In rare move, Flagstar seeks to dissolve its holding company

Bing Guan/Bloomberg

Flagstar Bank is seeking approval to dissolve its holding company, a rare maneuver but one that Flagstar's executives argue would cut costs and simplify its regulatory structure.

If the plan is approved by shareholders and regulators, Flagstar Financial, the holding company, will be folded into Flagstar Bank, leaving the bank as the surviving entity. The proposed change, as described to American Banker by Flagstar Chairman and CEO Joseph Otting, would erase about $15 million in annual costs and remove the Federal Reserve from regulatory oversight, leaving the Office of the Comptroller of the Currency as Flagstar's primary regulator.

Flagstar publicly disclosed its reorganization plans in a press release late Thursday afternoon, one day before the $97.6 billion-asset company, which is in the midst of an ambitious turnaround effort after nearly failing in early 2024, is scheduled to report second-quarter earnings. 

Otting, who led the OCC during the first Trump administration, told American Banker that the holding-company dissolution strategy is "clearly a cost-saving mechanism" for Flagstar as well as a way to "streamline the regulatory process" and eliminate certain corporate redundancies.

The bank intends to file a proxy statement with the Securities and Exchange Commission next month and plans to host a shareholder meeting in October. Pending the receipt of necessary approvals, the holding company dissolution is expected to be finalized by the end of the year, the bank said.

The switch does not involve a charter conversion, as the bank will remain a national bank after the dissolution.

Otting said the proposed change, which has already been approved by Flagstar's board of directors, may pique curiosity from other regional banks that operate under holding companies.

"People might say, 'Wow, here's the former comptroller of the currency eliminating the holding company. That's a big statement,'" Otting said. "How many other banks will take this approach?"

The proposed reorganization is the latest in a series of changes at Flagstar, which was known as New York Community Bancorp until last fall, when the Long Island-based bank rebranded. 

The name change came six months after Otting and other investors, including former Treasury Secretary Steven Mnuchin, rescued New York Community with a $1 billion investment. The company had been teetering on the brink of collapse due to increasing stress in its commercial real estate portfolio, including its prized and outsized multifamily lending book, and its rapid, acquisition-driven growth.

Flagstar — which took its name from one of its two recent acquisitions, the mortgage warehouse giant Flagstar Bancorp in Troy, Michigan — hasn't been profitable since the third quarter of 2023. As part of the turnaround push, Otting and the management team he recruited are reducing commercial real estate loans, including multifamily credits, and adding commercial-and-industrial loans.

They are also reducing expenses. The bank aims to cut $600 million this year through a mix of actions such as branch closures, back-office consolidations and the outsourcing of certain back-office functions.

In April, Otting reiterated that he expects Flagstar to return to profitability by year-end. For the second quarter, analysts polled by S&P Capital IQ are predicting a loss of $0.14 per share.

A bank deciding to ditch its holding company isn't a new concept, but it certainly isn't common. 

In 2017, Zions Bancorp., a bank holding company, sought and ultimately received permission to merge into its national bank subsidiary, Zions Bank. A holding company was no longer needed following Zions' decision a few years prior to combine seven banking charters into one, Zions Chairman and CEO Harris Simmons said at the time. Plus, without a holding company, Zions was able to end its designation as systemically important, a label it gained amid post-financial crisis regulations.
Today, the OCC is Zions' primary regulator.

Also in 2017, Bank of the Ozarks in Little Rock, Arkansas, said it would merge its holding company into its bank for cost-cutting purposes. The regional bank, which renamed itself Bank OZK in 2018 after expanding beyond the Ozarks, is no longer regulated by the Fed.

In 2021, the holding company Cadence Bancorp., based in Houston, agreed to be merged into BancorpSouth Bank in Tupelo, Mississippi, with BancorpSouth as the surviving entity, and was later renamed Cadence Bank. Like Zions and Bank OZK, its main regulator is the OCC.

Another somewhat related example is that of USAA Federal Savings Bank, which simplified its regulatory structure last year by merging USAA Savings Bank into itself. USAA Savings Bank's primary regulator was the Federal Deposit Insurance Corp. USAA Federal Savings Bank is overseen by the OCC.

H. Rodgin Cohen, a bank regulation attorney and senior chair at Sullivan & Cromwell who helped with Zions' consolidation, said bank holding companies are necessary for banks that are engaged in non-banking activities. Most banks with more than $10 billion of assets have them, he said.

"But if you don't want to engage in non-banking activities, if that's not your business plan, the rationale is a lot less," Cohen told American Banker. 

Flagstar Financial, the holding company, "doesn't have very much in it," and the bank isn't interested in doing non-banking business, said Bao Nguyen, Flagstar's general counsel.

In addition to the financial costs, the regulatory burden of operating a holding company can be a strain, requiring more effort by employees and involving twice the amount of paperwork, Nguyen said.

"This is, I would say, the next step in the journey we started last April with a new management team and a new board," Nguyen said. "We're focused on recalibrating our regulatory relationships. To be simple in our structure, to have less duplication and less regulation, that's all constructive for us."

Read more about Flagstar here: https://www.americanbanker.com/organization/flagstar-financial

There are no people- or managerial-related changes that will result from the proposed change, Otting said. If approved as planned, Flagstar's stock will continue to trade under the "FLG" ticker symbol.

If the holding company's dissolution is approved, it would be the company's second regulatory maneuver in less than four years.

New York Community went through a charter conversion in 2022 as part of its strategy to speed up its delayed acquisition of Flagstar Bancorp. Under the original structure of the deal, New York Community needed approval from three agencies: the Fed, the FDIC and the New York State Department of Financial Services.

A year after the Flagstar acquisition was announced, only the state Department of Financial Services had given the thumbs-up. In order to try to speed up the process, Flagstar Bank converted into a national banking association, and New York Community Bank merged into it. 

The revamped structure meant the companies needed approval from the Fed and the OCC, not the FDIC or the state Department of Financial Services, as originally planned.

Asked if he has any concerns about the perception of a former comptroller shifting the primary regulatory responsibility for the bank he's running to the agency he once ran, Otting said he had none.

"We're just following a well-documented process to eliminate the holding company," he said. "It's a legit option to narrow supervision."