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The Institutional Risk Analyst

© 2003-2024 | Whalen Global Advisors LLC  All Rights Reserved in All Media |  ISSN 2692-1812 

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NYCB Cleans House Badly, NAIC Gives Insurers Pass on Realized Losses

Updated: Feb 2

February 1, 2024 | In this issue of The Institutional Risk Analyst, we ponder yesterday’s earnings release by New York Community Bank (NYCB). But first we want to give a h/t to Nathan Tankus, the Research Director of the Modern Money Network. Nathan publishes “Notes on the Crises” – an always insightful discussion of the US political economy.

In his January 16, 2024 missive, Tankus tells the little known story of former Treasury Undersecretary Paul Volcker calling Federal Reserve Board Chairman Arthur Burns in 1973 to discuss the federal budget. “A confidential memo documenting this event was declassified on August 21st 2020,” Tankus relates. “That memo describes the phone call this way:”

“Mr. Volcker had telephoned Chairman Burns shortly after 9:30 a.m. on December 3 to ask whether the Federal Reserve, under existing law and regulations, could and would make a formal commitment at this time to refrain from tendering for redemption its holdings of Treasury bills maturing on December 6, in the event that the statutory debt ceiling remained below the amount of outstanding debt on that date. If the Federal Reserve did not tender those holdings for redemption, the Treasury would be able to meet other obligations for a somewhat longer period.”

Tankus notes that because the Fed would receive no interest on the debt after the maturity date: “That means the Federal Reserve was both foregoing profit, in addition to effectively providing credit to the Treasury.”  So much for the independence of the Federal Reserve Board.

Simon White at Bloomberg put things in perspective earlier this week:

Born in the 90s and tested to destruction during the Great Financial Crisis, modern-day central bank independence is effectively over in all but name. Persistently large government deficits, central banks with trillions of dollars of sovereign debt and the political toxicity of elevated inflation make it impossible any longer for the Federal Reserve, ECB et al to set monetary policy fully independently from their government overseers.”

White more recently echoed our view and the view of colleagues in the world of warehouse lending and mortgage finance, arguing that the Fed needs to cut short-term rates to take pressure off both dealers and issuers of securities. “Banking sector problems are a prescient reminder that elevated rates are cumulatively inflicting mounting damage across the economy,” White argues. “Ironically, that ultimately means yields are heading higher.” Repeat, higher yields ahead.

Lower short-term rates will help dealers and issuers of securities that want to finance inventory, but lower rates will not do much to ameliorate the carnage in commercial real estate. Every commercial asset is different. That's why veteran managers like Barry Sternlicht are warning of over $1 trillion in losses on commercial assets.

Nor will lower short-term rates necessarily help consumers, who pay for credit that is priced off the long end of the Treasury yield curve. Of note, Treasury Secretary Janet Yellen is seeking to issue the full allocation of 10s and 30-year Treasury debt next week.

That brings us to NYCB, which reported record operating results, but then charged-off two large commercial properties and took a big slug of losses related to the acquisition of assets and the assumption of deposits from Signature Bank via the FDIC receivership not quite a year ago.  The earnings snapshot from the $120 billion asset bank is shown below.

As a holder of NYCB, we are disappointed in the way the bank announced the results to investors. The NYCB team is still coming to grips with the reality of being a large bank. The disappointing results should have been pre-announced. Also, the bank should do a better job explaining the results. The bank's written disclosure is poorly designed and presented. Where is the investor presentation?

Also, the bank needs to up its game in terms of the management team. To Chief Executive Officer Thomas R. Cangemi’s point about being a Tier IV large bank, NYCB needs to have a chief risk officer in the leadership team before the regulators tell them to do so. We’ve got some ideas. You cannot expect to earn respect and credibility among investors as a large bank if you don't look and sound like a large bank. Duh.

Sad to say, the business at NYCB is doing better than you'd think reading the bank's absurd disclosure. Net interest income more than doubled at a time that the industry is reporting down results. Non-interest income was up 10-fold to $2.5 billion. The bank booked a $2.1 billion extraordinary gain for the purchase of Signature from the FDIC receivership, but booked $330 million in restructuring expenses and a $40 million special assessment by the FDIC.

Total commercial loans represent 46% of total NYCB loans held for investment, and multi-family loans represent 44% of total loans held for investment as of December 31, 2023. Residential loans and other loans represented 7% and 3%, respectively, of total loans held for investment.

The bank charged off $189 million in commercial and multifamily loans in Q4, an aggressive move we view as a sign of strength. NYCB also cut the dividend to accelerate the capital build required now that it is a Tier IV bank holding company.

