 828 194 5.72% 2.24% 0.52% 873 851 447 117 4.79% 4.67% 2.45% 0.64% Other loans: Commercial and industrial 27,622 32.06% 37,545 55.71% 32,279 58.57% 20,668 55.89% 12,335 67.64% Consumer Total 786 0.91% 1,360 2.02% 741 1.34% 356 0.96% 266 1.46% $ 86,162 100.00% 67,396 100.00% 55,120 100.00% 36,987 100.00% 18,236 100.00% 69 Summary of Loan Loss Experience The table below presents the changes in the allowance for loan losses for the years indicated: (in thousands) 2011 Years ended December 31, 2009 2010 2008 2007 Beginning balance - Allowance for loan losses $ 67,396 55,120 36,987 18,236 13,829 Charge-offs and recoveries: Loans charged-off Recoveries of loans previously charged off Net charge-offs Provision for loan losses Ending balance - Allowance for loan losses 35,393 2,283 33,110 51,876 86,162 $ 35,583 1,487 34,096 46,372 67,396 25,451 869 24,582 42,715 55,120 8,377 240 8,137 26,888 36,987 7,973 64 7,909 12,316 18,236 The table below presents a summary by loan portfolio segment of our allowance for loan losses, loan loss experience, and provision for loan losses for the periods indicated: (in thousands) For the year ended December 31, 2011 Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year For the year ended December 31, 2010 Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year Credit-rated commercial loans Commercial loans Non-rated Residential mortgages Consumer loans Total $ 56,212 51,635 (29,502) 508 78,853 $ $ 50,141 34,101 (28,070) 40 56,212 $ 8,352 (429) (4,467) 1,498 4,954 3,024 10,525 (6,369) 1,172 8,352 1,472 447 (350) - 1,569 1,216 688 (644) 212 1,472 1,360 223 (1,074) 277 786 739 1,058 (500) 63 1,360 67,396 51,876 (35,393) 2,283 86,162 55,120 46,372 (35,583) 1,487 67,396 Our net charge-offs during 2011 decreased to $33.1 million compared to $34.1 million for the prior year. Significant charge-offs for the year ended December 31, 2011 consisted of nine commercial and industrial relationships totaling $21.1 million, one commercial real estate loan in the amount of $4.0 million, and one construction loan in the amount of $616,000. The remainder of the 2011 charge-offs were primarily comprised of small business and overdraft line of credit relationships, for which the individual charge-off amount did not exceed $500,000. Deferred Tax Asset/Liability At December 31, 2011, after considering all available positive and negative evidence, management concluded that a valuation allowance for deferred tax assets was not necessary because it is more likely than not that these tax benefits will be fully realized. We will continue to monitor the need for a valuation allowance going forward; however, we do not expect to need one based upon projected profitability and taxable income in the carry-back period. Net deferred tax assets are included in other assets in our Consolidated Statements of Financial Condition. 70 The following table presents the components of the net deferred tax asset at December 31, 2011 and 2010: (in thousands) DEFERRED TAX ASSETS Allowance for loan losses Depreciation Unearned compensation - restricted shares Non-accrual interest Write-down for other-than-temporary impairment of securities Other Total deferred tax assets recognized in earnings Net unrealized losses on securities available-for-sale Total deferred tax assets DEFERRED TAX LIABILITIES Prepaid expenses Other Total deferred tax liabilities recognized in earnings Net unrealized gains on securities available-for-sale Total deferred tax liabilities Net deferred tax asset December 31, 2011 2010 $ 38,034 1,388 4,987 2,617 17,393 2,357 66,776 - 66,776 241 6 247 23,542 23,789 42,987 $ 29,642 992 1,232 2,026 19,930 1,943 55,765 14,456 70,221 368 - 368 - 368 69,853 Deferred tax assets arise from expected future tax benefits attributable to temporary differences and carry- forwards. Deferred tax liabilities arise from expected future tax expense attributable to temporary differences. Temporary differences are defined as differences between the tax basis of an asset or liability and its reported amount in the financial statements that will result in taxable or deductible amounts in future years. Carry-forwards are defined as deductions or credits that cannot be currently utilized for tax purposes that may be carried forward to reduce taxable income or taxes payable in a future year. Deposits At December 31, 2011, we maintained approximately 78,000 deposit accounts, compared to approximately 70,000 accounts at December 31, 2010. Excluding brokered deposits, total deposits at December 31, 2011 and 2010 were $11.70 billion and $9.41 billion, respectively. Included in deposits at December 31, 2011 and 2010 were approximately $774.0 million and $619.4 million, respectively, of short-term escrow deposits. We have developed a core competency in catering to the needs of law firms, accounting firms, claims administrators and title companies, which allows us to obtain from our clients short-term escrow deposits. The majority of short-term escrows outstanding at December 31, 2011, due to their nature, are expected to be released during the first quarter of 2012. Excluding the short-term escrow deposits and brokered deposits, our total core deposits increased approximately $2.13 billion during 2011 as a result of the addition of new private client groups, who assist us in growing our client base, and additional deposits by our current clients. 71 The following table presents the composition of our deposits and deposit products as of the dates indicated: (dollars in thousands) Personal demand (1) Business demand (1) Rent security Personal NOW Business NOW and interest-bearing demand Personal money market Business money market Personal time deposits Business time deposits Brokered time deposits Total Demand (1) NOW and interest-bearing demand Money market Time deposits Brokered time deposits Total Personal Business Brokered time deposits Total (1) Non-interest bearing. December 31, 2011 2010 Amount Percentage Amount Percentage $ 331,268 2,817,168 75,139 37,094 606,036 2,314,369 4,677,424 492,060 345,782 57,798 11,754,138 3,148,436 643,130 7,066,932 837,842 57,798 11,754,138 3,174,791 8,521,549 57,798 11,754,138 $ $ $ $ $ 2.82% 23.97% 0.64% 0.32% 5.16% 19.68% 39.79% 4.19% 2.94% 0.49% 100.00% 26.79% 5.48% 60.11% 7.13% 0.49% 100.00% 27.01% 72.50% 0.49% 100.00% 286,166 2,163,802 47,062 70,215 630,336 1,654,597 3,660,446 501,296 400,641 26,666 9,441,227 2,449,968 700,551 5,362,105 901,937 26,666 9,441,227 2,512,274 6,902,287 26,666 9,441,227 3.03% 22.92% 0.50% 0.74% 6.68% 17.53% 38.77% 5.31% 4.24% 0.28% 100.00% 25.95% 7.42% 56.80% 9.55% 0.28% 100.00% 26.61% 73.11% 0.28% 100.00% The following table presents our average deposits and average interest rates accrued for the periods indicated: (dollars in thousands) NOW and interest-bearing demand Money market Time deposits Brokered time deposits Non-interest-bearing demand deposits Total deposits Years ended December 31, 2011 2010 Average Balance Average Rate Average Balance Average Rate $ 632,804 6,611,992 871,929 45,063 2,702,236 10,864,024 $ 0.52% 1.08% 1.81% 1.07% - 0.84% 724,458 4,816,609 873,259 18,927 2,020,265 8,453,518 $ 0.55% 1.36% 2.11% 1.47% - 1.04% The following table presents time deposits of $100,000 or more by their maturity as of December 31, 2011: (dollars in thousands) Three months or less Over three months through six months Over six months through one year Over one year Total 72 December 31, 2011 $ 177,625 69,901 156,380 290,471 694,377 $ Borrowings The following table presents information regarding our borrowings: At or for the year ended December 31, 2011 2010 2009 (dollars in thousands) Amount Federal Home Loan Bank advances $ 675,000 Repurchase agreements Federal funds purchased Other short-term borrowings 695,000 55,800 Weighted Average Rate 0.92% 3.23% 0.17% Amount 558,000 540,000 118,000 6,200 Total borrowings $ 1,425,800 2.02% 1,222,200 Maximum total outstanding at any month-end Average balance Average rate $ 1,425,800 $ 1,073,430 1,222,200 913,199 Weighted Average Rate 1.64% 3.68% 0.18% 0.00% 2.39% Weighted Average Rate 3.42% 4.08% 0.07% 0.00% 3.58% Amount 305,000 627,000 70,000 6,900 1,008,900 1,166,129 944,144 2.76% 3.69% 4.06% At December 31, 2011, our borrowings were $1.43 billion, or 10.8% of our funding liabilities, compared to $1.22 billion, or 11.5% of our funding liabilities, at December 31, 2010. These borrowings are collateralized by our mortgage-backed and collateralized mortgage obligation securities. We also hold $30.4 million in Federal Home Loan Bank of New York (“FHLB”) capital stock as required collateral for our outstanding borrowing position with the FHLB. Based on our financial condition, our asset size, the available capacity under our repurchase agreement lines and with the FHLB, and the amount of securities available for pledging, we estimate our available consolidated borrowing capacity to be approximately $3.33 billion as of December 31, 2011. The following table shows the maturity or re-pricing of our borrowings at December 31, 2011. Maturity or repricing period (in thousands) 3 months or less 3 - 12 months 1 - 3 years Over 3 years Total $ 590,800 175,000 275,000 385,000 1,425,800 Fair Value of Financial Instruments Our AFS securities, which represent $6.51 billion of our total assets at December 31, 2011, are carried at fair value. Held-for-sale loans totaling $392.0 million at December 31, 2011, are carried at the lower of cost or fair value. U.S. GAAP establishes a three-level fair value hierarchy that prioritizes techniques used to measure the fair value of assets and liabilities, based on the transparency and reliability of inputs to valuation methodologies. An instrument’s categorization within the hierarchy is based upon the lowest level of input that is significant to the fair value measurement. Therefore, for assets classified in Levels 1 and 2 of the hierarchy where inputs are principally based on observable market data, there is less judgment applied in arriving at a fair value measurement. For instruments classified within Level 3 of the hierarchy, judgments are more significant. Where available, fair value of AFS securities is based upon valuations obtained from third-party pricing sources. In order to ensure the fair valuations obtained are appropriate, we typically compare data from two or more independent third-party pricing sources. If there is a large price discrepancy between the two pricing sources for an individual security, we utilize industry market spread data to assist in determining the most appropriate valuation. The valuations provided by the pricing services are derived from quoted market prices or using matrix pricing. Matrix pricing is a valuation technique consistent with the market approach of determining fair value. The market 73 approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices of specific securities, but rather on the securities’ relationship to other benchmark quoted securities. Most of our securities portfolio is priced using this method, and such securities are classified as Level 2. Securities are classified within Level 3 of the valuation hierarchy in cases where there is limited activity or less transparency around inputs to the valuation. In these cases, we determine fair value based upon in-depth analysis of the cash flow structure and credit analysis for each position. Relative market spreads are utilized to discount the cash flow to determine current market values, as well as analysis of relative coverage ratios, credit enhancements, and collateral characteristics. Our held-for-sale loans predominantly consist of variable rate SBA loans, which are fully guaranteed by the U.S. Government. Accordingly, the cost of these loans typically approximates fair value. We validate the fair value of these loans through our active market participation in the SBA secondary market, where we are one of the top market makers in the industry. We believe our valuation methods are appropriate and consistent with other market participants; however, the use of different methodologies or assumptions to determine the fair value of certain financial instruments could result in a different estimate of fair value at the reporting date. For further discussion of the determination of fair value, see Note 3 to our Consolidated Financial Statements. Contractual Obligations The following table presents our significant contractual obligations as of December 31, 2011: Less than 1 year $ 3,656 765,800 12,825 782,281 $ Payments due by period 3 - 5 years More than 5 years 1 - 3 years 7,763 275,000 26,053 308,816 6,981 235,000 20,049 262,030 - 150,000 22,210 172,210 Total 18,400 1,425,800 81,137 1,525,337 (in thousands) Information technology contract Borrowings Operating leases Total contractual cash obligations Off-Balance Sheet Arrangements In the normal course of business, we have various outstanding commitments and contingent liabilities that are not reflected in the accompanying Consolidated Financial Statements. We enter into transactions that involve financial instruments with off-balance sheet risks in the ordinary course of business to meet the financing needs of our clients. Such financial instruments include commitments to extend credit, standby letters of credit, and unused balances under confirmed letters of credit, all of which are primarily variable rate. Such instruments involve, to varying degrees, elements of credit and interest rate risk. Our exposure to credit loss in the event of nonperformance by the other party with regard to financial instruments is represented by the contractual notional amount of those instruments. Financial instrument transactions are subject to our normal credit policies and approvals, financial controls and risk limiting and monitoring procedures. We generally require collateral or other security to support financial instruments with credit risk. 74 A summary of commitments and contingent liabilities is as follows: (in thousands) Unused commitments to extend credit Financial standby letters of credit Commercial and similar letters of credit Other Total December 31, 2011 2010 $ $ 436,006 220,667 15,036 942 672,651 512,410 199,846 11,663 770 724,689 Commitments to extend credit consist of agreements having fixed expiration or other termination clauses and may require payment of a fee. Total commitment amounts may not necessarily represent future cash requirements. We evaluate each client's creditworthiness on a case-by-case basis. Upon the extension of credit, we will obtain collateral, if necessary, based on our credit evaluation of the counterparty. Collateral held varies but may include deposits held in financial institutions, commercial properties, residential properties, accounts receivable, property, plant and equipment and inventory. At December 31, 2011, our reserve for losses on unused commitments to extend credit amounted to $596,000 and is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. We recognize a liability at the inception of the guarantee that is equivalent to the fee received from the guarantor. This liability is amortized over the life of the guarantee on a straight-line basis. At December 31, 2011 and 2010, we had deferred revenue for commitment fees paid for the issuance of standby letters of credit in the amounts of $742,000 and $678,000, respectively. Standby letters of credit are conditional commitments issued by us to guarantee the performance of a client’s obligation to a third party. Standby letters of credit are primarily used to support clients' business trade transactions and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. We had reserves for credit losses on standby letters of credit totaling $444,000 and $471,000 at December 31, 2011 and 2010, respectively. At December 31, 2011 and 2010, we had commitments to sell residential mortgage loans and the U.S. government-guaranteed portion of SBA loans of $8.9 million and $4.1 million, respectively. Capital Resources As a New York state-chartered bank, we are required to maintain minimum levels of regulatory capital. These standards generally are as stringent as the comparable capital requirements imposed on national banks. The FDIC is also authorized to impose capital requirements in excess of these standards on individual banks on a case-by-case basis. We are required by FDIC regulations to maintain a minimum ratio of qualifying total capital to total risk-weighted assets (including off-balance sheet items) of 8%, at least one-half of which must be in the form of Tier 1 capital, and a ratio of Tier 1 capital to total risk-weighted assets of 4%. Tier 1 capital is generally defined as the sum of core capital elements less goodwill and certain other deductions. Core capital includes common shareholders’ equity, non-cumulative perpetual preferred stock and minority interests in equity accounts of consolidated subsidiaries. Supplementary capital, which qualifies as Tier 2 capital and counts towards total capital subject to certain limits, includes allowances for loan losses, perpetual preferred stock, subordinated debt and certain hybrid instruments. We are also required to maintain a certain leverage capital ratio - the ratio of Tier 1 capital (net of intangibles) to adjusted total assets. Banks that have received the highest rating of five categories used by regulators to rate banks and are not anticipating or experiencing any significant growth must maintain a leverage capital ratio of at least 3.0%. All other institutions must maintain a minimum leverage capital ratio of 4.0%. 75 For an institution to be considered “well capitalized” by the FDIC, it must maintain a minimum leverage capital ratio of 5.0% and a minimum risk-based capital ratio of 10.0%, of which at least 6.0% must be Tier 1 capital. The actual capital amounts and ratios presented in the following table demonstrate that we are “well capitalized” under the capital adequacy guidelines outlined above: (dollars in thousands) As of December 31, 2011: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Tier 1 leverage capital (to average assets) As of December 31, 2010: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Tier 1 leverage capital (to average assets) Actual Amount Ratio Required for Capital Adequacy Purposes Ratio Amount Required to be Well Capitalized Amount Ratio $ 1,465,422 1,378,219 1,378,219 18.17% 17.08% 9.67% $ 1,030,517 962,650 962,650 15.21% 14.21% 8.62% 645,350 322,675 570,201 541,981 270,991 446,782 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 806,688 484,013 712,752 10.00% 6.00% 5.00% 677,476 406,486 558,477 10.00% 6.00% 5.00% Liquidity Liquidity is the measurement of our ability to meet our cash needs. Our objective in managing liquidity is to maintain our ability to meet loan commitments and deposit withdrawals, purchase investments and pay other liabilities in accordance with their terms, without an adverse impact on our current or future earnings. Our liquidity management is guided by policies developed and monitored by our asset/liability management committee and approved by our Board of Directors. The asset/liability management committee consists of, among others, our Chairman, President and Chief Executive Officer, Vice-Chairman, Chief Operating Officer, Chief Financial Officer and Treasurer. These policies take into account the marketability of assets, the source and stability of deposits, our wholesale borrowing capacity and the amount of our loan commitments. For the years ended December 31, 2011, 2010 and 2009, our primary source of liquidity has been core deposit growth. Additionally, we have borrowing sources available to supplement deposit flows. These borrowing sources include the FHLB and securities sold under repurchase agreements. We also have access to the brokered deposit market, through which we have numerous alternatives and significant capacity, if needed. Credit availability at the FHLB is based on our financial condition, our asset size, and the amount of collateral we hold at the FHLB. At December 31, 2011, our FHLB borrowings included $675.0 million in advances with an average rate of 0.92% that mature by September 1, 2017. Also, we have repurchase agreement lines with several leading financial institutions totaling $1.98 billion. At December 31, 2011, we had $695.0 million of securities sold under repurchase agreements to five of these institutions. Based on our financial condition, our asset size, the available capacity under our repurchase agreement lines and with the FHLB, and the amount of securities available for pledging, we estimate our available consolidated capacity for additional borrowings to be approximately $3.33 billion at December 31, 2011. 76 ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK Market risk is defined as the sensitivity of income, fair values and capital to changes in interest rates, foreign currency exchange rates, commodity prices and other relevant market prices and rates. The primary risk to which we are exposed is interest rate movement inherent in our lending, investment management, deposit taking and borrowing activities. Substantially all of our interest rate risk arises from these activities, which are entered into for purposes other than trading. The principal objective of asset/liability management is to manage the sensitivity of net income to changes in interest rates. Asset/liability management is governed by policies approved by our Board of Directors. Our Board of Directors has delegated the day-to-day oversight of this function to our asset/liability management committee. Senior management and our Board of Directors, on an ongoing basis, review our overall interest rate risk position and strategies. Interest Rate Risk Management Our asset/liability management committee seeks to manage our interest rate risk by structuring our balance sheet to maximize net interest income while maintaining an acceptable level of risk exposure to changes in market interest rates. The achievement of this goal requires a balance among liquidity, interest rate risk, and profitability considerations. The committee meets regularly to review the sensitivity of assets and liabilities to interest rate changes, deposit rates and trends, the book and market values of assets and liabilities, unrealized gains and losses, purchase and sales activities, and the maturities of investments and borrowings. We use various asset/liability strategies to manage and control the interest rate sensitivity of our assets and liabilities. These strategies include pricing of loans and deposit products, adjusting the terms of loans and borrowings and managing the deployment of our securities and short-term assets to manage the mismatches in interest rate re-pricing. To effectively measure and manage interest rate risk, we use simulation analysis to determine the impact on net interest income under various interest rate scenarios. Based on these simulations, we quantify interest rate risk and develop and implement appropriate strategies. At December 31, 2011, we used a simulation model to analyze net interest income sensitivity to a parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves, in which the base market interest rate forecast was increased by 100, 200, and 300 basis points. Given the current low interest rate environment, including the Federal Funds rate and other short-term interest rates, we did not analyze net interest income sensitivity to a downward market interest rate forecast. The following table indicates the sensitivity of projected annualized net interest income to the interest rate movements described above at December 31, 2011: (dollars in thousands) Interest Rate Scenario: Up 300 basis points Up 200 basis points Up 100 basis points Base Adjusted Net Interest Income Percentage Change from Base $ 475,681 493,848 505,790 479,191 (0.73) 3.06 5.55 - We also use a simulation model to measure the impact that market interest rate changes will have on the net present value of assets and liabilities, which is defined as market value of equity. At December 31, 2011, we used a simulation model to analyze the market value of equity sensitivity to a parallel and sustained shift in interest rates derived from the current treasury and LIBOR yield curves. For rising interest rate scenarios, the base market interest rate forecast was increased by 100, 200, and 300 basis points. Given the current low interest rate 77 environment, including the Federal Funds rate and other short-term interest rates, we did not analyze the market value of equity sensitivity to a downward market interest rate forecast. The following table indicates the sensitivity of market value of equity at December 31, 2011 to the interest rate movements described above (base case market value of equity is $1.78 billion): (dollars in thousands) Interest Rate Scenario: Up 300 basis points Up 200 basis points Up 100 basis points Base Sensitivity Percentage Change from Base $ (336,250) (68,263) 95,555 - (18.87) (3.83) 5.36 - The market value of equity sensitivity analysis assumes an immediate parallel shift in interest rates and yield curves. The computation of prospective effects of hypothetical interest rate changes is based on numerous assumptions, including relative levels of interest rates, asset prepayments, deposit decay and changes in re- pricing levels of deposits to general market rates, and should not be relied upon as indicative of actual results. Further, the computations do not take into account any actions that we may undertake in response to future changes in interest rates. ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA For our Consolidated Financial Statements, see index on page F-1. ITEM 9. CHANGES IN AND DISAGREEMENTS WITH ACCOUNTANTS ON ACCOUNTING AND FINANCIAL DISCLOSURE None. ITEM 9A. CONTROLS AND PROCEDURES The Company’s management, with the participation of the Company’s principal executive officer and principal financial officer, has evaluated the effectiveness of the Company’s disclosure controls and procedures (as such term is defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934, as amended (the ‘‘Exchange Act’’)) as of the end of the period covered by this report. Based on such evaluation, the Company’s Chief Executive Officer and Chief Financial Officer have concluded that, as of the end of such period, the Company’s disclosure controls and procedures are effective to ensure that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act, including this report, is recorded, processed, summarized and reported within the time periods specified in the Securities and Exchange Commission’s rules and forms and that information required to be disclosed by the Company in the reports that it files or submits under the Exchange Act is accumulated and communicated to the Company’s management, including the Company’s principal executive officer and principal financial officer, as appropriate to allow timely decisions regarding the required disclosure. 78 a) Management’s Report on Internal Control over Financial Reporting The management of Signature Bank (the “Company”) is responsible for establishing and maintaining effective internal control over financial reporting. Our system of internal control is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of the Company’s consolidated financial statements for external reporting purposes in accordance with U.S. generally accepted accounting principles. Internal control over financial reporting includes procedures that pertain to the maintenance of records that, in reasonable detail, accurately reflect transactions and dispositions of assets; provide reasonable assurances that transactions are recorded to permit preparation of financial statements in accordance with U.S. generally accepted accounting principles, and that receipts and expenditures are made only in accordance with the authorization of management and the Board of Directors; and provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the Company’s assets that could have a material effect on our consolidated financial statements. All internal control systems, no matter how well designed, have inherent limitations, including the possibility of human error and the circumvention of controls. Furthermore, because of changes in conditions, the effectiveness of internal control may vary over time. Accordingly, internal control over financial reporting may not prevent or detect misstatements on a timely basis. Since these limitations are known features of the financial reporting process, however, it is possible to design into the process safeguards to reduce, though not eliminate, this risk. As of December 31, 2011, management evaluated the effectiveness of internal control over financial reporting based on the framework in Internal Control—Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Based on this evaluation, management believes that the Company’s internal control over financial reporting as of December 31, 2011 is effective using these criteria. The Company’s internal control over financial reporting as of December 31, 2011 has been audited by KPMG LLP, the independent registered public accounting firm that has also audited the Company’s consolidated financial statements as of and for the year ended December 31, 2011. The report of KPMG LLP on the effectiveness of the Company’s internal control over financial reporting is included below. 79 b) Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Signature Bank and subsidiaries: We have audited the internal control over financial reporting of Signature Bank and subsidiaries (Signature Bank) as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO). Signature Bank’s management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting, included in the accompanying Management’s Report on Internal Control over Financial Reporting. Our responsibility is to express an opinion on the Signature Bank’s internal control over financial reporting based on our audit. We conducted our audit in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. Our audit included obtaining an understanding of internal control over financial reporting, assessing the risk that a material weakness exists, and testing and evaluating the design and operating effectiveness of internal control based on the assessed risk. Our audit also included performing such other procedures as we considered necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinion. A company’s internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles. A company’s internal control over financial reporting includes those policies and procedures that (1) pertain to the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (2) provide reasonable assurance that transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations of management and directors of the company; and (3) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use, or disposition of the company’s assets that could have a material effect on the financial statements. Because of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate. In our opinion, Signature Bank and subsidiaries maintained, in all material respects, effective internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control – Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), the consolidated statements of financial condition of Signature Bank and subsidiaries as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011, and our report dated February 29, 2012 expressed an unqualified opinion on those consolidated financial statements. (signed) KPMG LLP New York, New York February 29, 2012 80 ITEM 9B. OTHER INFORMATION None. PART III ITEM 10. DIRECTORS, EXECUTIVE OFFICERS AND CORPORATE GOVERNANCE Incorporated by reference to Signature Bank’s Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2012. ITEM 11. EXECUTIVE COMPENSATION Incorporated by reference to Signature Bank’s Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2012. ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT AND RELATED STOCKHOLDER MATTERS Incorporated by reference to Signature Bank’s Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2012. ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS, AND DIRECTOR INDEPENDENCE Incorporated by reference to Signature Bank’s Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2012. ITEM 14. PRINCIPAL ACCOUNTANT FEES AND SERVICES Incorporated by reference to Signature Bank’s Proxy Statement for the Annual Meeting of Stockholders to be held April 25, 2012. 81 ITEM 15. EXHIBITS, FINANCIAL STATEMENT SCHEDULES A. Financial Statements and Financial Statement Schedules PART IV (1) The Consolidated Financial Statements of the Registrant are listed and filed as part of this report on pages F-1 to F-48. The Index to the Consolidated Financial Statements appears on page F-1. (2) Financial Statement Schedules: All schedule information is included in the notes to the Audited Consolidated Financial Statements or is omitted because it is either not required or not applicable. B. Exhibit Listing Exhibit No. Exhibit 3.1 Restated Organization Certificate. (Incorporated by reference to Signature Bank’s Quarterly Report on Form 10-Q for the period ended June 30, 2005.) 3.2 Certificate of Amendment, dated December 5, 2008, to the Bank's Restated Organization Certificate with respect to Signature Bank’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share. (Incorporated by reference to Signature Bank’s Current Report on Form 8-K filed on December 17, 2008.) 3.3 Amended and Restated By-laws of the Registrant. (Incorporated by reference to Signature Bank’s Current Report on Form 8-K filed on October 17, 2007.) 4.1 Specimen Common Stock Certificate. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 4.2 Specimen Warrant (Incorporated herein by reference to Exhibit 4.2 of the Bank’s Form 8-A filed on March 10, 2010.) 10.1 Signature Bank Amended and Restated 2004 Long-Term Incentive Plan. (Incorporated by reference from Appendix A to the 2008 Definitive Proxy Statement on Schedule 14A, filed with the Federal Deposit Insurance Corporation on March 19, 2008.) 10.2 Amended and Restated Signature Bank Change of Control Plan. (Incorporated by reference to Signature Bank’s Current Report on Form 8-K, filed with the Federal Deposit Insurance Corporation on September 19, 2007.) 10.3 Outsourcing Agreement, dated January 1, 2004, by and between Bank Hapoalim, Signature Bank and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.4 Networking Agreement, effective as of April 18, 2001, between Signature Securities and Signature Bank. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.5 Signature Securities Group Corporation Customer Agreement, effective as of May 31, 2003, between Bank Hapoalim and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.6 Signature Securities Group Corporation Customer Agreement, dated April 25, 2003, between Bank Hapoalim and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.7 Brokerage and Consulting Agreement, dated August 6, 2001, by and between Signature Bank and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 82 Exhibit No. Exhibit 10.10 Lease for 1225 Franklin Avenue, dated April 5, 2002, between Franklin Avenue Plaza LLC and Signature Bank. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.11 Sublease for 1177 Avenue of the Americas, dated as of April 4, 2001, by and between Bank Hapoalim and Signature Bank. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.13 Employment Agreement, dated March 22, 2004, between Signature Bank and Joseph J. DePaolo. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.14 Master Agreement for the provision of Hardware Software and/or Services, dated as of September 9, 2005, between Fidelity Information Services, Inc. and Signature Bank. (Incorporated by reference to Signature Bank’s Quarterly Report on Form 10-Q for the period ended September 30, 2005.) 10.15 Warrant Agreement, dated March 10, 2010, between Signature Bank and American Stock Transfer & Trust Company, LLC, as warrant agent (Incorporated herein by reference to Exhibit 4.1 of the Bank’s Form 8-A filed on March 10, 2010.) 14.1 Code of Ethics (Incorporated by reference from Signature Bank’s 2004 Form 10-K, filed with the Federal Deposit Insurance Corporation on March 16, 2005.) 21.1 Subsidiaries of Signature Bank. 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. 83 Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the registrant has duly caused this report to be signed on its behalf by the undersigned, thereunto duly authorized. SIGNATURES SIGNATURE BANK By: /s/ JOSEPH J. DEPAOLO Joseph J. DePaolo President, Chief Executive Officer and Director Date: February 29, 2012 Pursuant to the requirements of the Securities Exchange Act of 1934, this report has been signed below on February 29, 2012 by the following persons on behalf of the registrant in the capacities indicated. Signature Title /s/ SCOTT A. SHAY (Scott A. Shay) /s/ JOHN TAMBERLANE (John Tamberlane) Chairman of the Board of Directors Vice Chairman, Director /s/ ERIC R. HOWELL (Eric R. Howell) Executive Vice President and Chief Financial Officer (Principal Accounting and Financial Officer) /s/ KATHRYN A. BYRNE (Kathryn A. Byrne) /s/ ALFONSE M. D’AMATO (Alfonse M. D’Amato) /s/ ALFRED B. DELBELLO (Alfred B. DelBello) /s/ YACOV LEVY (Yacov Levy) /s/ JEFFREY W. MESHEL (Jeffrey W. Meshel) /s/ IVANKA TRUMP (Ivanka Trump) Director Director Director Director Director Director 84 INDEX TO CONSOLIDATED FINANCIAL STATEMENTS Report of Independent Registered Public Accounting Firm . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Financial Condition as of December 31, 2011 and 2010 . . . . . . . . . . . . . . . . . . Consolidated Statements of Operations for the years ended December 31, 2011, 2010, and 2009 . . . . . . . Consolidated Statements of Changes in Shareholders’ Equity for the years ended December 31, 2011, 2010, and 2009 . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . Consolidated Statements of Cash Flows for the years ended December 31, 2011, 2010, and 2009 . . . . . . Notes to Consolidated Financial Statements . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . . F-2 F-3 F-4 F-5 F-6 F-7 F-1 Report of Independent Registered Public Accounting Firm The Board of Directors and Stockholders Signature Bank: We have audited the accompanying consolidated statements of financial condition of Signature Bank and subsidiaries (Signature Bank) as of December 31, 2011 and 2010, and the related consolidated statements of operations, changes in shareholders’ equity, and cash flows for each of the years in the three-year period ended December 31, 2011. These consolidated financial statements are the responsibility of Signature Bank’s management. Our responsibility is to express an opinion on these consolidated financial statements based on our audits. We conducted our audits in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements. An audit also includes assessing the accounting principles used and significant estimates made by management, as well as evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion. In our opinion, the consolidated financial statements referred to above present fairly, in all material respects, the financial position of Signature Bank and subsidiaries as of December 31, 2011 and 2010, and the results of their operations and their cash flows for each of the years in the three-year period ended December 31, 2011, in conformity with U.S. generally accepted accounting principles. As discussed in note 4 to the consolidated financial statements, Signature Bank changed its method of evaluating other-than-temporary impairments of debt securities due to the adoption of new accounting requirements issued by the FASB, as of April 1, 2009. We also have audited, in accordance with the standards of the Public Company Accounting Oversight Board (United States), Signature Bank’s internal control over financial reporting as of December 31, 2011, based on criteria established in Internal Control - Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), and our report dated February 29, 2012 expressed an unqualified opinion on the effectiveness of the Company’s internal control over financial reporting. (signed) KPMG LLP New York, New York February 29, 2012 F-2 SIGNATURE BANK CONSOLIDATED STATEMENTS OF FINANCIAL CONDITION (dollars in thousands, except per share amounts) ASSETS Cash and due from banks Short-term investments Total cash and cash equivalents Securities available-for-sale (pledged $2,672,093 and $1,553,412 at December 31, 2011 2010 $ 34,083 6,071 40,154 31,558 14,741 46,299 December 31, 2011 and 2010) 6,512,855 5,249,286 Securities held-to-maturity (fair value $571,980 and $450,315 at December 31, 2011 and 2010; pledged $352,865 and $337,453 at December 31, 2011 and 2010) Federal Home Loan Bank stock Loans held for sale Loans, net Premises and equipment, net Accrued interest and dividends receivable Other assets Total assets LIABILITIES AND SHAREHOLDERS' EQUITY Deposits Non-interest-bearing Interest-bearing Total deposits Federal funds purchased and securities sold under agreements to repurchase Federal Home Loan Bank advances Other short-term borrowings Accrued expenses and other liabilities Total liabilities Shareholders’ equity Preferred stock, par value $.01 per share; 61,000,000 shares authorized; none 556,044 48,152 392,025 6,764,564 30,574 60,533 261,219 14,666,120 $ 3,148,436 8,605,702 11,754,138 750,800 675,000 - 78,066 13,258,004 447,896 38,439 382,463 5,177,268 29,385 53,211 248,842 11,673,089 2,449,968 6,991,259 9,441,227 658,000 558,000 6,200 65,115 10,728,542 issued at December 31, 2011 and 2010 - - Common stock, par value $.01 per share; 64,000,000 shares authorized; 46,181,890 and 41,347,540 shares issued and outstanding at December 31, 2011 and December 31, 2010 Additional paid-in capital Retained earnings Net unrealized gains (losses) on securities available-for-sale, net of tax Total shareholders' equity Total liabilities and shareholders' equity 462 954,833 423,032 29,789 1,408,116 14,666,120 $ 413 689,035 273,511 (18,412) 944,547 11,673,089 See accompanying notes to Consolidated Financial Statements. F-3 SIGNATURE BANK CONSOLIDATED STATEMENTS OF OPERATIONS (dollars in thousands, except per share amounts) INTEREST AND DIVIDEND INCOME Loans held for sale Loans, net Securities available-for-sale Securities held-to-maturity Other short-term investments Total interest income INTEREST EXPENSE Deposits Federal funds purchased and securities sold under agreements to repurchase Federal Home Loan Bank advances Other short-term borrowings Total interest expense Net interest income before provision for loan losses Provision for loan losses Net interest income after provision for loan losses NON-INTEREST INCOME Commissions Fees and service charges Net gains on sales of securities Net gains on sales of loans Other-than-temporary impairment losses on securities: Portion of loss recognized in other comprehensive income (before taxes) Net impairment losses on securities recognized in earnings Net trading income (loss) Other income Total non-interest income NON-INTEREST EXPENSE Salaries and benefits Occupancy and equipment Other general and administrative Total non-interest expense Income before income taxes Income tax expense Net income Dividends on preferred stock and related discount accretion (1) Net income available to common shareholders PER COMMON SHARE DATA Earnings per share – basic (1) Earnings per share – diluted (1) Years ended December 31, 2010 2009 2011 $ 3,772 333,395 223,129 18,403 1,817 580,516 4,020 264,898 180,543 15,254 1,815 466,530 2,786 213,357 157,228 11,401 1,363 386,135 91,100 87,963 85,398 22,324 7,305 - 120,729 459,787 51,876 407,911 9,058 15,022 14,387 4,054 (12,272) 10,183 (2,089) 319 1,287 42,038 114,537 16,303 51,884 182,724 267,225 117,699 149,526 - 24,010 9,698 1 121,672 344,858 46,372 298,486 9,063 14,119 25,367 6,054 (38,613) 24,437 (14,176) 124 2,097 42,648 99,728 14,861 50,307 164,896 176,238 74,187 102,051 - $ 149,526 102,051 27,921 10,420 1 123,740 262,395 42,715 219,680 9,572 13,280 8,683 3,648 (23,719) 22,397 (1,322) (1,009) 1,780 34,632 86,836 14,042 49,007 149,885 104,427 41,701 62,726 12,203 50,523 $ $ 3.43 3.37 2.49 2.46 1.32 1.30 (1) The year ended December 31, 2009 includes the negative effect of the $10.2 million deemed dividend associated with the difference between the redemption payment and the carrying value of the preferred stock repurchased from the United States Department of the Treasury. See note 20 for further discussion. See accompanying notes to Consolidated Financial Statements. F-4 SIGNATURE BANK CONSOLIDATED STATEMENTS OF CHANGES IN SHAREHOLDERS' EQUITY (in thousands) Preferred stock Common stock Additional paid-in capital Retained earnings Accumulated other comprehensive income (loss) Total shareholders' equity Balance at December 31, 2008 $ 109,314 352 534,458 116,707 (62,696) 698,135 Cumulative effect of change in accounting for securities impairment, net of tax of $3,594 Redemption of preferred stock (TARP) Deemed dividend on preferred stock (TARP) Dividends on preferred stock (TARP) Accretion of discount on preferred stock (TARP) Common stock issued Stock options activity, net Restricted stock activity, net Other Comprehensive income, net of tax: Net income Net change in unrealized gains and losses on securities, net of tax of $(37,527) Reclassification adjustment for net gains on sales of securities included in net income, net of tax of $3,848 Other-than-temporary losses on securities related to noncredit factors, net of tax of $9,926 Reclassification adjustment for other- than-temporary losses on securities related to credit factors included in net income, net of tax of $(586) Total comprehensive income, net of tax - (120,000) 10,232 - 454 - - - - - - (95) - - - 52 127,278 2 1,465 5,335 - - - - - - - - - - - - - - Balance at December 31, 2009 $ - Stock options activity, net Restricted stock activity, net Warrant auction costs (TARP) Other Comprehensive income, net of tax: Net income Net change in unrealized gains and losses on securities, net of tax of $(29,990) Reclassification adjustment for net gains on sales of securities included in net income, net of tax of $11,157 Other-than-temporary losses on securities related to noncredit factors, net of tax of $10,748 Reclassification adjustment for other- than-temporary losses on securities related to credit factors included in net income, net of tax of $(6,235) Total comprehensive income, net of tax - - - - - - - - - Balance at December 31, 2010 $ - Common stock issued Stock options activity, net Restricted stock activity, net Other Comprehensive income, net of tax: Net income Net change in unrealized gains and losses on securities, net of tax of $(48,013) Reclassification adjustment for net gains on sales of securities included in net income, net of tax of $6,351 Other-than-temporary losses on securities related to noncredit factors, net of tax of $4,496 Reclassification adjustment for other- than-temporary losses on securities related to credit factors included in net