Flagstar to shed holding company, citing $15M in annual savings

New York-based Flagstar Financial Inc. hopes to save money by taking the unusual step of eliminating its holding company.

The company plans to merge its holding company into its subsidiary, Flagstar Bank NA, a move that will remove it from the Federal Reserve's oversight. The bank will still be supervised by the Office of the Comptroller of the Currency (OCC). The company anticipates the change will result in $15 million in annual cost savings by reducing compliance costs and no longer being subject to the Fed's stress tests.

Flagstar, which has been working on a turnaround, is looking for savings anywhere it can, analysts said.

"They're looking at all kinds of operating costs, and I think they're finding that there's more to do," said Christopher Marinac, director of research at Janney Montgomery Scott LLC.

The Fed's stress tests are costly because they require banks to hire consultants and other resources.

"It's going to need less of the consultants' cost that goes into prepping the official stress test because I think there's a lot of expenses that the bigger banks have to incur to meet the standards every year," Marinac said.

Flagstar did not respond to a request for comment but addressed the move during its earnings call July 25.

This will mean "no external vendor spend, no need for internal staffing, all of those things," said Bao Nguyen, Flagstar's general counsel and chief of staff.

Analysts expect Flagstar will continue to conduct internal stress tests, a common practice for banks of its size. The bank had $92.24 billion in assets as of June 30.

Good for some banks but not others

While suitable for Flagstar and some other banks, the move to eliminate a holding company is not for everyone, analysts and advisers said. Some bank holding companies have a range of different businesses among their subsidiaries, which makes the process unsuitable for them.

Flagstar President and CEO Joseph Otting is familiar with the process from his time as head of the OCC from November 2017 to May 2020.

"This is a similar action that one of our regional bank peers undertook in 2018 when I was the comptroller of the currency," Otting said on the earnings call. "This is the right move for our company. This action is designed to primarily enhance our corporate, legal and regulatory structure."

Otting's experience at the OCC has influenced his decisions at Flagstar, according to Peter Winter, a research analyst at D.A. Davidson & Co. Strengthening the bank's regulatory relationships has been a focus for Otting since he became CEO, and he is "very comfortable with the OCC" due to his past, Winter noted.

Despite similar actions taken by other banks such as Zions Bancorp. NA, Bank OZK and Cadence Bank, advisers do not anticipate this to become a trend.

"It happens from time to time," said John Gorman, a partner at Luse Gorman PC who advises financial institutions on M&A and regulation. "Some companies make the determination that, for reasons probably particularly peculiar to them, there are more advantages than disadvantages to not having a holding company."

Banks need holding companies to engage in specific activities like broker/dealer and merchant banking. But they "typically get a benefit from those affiliate businesses that offsets the cost of having a holding company," said Matthew Bisanz, a bank regulatory partner at law firm Mayer Brown.

There will be no change to the bank's activities, Flagstar's Nguyen said during the earnings call.

"Given our structure and given that our activities are all at the bank, there is really no downside for us here," Nguyen said. "There are no changes in our activities. We don't have any plans on engaging in nonbanking activities, which is really the key reason for having a holding company."