Which of the 35 Unusually Active New York Community Bancorp Options Should You Choose?

To say that 2024 has not been a good year for New York Community Bancorp (NYCB) would be the understatement of the century.

The bank's share price closed Jan. 30 trading at $10.38, up 1.5% on the year. Then, it reported Q4 2023 results on Jan. 31 before the markets opened, and all hell broke loose. Its shares closed the day at $6.47. 

Despite a slight rebound yesterday due to the company's comments during a special conference call with analysts, its shares have fallen another two dollars. As I write this on Thursday morning, the premarket suggests they’ll fall again today. 

How low can they go is one question being asked by the media. Another is whether it will go under. Only the gods have these answers. 

I know that there were 35 unusually active options (23 calls and 12 puts) on Wednesday -- those with Vol/OI ratios greater than 1.25 and expiring after Friday -- and its total options volume was 458,173, more than 6x its 30-day average. 

If you’re an aggressive investor, here are my two cents on the options play. 

What We Know About the Situation

Here’s what we know about New York Community Bancorp’s situation.

First, it delivered an unexpected adjusted net loss of $193 million in the fourth quarter, forcing it to cut its quarterly dividend by 71% to $0.05 a share.  

As of September 30, 2023, it had $13.4 billion in commercial real estate loans or 16.0% of its $84.0 billion total loans. Of those loans, $26 million were 30 to 89 days past due, with $157 million in non-performing loans (NPLs), which are 90 days past due or more. The bank’s overall NPLs were 0.52% of its total loans, up from 0.28% on June 30, 2023. 

As of December 31, 2023, it had $13.4 billion in commercial real estate loans or 15.8% of its $84.6 billion in total loans. The press releases don’t break down the NPLs for CRE loans. Overall, NPLs were 0.51% ($428 million) of total loans, so no change. 

At the end of Q3 2023, $3.4 billion of the CRE portfolio were office properties, so a significant amount was outside the most troubled part of the commercial real estate market. 

A possibly more significant concern is found within its multi-family residential portfolio. It was $37.3 billion at the end of the fourth quarter, accounting for 44% of the bank’s total loans. That’s a big chunk.

Typically, multi-family residential real estate is a safe bet because people have to live somewhere. However, as of September 30, 2023, approximately 52% of its multi-family loans were in New York City, where rent-stabilization laws are in place. 

“Rent-stabilized apartments are generally located in buildings with six or more units that were built between February 1947 and January 1974. Rent-regulated apartments tend to be more affordable to live in because of the applicable regulations, and buildings with a preponderance of such rent-regulated apartments are therefore less likely to experience vacancies in times of economic adversity,” states pg. 6 of NYCB’s Q3 2023 10-Q.

High occupancy rates should be a good thing. However, the downside is that the borrowers for multi-family properties are experiencing a double whammy: Limited upside in rent prices -- a 3% cap on increases for one-year leases -- leading to lower property valuations. That’s a lethal combination for a smaller real estate investor. 

Bloomberg reported on several NYC multi-family residential properties that were recently sold. One in Harlem went for $3.8 billion, 59% lower than the owners paid in 2016. 

So, between CRE and multi-family loans, the bank was forced to increase its allowance for credit losses (ACL) at the end of December to $992 million, or 1.17% of total loans. Its provision for credit losses (PCL) in Q4 2023 increased by $552 million from $62 million in the third quarter.  

That reduced its net interest income in the quarter to $188 million, down from $820 million in Q3 2023, hence the loss. 

As a result, Moody’s downgraded NYCB’s debt to junk status on Tuesday, with possible further downgrades in the future. 

Is There Anything Positive About the Situation?

Bank stocks are the worst possible investment for investors to wrap their arms around. They require a special evaluation relative to other industries and sectors. They are not for the faint of heart. 

I see some things that could be construed as positive. 

First, bringing in former Flagstar Bank CEO Alessandro DiNello -- NYCB acquired Flagstar in December 2022 for $2.6 billion in stock -- to be Executive Chairman and help right the ship is a no-brainer. He cleaned up Flagstar’s balance sheet on operations. 

Secondly, he has said he will do everything possible to create a fortress-like balance sheet, including selling off loans. To that end, the bank is currently negotiating selling billions in commercial and non-core loans. 

Third, Moody’s kept its rating for deposits at investment grade. That’s a win. 

Fourth, Piper Sandler analysts Mark Fitzgibbon and Gregory Zingone have maintained his Buy rating on the stock, suggesting that its situation is much stronger than the media’s portrayal. 

“‘The company’s liquidity and deposit positions are markedly better than almost anybody thought yesterday,’ Piper Sandler & Co. analysts Mark Fitzgibbon and Gregory Zingone wrote in a note Wednesday,” Barron’s reported. 

As of Wednesday, the bank had $37.3 billion in liquidity, 163% higher than its uninsured deposits. Fitzgibbon suggested to clients that NYCB stock trades at 40% of its tangible book value and 7x 2024 earnings. 

If you’re an aggressive investor, this could be your Super Bowl.

The Play to Make?  

If you’re like me and bullish about its chances to recover, the options question comes down to long or short DTE (days to expiration). 

Because it will take months, perhaps years, to create a fortress-like balance sheet, a long DTE gives you a better opportunity to buy its shares at a bargain price. 

Of the 23 unusually active call options from Wednesday, four have DTEs of more than 90 days. Three expire in 162 days on July 19, with strike prices of $4, $5, and $6. The fourth call is the Jan. 17/2025 $5 strike. 

I'm leaning toward the 344 DTE, the ask was $1.65, or a 33% down payment. With a delta of 0.61738, you can double your money without holding to expiry if the share price moves $2.67 higher over the next year. Very doable. Your downside is $165 per contract.

Of the three remaining that expire on July 19, I’d go with the one with the lowest down payment. That would be the $6 strike and an ask price of $0.95, or 15.8% down. To double your money, NYCB must rise by $2.01 over the next 162 days, or about half the time. 

So, the 344 DTE has to appreciate by 60% (5.2% per month) based on its $4.48 closing price, while the 162 DTE has to appreciate by 45% (8.3% per month).

While I can see why someone would prefer the $95 capital outlay vs. the $165, I think the latter gives you more time to let this situation play out.   

If you want to bet on NYCB, options are the responsible way.

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