income, net of tax of $(922) Total comprehensive income, net of tax - - - - - - - - - 406 3 4 - - - - - - - 413 47 2 - - - - - - - 4,539 - (10,232) (1,817) (454) - - (5) 62,726 - - - - - - (4) 102,051 - - - - - - - (5) 149,526 - - - - (4,539) - - - - - - - - - - (120,095) - (1,817) - 127,330 1,465 5,337 (5) 62,726 47,153 47,153 (4,835) (4,835) (12,471) (12,471) 736 93,309 803,659 9,423 11,493 (315) (4) 102,051 7,941 120,291 944,547 253,347 4,004 8,496 (5) 149,526 - - - - - - - - - - 60,757 60,757 (8,036) (8,036) (5,687) (5,687) 1,167 1,167 197,727 736 171,464 (36,652) 38,198 38,198 (14,210) (14,210) (13,689) (13,689) 7,941 273,511 (18,412) - - - - - 668,441 9,420 11,489 (315) - - - - - - 689,035 253,300 4,002 8,496 - - - - - - Balance at December 31, 2011 $ - 462 954,833 423,032 29,789 1,408,116 See accompanying notes to Consolidated Financial Statements. F-5 SIGNATURE BANK CONSOLIDATED STATEMENTS OF CASH FLOWS (in thousands) CASH FLOWS FROM OPERATING ACTIVITIES Years ended December 31, 2010 2011 2009 Net income $ 149,526 102,051 62,726 Adjustments to reconcile net income to net cash provided by operating activities: Depreciation and amortization Provision for loan losses Net impairment losses on securities recognized in earnings Net amortization/accretion of premium/(discount) Stock-based compensation expense Net gains on sales of securities and loans Purchases and originations of loans held for sale 6,111 51,876 2,089 90,712 8,496 5,783 46,372 14,176 73,856 9,332 5,395 42,715 1,322 36,318 5,455 (18,441) (31,421) (12,331) (1,023,633) (806,819) (803,775) Proceeds from sales and principal repayments of loans held for sale 947,198 762,835 636,980 Net increase in accrued interest and dividends receivable Deferred income tax benefit Net increase in other assets Net increase (decrease) in accrued expenses and other liabilities Net cash provided by operating activities CASH FLOWS FROM INVESTING ACTIVITIES Purchases of securities available-for-sale ("AFS") Proceeds from sales of securities AFS (7,322) (11,132) (39,243) 12,951 169,188 (10,018) (13,089) (59,357) (45,892) 47,809 (6,867) (8,460) (12,612) 54,729 1,595 (2,791,800) (3,554,431) (2,112,128) 480,399 778,286 378,442 923,609 Maturities, redemptions, calls and principal repayments on securities AFS 1,130,447 1,299,273 Purchases of securities held-to-maturity ("HTM") Maturities, redemptions, calls and principal repayments on securities HTM Net purchases of Federal Home Loan Bank stock Net increase in loans Net purchases of premises and equipment Net cash used in investing activities CASH FLOWS FROM FINANCING ACTIVITIES Net increase in non-interest-bearing deposits Net increase in interest-bearing deposits Net increase in secured short-term borrowings Proceeds from the issuance of long-term borrowings Repayment of long-term borrowings Tax benefit from stock-based compensation Issuance of common stock and exercise of options Warrant auction costs (TARP) Redemption of preferred stock (TARP) Dividends paid on preferred stock (TARP) Other Net cash provided by financing activities Net decrease in cash and cash equivalents Cash and cash equivalents at beginning of year Cash and cash equivalents at end of year Supplemental disclosures of cash flow information: Interest paid during the year Income taxes paid during the year Non-cash investing activities: (166,843) (192,601) (119,465) 54,792 (9,713) 36,929 (14,533) 59,227 (5,495) (1,639,172) (902,662) (930,138) (7,300) (3,366) (3,976) (2,949,190) (2,553,105) (1,809,924) 698,468 1,614,443 103,600 250,000 480,234 1,738,447 335,300 105,000 406,327 1,428,333 9,000 95,000 (150,000) (227,000) (145,000) 2,118 255,233 - - - (5) 5,967 5,617 (315) - - (4) 403 128,274 - (120,095) (1,817) (4) 2,773,857 2,443,246 1,800,421 (6,145) (62,050) (7,908) 46,299 40,154 $ 108,349 46,299 116,257 108,349 $ 120,995 126,550 122,817 85,125 125,100 47,326 Transfer of loans to other real estate owned, at fair value - 1,101 700 See accompanying notes to Consolidated Financial Statements. F-6 SIGNATURE BANK Notes to Consolidated Financial Statements (1) Organization Signature Bank and subsidiaries (“we,” “us” or the “Bank”) is a New York State chartered bank. On April 5, 2001, the Bank received its charter from the New York State Banking Department (known as the New York State Department of Financial Services as of October 3, 2011). The Bank commenced business on May 1, 2001. Signature Securities Group Corporation (“SSG” or “Signature Securities”), a wholly-owned subsidiary of Signature Bank, was incorporated on May 26, 2000 in the State of New York and is a registered broker and dealer in securities under the Securities Exchange Act of 1934 and a member of the National Association of Securities Dealers, Inc. (2) Summary of Significant Accounting Policies (a) Basis of Presentation and Consolidation The accompanying consolidated financial statements of the Bank have been prepared in accordance with U.S. generally accepted accounting principles (“GAAP”) and practices within the banking industry. In the opinion of management, these financial statements have been prepared to reflect all adjustments necessary to present fairly the financial position and results of operations as of the dates and for the periods shown. All significant intercompany accounts and transactions have been eliminated in consolidation. (b) General Accounting Policy The accompanying Consolidated Financial Statements are presented on the accrual basis of accounting. (c) Management’s Use of Estimates The preparation of consolidated financial statements in conformity with GAAP requires management to make estimates and assumptions that affect the reported amounts of assets and liabilities and disclosure of contingent assets and liabilities at the date of the consolidated financial statements and the reported amounts of revenues and expenses during the reporting period. Actual results may differ from those estimates. The most significant estimates include the adequacy of the allowance for loan losses, valuation of securities, and the evaluation of other-than-temporary impairment of securities. Current market conditions increase the risk and complexity of the judgments involved in these estimates. (d) Cash and Cash Equivalents For the purpose of presentation in the Consolidated Statements of Cash Flows, we have defined cash and cash equivalents to include cash and due from banks and short-term investments with original maturities of 90 days or less. Short-term investments consist of Federal funds sold, interest-bearing deposits with banks and money market mutual funds. Cash and cash equivalents at December 31, 2011 consisted of cash and due from banks of $34.1 million, interest- bearing deposits with banks of $2.4 million and money market mutual funds of $3.7 million. Cash and cash equivalents at December 31, 2010 consisted of cash and due from banks of $31.6 million, interest-bearing deposits with banks of $7.8 million and money market mutual funds of $6.9 million. We are required by the Federal Reserve System to maintain non-interest bearing cash reserves equal to a percentage of certain deposits. The reserve requirement amounted to $85.8 million and $68.3 million for the periods that included December 31, 2011 and 2010, respectively. F-7 (e) Securities Available-for-Sale and Securities Held-to-Maturity The designation of a security as available-for-sale (“AFS”) is made at the time of acquisition. The AFS classification includes debt and equity securities that are carried at estimated fair value. Unrealized gains or losses on securities available-for-sale are included as a separate component of shareholders’ equity, net of tax effect. Amortization of premiums and accretion of discounts are recognized using the level yield method. Realized gains and losses on sales of securities are computed using the specific identification method and are reported in non-interest income. The designation of a security as held-to-maturity (“HTM”) is made at the time of acquisition. Securities that we have the positive intent and ability to hold to maturity are classified as HTM and carried at amortized cost. Amortization of premiums and accretion of discounts are recognized using the level yield method. One of the significant estimates related to securities is the evaluation of securities for other-than-temporary impairment. We regularly evaluate our securities to identify declines in fair value that are considered other-than- temporary. Our evaluation of securities for impairments is a quantitative and qualitative process, which is subject to risks and uncertainties. If the amortized cost of an investment exceeds its fair value, we evaluate, among other factors, general market conditions, the duration and extent to which the fair value is less than amortized cost, the probability of a near-term recovery in value, whether we intend to sell the security and whether it is more likely than not that we will be required to sell the security before full recovery of our investment or maturity. We also consider specific adverse conditions related to the financial health, projected cash flow and business outlook for the investee, including industry and sector performance, operational and financing cash flow factors and rating agency actions. Once a decline in fair value is determined to be other-than-temporary, for equity securities, an impairment charge is recorded through current earnings based upon the estimated fair value of the security at time of impairment and a new cost basis in the investment is established. For debt investment securities deemed to be other-than-temporarily impaired on or after April 1, 2009, the investment is written down to fair value with the estimated credit loss charged to current earnings and the noncredit-related impairment loss charged to other comprehensive income. Prior to April 1, 2009, the full amount of other-than-temporary impairment on debt securities was charged to current earnings. We changed our accounting policy beginning April 1, 2009 in order to adopt new accounting requirements issued by the Financial Accounting Standards Board (“FASB”). If market, industry and/or investee conditions deteriorate, we may incur future impairments. Securities, other than securitized financial assets that are in an unrealized loss position, are reviewed at least quarterly to determine if an other-than-temporary impairment is present based on certain quantitative and qualitative factors. The primary factors considered in evaluating whether a decline in value for these securities is other-than-temporary include: (a) the length of time and extent to which the fair value has been less than cost or amortized cost and the expected recovery period of the security, (b) the financial condition, credit rating, and future prospects of the issuer, (c) whether the debtor is current on contractually-obligated interest and principal payments, and (d) whether we intend to sell or whether we will be required to sell these instruments before recovery of their cost basis. In performing our other-than-temporary impairment analysis for securitized financial assets with contractual cash flows (asset-backed securities, collateralized debt obligations, commercial mortgage-backed securities and mortgage-backed securities), we estimate future cash flows for each security based upon our best estimate of future delinquencies, estimated defaults, loss severity, and prepayments. We review the estimated cash flows to determine whether we expect to receive all originally expected cash flows. Projected credit losses are compared to the current level of credit enhancement to assess whether the security is expected to incur losses in any future period and therefore would be deemed other-than-temporarily impaired. Equity securities, including FHLB stock, that are not quoted on an exchange and not considered to be readily marketable are recorded at cost, less impairment (if any). F-8 (f) Loans Held for Sale Loans originated and held for sale in the secondary market are carried at the lower of cost or estimated fair value in the aggregate. Net unrealized losses, if any, are recognized through a valuation allowance by charges to current earnings. Gains or losses resulting from sales of loans held for sale, net of unamortized deferred fees and costs, are recognized at the time of sale and are included in net gains on sales of loans on the Consolidated Statements of Operations. (g) Loans, Net Loans are carried at the principal amount outstanding, less unearned discounts, net of deferred loan origination fees and costs and the allowance for loan losses. Unearned income and net deferred loan fees and costs are accreted into interest income over the loan term on a basis that approximates the level yield method. The accrual of interest income is generally discontinued at the time a loan becomes 90 days delinquent based on contractual terms. In the case of commercial loans, residential mortgages, and home equity lines of credit, exceptions may be made if the loan has sufficient collateral value, based on a current appraisal, and is in process of collection. In all cases, loans are placed on non-accrual status or charged-off at an earlier date if collection of principal or interest is considered doubtful. Once a loan is placed on non-accrual status, our accounting policies are applied consistently, regardless of loan type. All interest previously accrued but not collected for loans that are placed on non-accrual status is reversed against interest income. Payments received on non-accrual loans are applied against the outstanding loan principal. Loans are returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Impaired loans include non-accrual loans and troubled debt restructured loans. Loans classified as troubled debt restructurings include those loans where a borrower experiences financial difficulty and the Bank makes certain concessionary modifications to contractual terms, such as a reduction of the stated interest rate or face amount of the loan, a reduction of accrued interest, or an extension of the maturity date(s) at a stated interest rate lower than the current market rate for a new loan with similar risk. (h) Allowance for Loan Losses The allowance for loan losses is established through a provision for loan losses charged to current earnings. The allowance for loan losses is maintained at a level estimated by management to absorb probable losses inherent in the loan portfolio and is based on management’s continuing evaluation of the portfolio, the related risk characteristics, and the overall economic conditions affecting the loan portfolio. This estimation is inherently subjective as it requires measures that are susceptible to significant revision as more information becomes available. Our methodology to determine the allowance for loan losses includes segmenting the loan portfolio into various components and applying various loss factors to estimate the amount of probable losses. The largest segment of our loan portfolio is comprised of credit-rated commercial loans, comprising 93.6% of our total loan portfolio, excluding loans held for sale, as of December 31, 2011. Our credit-rated commercial loans include commercial and industrial loans along with loans to commercial borrowers that are secured by real estate (commercial property, multi-family residential property, 1-4 family residential property, and construction and land). For each loan within this segment, a credit rating is assigned based on a review of specific risk factors including (i) historical and projected financial results of the borrower, (ii) market conditions of the borrower’s industry that may affect the borrower’s future financial performance, (iii) business experience of the borrower’s management, (iv) nature of the underlying collateral, if any, and (v) borrower’s history of payment performance. When assigning a credit rating to a loan, we use an internal nine-level rating system in which a rating of one carries the lowest level of credit risk and is used for borrowers exhibiting the strongest financial condition. Loans rated one through six are deemed to be acceptable quality and are considered “Pass.” Loans that are deemed to be of questionable quality are rated seven (special mention). Loans with adverse classifications (substandard or doubtful) are rated eight or nine, respectively. A loan is considered substandard if it is inadequately protected by the current net worth and paying capacity of the borrower, or of the collateral pledged. Substandard loans are characterized by the distinct possibility that the Bank will sustain some loss if the deficiencies are not corrected. F-9 Loans classified as doubtful have all of the weaknesses inherent in those classified substandard with the added characteristic that the weaknesses present make collection or liquidation in full, on the basis of currently existing facts, conditions, and values, highly questionable and improbable. The outstanding amounts of credit-rated commercial loans are aggregated by credit rating, and we estimate the allowance for losses for each credit rating using loss factors based on historical loss experience and qualitative adjustments reflecting the current economic conditions and outlook for housing, employment, manufacturing, and consumer spending. The economic adjustments reflect the imprecision that is inherent in the estimates of probable loan losses, and are intended to ensure adequacy of the overall allowance amount. The loss factors assigned to each credit rating are adjusted based on management’s judgment, along with certain qualitative factors such as the trend and severity of problem loans that can cause the estimation of inherent losses to differ from historical experience. Any change to an individual credit rating affects the amount of the related allowance. Our internal review process results in the periodic review of assigned credit ratings to reflect changes in specific risk factors. Commercial lines of credit are generally issued with terms of one year, and upon annual renewal our lenders perform a full review of the specific risk factors to assess the appropriateness of the assigned credit ratings. Furthermore, loans classified as special mention, substandard or doubtful are placed on our internal watch list, and our lenders perform a credit rating review on a quarterly basis (special mention loans) or monthly basis (substandard and doubtful loans). In addition, our Risk Management function, which reports directly to the Risk Committee of our Board of Directors, performs periodic credit reviews that provide an independent evaluation of the assigned credit ratings. These reviews generally cover, in aggregate, between 40-50% of the commercial loan portfolio, including all commercial loans over $500,000 with adverse credit ratings, on an annual basis. Additionally, our Risk Management function focuses its reviews on those loans with higher-risk attributes, such as lines of credit with higher utilization percentages and loan facilities with delinquencies. Our methodology to determine the allowance for loan losses for the non-rated segments of our loan portfolio is based on historical loss experience and qualitative factors. Non-rated loans generally include commercial loans with outstanding principal balances below $100,000, overdrafts, residential mortgages, and consumer loans. The outstanding amounts of loans in each of these segments are aggregated, and we apply percentages based on historical losses and qualitative factors by segment to estimate the required allowance for loan losses. Non-rated loans comprise 6.4% of our total loan portfolio, excluding loans held for sale, as of December 31, 2011. We consider all non-accrual loans to be impaired loans, and the related specific allowances for loan losses are determined on an individual (non-homogeneous) basis. Factors contributing to the determination of specific allowances on impaired loans include the creditworthiness of the borrower and, more specifically, changes in the expected future receipt of principal and interest payments or, for collateral-dependent loans, the value of pledged collateral. For impaired loans in excess of $300,000, a specific allowance is recorded when the carrying amount of the loan exceeds the discounted estimated cash flows using the loan’s initial effective interest rate or, for collateral-dependent loans, the fair value of collateral. For smaller impaired loans, in the absence of other factors affecting the collectability of the loan, we generally determine the amount of specific allowance using estimated loss percentages based on the amount of time the loan has been delinquent. For economic reasons and to maximize the recovery of loans, we may work with borrowers experiencing financial difficulties, and will consider modifications to a borrower’s existing loan terms and conditions that we would not otherwise consider, commonly referred to as troubled debt restructurings (“TDRs”). We record an impairment loss associated with TDRs, if any, based on the present value of expected future cash flows discounted at the original loan’s effective interest rate or, if the loan is collateral dependent, based on the fair value of the collateral less costs to sell. At the time of restructuring, we determine whether a TDR loan should accrue interest based on the accrual status of the loan immediately prior to modification. A non-accrual TDR loan will be returned to accrual status when all the principal and interest amounts contractually due are brought current and future payments are reasonably assured. Additionally, there should be a sustained period of repayment performance (generally a period of six months) by the borrower in accordance with the modified contractual terms. In years after the year of restructuring, the loan is not reported as a TDR loan if it was restructured at a market interest rate and it is performing in accordance with its modified terms. Other TDRs are reported as such for as long as the loan remains outstanding. In addition, bank regulators, as an integral part of their supervisory functions, periodically review our loan portfolio and related allowance for loan losses. These regulatory agencies may require us to increase our provision for loan losses or to recognize further loan charge-offs based upon their judgments, which may be different from ours. F-10 An increase in the allowance for loan losses required by these regulatory agencies could materially adversely affect our financial condition and results of operations. (i) Charge-off of Uncollectible Loans Loan losses are charged-off in the period the loans, or a portion thereof, are deemed uncollectible. For collateral dependent risk-rated commercial loans, charge-offs are recorded no later than when the Bank takes possession of collateral, and charge-offs are generally measured as the excess of the loan carrying value over the estimated fair value of the collateral, net of selling costs. Fair value is estimated based on credible, verifiable indicators of value such as appraisals, evaluations, documented discussions with brokers, or recent sales or market listings of comparable properties. In the case of other loan segments, including non-rated commercial loans, consumer loans, and residential mortgages, charge-offs are generally recorded when a loan reaches 180 days of delinquency unless there are extenuating circumstances that can be clearly evidenced. Such circumstances include loans that are well secured and in process of collection along with