Flagstar Financial, headquartered in Hicksville, New York, is taking significant steps to streamline its operations by consolidating its physical footprint. This move is a key component of the bank’s broader strategy to reduce operating expenses by $600 million by the end of 2024, as revealed by CFO Lee Smith during a recent earnings call.
The consolidation includes the closure of approximately 60 retail branches, the majority of which are leased properties. Additionally, around 20 private-client retail locations and a couple of bank-owned operating centers will be shuttered. These closures were announced alongside Flagstar’s report of a $160 million loss in the fourth quarter. Despite the current financial setback, CEO Joseph Otting expressed confidence in the bank’s trajectory, projecting a return to profitability by the fourth quarter of 2025. This positive outlook suggests a turning point for Flagstar as it aims to achieve consistent profitability.
Beyond physical locations, Flagstar is scrutinizing other areas for cost savings, including compensation, benefits, and vendor contracts, according to Smith. He indicated that many of these cost-reduction initiatives are already in motion or have been completed.
Regarding the consolidation of operating centers, Flagstar plans to relocate to smaller facilities, optimizing space and resources. The branches and private-client locations being closed are strategically selected due to their proximity to other Flagstar locations. Smith assured that these closures are designed to enhance efficiency without negatively impacting customer service. The bank believes it can maintain, or even improve, service levels through its remaining, optimized network.
The branch closures are planned in three phases, with the first phase already underway and the subsequent phases unfolding later in the year. Flagstar anticipates a seamless transition for customers, with no disruptions to their banking experience. While a bank spokesperson did not immediately provide further details on specific branch locations affected, the overall strategy underscores Flagstar’s commitment to adapting to the evolving banking landscape and optimizing its operational efficiency.
Otting characterized 2024 as a “transitional year” for Flagstar, emphasizing that the groundwork has been laid for profitable growth in the future. “The company is in a better position than it was 12 months ago,” Otting stated, highlighting the progress made in the past year.
This contrasts sharply with the situation a year prior, when Flagstar, then operating as New York Community Bank, reported a significant $252 million loss in Q4 2023. This loss was attributed to the bank’s exposure to commercial real estate, causing a sharp decline in the company’s share price. Further financial strain was revealed a week later with a $2.4 billion impairment charge and a subsequent change in CEO.
In a move to stabilize its financial position, Flagstar secured a $1.05 billion capital infusion in March. This investment was led by Liberty Strategic Capital, founded by former Treasury Secretary Steven Mnuchin, along with other investors. Following this investment, Joseph Otting, former head of the Office of the Comptroller of the Currency, assumed the role of CEO, tasked with steering the bank’s turnaround.
Since Otting’s appointment, Flagstar has actively pursued a comprehensive turnaround plan focused on diversifying its portfolio and restoring profitability. Key actions included the sale of $5 billion in mortgage warehouse loans to JPMorgan Chase and the divestiture of its residential mortgage servicing business to Mr. Cooper for $1.4 billion. These strategic sales are part of a broader effort to reshape Flagstar’s business and focus on core strengths.
Flagstar is actively working to reduce its exposure to commercial real estate (CRE) and manage проблемные кредиты. The bank has successfully reduced its total CRE balances by 9%, from $50.6 billion at the close of 2023 to $45.9 billion by the end of 2024. This reduction is also reflected in the bank’s CRE concentration ratio, which has decreased from 501% to 443% during the same period. These figures, detailed in a recent earnings presentation, demonstrate tangible progress in mitigating risk and rebalancing the bank’s portfolio.
Otting explained that historically, Flagstar had taken “very large positions” in certain sectors, particularly commercial real estate, which contributed to the current need for portfolio diversification.
Looking ahead to 2025, Flagstar’s strategy involves further reducing CRE exposure through loan payoffs and sales. Concurrently, the bank aims to expand its commercial and industrial (C&I) loan business and grow its residential mortgage portfolio to achieve a more balanced and diversified loan book. In the fourth quarter of 2024, Flagstar sold approximately $244 million of non-accrual CRE assets, including its largest office loan, and designated $266 million as available-for-sale, with the sale expected to be finalized in the current quarter.
Otting emphasized that achieving a better portfolio balance is “a combination of pulling those commitments down slightly while we’re growing the market to get better diversity to the portfolio.” This dual approach of reducing risk in CRE while expanding in other sectors is central to Flagstar’s strategy for sustainable profitability.
In October of last year, Flagstar announced job cuts as part of its cost-saving measures. The company’s headcount has decreased from approximately 9,000 to around 6,000. However, in a positive sign for future growth, Flagstar added over 50 bankers in the latter half of 2024 and plans to recruit another 100 in 2025. This strategic hiring indicates a forward-looking approach, investing in talent to support the bank’s growth objectives even amidst cost optimization efforts.
In conclusion, Flagstar Bank’s strategic branch closures and cost reduction initiatives are critical steps in its plan to restore profitability and achieve sustainable growth. While the bank faced significant financial headwinds and reported a loss in the recent quarter, the leadership team, under CEO Joseph Otting, is implementing a comprehensive turnaround strategy. This strategy encompasses streamlining operations, diversifying its loan portfolio, reducing CRE exposure, and investing in strategic growth areas. The projected return to profitability in Q4 2025 suggests that Flagstar’s efforts are gaining traction, positioning the bank for a stronger and more stable future in the competitive financial landscape.
