Flagstar projects profitability by Q4 as turnaround continues
Allissa Kline
5 min read
Flagstar Financial's stock price rose sharply Thursday after the Long Island-based company reported better-than-expected quarterly results and said it could return to profitability this year.
Shares of the company formerly known as New York Community Bancorp jumped 15% by the close of trading as investors absorbed a long list of positives that executives laid out during the fourth-quarter earnings call. Among Flagstar's achievements: selling off noncore assets like mortgage warehouse and servicing, improving its capital levels and reducing its exposure to commercial real estate. A high CRE concentration put Flagstar in a perilous situation last year.
Multifamily loans were down 9% year over year, while CRE credits, which include office loans, were down 17%, the bank said. During the quarter, the company sold its largest office loan.
The $100.2 billion-asset Flagstar — which is in a multiyear rebuilding phase after a near-collapse early last year — is well on its way to recovery, Chairman and CEO Joseph Otting assured analysts on the call.
While near-term pain remains, Flagstar expects to turn a profit in the fourth quarter of this year, he said.
Having achieved its objectives for 2024, such as understanding CRE credit issues and regulatory compliance gaps, "the company is in a better position than it was 12 months ago and, strategically, for a long time," Otting said. Getting back to positive earnings in the fourth quarter "will ultimately mark the company's turning point on its return to consistent profitability," he said.
The company, which rebranded as Flagstar in October, has been in an unsettled state for more than a year. Its troubles came to a head in late January 2024 when it reported a sizable quarterly loss, signaled trouble in itscommercial real estate loan portfolio and slashed its dividend,sparking a 37% single-day decline in its share price. The sell-off continued for weeks as investors remained wary about the company's loan books and the potential for a deposit run.
In March 2024, asurprise $1 billion investment led by former Treasury Secretary Steven Mnuchin helped ease the turmoil and bolster the company's capital levels. Otting, who alongside Mnuchin previously turned around the failed IndyMac Bank and sold it for a large profit, joined the company as CEO in April and began a multimonth revamp of the management team.
In May, the company laid out a path to improved profitability, but Otting and other executives warned that 2024 would be a "transition year."
For the three months ending Dec. 31, Flagstar reported a net loss of $160 million, or 41 cents per share. Analysts polled by S&P Capital IQ had estimated a net loss of 52 cents per share.
While it was the fourth consecutive quarter of losses at Flagstar, the losses were narrower than in the previous quarters. Excluding one-time items, the company's quarterly net loss was 34 cents.
Net interest income tumbled to $461 million, down 38% year over year, due to lower average loan balances and higher levels of both interest-bearing deposits and average borrowed funds, the company said.
Fee income of $164 million was up 29% from the year-ago period and included an $89 million net gain on the sale of Flagstar's mortgage servicing and third-party origination business to Mr. Cooper. That $1.3 billion cash deal closed on Nov. 1, 2024.
Noninterest expenses totaling $718 million fell by 77% compared with the fourth quarter of 2023, when the bank's results included a goodwill impairment charge and a special Federal Deposit Insurance Corp. fee.
Expense reduction will continue to be a focal point for Flagstar. The company is planning to reduce its spending by $600 million this year, with several cost-cutting initiatives already completed or underway, said Lee Smith, who was appointed chief financial officer in late December. Smith replaced Craig Gifford, who joined the company in April and will remain at the bank through March 31.
Full-year 2024 expenses were $2.8 billion. In addition to trimming compensation and benefits costs, the company expects to cut its data spending and consolidate real estate, Smith said.
Flagstar will consolidate "a couple of operating centers" and move into smaller facilities, while also trimming about 20 of its private bank offices and closing about 60 retail branches, Smith said. The branch shutdowns will happen in three phases, with the first phase already in progress, he said.
Flagstar is also making progress on building up its capital. For the quarter, its common equity Tier 1 ratio came in at 11.86%. That's within the company's three-year target of 11% to 12%.
The ratio was 9.05% in the year-ago quarter.
Excess capital will be used to build up the bank's balance sheet and support its goal of becoming a successful regional bank, Otting said. Commercial and industrial loans will be key, he said.
"America needs a strong regional bank," said Otting, who served as comptroller of the currency during the first Trump administration. "We see that in the C&I business … the other regional banks are kind of tapped out. We're a new entrant into that space."
Flagstar plans to hire 100 commercial bankers in 2025. Since June, it has hired 54, with a focus on experienced, mid-career bankers from other regional banks.
Analysts' reactions to the company's earnings report were largely positive. Jared Shaw, an analyst at Barclays, said in a research note that while Flagstar's guidance calls for lower net interest income in 2025 and 2026, that trend will be "more than offset by stronger fee income and lower expenses."
"While the revenue turnaround is slower, progress toward becoming a more profitable institution with lower credit risk and higher capital is on the right track," Shaw wrote.