loans undergoing extensive restructuring/settlement discussions with the borrower. (j) Loan Origination and Commitment Fees Loan origination and commitment fees are deferred and amortized into interest income on a basis that approximates the level yield method. Net commitment fees on revolving lines of credit are recognized in interest income on the straight-line method over the period the revolving line is active. Any fees that are unamortized at the time a loan is paid off or a commitment is closed are recognized into income immediately. (k) Securitizations The Bank purchases, securitizes and sells the government-guaranteed portions of U.S. Small Business Administration (“SBA”) loans. When the Bank securitizes SBA loans, we may retain interest-only strips, which are generally considered residual interests in the securitized assets. These SBA interest-only strips are accounted for and classified as AFS securities. Gains and losses upon sale of the securitized SBA loans depend, in part, on our allocation of the previous carrying amount of the loans to the retained interests. Previous carrying amounts are allocated in proportion to the relative fair values of the loans sold and interests retained. The Bank uses an internal valuation process to determine the fair value of its SBA interest-only strip securities. The excess of cash flows expected to be received over the amortized cost of the retained interests is recognized as interest income using the effective yield method. If the fair value of the retained interest has declined below its carrying amount and there has been an adverse change in estimated cash flows of the underlying loans, then the decline in fair value is considered to be other-than-temporary and the retained interest is written down to fair value with a corresponding charge to earnings. (l) Premises and Equipment Premises and equipment are stated at cost less accumulated depreciation and amortization. Depreciation of furniture, fixtures, and equipment is computed by the straight-line method over the estimated useful lives of the related assets. Furniture and fixtures are normally amortized over seven years and equipment; computer hardware and computer software are normally amortized over five years. Amortization of leasehold improvements is computed by the straight-line method over their estimated useful lives or the terms of the leases, whichever is shorter. F-11 (m) Bank-owned Life Insurance The Bank has purchased life insurance policies on certain employees. These Bank-owned life insurance (“BOLI”) policies are carried at the amount that could be realized under our BOLI policies as of the date of the Consolidated Statements of Financial Condition and are included in other assets. Increases in the carrying value are recorded as “Other Income” in the Consolidated Statements of Operations and insurance proceeds received are generally recorded as a reduction of the carrying value. The carrying value consists of cash surrender value of $61.8 million at December 31, 2011, and $60.4 million at December 31, 2010, and deferred acquisition costs of $435,000 at December 31, 2011, and $560,000 at December 31, 2010. Our investment in BOLI generated income of $1.9 million, $2.1 million, and $1.8 million for the years ended December 31, 2011, 2010, and 2009, respectively. (n) Other Real Estate Owned Other real estate (“ORE”) owned represents real estate acquired through foreclosure on loans secured by real estate and is carried at the lower of cost or fair value, less estimated selling costs. ORE is included in other assets. As of December 31, 2011 and 2010, our ORE totaled $566,000 and $1.7 million, respectively. Any write- downs at the date of foreclosure are charged to the allowance for loan losses. Expenses incurred to maintain ORE, unrealized losses resulting from write-downs after the date of foreclosure, and realized gains and losses upon sale of the properties are included in other non-interest expense and other non-interest income, as appropriate. (o) Securities Sold Under Agreements to Repurchase When we maintain effective control over the underlying securities, securities sold under agreements to repurchase are accounted for as financings (rather than as sales) and the obligations to repurchase securities sold are reflected as liabilities in the Consolidated Statements of Financial Condition at the amounts at which the securities will be subsequently repurchased. All of our agreements have been accounted for as financings through December 31, 2011. The dollar amount of securities underlying the agreements remains in the asset accounts, although the securities underlying the agreements are delivered to the counterparties who arranged the transactions. In certain instances, the counterparties may have sold, loaned, or disposed of the securities to other parties in the normal course of their operations, and have agreed to resell to us substantially similar securities at the maturity of the agreements. (p) Income Taxes Signature Bank files consolidated Federal and combined New York State and New York City income tax returns with its subsidiaries, with the exception of Signature Preferred Capital, Inc. which files separately as a real estate investment trust. Additionally, SSG files other state and local returns on a separate basis. Income tax expense consists of current and deferred income tax expense (benefit). Deferred income tax expense (benefit) is determined by recognizing deferred tax assets and liabilities for future tax consequences attributable to differences between the financial statement carrying amounts of existing assets and liabilities and their respective tax bases and certain unused carry-forward deductions and credits. The realization of deferred tax assets is assessed and if necessary, a valuation allowance is provided to reduce the asset to the amount that will more likely than not be realized. Deferred tax assets and liabilities are measured using enacted tax rates expected to apply to taxable income in the year in which those temporary differences are expected to be recovered or settled and carry-forward deductions and credits are expected to be utilized. The effect on deferred tax assets and liabilities of a change in tax laws or rates is recognized in income tax expense in the period that includes the enactment date of the change. (q) Stock-Based Compensation We recognize compensation expense in our Consolidated Statement of Operations for all stock-based compensation awards over the requisite service period with a corresponding credit to equity, specifically additional paid-in capital. Compensation expense is measured based on grant date fair value and is included in salaries and benefits (non- interest expense). The fair value of each option grant is estimated on the date of grant using the Black-Scholes option pricing model. The fair value of restricted stock grants is measured based on the market price of the shares at the date of grant. F-12 (r) Earnings Per Common Share Basic earnings per common share is computed by dividing net income available to common shareholders by the weighted-average common shares outstanding during the year. Diluted earnings per common share is computed using the same method as basic earnings per share, but includes the potential dilutive effect of stock options outstanding and the unvested portions of restricted stock awards. The dilutive effect is calculated using the treasury stock method. (s) Segment Reporting Public companies are required to report certain financial information about operating segments for which such information is available and utilized by the chief operating decision maker in deciding how to allocate resources and in assessing performance. Specific information to be reported for individual operating segments includes a measure of segment profit and loss, certain specific revenue and expense items and segment assets. As presented in Note 21, we have identified two operating segments, the Bank and Signature Securities. (t) Derivatives The Bank accounts for interest rate cap derivatives on the Consolidated Statements of Financial Condition at their respective fair values. As of December 31, 2011, the Bank had no derivatives designated in any hedging relationship that qualify for hedge accounting. Changes in the fair value of derivatives are recognized as trading income (loss) in the Consolidated Statements of Operations. (u) New Accounting Standards In July 2010, the FASB issued Accounting Standards Update 2010-20, which amends ASC Topic 310 (Receivables) to require significant new disclosures about the credit quality of financing receivables and the allowance for credit losses. The objective of the new disclosures is to improve financial statement users’ understanding of (1) the nature of an entity’s credit risk associated with its financing receivables, and (2) the entity’s assessment of that risk in estimating its allowance for credit losses, as well as changes in the allowance and the reasons for those changes. The disclosures are to be presented at the level of disaggregation that management uses when assessing and monitoring the portfolio’s risk and performance (by portfolio segment). The required disclosures include, among other things, a rollforward of the allowance for credit losses by portfolio segment, as well as information about credit quality indicators and modified, impaired, non-accrual, and past due loans. The disclosures related to period-end information (e.g., credit-quality information and the ending financing receivables balance segregated by impairment method) are required in all interim and annual reporting periods ending on or after December 15, 2010 (December 31, 2010 for the Bank). Disclosures of activity that occurs during a reporting period (e.g., the rollforward of the allowance for credit losses by portfolio segment) will be required in interim or annual periods beginning on or after December 15, 2010; disclosures of activity related to TDRs are anticipated to be required in interim or annual periods ending after June 15, 2011 based on ASU 2011- 01, Deferral of the Effective Date of Disclosures about Troubled Debt Restructurings in Update No. 2010-20. We adopted the applicable requirements for the period-ended December 31, 2010 and have provided the related disclosures as required In April 2011, the FASB issued ASU 2011-03, Reconsideration of Effective Control for Repurchase Agreements, which amends the provisions of ASC Topic 860 (Transfers and Servicing) related to whether or not the transferor has maintained effective control over the transferred assets that affects the determination of whether the transaction is accounted for as a sale or a secured borrowing. In the assessment of effective control, ASU 2011- 03 removed the criterion that requires transferors to have the ability to repurchase or redeem the financial assets on substantially the agreed terms, even in the event of default by the transferee. Other criteria applicable to the assessment of effective control have not been changed. This guidance is effective for prospective periods beginning on or after December 15, 2011, or January 1, 2012 for the Bank. Early adoption is prohibited. We do not expect the adoption of ASU 2011-03 to have a material impact on our Consolidated Financial Statements. In May 2011, the FASB issued ASU 2011-04, Fair Value Measurement: Amendments to Achieve Common Fair Value Measurement and Disclosure Requirements in U.S. GAAP and IFRSs, which expands existing disclosure requirements found in ASC Topic 820 (Fair Value Measurement and Disclosures). This ASU is the result of efforts to converge GAAP and International Financial Reporting Standards (“IFRSs”), and provides guidance on how fair F-13 value should be measured and disclosed. This guidance is effective for interim and annual periods beginning after December 15, 2011. Early adoption is prohibited. We do not expect the adoption of ASU 2011-04 to have a material impact on our Consolidated Financial Statements. In June 2011, the FASB issued ASU 2011-05, Presentation of Comprehensive Income, which amends ASC Topic 220 (Comprehensive Income). The new guidance requires entities to report components of comprehensive income in either (1) a single financial statement, where total net income and its components, total other comprehensive income (OCI) and its components, and total comprehensive income are presented in a continuous format, or (2) in two consecutive financial statements, where net income is reported in one statement, immediately followed by a statement presenting OCI and its components and a total for comprehensive income. The earnings per share computation is not affected by the new guidance. This guidance is effective for annual and interim periods beginning after December 15, 2011 and should be applied retrospectively. Early adoption is permitted. We do not expect the adoption of ASU 2011-05 to have a material impact on our Consolidated Financial Statements. (3) Fair Value Measurements The Bank uses fair value measurements to record fair value adjustments to certain assets and liabilities and to determine fair value disclosures. Fair value measurements are recorded on a recurring basis for certain assets and liabilities when fair value is the measure for accounting purposes, such as investment securities classified as available-for-sale and derivatives. Certain other assets and liabilities are measured at fair value on a non- recurring basis and are subject to fair value adjustments in certain circumstances, such as when there is evidence of impairment. U.S. GAAP establishes a three-level fair value hierarchy that prioritizes techniques used to measure the fair value of assets and liabilities, based on the transparency and reliability of inputs to valuation methodologies. The three levels are defined as follows: • • • Level 1 – Valuations are based on quoted prices in active markets for identical assets or liabilities. Accordingly, valuation of these assets and liabilities does not entail a significant degree of judgment. Examples include most U.S. Government securities and exchange-traded equity securities. Level 2 – Valuations are based on either quoted prices in markets that are not considered to be active or significant inputs to the methodology that are observable, either directly or indirectly. Examples include U.S. Agency securities, municipal bonds, corporate bonds, certain residential and commercial mortgage- backed securities, deposits, and most structured notes. Level 3 – Valuations are based on inputs to the methodology that are unobservable and significant to the fair value measurement. These inputs reflect management’s own judgments about the assumptions that market participants would use in pricing the assets and liabilities. Examples include certain commercial loans, certain residential and commercial mortgage-backed securities, private equity investments, and complex over-the-counter derivatives. Valuation Methodology The Bank has an established and well documented process for determining fair values. The Bank uses quoted market prices, when available, to determine fair value and classifies such items as Level 1. In many cases, the Bank utilizes valuation techniques, such as matrix pricing, to determine fair value, in which case the items are classified as Level 2. Fair value estimates may also be based upon internally-developed valuation techniques that use current market-based inputs such as discount rates, credit spreads, default and delinquency rates, and prepayment speeds. Items valued using internal valuation techniques are classified according to the lowest level input that is significant to the valuation, and are typically classified as Level 3. We utilize independent third-party pricing sources to value most of our investment securities. Two independent third-party pricing sources are employed to value positions and validate market values. If there is a large price discrepancy between the two pricing services for an individual security, we utilize industry market spread data to assist in determining the most appropriate fair value. In addition, the third-party pricing sources have an established challenge process in place for all security valuations, which facilitates identification and resolution of F-14 potentially erroneous prices. We believe that the prices received from our pricing sources are representative of prices that would be received to sell the assets at the measurement date (exit prices) and are classified appropriately in the hierarchy. The valuations provided by the pricing services are derived from quoted market prices or using matrix pricing. Matrix pricing is a valuation technique consistent with the market approach of determining fair value. The market approach uses prices and other relevant information generated by market transactions involving identical or comparable assets. Matrix pricing is a mathematical technique used principally to value debt securities without relying exclusively on quoted prices of specific securities, but rather on the securities’ relationship to other benchmark quoted securities. Most of our securities portfolio is priced using this method, and such securities are classified as Level 2. Securities are classified within Level 3 of the valuation hierarchy in cases where there is limited activity or less transparency around inputs to the valuation. In these cases, the valuations are determined based upon an analysis of the cash flow structure and credit analysis for each position. Relative market spreads are utilized to discount the cash flow to determine current market values, as well as analysis of relative coverage ratios, credit enhancements, and collateral characteristics. Markets for Small Business Administration (“SBA”) interest-only strip securities are relatively inactive, with limited observable secondary market transactions. Our SBA interest-only strip securities are classified as other debt securities available-for-sale and reported at fair value, with changes in fair value recognized in accumulated other comprehensive income or loss. The securities are valued using Level 3 inputs and had fair values of $70.1 million at December 31, 2011 and $90.7 million at December 31, 2010. The decrease in fair value of the SBA interest- only strip securities is attributed to the sale of a portion of our portfolio during the first and second quarters, resulting in realized gains of $5.3 million and $2.1 million, respectively. The securities sold in the first and second quarters had an amortized cost of $44.5 million and $16.0 million, and a fair value of $47.6 million and $15.2 million at December 31, 2010 and March 31, 2011, respectively. Since the cash flows of the SBA interest-only strip securities are guaranteed by the U.S. Government, there is limited credit risk involved in the cash flows. Therefore, the primary assumptions built into the pricing model to generate the projected cash flows used to compute the fair values of the SBA interest-only strip securities are the discount yield and prepayment speeds. The Bank determined the inputs to the discounted cash flow model based on historical performance and information provided by brokers. Our derivatives, at December 31, 2011, consisted of interest rate caps. At December 31, 2010, our derivatives included interest rate caps and credit default swaps. The fair value of our interest rate caps is provided by a third party and validated using third party inputs such as LIBOR, Swap and Treasury curves. The fair value of our credit default swaps is determined by using externally-developed pricing models based on market observable inputs. The fair values of our derivatives are classified as Level 2 measurements. F-15 Financial Instruments Measured at Fair Value on a Recurring Basis The following tables present the assets and liabilities carried at fair value as of December 31, 2011 and 2010, classified according to the three-level valuation hierarchy: (in thousands) December 31, 2011 ASSETS Securities available-for-sale: Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: Commercial mortgage-backed securities Single issuer trust preferred & corporate debt securities Pooled trust preferred securities Collateralized debt obligations Other Equity securities (1) Total securities available-for-sale Derivatives (interest rate caps) Total assets LIABILITIES Derivatives (interest rate caps) Total liabilities December 31, 2010 ASSETS Securities available-for-sale: Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: Commercial mortgage-backed securities Single issuer trust preferred & corporate debt securities Pooled trust preferred securities Collateralized debt obligations Other Equity securities (1) Total securities available-for-sale Derivatives (interest rate caps) Total assets LIABILITIES Derivatives (interest rate caps and credit default swaps) Total liabilities Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Carrying Value $ - - - - - - - - - - - - - $ - $ - $ - $ - - - - - - - - - - - - - $ - $ - $ - 38,649 1,141,619 697,542 2,968,904 786,670 322,026 336,623 - - 119,415 14,356 6,425,804 9 6,425,813 10 10 25,538 1,065,450 646,627 2,084,165 791,803 191,063 203,416 - - 120,296 15,167 5,143,525 55 5,143,580 78 78 - - - - 5,844 - - 7,116 2,757 70,091 1,243 87,051 - 87,051 - - - - - - 5,675 - - 4,562 4,874 90,650 - 105,761 - 105,761 - - 38,649 1,141,619 697,542 2,968,904 792,514 322,026 336,623 7,116 2,757 189,506 15,599 6,512,855 9 6,512,864 10 10 25,538 1,065,450 646,627 2,084,165 797,478 191,063 203,416 4,562 4,874 210,946 15,167 5,249,286 55 5,249,341 78 78 (1) Equity securities represent Community Reinvestment Act (“CRA”) qualifying closed-end bond fund investments. F-16 Changes in Level 3 Fair Value Measurements We recognize transfers between levels of the valuation hierarchy at the end of reporting periods. The following table presents information for recurring assets classified by the Bank within Level 3 of the valuation hierarchy for the years ended December 31, 2011, 2010 and 2009: (in thousands) Beginning balance Transfers into Level 3 Transfers out of Level 3 Total gains or (losses) (realized/unrealized): Included in earnings Included in other comprehensive income Sales Ending balance Securities Available-for-sale 2010 2009 2011 $ 105,761 1,384 - 7,433 40,452 (67,979) 87,051 $ 123,445 - (3,332) (12,192) (2,160) - 105,761 126,936 102,341 (79,965) (702) (25,165) - 123,445 Assets Measured at Fair Value on a Non-recurring Basis Certain assets are measured at fair value on a non-recurring basis. These assets are not measured at fair value on an on-going basis but are subject to fair value adjustments only in certain circumstances, such as when there is an impairment or when an adjustment is required to reduce the carrying value to the lower of cost or fair value. These assets may include collateral-dependent impaired loans, securities HTM that are other-than-temporarily impaired, loans held-for-sale, other real estate owned, and certain long-lived assets. The following tables present the assets measured at fair value on a non-recurring basis as of December 31, 2011 and 2010, classified according to the three-level valuation hierarchy: (in thousands) December 31, 2011 Held-to-maturity securities: Quoted Prices in Active Markets (Level 1) Significant Other Observable Inputs (Level 2) Significant Unobservable Inputs (Level 3) Total Carrying Value Collateralized mortgage obligations - Private $ - 6,346 - Other debt securities - CDO Collateral-dependent