Of note, NYCB’s unrealized losses on securities fell 33% in 2023 to less than 5% of capital, partly as a result of aggressive sales of legacy securities and partly due to lower interest rates. During the fourth quarter, NYCB recorded a $552 million provision for credit losses compared to $62 million in the previous quarter. Net charge-offs were $185 million during the fourth quarter 2023 compared to $24 million in the third quarter 2023, driven by just two commercial loans.

Source: Google Finance (2/1/2024)

All of this said, we still like the NYCB story and, indeed, bought more shares at the lows. Our basis was half of book and today NYCB is a 0.45x book value just under Citigroup (C). The legacy NYCB is where the problems lie in this story, in our view, while the Flagstar team and franchise represent the future. We'd like to see Cangemi become Nonexecutive Chairman and see Alessandro (Sandro) DiNello, now Non-Executive Chairman, take over as CEO. DiNello ran a top-five national mortgage business at Flagstar and better understands the world of large bank regulation and investor relations.

Eric Hagen at BTIG put the NYCB results and the reason we still like the stock into the context of small bank earnings:

Some weakness in regional bank stocks this week could potentially help reinforce the strong supply of MSRs which we see developing this year, especially if interest rates fall... Pressure specifically on New York Community Bank appears mostly a function of having achieved rapid growth following its acquisitions of Signature Bank and Flagstar Bank, prompting it to cut its dividend and build capital to satisfy new regulatory thresholds. Flagstar carries a significant presence in mortgage finance, starting with its $380 billion servicing portfolio, including almost $300 billion which it subservices on behalf of others. It's also the second largest warehouse lender behind JP Morgan with $12 billion of commitments, and it supplies around $2.5 billion of MSR financing to a range of investors/servicers. NYCB is also a top lender of commercial multifamily credit.”

Readers of The Institutional Risk Analyst should prepare for a bumpy and unpredictable year in financials. As we noted on X, commercial real estate is going to be the primary source of losses for commercial banks in 2024 and for much of the remainder of the decade. Banks like NYCB that have the operating income and capital to clean house will be the winners in the race for loss mitigation. Banks that cannot restructure losing securities portfolios and write off commercial bad assets will do badly. 

Of note, Olivia Raimonde of Bloomberg wrote a fascinating story entitled “Insurers Are Set to Unleash $400 Billion Wave of Credit Trading.” Why are insurers getting ready to sell half a trillion in low-coupon securities?  Because the National Association of Insurance Commissioners is allowing insurers in the US to count realized losses on securities as capital through 2025. Tales of S&L net worth certificates redux.

“Driving this is a change to a little-known accounting item, namely the interest maintenance reserve, Raimonde writes. “Insurers use these reserves to defer interest rate-driven losses or gains from fixed-income investments, for reporting to regulators. That way, any losses are spread out over several years rather than being realized as a larger lump cost upfront, keeping insurers’ regulatory capital buffers from yo-yoing.”

Last year, the National Association of Insurance Commissioners allowed life insurers to include a portion of negative IMR — when realized losses exceed gains — as regulatory capital through 2025. This effectively enables them to absorb up to $55 billion of additional realized losses or nearly 2.5 times more than before, Barclays estimates in a research note. 

So if the NAIC is making it easier for insurers to sell lower-yielding bonds, why isn’t the Federal Reserve and other bank regulators doing the same thing?  If analysts are right about the long end of the Treasury yield curve rising over time, the Fed should be moving heaven and earth to get banks to sell low coupon securities as soon as possible so we can prepare for the next challenge, namely losses on commercial real estate. 

The Institutional Risk Analyst (ISSN 2692-1812) is published by Whalen Global Advisors LLC and is provided for general informational purposes only and is not intended for trading purposes or financial advice. By making use of The Institutional Risk Analyst web site and content, the recipient thereof acknowledges and agrees to our copyright and the matters set forth below in this disclaimer. Whalen Global Advisors LLC makes no representation or warranty (express or implied) regarding the adequacy, accuracy, or completeness of any information in The Institutional Risk Analyst. Information contained herein is obtained from public and private sources deemed reliable. Any analysis or statements contained in The Institutional Risk Analyst are preliminary and are not intended to be complete, and such information is qualified in its entirety. Any opinions or estimates contained in The Institutional Risk Analyst represent the judgment of Whalen Global Advisors LLC at this time, and is subject to change without notice. The Institutional Risk Analyst is not an offer to sell, or a solicitation of an offer to buy, any securities or instruments named or described herein. The Institutional Risk Analyst is not intended to provide, and must not be relied on for, accounting, legal, regulatory, tax, business, financial or related advice or investment recommendations. Whalen Global Advisors LLC is not acting as fiduciary or advisor with respect to the information contained herein. You must consult with your own advisors as to the legal, regulatory, tax, business, financial, investment and other aspects of the subjects addressed in The Institutional Risk Analyst. Interested parties are advised to contact Whalen Global Advisors LLC for more information.  

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