Flagstar Forecasts Q4 Return to Profitability As Its Cleanup Continues

After turning from rescuer to rescuee, Flagstar needed two shots in the arm: fresh capital and experienced turnaround management. Early indications are that it's working.

By Steve Cocheo, Senior Executive Editor at The Financial Brand

Published on February 3rd, 2025 in Banking Trends

Flagstar Financial, parent of Flagstar Bank, is predicting a return to profitability in the fourth quarter of 2025 after a transition year that’s seen a regimen of cuts, strategic shifts and targeted hiring. New management’s ultimate goal is to transform Flagstar into a solid regional bank.

During the bank’s Jan. 30 earnings briefing, Flagstar leadership reported that the company had a net loss of $160 million in the fourth quarter, compared to a net loss of $280 million in the third quarter and a net loss of $2.7 billion in the fourth quarter of 2023. More losses await, but Joseph Otting, chairman, president and CEO, told analysts that improvement was well underway. Otting, who joined $100.2 billion-assets Flagstar in March of 2024, served as Comptroller of the Currency during the first Trump administration.

"The company is in a better position than it was 12 months ago and strategically for a long time," said Otting. He added that current momentum "will ultimately mark the company’s turning point on its return to consistent profitability."

Beyond the forecast for the final quarter of this year, Otting said that "we’re on track to reach full profitability in 2026."

This comes as Flagstar, formerly New York Community Bancorp, continues a series of measures to redefine the institution that began when new leadership came in along with a $1.05 billion plus equity investment, in March 2024. Steven Mnuchin, Secretary of the Treasury during the first Trump administration, heads Liberty Strategic Capital, which leads the investor organizations that put up the equity.

During the briefing Otting and Lee Smith, CFO, discussed how Flagstar has worked to turn things around. This included analyzing and cleaning up its commercial real estate and multifamily loan portfolios, building out commercial and industry lending, rebalancing the bank’s deposit portfolio, and cutting costs. The latter includes staff cutbacks through both layoffs and sale of certain operations, a pending round of branch closures, and rationalization of other company real estate.

A Brand-New Thrust from Flagstar

The bank is also building out an effort to become a "lead-left." In multi-bank lending deals, the "lead-left" is the institution responsible for the underwriting and syndication of the group credit.

Besides having its own piece of the interest-bearing credit in the deal, the institution obtains fee income for running it.

Otting said many banks that take part in this market have hit their ceilings for such lending. "We’re a new entrant into that space, and we’re hiring people who have long histories and track records," he said.

Career banker Otting noted that this was the part of the industry where he himself started. (The term "lead-left" originated with the spot on the prospectus where the organizing bank’s name appears.)

"Our whole focus is to be a relationship bank. So we will not enter relationships where we do not have the opportunity for non-interest income."

— Joseph Otting, Flagstar

Fee income for doing commercial credit is a high priority for the new management team, including its insistence that commercial borrowers will be expected to bring treasury management, interest-rate swaps and other needs to Flagstar.

"Our whole focus is to be a relationship bank," said Otting. "So we will not enter relationships where we do not have the opportunity for non-interest income."

The many steps Flagstar has taken, as well as the $1 billion-plus infusion, have improved its capital ratios and levels. An analyst asked if stock buybacks would be coming — a frequent question from analysts to many big banks these days. Otting resisted the idea, explaining that his intent is to use regained capital strength to create profitable loans — not to give the capital back.

Refocusing Real Estate Lending

One of the new team’s priorities was to get a handle on commercial real estate lending of all types. This was both to analyze what the bank already had, in order to clean things up, as well as to sell certain loans. The bank has overall shrunk its exposure to CRE and management plans to continue to in 2025.

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The bank has also been refining its multifamily lending portfolio through a combination of payoffs, sales and chargeoffs. And the bank has been working to build up its mortgage lending operations, a historical strength of the legacy Flagstar organization.

However, some aspects of its mortgage focus have been axed. Flagstar sold off its mortgage warehousing operation in the third quarter of 2024. Sales of other pieces of the mortgage business include its third-party origination business.

Some of the proceeds of the sales were used to pay down higher-cost wholesale borrowings, such as $5 billion in advances from the Federal Home Loan Bank System. In addition, escrow deposits associated with the sold mortgage servicing business have been rolling off, saving the company interest costs.

Otting said that the bank has had success holding onto CD accounts as they have repriced at lower levels, and that accounts that haven’t stayed on have been readily replaced by fresh deposits. The bank has been able to reduce brokered CD funding and anticipates doing more of that in 2025.

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Trimming Back Flagstar’s Own Real Estate

Flagstar cut approximately 700 positions in 2024 through layoffs and reduced further through the sale of operations like the mortgage warehouse. More reductions are coming. All told, the bank has already fallen to 6,000 from approximately 9,000.

Smith said that some of this will result from optimizing the bank’s own real estate.

First, the company has multiple operating centers which it intends to consolidate, moving the resulting entity to smaller facilities.

Second, the bank currently has 20 private client retail locations that it is looking into combining with other Flagstar locations. "We feel we can be more efficient and not lose anything from a customer service point of view," said Smith.

Branch Cutbacks:

Flagstar believes it can shrink its branch network and fold private banking offices into other locations without losing customer experience quality.

Third, the bank is looking at approximately 60 branches that are close to other locations that it believes it can merge without harming customer experience. Smith said most of the branches being looked at are leased, rather than owned. (At yearend the bank had 418 branches.)

These closures will happen in three phases, Smith said. One is already underway and two more will happen later in 2025.

On the other hand, as Flagstar focuses on increased C&I lending, the bank has been hiring commercial bankers, both lenders as well as backshop staff. Otting said the emphasis has been on hiring experienced bankers who not only know the C&I business but who also have business contacts that can help them ramp up new volume for Flagstar quickly.

"We have high expectations for quick production by hiring the seasoned people," said Otting. Flagstar is also looking to the private banker teams that came aboard in the Signature Bank deal to bolster the C&I push.

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If the C&I strategy seems familiar, Otting himself pointed out that when he and Mnuchin built OneWest Bank on the chassis of the failed IndyMac Bank, they took a similar path.

"We did not have any C&I portfolio," said Otting. "We added a substantial number of bankers to that company as well, and significantly grew in a short period of time in the C&I business."