impaired loans: Commercial property Construction and land Commercial and industrial Other real estate owned Total assets December 31, 2010 Held-to-maturity securities: - - - - - $ - - - - - - 6,346 2,710 13,012 4,929 9,392 566 30,609 Collateralized mortgage obligations - Private $ - 7,287 - Other debt securities - CDO Collateral-dependent impaired loans: Commercial property Construction and land Commercial and industrial Other real estate owned Total assets - - - - - $ - - - - - - 7,287 3,687 4,247 6,730 8,379 1,667 24,710 6,346 2,710 13,012 4,929 9,392 566 36,955 7,287 3,687 4,247 6,730 8,379 1,667 31,997 HTM securities for which other-than-temporary impairment losses were recognized during the current period are reflected in the above table at their fair values based on the valuation methodology for investment securities, as previously described. In accordance with FASB requirements, when debt securities are determined to be other- than-temporarily impaired and management believes it is not more likely than not that we will be required to sell F-17 the security before recovery of its amortized cost, the investment is written down through current earnings for the impairment related to the estimated credit loss, while the noncredit related impairment loss is recognized in other comprehensive income. During the year ended December 31, 2011, we recognized other-than-temporary impairment totaling $1.7 million on one HTM debt security, for which we recognized the credit component ($503,000) in earnings and the noncredit component ($1.2 million) in other comprehensive income. During the year ended December 31, 2010, we recognized other-than-temporary impairment totaling $3.5 million on one HTM debt security with a carrying value of $3.9 million, for which we recognized the credit component of $1.5 million in earnings and the noncredit component of $1.9 million in other comprehensive income. In 2009, we recognized a $180,000 other-than-temporary impairment loss in earnings on an HTM debt security with a carrying value of $9.8 million. Collateral-dependent impaired loans are reported at the fair value of the underlying collateral, which is determined based on individual appraisals that may be discounted by management for unobservable factors resulting from its knowledge of the property. Fair value adjustments for collateral-dependent impaired loans are recorded through a specific allocation of the allowance for loan losses. During the years ended December 31, 2011, 2010 and 2009 we recorded fair value adjustments totaling $24.5 million, $13.7 million and $11.5 million, respectively, on collateral-dependent impaired loans. Other real estate owned represents real estate acquired as a result of foreclosure and is carried at the lower of cost or fair value, less estimated selling costs. Fair value is determined through current appraisals, and fair value adjustments are reported through a valuation allowance against the asset. During the years ended December 31, 2011 and 2010, we recorded fair value adjustments of $476,000 and $134,000, respectively, on other real estate owned (none during the year ended December 31, 2009). Other Fair Value Disclosures The preparation of financial statements in accordance with U.S. GAAP requires disclosure of the fair value of financial assets and liabilities, including those items that are not measured and reported at fair value on a recurring or non-recurring basis. The methodologies for estimating the fair value of financial assets and liabilities that are measured at fair value on a recurring or non-recurring basis are discussed above. The methodologies for estimating the fair value of other items, which are carried on the Consolidated Statements of Financial Condition at cost or amortized cost, are discussed below. Fair value estimates for our financial instruments are made at a specific point in time, based on relevant market information and information about the financial instrument. Fair value estimates are not necessarily representative of our total enterprise value. Fair value estimates, methods and assumptions are set forth below. The carrying amounts for cash and cash equivalents are reasonable estimates of fair value. The redemption (par) value of Federal Home Loan Bank stock is a reasonable estimate of fair value. Our loans held for sale consist of the government-guaranteed portion of SBA loans. The fair value of our loans held for sale approximates cost, as these loans have adjustable rates and are backed by the full faith and credit of the U.S. Government. The estimated fair value of our loans, net, was based on the discounted value of contractual cash flows using interest rates that approximated those offered for loans with similar maturities and collateral requirements to borrowers of comparable credit worthiness. Since this method of estimating fair value is based on a comparison to current market rates for similar loans, it does not fully incorporate an exit-value approach to estimating fair value, which would also consider adjustments for other factors such as liquidity and credit quality. The fair value estimate could be affected significantly by these other factors. Deposits are mostly non-interest-bearing or NOW and money market deposits that bear floating interest rates that are re-priced based on market considerations and the Bank’s strategy. Therefore, the carrying value equals fair value. The carrying and fair values do not include the intangible fair value of core deposit relationships, which comprise a significant portion of our deposit base. Management believes that the Bank’s core deposit relationships represent a relatively stable, low-cost source of funding that has a substantial intangible value separate from the deposit balances. Time deposits, 58.5% of which mature within one year, had a carrying value F-18 of $895.6 million and an estimated fair value of $909.5 million at December 31, 2011. The estimated fair value is based on the discounted value of contractual cash flows using interest rates that approximated those offered for time deposits with similar maturities and terms. The estimated fair value of borrowings is based on the discounted value of contractual cash flows using interest rates that approximate those offered for borrowings with similar maturities and collateral requirements. The following table summarizes the carrying amounts and estimated fair values of our financial assets and liabilities: (in thousands) Financial assets Cash and cash equivalents Securities available-for-sale Securities held-to-maturity Federal Home Loan Bank stock Loans held for sale Loans, net (1) Derivatives Total financial assets Financial liabilities Deposits (2) Repurchase agreements Federal funds purchased Federal Home Loan Bank advances Other short-term borrowings Derivatives Total financial liabilities December 31, 2011 December 31, 2010 Carrying Amount Estimated Fair Value Carrying Amount Estimated Fair Value $ 40,154 6,512,855 556,044 48,152 392,025 6,764,564 9 14,313,803 $ 40,154 6,512,855 571,980 48,152 392,025 6,877,829 9 14,443,004 11,754,138 695,000 55,800 675,000 11,768,043 737,455 55,800 681,428 - - 10 13,179,948 $ 10 13,242,736 46,299 5,249,286 447,896 38,439 382,463 5,177,268 55 11,341,706 9,441,227 540,000 118,000 558,000 6,200 78 10,663,505 46,299 5,249,286 450,315 38,439 382,463 5,246,039 55 11,412,896 9,446,165 572,925 118,000 568,484 6,199 78 10,711,851 (1) The fair values of loans do not include adjustments other than those related to market interest rates, such as adjustments for liquidity and credit quality. (2) The carrying and fair values of deposits do not include the intangible fair value of core deposit relationships. (4) Securities We generally invest in U.S. Government agency obligations, securities guaranteed by U.S. Government- sponsored enterprises, and other investment grade securities. The fair value of these investments fluctuates based on several factors, including general interest rate changes. For collateralized mortgage obligations and certain other debt securities, fair value fluctuates based on credit quality, changes in credit spreads, and the degree of market liquidity, among other factors. F-19 The following table summarizes the components of our securities portfolios as of the dates indicated: 2011 Gross Gross 2010 Gross Gross December 31, (in thousands) AVAILABLE-FOR-SALE Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: Amortized Cost Unrealized Unrealized Gains Losses Fair Value Amortized Unrealized Unrealized Gains Losses Cost Fair Value $ 36,437 1,103,380 681,869 2,902,349 818,904 2,212 38,278 20,177 86,281 11,208 - 38,649 24,764 (39) 1,141,619 1,048,591 (4,504) 697,542 642,741 (19,726) 2,968,904 2,060,430 (37,598) 792,514 825,674 779 19,946 9,236 40,037 8,421 (5) 25,538 (3,087) 1,065,450 (5,350) 646,627 (16,302) 2,084,165 (36,617) 797,478 Commercial mortgage-backed securities 315,573 7,329 (876) 322,026 191,293 1,650 (1,880) 191,063 Single issuer trust preferred & corporate debt securities Pooled trust preferred securities Collateralized debt obligations Other Equity securities (1) Total available-for-sale HELD-TO-MATURITY Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: Commercial mortgage-backed securities Collateralized debt obligations Other Total held-to-maturity 345,324 28,216 6,487 204,002 3,076 - - (11,777) (21,100) (3,730) 336,623 7,116 2,757 7,938 (22,434) 189,506 15,708 6,458,249 $ 166 176,665 (275) (122,059) 15,599 6,512,855 207,363 28,608 6,992 228,949 15,475 5,280,880 $ 3,286 20,013 122,560 358,859 11,419 358 5,309 34,240 556,044 $ 145 846 5,647 16,808 4 1 - 762 24,213 - - (22) (6) (3,451) - (2,599) (2,199) (8,277) 3,431 20,859 128,185 375,661 7,972 359 2,710 32,803 571,980 3,796 9,465 83,858 279,497 12,838 12,495 6,342 39,605 447,896 981 (4,928) 203,416 - - 3,443 - 84,493 124 533 2,534 8,881 46 26 - 889 13,033 (24,046) (2,118) 4,562 4,874 (21,446) 210,946 (308) (116,087) 15,167 5,249,286 - - (434) (2,202) (2,526) (26) (2,654) (2,772) (10,614) 3,920 9,998 85,958 286,176 10,358 12,495 3,688 37,722 450,315 (1) Equity securities represent Community Reinvestment Act (“CRA”) qualifying closed-end bond fund investments. Gross realized gains on sales of AFS securities for the years ended December 31, 2011, 2010 and 2009 were $14.6 million, $25.4 million, and $8.9 million, respectively. Gross realized losses on sales of AFS securities for the years ended December 31, 2011, 2010 and 2009 were $185,000, $40,000 and $244,000, respectively. We use securities as collateral for debtor-in-possession deposit accounts in excess of FDIC insurance, clients’ treasury tax and loan deposits, public deposits, securities sold under agreements to repurchase and advances from the Federal Home Loan Bank of New York. At December 31, 2011 and 2010, the total amount of collateral we were required to pledge was $2.99 billion and $1.72 billion, respectively. In order to readily facilitate future borrowing needs, we typically pledge securities in excess of our required collateral obligation. If necessary, the excess collateral can be returned. At December 31, 2011, our total pledged securities had a fair value of $3.66 billion and a carrying value of $3.64 billion. At December 31, 2010, our total pledged securities had a fair value of $3.62 billion and a carrying value of $3.59 billion. Trade date security purchases totaling $6.4 million were included in accrued expenses and other liabilities at December 31, 2010. We had no trade date security purchases at December 31, 2011. During the year-ended December 31, 2011, we recognized other-than-temporary impairment losses totaling $12.3 million on ten debt securities that we do not intend to sell and for which it is not more likely than not that we will be required to sell the security prior to recovery. We recognized the credit component of the other-than-temporary impairment in earnings ($2.1 million) and the noncredit component in other comprehensive income ($10.2 million). F-20 During the years ended December 31, 2011, 2010, and 2009, we recorded other-than-temporary impairment on debt securities as follows: (in thousands) December 31, 2011 Available-for-sale Held-to-maturity Collateralized Debt Obligations Pooled Trust Preferred Securities Private CMOs Other Collateralized Debt Obligations Private CMOs Total Total other-than-temporary impairment losses Less: Portion of loss recognized in OCI (1) Net impairment losses recognized in earnings (2) $ - - $ - - - - December 31, 2010 Total other-than-temporary impairment losses Less: Portion of loss recognized in OCI (1) Net impairment losses recognized in earnings (2) December 31, 2009 Total other-than-temporary impairment losses Less: Portion of loss recognized in OCI (1) Net impairment losses recognized in earnings (2) $ (8,743) 80 (8,663) $ (19,586) 16,269 (3,317) $ - - $ - (9,931) (10,973) 9,229 (702) 10,533 (440) (9,328) 7,968 (1,360) (6,830) 6,178 (652) (1,226) 1,000 (226) - - - - - - (1,718) 1,215 (503) (3,454) 1,910 (1,544) - - - - - - (12,272) 10,183 (2,089) (38,613) 24,437 (14,176) - - - (2,815) (23,719) 2,635 (180) 22,397 (1,322) (1) (2) Represents the noncredit component impact of the other-than-temporary impairment on debt securities. Represents the credit component impact of the other-than-temporary impairment on debt securities. The following table presents a rollforward of activity related to the credit component of other-than-temporary impairments recognized in pre-tax earnings on debt securities for which a portion of the impairment was recognized in other comprehensive income at period-end: (in thousands) Year ended December 31, 2011 Cumulative credit component of other-than-temporary impairment losses at beginning of period Additions for the credit component on debt securities for which other-than-temporary impairment was not previously recognized Additions for the credit component on debt securities for which other-than-temporary impairment was previously recognized Cumulative credit component of other-than-temporary impairment losses at end of period Year ended December 31, 2010 Cumulative credit component of other-than-temporary impairment losses at beginning of period Additions for the credit component on debt securities for which other-than-temporary impairment was not previously recognized Additions for the credit component on debt securities for which other-than-temporary impairment was previously recognized Cumulative credit component of other-than-temporary impairment losses at end of period Year ended December 31, 2009 Credit component of all prior other-than-temporary impairment not reclassified to OCI in conjunction with the cumulative effect transition adjustment as of April 1, 2009 (1) Activity after April 1, 2009: Additions for the credit component on debt securities for which other-than-temporary impairment was not previously recognized Cumulative credit component of other-than-temporary impairment losses at end of period $ 43,267 1,286 803 $ 45,356 $ 29,091 233 13,943 $ 43,267 $ 27,769 1,322 $ 29,091 (1) As of April 1, 2009, we had securities with $35.9 million of other-than-temporary impairment previously recognized in earnings, of which $27.8 million represented the credit component and $8.1 million represented the noncredit componentthat was reclassified back to OCI through a cumulative-effect type adjustment ($4.5 million, net of tax effect). F-21 For the periods ended December 31, 2011, 2010, and 2009, our securities for which other-than-temporary impairment has been recorded, where a portion of the loss was specifically related to credit, consisted of collateralized debt obligations (“CDOs”), private collateralized mortgage obligations (“CMOs”), pooled trust preferred securities, and certain securities classified as other debt securities. When estimating the portion of loss attributable to credit, we use a discounted cash flow model that considers credit enhancement and structural protection. The estimation of cash flow incorporates numerous assumptions including default rates, severity estimates, recovery rates, prepayment speeds and structural enhancement characteristics. Assumptions will vary based upon the specific underlying characteristics and collateral profiles of the underlying securities. Specifically, assumptions will be determined based upon collateral vintage, borrower characteristic, geographical data and payment performance. Market data and third-party inputs are utilized to validate assumptions. Subsequent assessments may result in additional estimated credit losses on previously impaired securities. These additional estimated credit losses are recorded as reclassifications from the portion of other-than-temporary impairment previously recognized in other comprehensive income to earnings in the period of such assessments. In our evaluation of CDOs and CMOs for other-than-temporary impairment, we evaluated the collateral performance and structural credit enhancements for each security. During the year ended December 31, 2011, seven CMOs classified as AFS were deemed to have other-than-temporary impairment totaling $9.3 million, of which $1.4 million was due to estimated credit losses and charged to earnings, and $7.9 million was recognized in other comprehensive income. Additionally, one CDO classified as HTM was deemed to have other-than- temporary impairment totaling $1.7 million, of which $503,000 was due to estimated credit losses and charged to earnings, and $1.2 million was recognized in other comprehensive income. During 2010, three CDOs and five CMOs classified as AFS were deemed to have other-than-temporary impairment totaling $8.7 million and $6.8 million, respectively, of which $8.7 million and $652,000 was due to estimated credit loss and was charged to earnings, respectively, and $80,000 and $6.2 million was recognized in other comprehensive income, respectively. Additionally, one CDO classified as HTM was deemed to have other-than-temporarily impaired totaling $3.5 million, of which $1.6 million was due to estimated credit loss and was charged to earnings and $1.9 million was recognized in other comprehensive income. Six CMOs classified as AFS were deemed to have other-than- temporary impairment during 2009, of approximately $11.0 million, of which $400,000 was due to estimated credit losses and charged to earnings, and $10.5 million was recognized in other comprehensive income. In our evaluation of bank-collateralized pooled trust preferred securities for other-than-temporary impairment, we considered various annual default scenarios. Additionally, the collateral was reviewed to determine if additional bank issuers should be assumed to be an immediate default or would cure (resume paying interest) based on Fitch credit scoring, TARP participation, ratio of non-performing assets to tangible common equity and loan loss reserves, capital levels, and FDIC quarterly trends. Based on this review, we assumed that certain bank issuers on our watch list will default and others will cure in the future. Utilizing our assumptions, we then discounted the cash flows to assess the amount of credit loss. During the year ended December 31, 2010, six bank-collateralized pooled trust preferred securities classified as AFS were deemed to have other-than-temporary impairment totaling $19.6 million, of which $3.3 million was due to estimated credit loss and was charged to earnings, and $16.3 million was recognized in other comprehensive income. During the year ended December 31, 2009, three bank- collateralized pooled trust preferred securities classified as AFS were deemed to have other-than-temporary impairment totaling $11.1 million, of which $702,000 was due to estimated credit losses and charged to earnings, and $10.4 million was recognized in other comprehensive income. We did not recognize any other-than- temporary impairment on our pooled trust preferred securities during 2011. In our evaluation of other debt securities for other-than-temporary impairment, we reviewed the collateral performance and market considerations and assumptions in conjunction with any credit enhancements for each security. During the year ended December 31, 2011, two AFS securities classified within other debt securities was deemed to have other-than-temporary impairment totaling $1.2 million, of which $225,000 was due to estimated credit loss and charged to earnings and $1 million was recognized in other comprehensive income. We did not recognize any other-than-temporary impairment within other debt securities during 2010 or 2009. F-22 The following table presents information regarding AFS securities, categorized by type of security and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated. Unrealized losses on other-than-temporarily impaired securities include noncredit impairments recorded in other comprehensive income. (in thousands) December 31, 2011 Temporarily-impaired securities Residential mortgage-backed securities: Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 27,416 (34) 182 (5) 27,598 (39) 165,195 555,067 143,216 (4,391) (15,081) (4,028) 13,321 26,984 107,134 (113) (4,645) (17,329) 178,516 582,051 250,350 (4,504) (19,726) (21,357) Commercial mortgage-backed securities 40,697 (535) 19,798 (341) 60,495 (876) Single issuer trust preferred & corporate debt securities Pooled trust preferred securities Other Equity securities (1) 140,568 (3,686) - 36,005 - - (509) - 60,490 2,627 61,028 8,581 (8,091) (4,008) (9,680) (275) 201,058 2,627 97,033 8,581 (11,777) (4,008) (10,189) (275) Total temporarily-impaired securities 1,108,164 (28,264) 300,145 (44,487) 1,408,309 (72,751) Other-than-temporarily impaired securities Collateralized mortgage obligations - private 3,847 (1,651) 29,897 (14,590) 33,744 (16,241) Other debt securities: Pooled trust preferred securities Collateralized debt obligations Other - - - - - - 4,489 2,757 9,833 Total other-than-temporarily impaired securities 3,847 (1,651) 46,976 (17,092) (3,730) (12,245) (47,657) 4,489 2,757 9,833 50,823 (17,092) (3,730) (12,245) (49,308) Total temporarily-impaired and other-than- temporarily impaired securities $ 1,112,011 (29,915) 347,121 (92,144) 1,459,132 (122,059) December 31, 2010 Temporarily-impaired securities Residential mortgage-backed securities: U.S. Government Agency Government-sponsored enterprises Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Private Other debt securities: $ 3,420 (4) 248,698 (3,087) 269,934 478,160 203,558 (5,184) (16,172) (3,991) 79 51 15,247 20,363 (1) - (166) (130) 147,661 (28,100) 3,499 248,749 285,181 498,523 351,219 (5) (3,087) (5,350) (16,302) (32,091) Commercial mortgage-backed securities 99,906 (1,572) 8,889 (308) 108,795 (1,880) Single issuer trust preferred & corporate debt securities Pooled trust preferred securities Other Equity securities (1) 91,964 (2,542) - 61,454 6,757 - (4,085) (51) 51,051 1,607 27,884 8,260 (2,386) (5,045) (8,228) (257) 143,015 1,607 89,338 15,017 (4,928) (5,045) (12,313) (308) Total temporarily-impaired securities 1,463,851 (36,688) 281,092 (44,621) 1,744,943 (81,309) Other-than-temporarily impaired securities Collateralized mortgage obligations - private Other debt securities: Pooled trust preferred securities Collateralized debt obligations Other Total other-than-temporarily impaired securities Total temporarily-impaired and other-than- temporarily impaired securities - - - - - - - - - - 29,374 (4,526) 29,374 (4,526) 2,955 4,874 12,017 49,220 (19,001) (2,118) (9,133) (34,778) 2,955 4,874 12,017 49,220 (19,001) (2,118) (9,133) (34,778) $ 1,463,851 (36,688) 330,312 (79,399) 1,794,163 (116,087) (1) Equity securities represent Community Reinvestment Act (“CRA”) qualifying closed-end bond fund investments. F-23 The following table presents information regarding HTM securities, categorized by type of security and length of time that individual securities have been in a continuous unrealized loss position at the dates indicated. Unrealized losses on other-than-temporarily impaired securities include noncredit impairments recorded in other comprehensive income. (in thousands) December 31, 2011 Temporarily-impaired securities Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Other debt securities: Other Total temporarily-impaired securities Other-than-temporarily impaired securities Collateralized mortgage obligations - private Collateralized debt obligations Total other-than-temporarily impaired securities Total temporarily-impaired and other-than- temporarily impaired securities December 31, 2010 Temporarily-impaired securities Collateralized mortgage obligations: U.S. Government Agency Government-sponsored enterprises Other debt securities: Commercial mortgage-backed securities Other Total temporarily-impaired securities Other-than-temporarily impaired securities Collateralized mortgage obligations - private Collateralized debt obligations Total other-than-temporarily impaired securities Total temporarily-impaired and other-than- temporarily impaired securities Less than 12 months 12 months or longer Total Fair Value Unrealized Losses Fair Value Unrealized Losses Fair Value Unrealized Losses $ 16,946 4,051 - 20,997 - - - (22) (6) - (28) - - - - - 21,978 21,978 6,346 2,710 9,056 - - (2,199) (2,199) (3,451) (2,599) (6,050) 16,946 4,051 21,978 42,975 6,346 2,710 9,056 (22) (6) (2,199) (2,227) (3,451) (2,599) (6,050) $ 20,997 (28) 31,034 (8,249) 52,031 (8,277) $ 16,686 51,545 (434) (2,202) 3,160 - (1) - 71,391 (2,637) - 1,467 1,467 - (996) (996) - - 4,098 26,753 30,851 7,287 2,221 9,508 - - (25) (2,772) (2,797) (2,526) (1,658) (4,184) 16,686 51,545 7,258 26,753 102,242 7,287 3,688 10,975 (434) (2,202) (26) (2,772) (5,434) (2,526) (2,654) (5,180) $ 72,858 (3,633) 40,359 (6,981) 113,217 (10,614) F-24 The contractual maturities of investments in AFS and HTM debt securities are summarized in the following table. Expected maturities will differ from contractual maturities since borrowers may have the right to call or prepay obligations with or without call or prepayment penalties. (in thousands) AVAILABLE-FOR-SALE Due in one year or less Due after one year through five years Due after five years through ten years Due after ten years Total available-for-sale debt securities HELD-TO-MATURITY Due after one year through five years Due after five years through ten years Due after ten years Total held-to-maturity debt securities December 31, 2011 Amortized Cost Fair Value $ 88,005 24,993 373,815 5,955,728 6,442,541 $ $ 14,085 27,573 $ 514,386 556,044 95,858 25,181 370,988 6,005,229 6,497,256 15,182 29,045 527,753 571,980 The unrealized losses in our securities portfolio are primarily due to the prevailing interest rate environment, wider credit spreads on securities, and reduced levels of liquidity in the mortgage and credit markets. Sharp declines in residential home values, increased unemployment, a slowdown in consumer spending, and contraction in the credit markets, among other factors, led to decreased market liquidity for certain assets, increased credit risk for certain securities in our portfolio, and the corresponding widening of credit spreads. In performing our other-than-temporary impairment analysis for private CMOs and other debt securities, which had a total temporary unrealized loss position of $50.4 million at December 31, 2011, we estimated future cash flows for each security based upon our best estimate of future delinquencies, estimated defaults, loss severity, and prepayments. We reviewed the estimated cash flows to determine whether we expect to receive all originally scheduled cash flows. Projected credit losses were compared to the current level of credit enhancement to assess whether the security is expected to incur losses in any future period and therefore would be deemed other- than-temporarily impaired at December 31, 2011. Based on our review, we have determined that the estimated future cash flows were not less than amortized cost; therefore, the decline in fair value of these securities is attributable to a substantial widening of interest rate spreads across market sectors related to the continued illiquidity and uncertainty of the securities markets. Since we have no intent to sell and we believe it is not more likely than not that we will be required to sell these investments before recovery of their amortized cost basis, we do not consider these securities to be other-than-temporarily impaired as of December 31, 2011. Continued deterioration in general market conditions could have a negative effect on the projected cash flows and ultimate recoverability of our securities. If a security is deemed to be other-than-temporarily impaired, we are required to write down the security to fair value. Losses on securities that become other-than-temporarily impaired (where we do not intend to sell the security and it is not more likely than not that we will be required to sell the security prior to recovery of the security’s amortized cost) are bifurcated with the credit portion of the loss recognized in earnings and the noncredit loss portion of the impairment recognized in other comprehensive income, net of tax. The private CMOs and other debt securities, with total unrealized losses of $21.4 million and $29.0 million, respectively, at December 31, 2011, are the securities in our portfolio that are the most exposed to impairment losses. It is reasonably possible that the underlying collateral of these securities may perform at a level below our current expectations, which may result in adverse changes in cash flows for these securities and potential other-than- temporary impairment losses in the future. Events that may cause material declines in fair values for these securities include, but are not limited to, the deterioration of credit metrics, higher default levels, further illiquidity, or increased levels of losses in underlying collateral. F-25 (5) Federal Home Loan Bank Stock As a member of the Federal Home Loan Bank (“FHLB”) of New York, Signature Bank is required to maintain a specified minimum investment in the FHLB’s Class B capital stock. The minimum stock investment requirement is the sum of the membership stock purchase requirement, determined on an annual basis at the end of each calendar year, and the activity-based stock purchase requirement, determined on a daily basis. At December 31, 2011 and 2010, Signature Bank was in compliance with the FHLB’s minimum investment requirement with stock investments of $48.2 million and $38.4 million, respectively, carried at cost on the Consolidated Statements of Financial Condition. Collateral pledged for outstanding FHLB borrowings at December 31, 2011 and 2010 included $30.4 million and $25.1 million, respectively, of FHLB capital stock. In performing our other-than-temporary impairment analysis of FHLB stock, we evaluated, among other things, (i) the FHLB’s earnings performance, including the significance of any decline in net assets of the FHLB as compared to the regulatory capital amount of the FHLB, (ii) the commitment by the FHLB to make dividend payments, and (iii) the liquidity position of the FHLB. We do not consider this security to be other-than-temporarily impaired at December 31, 2011. (6) Loans Held for Sale Loans held for sale at December 31, 2011 and 2010 were $392.0 million and $382.5 million, respectively. Gains on sales associated with the securitization of pooled loans and sale of mortgage loans for the years ended December 31, 2011, 2010 and 2009 amounted to $4.1 million, $6.1 million and $3.6 million, respectively. We are an active participant in the SBA loan and SBA pool secondary market by purchasing, securitizing, and selling the guaranteed portions of SBA loans. Most SBA loans have adjustable rates and float at a spread over prime and reset monthly or quarterly. The guaranteed portions of SBA loans are backed by the full faith and credit of the U.S. Government and therefore carry a 0% risk weight for regulatory capital purposes. We utilize the services of SSG to act as agent for and consultant to the Bank on the purchase, assembly, and sale of SBA loans and pools. We warehouse loans for generally up to 180 days until there are sufficient loans with similar characteristics to securitize the pool. We may strip excess servicing from loans with different coupons to create a pool at a common rate. This process results in the creation of two assets: a par pool, which is sold to accredited investors, and an interest-only strip, which we retain as an available-for-sale security. The interest-only strip represents the portion of the coupon stripped from a loan. F-26 (7) Loans, Net The following table summarizes our loan portfolio as of the dates indicated: (in thousands) Mortgage loans: Multi-family residential property Commercial property 1-4 family residential property Home equity lines of credit Construction and land Total mortgage loans Other loans: Commercial and industrial Consumer Total other loans Less: Net deferred fees and costs Allowance for loan losses Net loans December 31, 2011 December 31, 2010 $ 3,003,428 2,218,053 259,418 198,375 63,775 5,743,049 1,098,805 11,837 1,110,642 (2,965) (86,162) 6,764,564 $ 1,716,248 1,799,162 265,746 192,027 115,195 4,088,378 1,146,110 13,086 1,159,196 (2,910) (67,396) 5,177,268 As of December 31, 2011 and 2010, commercial and industrial loans include overdrafts of commercial deposit accounts totaling $27.9 million and $28.1 million, respectively, and other consumer loans include overdrafts of personal deposit accounts totaling $2.5 million and $3.1 million, respectively. In order to assist us in managing credit quality, management views the loan portfolio by various segments and classes of loans. For commercial loans, we assign individual credit ratings ranging from 1 (lowest risk) to 9 (highest risk) as an indicator of credit quality. These ratings are based on specific risk factors including (i) historical and projected financial results of the borrower, (ii) market conditions of the borrower’s industry that may affect the borrower’s future financial performance, (iii) business experience of the borrower’s management, (iv) nature of the underlying collateral, if any, and (v) borrower’s history of payment performance. Non-rated loans generally include commercial loans with outstanding principal balances below $100,000, commercial overdrafts, residential mortgages, and consumer loans. F-27 The following table summarizes the recorded investment of our portfolio of commercial loans by credit rating as of the dates indicated: (in thousands) December 31, 2011 Commercial loans secured by real estate: Multi-family residential property Commercial property 1-4 family residential property Construction and land Commercial and industrial loans Total commercial loans December 31, 2010 Commercial loans secured by real estate: Multi-family residential property Commercial property 1-4 family residential property Construction and land Commercial and industrial loans Total commercial loans pass pass Rating 1-4 Rating 5-6 special mention Rating 7 substandard Rating 8 doubtful Rating 9 Non-rated Total $ 2,436,175 1,393,854 37,121 5,166 512,767 755,644 40,905 43,250 441,753 4,314,069 $ 540,329 1,892,895 $ 1,282,318 1,041,618 25,956 429,789 709,110 47,767 463 102,939 410,587 2,760,942 $ 604,184 1,893,789 32,838 26,140 6,800 597 20,576 86,951 1,593 34,918 476 3,988 25,525 66,500 19,573 39,876 1,269 14,762 34,807 110,287 369 11,746 7,852 7,805 39,690 67,462 - 2,500 - - 7,707 10,207 - 3,001,353 39 2,218,053 - - 86,095 63,775 53,633 53,672 1,098,805 6,468,081 - - - - - - - - 1,714,069 1,797,392 82,051 115,195 9,201 9,201 56,923 56,923 1,146,110 4,854,817 For consumer loans, including residential mortgages and home equity lines of credit, we consider the borrower’s payment history and current payment performance as lead indicators of credit quality. A consumer loan is considered non-performing generally when it becomes 90 days delinquent based on contractual terms, at which time the accrual of interest income is discontinued. In the case of residential mortgages and home equity lines of credit, exceptions are made if the loan has sufficient collateral value, based on a current appraisal, and is in process of collection. The following table summarizes the recorded investment of our portfolio of consumer loans by performance status as of the dates indicated: (in thousands) December 31, 2011 Residential mortgages Home equity lines of credit Other consumer loans Total consumer loans December 31, 2010 Residential mortgages Home equity lines of credit Other consumer loans Total consumer loans Performing Nonperforming Total $ $ $ $ 172,792 198,026 11,501 382,319 187,909 191,576 12,567 392,052 2,606 349 336 3,291 - 451 519 970 175,398 198,375 11,837 385,610 187,909 192,027 13,086 393,022 Loans to related parties include loans to directors and their related companies and our executive officers. Such loans are made in the ordinary course of business on substantially the same terms as loans to other individuals and businesses of comparable risks. Related party loans were $6.1 million and $809,000 at December 31, 2011 and 2010, respectively, and all related party loans are current as to payments. F-28 The following table summarizes the delinquency and accrual status of our loan portfolio, excluding loans held for sale, as of the dates indicated: (in thousands) December 31, 2011 Commercial loans Past Due 30-89 Days Past Due 90+ Days Total Past Due Current Total Loans Accruing Loans Past Due 90+ Days Non-accruing Loans Loans secured by real estate: Multi-family residential property $ 34,780 Commercial property 1-4 family residential property Construction and land Commercial and industrial loans Consumer loans Residential mortgages Home equity lines of credit Consumer loans Total December 31, 2010 Commercial loans 3,589 6,755 - 8,100 1,547 1,635 62 56,468 $ Loans secured by real estate: Multi-family residential property $ 15,149 Commercial property 1-4 family residential property Construction and land 15,797 6,226 - 369 14,608 - 4,762 23,271 5,797 2,075 336 51,218 3,169 6,901 830 6,571 35,149 18,197 6,755 4,762 2,966,204 3,001,353 2,199,856 2,218,053 79,340 59,013 86,095 63,775 - 699 - - 31,371 1,067,434 1,098,805 3,384 7,344 3,710 398 107,686 168,054 194,665 11,439 6,746,005 175,398 198,375 11,837 6,853,691 18,318 22,698 7,056 6,571 1,695,751 1,714,069 1,774,694 1,797,392 74,995 108,624 82,051 115,195 369 13,909 - 4,762 19,887 2,606 349 336 42,218 369 4,711 - 6,571 21,513 - 451 519 34,134 3,191 1,726 - 9,000 2,800 2,190 830 - 3,440 4,602 1,851 27 15,740 Commercial and industrial loans 13,635 24,953 38,588 1,107,522 1,146,110 Consumer loans Residential mortgages Home equity lines of credit Consumer loans Total 5,868 156 240 57,071 $ 4,602 2,302 546 49,874 10,470 2,458 786 106,945 177,174 189,569 12,300 5,140,629 187,644 192,027 13,086 5,247,574 Non-accrual loans at December 31, 2011 and 2010 totaled $42.2 million and $34.1 million, respectively. If all non- accrual loans outstanding at December 31, 2011, 2010, and 2009 had been performing in accordance with their original terms, we would have recorded interest income with respect to such loans of approximately $4.2 million, $4.1 million, and $3.8 million for the years then ended, respectively. This compares to actual payments recorded as interest income realized with respect to such loans of $363,000, $765,000, and $603,000 for the years ended December 31, 2011, 2010, and 2009, respectively. As of December 31, 2011, there were no commitments to lend additional funds on non-accrual loans. Accruing loans past due 90 days or more at December 31, 2011 and 2010, totaled $9.0 million and $15.7 million, respectively, excluding loans held for sale. At December 31, 2011, accruing loans past due 90 days or more include $3.8 million of 1-4 family real estate loans that are well secured and in process of collection and a $1.9 million commercial loan that was paid in full during January 2012. At December 31, 2010, accruing loans past due 90 days or more include matured performing loans in the normal process of renewal ($519,000) and real estate loans that are well secured and in process of collection ($3.7 million of 1-4 family, $2.8 million of multi-family, and $1.4 million of commercial real estate). Commercial loans (including commercial and industrial loans along with loans to commercial borrowers that are secured by real estate) constitute a substantial portion of our loan portfolio. Substantially all of the real estate collateral for the loans in our portfolio is located within the New York metropolitan area. As a result, our financial condition and results of operations may be affected by changes in the economy and the real estate market of the New York metropolitan area. A prolonged period of economic recession or other adverse economic conditions in the New York metropolitan area, such as the one we are experiencing now, may result in an increase in nonpayment of loans, a decrease in collateral value, and an increase in our allowance for loan losses. F-29 (8) Allowance for Loan Losses Changes in the allowance for loan losses for the years ended December 31, 2011, 2010 and 2009 are as follows: (in thousands) Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year December 31, 2010 55,120 46,372 (35,583) 1,487 67,396 2011 67,396 51,876 (35,393) 2,283 86,162 $ $ 2009 36,987 42,715 (25,451) 869 55,120 The table below presents a summary by loan portfolio segment of our allowance for loan losses, loan loss experience, and provision for loan losses for the periods indicated: (in thousands) For the year ended December 31, 2011 Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year For the year ended December 31, 2010 Balance at beginning of year Provision for loan losses Loans charged off Recoveries of loans previously charged off Balance at end of year Credit-rated commercial loans Commercial loans Non-rated Residential mortgages Consumer loans Total $ 56,212 51,635 (29,502) 508 78,853 $ $ 50,141 34,101 (28,070) 40 56,212 $ 8,352 (429) (4,467) 1,498 4,954 3,024 10,525 (6,369) 1,172 8,352 1,472 447 (350) - 1,569 1,216 688 (644) 212 1,472 1,360 223 (1,074) 277 786 739 1,058 (500) 63 1,360 67,396 51,876 (35,393) 2,283 86,162 55,120 46,372 (35,583) 1,487 67,396 The following table presents our allowance for loan losses and outstanding loan balances by loan portfolio segment, based on the methodology followed in determining the allowance for loan losses: (in thousands) As of December 31, 2011 Allowance for loan losses: Credit-rated commercial loans Commercial loans Non-rated Residential mortgages Consumer loans Total Individually evaluated for impairment $ 4,651 Collectively evaluated for impairment 74,202 Recorded investment in loans: Individually evaluated for impairment Collectively evaluated for impairment 56,216 6,358,193 As of December 31, 2010 Allowance for loan losses: Individually evaluated for impairment $ 8,011 Collectively evaluated for impairment 48,201 Recorded investment in loans: Individually evaluated for impairment Collectively evaluated for impairment 30,249 4,767,645 991 3,963 2,190 51,482 1,445 6,907 2,915 54,008 291 1,278 168 618 6,101 80,061 4,817 368,956 336 11,501 63,559 6,790,132 130 1,342 451 379,485 256 1,104 519 12,567 9,842 57,554 34,134 5,213,705 F-30 In determining whether a loan is impaired, we review the payment performance and, for all loan classes, we consider a loan to be impaired once it is placed on non-accrual status. In addition, if a loan is restructured as troubled debt (“TDR”) at a market rate at the TDR date, we consider the loan as impaired during the year of restructuring. If that loan is performing in accordance with the modified terms, we do not consider the loan as impaired in subsequent years. Other TDRs are reported as such for as long as the loan remains outstanding. The following table summarizes the recorded investment, unpaid principal balance, and related allowance for our impaired loans as of the dates indicated: (in thousands) With no related allowance recorded: Commercial loans secured by real estate: Commercial property Construction and land Multi-family residential property 1-4 family residential property Commercial and industrial loans Residential mortgages Home equity lines of credit Other consumer loans With an allowance recorded: Commercial loans secured by real estate: Commercial property Construction and land Multi-family residential property 1-4 family residential property December 31, 2011 Unpaid Principal Balance Recorded Investment Related Allowance December 31, 2010 Unpaid Principal Balance Recorded Investment Related Allowance $ 32,062 32,062 3,191 1,590 1,269 24,645 4,203 - - 2,639 2,821 - - 3,191 1,590 1,269 24,645 4,203 - - 2,639 2,821 - - - - - - - - - - 208 202 - - 2,511 3,750 369 - 8,545 1,200 - - 2,200 2,821 - - 2,511 3,750 369 - 8,545 1,200 - - 2,200 2,821 - - - - - - - - - - 164 210 - - Commercial and industrial loans 13,531 13,531 5,232 20,298 20,298 9,082 Residential mortgages Home equity lines of credit Other consumer loans Total: Commercial loans secured by real estate Commercial and industrial loans Residential mortgages Home equity lines of credit Other consumer loans Total impaired loans 267 349 336 43,572 38,176 4,470 349 336 267 349 336 43,572 38,176 4,470 349 336 67 224 168 410 5,232 67 224 168 - 451 519 11,651 28,843 1,200 451 519 - 451 519 11,651 28,843 1,200 451 519 - 130 256 374 9,082 - 130 256 $ 86,903 86,903 6,101 42,664 42,664 9,842 F-31 The following table summarizes the average recorded investment of impaired loans and interest income recognized on impaired loans for the periods indicated: (in thousands) With no related allowance recorded: Commercial loans secured by real estate: Commercial property Construction and land Multi-family residential property 1-4 family residential property Commercial and industrial loans Residential mortgages Home equity lines of credit Other consumer loans With an allowance recorded: Commercial loans secured by real estate: Commercial property Construction and land Multi-family residential property 1-4 family residential property Commercial and industrial loans Residential mortgages Home equity lines of credit Other consumer loans Total: Commercial loans secured by real estate Commercial and industrial loans Residential mortgages Home equity lines of credit Other consumer loans Total Years ended December 31, 2011 2010 Average Recorded Investment Interest Income Recognized Average Recorded Investment Interest Income Recognized $ 8,446 2,031 857 254 11,257 2,366 - - 7,850 4,131 - 58 19,915 53 444 470 23,627 31,172 2,419 444 470 $ 58,132 490 26 9 13 326 23 - - - - - - - - - 5 538 331 23 - - 892 502 750 74 - 3,423 240 - - 6,108 9,495 755 50 21,763 - 561 406 17,734 25,186 240 561 406 44,127 - - - - 138 - - - - - - - 88 - - - - 226 - - - 226 For economic reasons and to maximize the recovery of loans, we may work with borrowers experiencing financial difficulties, and will consider modifications to a borrower’s existing loan terms and conditions that we would not otherwise consider, commonly referred to as TDR loans. Our TDR loans consist of those loans where we modify the contractual terms of the loan, such as (i) a deferral of the loan’s principal amortization through either interest- only or reduced principal payments, (ii) a reduction in the loan’s contractual interest rate or (iii) an extension of the loan’s contractual term. F-32 During the years ended December 31, 2011 and 2010, we recorded TDR loans as follows: (dollars in thousands) Commercial loans secured by real estate: Commercial property Multi-family residential property Construction and land Commercial and industrial loans Residential mortgages Total December 31, 2011 Pre- Modification Balance Post- Modification Balance Number of Loans December 31, 2010 Pre- Modification Balance Post- Modification Balance Number of Loans 9 1 1 22 6 39 $ 20,803 1,221 1,231 21,452 1,744 $ 46,451 20,792 1,221 1,250 20,075 1,933 45,271 - - - 7 1 8 - - - 9,851 1,200 11,051 - - - 10,309 1,200 11,509 There were no TDR loans recorded during the year ended December 31, 2009. The following table summarizes how the TDR loans recorded during 2011 were modified: (in thousands) December 31, 2011 Deferred Principal Amortization with Rate Reduction Deferred Principal Amortization Term Extension Rate Reduction Total Commercial loans secured by real estate: Commercial property $ 7,400 1-4 family residential property Construction and land Multi-family residential property Commercial and industrial loans - - 1,221 454 Total $ 9,075 828 1,533 - - 2,315 4,676 12,564 400 1,250 - 17,140 31,354 - - - - 166 - 20,792 1,933 1,250 1,221 20,075 45,271 Our impaired loans at December 31, 2011 and 2010 include TDR loans totaling $46.5 million and $11.5 million, respectively. During the year of restructuring, we consider a TDR loan as impaired. In subsequent years, we do not consider the loan as impaired if it was restructured at a market rate and continues to perform in accordance with its modified terms. Other TDR loans are reported as such for as long as the loan remains outstanding. For all loans classified as a TDR, we record an impairment loss, if any, based on the present value of expected future cash flows discounted at the original loan’s effective interest rate, or, if the loan is collateral dependent, based on the fair value of the collateral less costs to sell. We had four TDR loans for which there was a payment default during the year ended December 31, 2011, including two commercial and industrial loans totaling $350,000 and two residential mortgages totaling $1.4 million, one of which ($1.2 million) was restructured during 2010 and continues to be reported as a TDR loan as a result of its non-performance. For the years ended December 31, 2011 and 2010, we recorded interest income on impaired loans during the period of impairment totaling $892,000 and $226,000, respectively; no interest income was recorded on impaired loans during the period of impairment for the year ended December 31, 2009. If all impaired loans had been performing in accordance with their original terms, we would have recorded interest income, with respect to such loans, of approximately $5.1 million, $4.3 million, and $3.8 million for the years ended December 31, 2011, 2010, and 2009, respectively. Average impaired loans for the years ended December 31, 2011, 2010 and 2009 totaled $58.1 million, $44.1 million, and $44.5 million, respectively. F-33 (9) Premises and Equipment Premises and equipment are summarized as follows as of the dates indicated: (in thousands) Leasehold improvements Furniture, fixtures and equipment Less accumulated depreciation and amortization Premises and equipment, net December 31, 2011 2010 $ 41,154 21,360 62,514 (31,940) 30,574 $ 36,617 18,597 55,214 (25,829) 29,385 Depreciation and amortization expense amounted to $6.1 million, $5.8 million and $5.4 million for the years ended December 31, 2011, 2010 and 2009, respectively. (10) Deposits The types of deposits are summarized as follows as of the dates indicated: December 31, (in thousands) Non-interest-bearing demand NOW and interest-bearing demand Money market Time deposits Brokered time deposits Total deposits $ 2011 3,148,436 643,130 7,066,932 837,842 57,798 11,754,138 $ 2010 2,449,968 700,551 5,362,105 901,937 26,666 9,441,227 The aggregate amounts of time deposits in denominations of $100,000 or more at December 31, 2011 and 2010 were $694.4 million and $765.1 million, respectively. The related interest expense on these types of deposits for the years ended December 31, 2011 and 2010 amounted to $13.6 million and $15.8 million, respectively. At December 31, 2011, the scheduled maturities of time deposits are as follows: (in thousands) 2012 2013 2014 2015 2016 Total time deposits December 31, 2011 $ 523,901 183,614 72,635 67,465 48,025 895,640 $ At December 31, 2011 and 2010, we had approximately $42.2 million and $13.4 million, respectively, in deposits held by our directors and their related interests. F-34 (11) Incentive Savings Plan We have a 401(k) program under which employees may make personal contributions of up to 60% of their pretax earnings by means of payroll deductions. We match 100% of the first 3% of compensation contributed to the plan and 50% of the next 4% of compensation contributed. Our contributions, included in salaries and benefits expense, were $3.8 million, $2.4 million and $2.1 million, respectively, for the years ended December 31, 2011, 2010 and 2009. In addition, the Bank made a 2010 profit-sharing contribution to the 401(k) program on behalf of eligible employees, resulting in an expense of $1.1 million (or 2% of compensation paid to eligible employee participants) recorded during the year ended December 31, 2010. (12) Federal Funds Purchased and Securities Sold Under Agreements to Repurchase The following is a summary of Federal funds purchased and securities sold under agreements to repurchase at or for the years ended: (dollars in thousands) Federal Funds Purchased Year-end balance Maximum amount outstanding at any month-end Average outstanding balance Weighted-average interest rate paid Weighted-average interest rate at year-end Securities Sold Under Agreements to Repurchase Year-end balance Maximum amount outstanding at any month-end Average outstanding balance Weighted-average interest rate paid Weighted-average interest rate at year-end December 31, 2011 2010 $ $ $ 55,800 133,350 74,570 0.18% 0.17% $ $ $ 118,000 170,000 38,735 0.22% 0.18% $ $ $ 695,000 695,000 645,027 3.44% 3.23% $ $ $ 540,000 627,000 595,759 4.02% 3.68% During the years ended December 31, 2011, 2010, and 2009, interest expense recorded on Federal funds purchased and securities sold under agreements to repurchase totaled $22.3 million, $24.0 million, and $27.9 million, respectively. At December 31, 2011, securities with a fair value of $804.7 million and a carrying value of $802.2 million were pledged to meet our collateral requirement of $729.6 million on repurchase agreements. At December 31, 2010, securities with a fair value of $621.7 million and a carrying value of $620.0 million were pledged to meet our collateral requirement of $567.0 million on repurchase agreements. F-35 The Federal funds purchased at December 31, 2011 were overnight transactions, while the securities sold under repurchase agreements at December 31, 2011 have contractual maturities as follows: (in thousands) Amount 2012 2013 2014 2015 2016 2017 Total advances $ $ 150,000 50,000 145,000 205,000 20,000 125,000 695,000 (13) Federal Home Loan Bank Advances As a member of the FHLB of New York, we are required to acquire and hold shares of capital stock in the FHLB in an amount at least equal to 1% of the aggregate principal amount of our unpaid residential mortgage loans and similar obligations at the beginning of each year, 4.5% of our borrowings from the Federal Home Loan Bank, or 0.3% of assets, whichever is greater. As of December 31, 2011, we were in compliance with this requirement. The following is a summary of Federal Home Loan Bank (“FHLB”) advances at or for the years ended: (dollars in thousands) Year-end balance Maximum amount outstanding at any month-end Average outstanding balance Weighted-average interest rate paid Weighted-average interest rate at year-end December 31, 2011 2010 $ $ $ 675,000 675,000 347,567 2.10% 0.92% $ $ $ 558,000 558,000 273,474 3.55% 1.64% During the years ended December 31, 2011, 2010, and 2009, interest expense recorded on FHLB advances totaled $7.3 million, $9.7 million, and $10.4 million, respectively. At December 31, 2011, securities with a fair value and carrying value of $1.17 billion were available to meet our collateral requirement of $708.8 million on FHLB advances. At December 31, 2010, securities with a fair value and carrying value of $1.59 billion were available to meet our collateral requirement of $257.3 million on FHLB advances. FHLB advances at December 31, 2011 have contractual maturities as follows: (in thousands) Amount 2012 2013 2014 2015 2016 2017 Total advances F-36 $ $ 560,000 65,000 15,000 - 10,000 25,000 675,000 Certain of the long-term FHLB advances are callable by the issuer for redemption prior to their scheduled maturity date. Advances reported in the table above include $95.0 million in advances that are callable in 2012, which have interest rates ranging from 2.85% to 4.59% and a weighted average interest rate of 4.03%. (14) Other Short-Term Borrowings The following table summarizes our Federal Reserve Treasury Tax and Loan borrowings at or for the years ended: (dollars in thousands) Year-end balance Maximum amount outstanding at any month-end Average outstanding balance Weighted-average interest rate paid Weighted-average interest rate at year-end December 31, 2011 $ - $ 7,200 $ 6,266 0.00% 0.00% 2010 $ $ $ 6,200 14,717 5,231 0.01% 0.00% (15) Income Taxes The following table presents the components of income tax expense for the periods indicated: (in thousands) FEDERAL Current expense Deferred income tax benefit Total STATE AND LOCAL Current expense Deferred income tax benefit Total TOTAL Current expense Deferred income tax benefit Total Years ended December 31, 2010 2011 2009 $ $ 86,403 (5,969) 80,434 $ $ 42,428 (5,163) 37,265 $ $ 128,831 (11,132) 117,699 62,238 (7,684) 54,554 25,038 (5,405) 19,633 87,276 (13,089) 74,187 39,043 (5,974) 33,069 11,118 (2,486) 8,632 50,161 (8,460) 41,701 Management has concluded that a valuation allowance for deferred tax assets is not necessary at December 31, 2011 based on the Bank’s historical and anticipated future pre-tax earnings. We will continue to monitor the need for a valuation allowance in future periods. Net deferred tax assets are reflected in other assets in the Consolidated Statements of Financial Condition. F-37 The following table presents the components of our net deferred tax asset as of the dates indicated: (in thousands) DEFERRED TAX ASSETS Allowance for loan losses Depreciation Unearned compensation - restricted shares Non-accrual interest Write-down for other-than-temporary impairment of securities Other Total deferred tax assets recognized in earnings Net unrealized losses on securities available-for-sale Total deferred tax assets DEFERRED TAX LIABILITIES Prepaid expenses Other Total deferred tax liabilities recognized in earnings Net unrealized gains on securities available-for-sale Total deferred tax liabilities Net deferred tax asset December 31, 2011 2010 $ 38,034 1,388 4,987 2,617 17,393 2,357 66,776 - 66,776 241 6 247 23,542 23,789 42,987 $ 29,642 992 1,232 2,026 19,930 1,943 55,765 14,456 70,221 368 - 368 - 368 69,853 In April 2007, the State of New York enacted tax legislation that included, for companies with average assets in excess of $8 billion, a four-year phase out of the tax benefit received on income from REIT subsidiaries. Since our average assets are in excess of $8 billion, the income tax benefit on income from our REIT subsidiary was completely eliminated beginning January 1, 2011. Accordingly, our effective tax rate for the year ended December 31, 2011 increased to 44.0%, compared to 42.1% for the prior year. The following table presents a reconciliation of statutory federal income tax expense to combined effective income tax expense for the periods indicated: (in thousands) Years ended December 31, 2011 2010 2009 Expense (Benefit) Rate Expense (Benefit) Rate Expense (Benefit) Rate Statutory federal income tax expense $ 93,529 35% 61,683 35% 36,546 35% State and local income taxes, net of federal income tax benefit Tax exempt income Other items, net Effective income tax expense * - Less than 1%. 24,222 (443) 391 117,699 $ 9% * * 44% 12,761 (731) 474 74,187 7% * * 42% 5,611 (674) 218 41,701 6% (1%) * 40% We have not recognized any liabilities for unrecognized tax benefits related to uncertain tax positions. Our policy is to recognize interest and penalties on income taxes in income tax expense. We remain subject to examination for income tax returns for the years ending after December 31, 2007. F-38 (16) Equity Incentive Plan We have an equity incentive plan designed to assist us in attracting, retaining and motivating officers, employees, directors and/or consultants and to provide us and our subsidiaries and affiliates with a stock plan providing incentives directly related to increases in our shareholder value. Activity related to the equity incentive plan for the years ended December 31, 2011 and 2010 is summarized as follows: Shares available for future awards at beginning of the year Options Years ended December 31, 2011 1,461,118 2010 1,359,560 Granted Forfeited or expired Shares sold to cover minimum tax withholding and/or option price upon exercise - - - 500 233,554 73,301 Restricted stock Granted Forfeited Shares sold to cover minimum tax withholding upon vesting Shares available for future awards at end of the year (290,849) (277,663) 3,668 3,838 - 141,329 1,247,238 1,461,118 Stock Options As of December 31, 2011, all outstanding options were fully vested and exercisable. Accordingly, no additional compensation cost will be expensed for these options. During the years ended December 31, 2011 and 2010, we recognized no compensation expense for stock options. All options granted under the equity incentive plan expire ten years from the date of grant. At the time of grant, all options vested in whole or in part over three years from the date of issuance. The following table summarizes information regarding the stock option component of the 2004 equity incentive plan for the years ended December 31, 2011 and 2010: Years ended December 31, 2011 2010 Shares Underlying Options 723,750 Weighted Average Exercise Price $ 17.27 Shares Underlying Options 1,070,500 Weighted Average Exercise Price $ 16.93 - - 15.79 (119,350) - - $ 17.57 604,400 - - 16.22 (346,250) 15.50 (500) $ 17.27 723,750 Outstanding at beginning of the year Granted Exercised Forfeited or expired Outstanding at end of the year The total intrinsic values of options exercised during the years ended December 31, 2011 and 2010 were $4.8 million and $8.7 million, respectively, and the cash received from those exercises was $1.9 million and $5.6 million. Available authorized common shares are issued for stock options exercised. F-39 The following is a summary of outstanding and exercisable stock options as of December 31, 2011: Exercise Price $ 15.50 24.98 26.11 26.87 28.97 At December 31, 2011 Weighted Average Remaining Contractual Life 487,000 1,750 108,500 7,000 150 604,400 2.22 years 3.80 years 3.22 years 3.55 years 3.89 years 2.42 years As of December 31, 2011, the intrinsic value of options outstanding and exercisable was $25.6 million. Restricted Stock The following table summarizes information regarding the restricted stock component of the 2004 equity incentive plan for the years ended December 31, 2011 and 2010: Years ended December 31, 2011 2010 Weighted Average Grant Price Weighted Average Grant Price Shares Shares Outstanding at beginning of the year Granted Vested Forfeited Outstanding at end of the year 619,300 290,849 $ 29.89 53.98 - - 48.11 (3,668) $ 37.55 906,481 727,208 277,663 (381,733) (3,838) 619,300 $ 27.22 38.22 30.81 34.47 $ 29.89 As of December 31, 2011, there was $22.8 million of total unrecognized compensation cost related to unvested restricted shares that is expected to be recognized over a weighted-average period of 3.76 years. During the years ended December 31, 2011, 2010, and 2009, we recognized compensation expense of $8.5 million, $9.3 million, and $5.5 million, respectively, for restricted shares. Included in compensation expense for the year ended December 31, 2010 was $1.6 million from the December 13, 2010 accelerated vesting of 214,330 restricted shares originally scheduled to vest on March 22, 2011. No restricted shares vested during the year ended December 31, 2011. The total fair value of restricted shares that vested during the year ended December 31, 2010 was $16.7 million. F-40 (17) Earnings Per Share The following table shows the computation of basic and diluted earnings per common and common equivalent share for the years ended December 31, 2011, 2010 and 2009: (in thousands, except per share amounts) Net income available to common shareholders Common and common equivalent shares: Weighted average common shares outstanding Weighted average common equivalent shares Weighted average common and common equivalent shares Basic earnings per share Diluted earnings per share Years ended December 31, 2010 2011 2009 $ 149,526 102,051 50,523 43,622 796 44,418 3.43 3.37 $ $ 40,923 635 41,558 2.49 2.46 38,306 421 38,727 1.32 1.30 For the year ended December 31, 2009, outstanding options and warrants to purchase approximately 597,000 shares of the Bank’s common stock at a weighted average price of $30.21 were excluded from the computation of diluted earnings per share because the exercise price exceeded the average market price of the Company’s common shares. The outstanding options and warrants were primarily comprised of the 595,829 ten-year warrant issued to the U.S. Treasury with a strike price of $30.21. There were no options or warrants excluded from the computation of diluted earnings per share for the years ended December 31, 2011 and 2010. (18) Commitments and Contingent Liabilities In the normal course of business, we have various outstanding commitments and contingent liabilities that are not reflected in the accompanying Consolidated Financial Statements. (a) Lease Commitments We have entered into noncancelable operating lease agreements for premises and equipment with expiration dates through the year 2024. Our premises are used principally for private client offices and administrative operations. Rental expense for our premises for the years ended December 31, 2011, 2010, and 2009 amounted to $13.3 million, $12.1 million and $11.5 million, respectively. The required minimum rental payments under the terms of the noncancelable leases at December 31, 2011 are summarized as follows: (in thousands) 2012 2013 2014 2015 2016 Thereafter Total F-41 December 31, 2011 $ 12,825 13,164 12,889 11,542 8,507 22,210 81,137 $ (b) Information Technology Services Contract On September 9, 2005, we entered into a Master Agreement for the Provision of Hardware, Software and/or Services (the “Agreement”) with Fidelity Information Services, Inc. (“Fidelity”). Under the terms of the agreement, Fidelity provides us with hardware, software and account processing services related to our core banking applications. Particularly, Fidelity is providing us with enterprise banking services, core data processing services and managed operations services. Additionally, Fidelity also provides us with implementation and training services for the software and hardware provided under the Agreement. We began making monthly payments on July 1, 2006, and during the years ended December 31, 2011, 2010, and 2009, we incurred contractual costs of $3.5 million, $3.4 million, and $3.2 million, respectively. During 2010, the original 84 month contractual term was extended by 38 months, and the Agreement now terminates in August 2016. We have the right to terminate the Agreement upon a change of control of us, or a failure by Fidelity to meet the terms of the Agreement, subject to certain penalties. The required payments under the terms of the Agreement at December 31, 2011 are as follows: (in thousands) 2012 2013 2014 2015 2016 Thereafter Total December 31, 2011 3,656 $ 3,804 3,959 4,121 2,860 - 18,400 $ (c) Financial Instruments with Off-Balance Sheet Risks In the normal course of business, we have various outstanding commitments and contingent liabilities that are not reflected in the accompanying Consolidated Financial Statements. We enter into transactions that involve financial instruments with off-balance sheet risks in the ordinary course of business to meet the financing needs of our clients. Such financial instruments include commitments to extend credit, standby letters of credit, and unused balances under confirmed letters of credit, all of which are primarily variable rate. Such instruments involve, to varying degrees, elements of credit and interest rate risk. Our exposure to credit loss in the event of nonperformance by the other party with regard to financial instruments is represented by the contractual notional amount of those instruments. Financial instrument transactions are subject to our normal credit policies and approvals, financial controls and risk limiting and monitoring procedures. We generally require collateral or other security to support financial instruments with credit risk. A summary of our commitments and contingent liabilities is as follows: December 31, 2011 2010 $ $ 436,006 220,667 15,036 942 672,651 512,410 199,846 11,663 770 724,689 (in thousands) Unused commitments to extend credit Financial standby letters of credit Commercial and similar letters of credit Other Total F-42 Commitments to extend credit consist of agreements having fixed expiration or other termination clauses and may require payment of a fee. Total commitment amounts may not necessarily represent future cash requirements. We evaluate each client's creditworthiness on a case-by-case basis. Upon the extension of credit, we will obtain collateral, if necessary, based on our credit evaluation of the counterparty. Collateral held varies but may include deposits held in financial institutions, commercial properties, residential properties, accounts receivable, property, plant and equipment and inventory. At December 31, 2011, our reserve for losses on unused commitments to extend credit amounted to $596,000 and is included in accrued expenses and other liabilities in our Consolidated Statements of Financial Condition. We recognize a liability at the inception of the guarantee that is equivalent to the fee received from the guarantor. This liability is amortized to income over the term of the guarantee on a straight-line basis. At December 31, 2011 and December 31, 2010, we had deferred revenue for commitment fees paid for the issuance of standby letters of credit in the amounts of $742,000 and $678,000, respectively. Standby letters of credit are conditional commitments issued by us to guarantee the performance of our clients’ obligations to third parties. Standby letters of credit are primarily used to support clients' business trade transactions and may require payment of a fee. The credit risk involved in issuing letters of credit is essentially the same as that involved in extending loan facilities to clients. We had reserves for credit losses on standby letters of credit totaling $444,000 and $471,000 at December 31, 2011 and 2010, respectively. During the years ended December 31, 2011 and 2010, there were no charge-offs recorded on standby letters of credit and provisions for losses totaling $(26,000) and $146,000, respectively, were reported in other general and administrative expenses in our Consolidated Statements of Operations. At December 31, 2011 and 2010, we had commitments to sell residential mortgage loans and SBA loans of $8.9 million and $4.1 million, respectively. Related fair values were insignificant at December 31, 2010 and 2009. (d) Litigation In the normal course of business, the Bank has been named as a defendant in various legal actions. In the opinion of management, after reviewing such claims with legal counsel, resolution of these matters will not have a material adverse impact on our financial condition, results of operations or liquidity. (19) Regulatory Matters We are subject to various regulatory capital requirements administered by state and Federal regulatory agencies. Failure to meet minimum capital requirements can initiate certain mandatory—and possible additional discretionary—actions by regulators that, if undertaken, could have a direct material adverse effect on our financial statements. Under capital adequacy guidelines and the regulatory framework for prompt corrective action, we must meet specific capital guidelines that involve quantitative measures of our assets, liabilities, and certain off- balance sheet items as calculated under regulatory accounting practices. Our capital amounts and classifications are also subject to qualitative judgments by the regulators about components, risk weightings, and other factors. In addition, we are subject to the provisions of the Federal Deposit Insurance Corporation Improvement Act of 1991 (“FDICIA”) which imposes a number of mandatory supervisory measures. Among other matters, FDICIA established five capital categories ranging from “well capitalized” to “critically undercapitalized.” Such classifications are used by regulatory agencies to determine a bank’s deposit insurance premium, approval of applications authorizing institutions to increase their asset size or otherwise expand business activities or acquire other institutions. Under the provisions of FDICIA, a “well capitalized” bank must maintain minimum leverage, Tier 1 and Total Capital ratios of 5%, 6% and 10%, respectively. Quantitative measures established by regulation to ensure capital adequacy require us to maintain minimum amounts and ratios of total and Tier I capital to risk-weighted assets (as defined), and of Tier I capital (as defined) to average assets (as defined). As of December 31, 2011 and 2010, we met all capital adequacy requirements to which we were subject. The most recent notification from the Federal Deposit Insurance Corporation categorized us as well capitalized under the regulatory framework for prompt corrective action. To be categorized as well capitalized, we must F-43 maintain minimum total risk-based, Tier I risk-based, and Tier I leverage ratios as set forth in the table. There are no conditions or events since that notification that management believes have changed the Bank’s category. Our actual capital amounts and ratios are presented in the table below. (dollars in thousands) As of December 31, 2011: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Tier 1 leverage capital (to average assets) As of December 31, 2010: Total capital (to risk-weighted assets) Tier 1 capital (to risk-weighted assets) Tier 1 leverage capital (to average assets) Actual Amount Ratio Required for Capital Adequacy Purposes Amount Ratio Required to be Well Capitalized Amount Ratio $ 1,465,422 1,378,219 1,378,219 18.17% 17.08% 9.67% $ 1,030,517 962,650 962,650 15.21% 14.21% 8.62% 645,350 322,675 570,201 541,981 270,991 446,782 8.00% 4.00% 4.00% 8.00% 4.00% 4.00% 806,688 484,013 712,752 10.00% 6.00% 5.00% 677,476 406,486 558,477 10.00% 6.00% 5.00% A depository institution, under federal law, is prohibited from paying a dividend if such dividend would cause the depository institution to be “undercapitalized” as determined by federal bank regulatory agencies. The relevant federal regulatory agencies and the state regulatory agency, the New York State Department of Financial Services, also have the authority to prohibit a bank from engaging in what, in the opinion of such regulatory body, constitutes an unsafe or unsound practice in conducting its business. We would require the approval of the Superintendent of the New York State Department of Financial Services if the dividends we declared in any calendar year were to exceed net profit for that year combined with retained net profits of the preceding two calendar years, less any required transfer to paid-in capital. The term “net profit” is defined as the remainder of all earnings from current operations plus actual recoveries on loan and investment and other assets, after deducting from the total thereof all current operating expenses, actual losses, if any, and all federal and local taxes. The payment of dividends could, depending upon our financial condition, be deemed to constitute such an unsafe or unsound practice. (20) Issuances of Preferred Stock and Warrant On December 12, 2008, we completed the issuance of 120,000 shares senior preferred stock (with an aggregate liquidation preference of $120.0 million) and a warrant to purchase 595,829 common shares to the U.S. Treasury through the Troubled Asset Relief Program Capital Purchase Program (the “TARP Offering”). We began to use the proceeds from the TARP Offering to fund our continued loan growth, and we believe our active lending to credit-worthy borrowers during our participation in the program supported the U.S. Treasury’s stated goal of increasing the flow of credit to both consumers and businesses. On February 17, 2009, the American Recovery and Reinvestment Act of 2009 (the “Recovery Act”) was enacted. The Recovery Act included limitations and other provisions that have affected the manner in which participants in the TARP Capital Purchase Program conduct their business. In light of the restrictions of the Recovery Act, on March 31, 2009, we repurchased the preferred stock we issued to the U.S. Treasury for $120.0 million (the aggregate liquidation preference of such preferred stock) plus accrued and unpaid dividends of $767,000. We believe exiting the program was in our best interest, and we remain significantly above “well capitalized” as defined for regulatory purposes. On March 12, 2010, the U.S. Treasury sold the ten-year warrant to purchase up to 595,829 shares of our common stock that was issued in connection with the TARP Offering. We did not repurchase any portion of the warrant auctioned by the U.S. Treasury. F-44 The following table provides reconciliations of net interest income, non-interest income, non-interest expense, net income, and total assets for reportable segments to the Consolidated Financial Statement totals: (in thousands) Net interest income: Bank 2011 2010 2009 $ 459,721 344,841 F-46 (22) Accumulated Other Comprehensive Income (Loss) The following table presents changes in the accumulated other comprehensive income (loss) for the periods indicated: (in thousands) At or for the years ended December 31, 2010 2009 2011 Accumulated other comprehensive income (loss) at beginning of the year, net of tax $ (18,412) (36,652) (62,696) Cumulative effect of change in accounting for securities impairment Tax effect Net of tax Net change in unrealized gains and losses on securities Tax effect Net of tax Reclassification adjustment for net gains on sales of securities included in net income Tax effect Net of tax Other-than-temporary losses on securities related to noncredit factors Tax effect Net of tax Reclassification adjustment for other-than-temporary losses on securities related to credit factors included in net income Tax effect Net of tax - - - 108,770 (48,013) 60,757 (14,387) 6,351 (8,036) (10,183) 4,496 (5,687) 2,089 (922) 1,167 - - - 68,188 (29,990) 38,198 (25,367) 11,157 (14,210) (24,437) 10,748 (13,689) 14,176 (6,235) 7,941 (8,133) 3,594 (4,539) 84,680 (37,527) 47,153 (8,683) 3,848 (4,835) (22,397) 9,926 (12,471) 1,322 (586) 736 Accumulated other comprehensive income (loss) at end of the year, net of tax $ 29,789 (18,412) (36,652) F-47 (23) Quarterly Data (unaudited) (dollars in thousands, except per share amounts) March 31 June 30 September 30 December 31 2011 QUARTER Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Other-than-temporary impairment losses on securities Non-interest income excluding other-than- temporary impairment losses on securities Non-interest expense Income before taxes Income tax expense Net income Basic earnings per common share Diluted earnings per common share 2010 QUARTER Interest income Interest expense Net interest income Provision for loan losses Net interest income after provision for loan losses Non-interest income Other-than-temporary impairment losses on securities Non-interest income excluding other-than- temporary impairment losses on securities Non-interest expense Income before taxes Income tax expense Net income Basic earnings per common share Diluted earnings per common share $ 133,068 29,396 103,672 12,322 91,350 15,067 143,834 30,846 112,988 12,851 100,137 10,248 148,819 30,959 117,860 12,122 105,738 8,821 154,795 29,528 125,267 14,581 110,686 7,902 (726) (806) (216) (341) 15,793 44,669 61,748 27,164 $ 34,584 $ $ 0.84 0.82 11,054 45,220 65,165 28,548 36,617 0.89 0.87 9,037 45,704 68,855 30,505 38,350 0.84 0.83 8,243 47,131 71,457 31,482 39,975 0.87 0.85 $ 108,780 112,477 120,131 125,142 30,023 78,757.00 11,233 67,524.00 11,127.00 31,387 81,090 11,128 69,962 10,259 31,026 89,105 10,433 78,672 11,257 29,236 95,906 13,578 82,328 10,005 (9,505) (1,919) (2,093) (659) 20,632 39,744.00 38,907.00 16,813.00 $ 22,094 $ $ 0.54 0.54 12,178 41,715 38,506 16,237 22,269 0.54 0.54 13,350 42,463 47,466 20,104 27,362 0.67 0.66 10,664 40,974 51,359 21,033 30,326 0.74 0.72 F-48 (This page has been left blank intentionally.) Exhibit No. Exhibit Index Exhibit 3.1 Restated Organization Certificate. (Incorporated by reference to Signature Bank’s Quarterly Report on Form 10-Q for the period ended June 30, 2005.) 3.2 Certificate of Amendment, dated December 5, 2008, to the Bank's Restated Organization Certificate with respect to Signature Bank’s Fixed Rate Non-Cumulative Perpetual Preferred Stock, Series A, par value $0.01 per share. (Incorporated by reference to Signature Bank’s Current Report on Form 8-K filed on December 17, 2008.) 3.3 Amended and Restated By-laws of the Registrant. (Incorporated by reference to Signature Bank’s Current Report on Form 8-K filed on October 17, 2007.) 4.1 Specimen Common Stock Certificate. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 4.2 Specimen Warrant (Incorporated herein by reference to Exhibit 4.2 of the Bank’s Form 8-A filed on March 10, 2010.) 10.1 Signature Bank Amended and Restated 2004 Long-Term Incentive Plan. (Incorporated by reference from Appendix A to the 2008 Definitive Proxy Statement on Schedule 14A, filed with the Federal Deposit Insurance Corporation on March 19, 2008.) 10.2 Amended and Restated Signature Bank Change of Control Plan. (Incorporated by reference to Signature Bank’s Current Report on Form 8-K, filed with the Federal Deposit Insurance Corporation on September 19, 2007.) 10.3 Outsourcing Agreement, dated January 1, 2004, by and between Bank Hapoalim, Signature Bank and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.4 Networking Agreement, effective as of April 18, 2001, between Signature Securities and Signature Bank. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.5 Signature Securities Group Corporation Customer Agreement, effective as of May 31, 2003, between Bank Hapoalim and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.6 Signature Securities Group Corporation Customer Agreement, dated April 25, 2003, between Bank Hapoalim and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.7 Brokerage and Consulting Agreement, dated August 6, 2001, by and between Signature Bank and Signature Securities. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.10 Lease for 1225 Franklin Avenue, dated April 5, 2002, between Franklin Avenue Plaza LLC and Signature Bank. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.11 Sublease for 1177 Avenue of the Americas, dated as of April 4, 2001, by and between Bank Hapoalim and Signature Bank. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) Exhibit No. Exhibit 10.13 Employment Agreement, dated March 22, 2004, between Signature Bank and Joseph J. DePaolo. (Incorporated by reference to Signature Bank’s Registration Statement on Form 10 or amendments thereto, filed with the Federal Deposit Insurance Corporation on March 17, 2004.) 10.14 Master Agreement for the provision of Hardware Software and/or Services, dated as of September 9, 2005, between Fidelity Information Services, Inc. and Signature Bank. (Incorporated by reference to Signature Bank’s Quarterly Report on Form 10-Q for the period ended September 30, 2005.) 10.15 Warrant Agreement, dated March 10, 2010, between Signature Bank and American Stock Transfer & Trust Company, LLC, as warrant agent (Incorporated herein by reference to Exhibit 4.1 of the Bank’s Form 8-A filed on March 10, 2010.) 14.1 Code of Ethics (Incorporated by reference from Signature Bank’s 2004 Form 10-K, filed with the Federal Deposit Insurance Corporation on March 16, 2005.) 21.1 Subsidiaries of Signature Bank. 31.1 Certification of the Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 31.2 Certification of the Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002. 32.1 Certification of the Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. SIGNATURE BANK LIST OF SUBSIDIARIES AS OF FEBRUARY 29, 2012 (all subsidiaries are 100% owned by Signature Bank, except as indicated) EXHIBIT 21.1 Subsidiary Signature Securities Group Corporation Signature Preferred Capital, Inc. (1) State or Jurisdiction Under Which Organized New York New York (1) Signature Bank owns 100% of Signature Preferred Capital, Inc. ("SPC") common shares and 88% of SPC preferred shares issued and outstanding as of February 29, 2012. EXHIBIT 31.1 I, Joseph J. DePaolo, certify that: CERTIFICATION 1. I have reviewed this annual report on Form 10-K of Signature Bank for the fiscal year ended December 31, 2011; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Examining Committee of the registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 29, 2012 /s/ JOSEPH J. DEPAOLO Joseph J. DePaolo President, Chief Executive Officer and Director CERTIFICATION EXHIBIT 31.2 I, Eric R. Howell, certify that: 1. I have reviewed this annual report on Form 10-K of Signature Bank for the fiscal year ended December 31, 2011; 2. Based on my knowledge, this report does not contain any untrue statement of a material fact or omit to state a material fact necessary to make the statements made, in light of the circumstances under which such statements were made, not misleading with respect to the period covered by this report; 3. Based on my knowledge, the financial statements, and other financial information included in this report, fairly present in all material respects the financial condition, results of operations and cash flows of the registrant as of, and for, the periods presented in this report; 4. The registrant’s other certifying officer and I are responsible for establishing and maintaining disclosure controls and procedures (as defined in Exchange Act Rules 13a-15(e) and 15d-15(e)) and internal control over financial reporting (as defined in Exchange Act Rules 13a-15(f) and 15d-15(f)) for the registrant and have: a) Designed such disclosure controls and procedures, or caused such disclosure controls and procedures to be designed under our supervision, to ensure that material information relating to the registrant, including its consolidated subsidiaries, is made known to us by others within those entities, particularly during the period in which this report is being prepared; b) Designed such internal control over financial reporting, or caused such internal control over financial reporting to be designed under our supervision, to provide reasonable assurance regarding the reliability of financial reporting and the preparation of financial statements for external purposes in accordance with generally accepted accounting principles; c) Evaluated the effectiveness of the registrant's disclosure controls and procedures and presented in this report our conclusions about the effectiveness of the disclosure controls and procedures, as of the end of the period covered by this report based on such evaluation; and d) Disclosed in this report any change in the registrant's internal control over financial reporting that occurred during the registrant's most recent fiscal quarter (the registrant's fourth fiscal quarter in the case of an annual report) that has materially affected, or is reasonably likely to materially affect, the registrant's internal control over financial reporting; and 5. The registrant's other certifying officer and I have disclosed, based on our most recent evaluation of internal control over financial reporting, to the registrant's auditors and the Examining Committee of the registrant's Board of Directors (or persons performing the equivalent functions): a) All significant deficiencies and material weaknesses in the design or operation of internal control over financial reporting which are reasonably likely to adversely affect the registrant's ability to record, process, summarize and report financial information; and b) Any fraud, whether or not material, that involves management or other employees who have a significant role in the registrant's internal control over financial reporting. Date: February 29, 2012 /s/ ERIC R. HOWELL Eric R. Howell Executive Vice President and Chief Financial Officer Certification Pursuant to 18 U.S.C. Section 1350 As Adopted Pursuant to Section 906 of the Sarbanes-Oxley Act of 2002 EXHIBIT 32.1 Pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code), each of the undersigned officers of Signature Bank, a New York bank (the "Company"), does hereby certify, to the best of such officer's knowledge, that: The Annual Report on Form 10-K for the year ended December 31, 2011 (the "Form 10-K") of the Company fully complies with the requirements of section 13(a) or 15(d) of the Securities Exchange Act of 1934 and information contained in the Form 10-K fairly presents, in all material respects, the financial condition and results of operations of the Company. Dated: February 29, 2012 Dated: February 29, 2012 /s/ JOSEPH J. DEPAOLO Joseph J. DePaolo President, Chief Executive Officer and Director /s/ ERIC R. HOWELL Eric R. Howell Executive Vice President and Chief Financial Officer The foregoing certification is being furnished solely pursuant to section 906 of the Sarbanes-Oxley Act of 2002 (subsections (a) and (b) of section 1350, chapter 63 of title 18, United States Code) and is not being filed as part of the Form 10-K or as a separate disclosure document. (This page has been left blank intentionally.) C o r p o r at e I n f o r m at i o n Board of Directors Advisory Board Stockholder Infor m ation Scott A. Shay Chairman of the Board Signature Bank Kathryn A. Byrne, CPA Partner WeiserMazars LLP Alfonse M. D’Amato Managing Director Park Strategies, LLC Former U.S. Senator Alfred B. DelBello Partner DelBello Donnellan Weingarten Wise & Wiederkehr, LLP Former New York State Lieutenant Governor Joseph J. DePaolo President & Chief Executive Officer Signature Bank Yacov Levy Managing Partner KerenTwo, LLC Jeffrey W. Meshel President Paradigm Capital Corp. John Tamberlane Vice Chairman Signature Bank Ivanka M. Trump Executive Vice President, Development & Acquisitions The Trump Organization President, Ivanka Trump Collection Senior M anagement Scott A. Shay Chairman of the Board of Directors Joseph J. DePaolo President & Chief Executive Officer John Tamberlane Vice Chairman Mark T. Sigona Executive Vice President & Chief Operating Officer Michael J. Merlo Executive Vice President & Chief Credit Officer Eric R. Howell Executive Vice President & Chief Financial Officer Peter S. Quinlan Executive Vice President & Treasurer Michael Sharkey Senior Vice President & Chief Technology Officer Stanley Kreitman Director, Medallion Financial Corp. Director, KSW Corp. Chairman of the Board, CCA Industries, Inc. Trustee, North Shore LIJ Health System, Inc. Lewis S. Ranieri Founder & Managing Partner Hyperion Partners & Ranieri Partners John P. Sullivan Managing Director CapGen Financial Locations Manhattan 261 Madison Avenue 300 Park Avenue 71 Broadway 565 Fifth Avenue 950 Third Avenue 200 Park Avenue South 1020 Madison Avenue 50 West 57th Street 2 Penn Plaza 111 Broadway (Accommodation Office) Brooklyn 26 Court Street 84 Broadway 6321 New Utrecht Avenue Queens 36-36 33rd Street, Long Island City 78-27 37th Avenue, Jackson Heights 8936 Sutphin Boulevard, Jamaica Bronx 421 Hunts Point Avenue Staten Island 2066 Hylan Boulevard Westchester 1C Quaker Ridge Road, New Rochelle 360 Hamilton Avenue, White Plains Long Island 1225 Franklin Avenue, Garden City 279 Sunrise Highway, Rockville Centre 68 South Service Road, Melville 923 Broadway, Woodmere 40 Cuttermill Road, Great Neck 100 Jericho Quadrangle, Jericho Signature Securities Group Institutional Trading (Services limited to institutional clients) 9 Greenway Plaza, Houston, TX 77046 Signature Bank 565 Fifth Avenue New York, NY 10017 646-822-1500 866-SIG-LINE (866-744-5463) www.signatureny.com Counsel Paul, Weiss, Rifkind, Wharton & Garrison LLP 1285 Avenue of the Americas New York, NY 10019 212-373-3000 Independent Auditors KPMG LLP 345 Park Avenue New York, NY 10154-0102 212-758-9700 Stock Transfer Agent & Registrar American Stock Transfer 59 Maiden Lane New York, NY 10038 212-936-5100 Stock Trading Information The Bank’s common stock is traded on the NASDAQ National Market under the symbol SBNY. Annual Meeting The annual meeting of stockholders will be held on Wednesday, April 25, 2012, 9:30 AM at: The Roosevelt Hotel 45 East 45th Street New York, NY 10017 212-661-9600 Form 10-K A copy of Signature Bank’s Annual Report on Form 10-K filed with the FDIC is available without charge by download from www.signatureny.com, or by written request to: Signature Bank Attention: Investor Relations 565 Fifth Avenue New York, NY 10017 Certain statements in this Annual Report that are not historical facts constitute “forward-looking statements” within the meaning of the Private Securities Litigation Reform Act of 1995 (the “Reform Act”). Such forward- looking statements are based on the Bank’s current expectations, speak only as of the date on which they are made and are susceptible to a number of risks, un- certainties and other factors. The Bank’s actual results, performance and achievements may differ materially from any future results, performance or achieve- ments expressed or implied by such forward-looking statements. For those statements, the Bank claims the protection of the safe harbor for forward-looking state- ments contained in the Reform Act. See “Private Securi- ties Litigation Reform Act Safe Harbor Statement” and “Part I, Item 1A. Business−Risk Factors,” appearing in the Bank’s Annual Report on Form 10-K for the fiscal year ended December 31, 2011, included herein. 565 Fifth Avenue New York, NY 10017 866-SIG-LINE (866-744-5463) www.signatureny.com 

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