After three consecutive years of losses directly related to residential real estate, Flagstar Bancorp Inc. of Troy, Mich., is looking to diversify its portfolio in 2010.

Joseph P. Campanelli, Flagstar's president and chief executive, said it plans to broaden its revenue stream with ventures outside its national mortgage banking model. It aims to expand in small-business banking, cash management services, middle-market commercial lending and government banking, he said.

"As part of our plan for 2010, Flagstar has begun the process to rebalance our revenue streams and reduce our reliance on the mortgage business," Campanelli said Tuesday during a conference call with analysts and investors. "Make no mistake, we are absolutely committed to maintaining our position as a top national mortgage originator."

Analysts said diversification appears to be smart for the $14 billion-asset Flagstar. It mitigates the risk inherent in the volatility of the mortgage business, and investors regard a well-diversified company as more valuable.

"Expanding beyond mortgages is absolutely the right thing to do. My only question is why the previous management hadn't done that earlier?" said Joe Garrett, a principal at Garrett, Watts & Co., a San Francisco consulting firm. "If there is any lesson to be learned in all of this mess, it is that having more granularities in your risk is a good thing."

Flagstar's current condition reflects its lack of diversity. At the end of 2009 it had $1.3 billion of nonperforming assets, up 62% from a year earlier and 9.24% of total assets. Half of the nonperforming assets are mortgages.

Campanelli said in an interview that the company is capable of simultaneously working through those problems and entering new business lines.

"I think we can improve asset quality while we look for ways to do things better," he said.

Campanelli, who joined Flagstar Oct. 1, has brought a handful of former Sovereign Bancorp Inc. employees along with him to try to match some of that company's growth. Campanelli noted in the call that Sovereign went from a "traditional regional thrift to an $80 billion full-service bank."

In the earlier part of last decade Campanelli headed Sovereign's New England division, overseeing a 268-branch integration. From 2006 to late 2008 he was the CEO at Sovereign, which is now part of Banco Santander.

Analysts had praise for Campanelli's efforts to expand Sovereign in New England and say he is a good fit for Flagstar as it tries to diversify.

Campanelli said in an interview that one of the ways he intends to diversify is by better strategic use of Flagstar's 162 branches in Michigan, Indiana and Georgia. Those branches, he said, have largely been used for deposit taking.

"The brick and mortar is there. There are approximately 500,000 small businesses located near our branches," he said. As the economy improves, "those companies are going to need access to working capital."

Late Monday, Flagstar reported a $71.6 million fourth-quarter loss, 67% smaller than the year-earlier loss.

A $95 million provision for loan losses drove the quarterly results. Still, the provision was 46% less than the provision taken a year earlier.

The company lost $496.6 million for the year, up 80% from a year earlier.

Despite the prolonged losses, Flagstar's thrift unit was well-capitalized at the end of the fourth quarter, with a total risk-based capital ratio of 11.68%.

Though the company would not say predict when it might return to profitability, analysts project it will be back in the black in the fourth quarter.

Garrett said building a diversified bank could also be a boon to MatlinPatterson Global Advisors LLC, a New York private-equity firm that has pumped $650 million in capital into Flagstar in the past year. That's because more traditional banks often trade at higher levels than mortgage-heavy thrifts.

"Even in better days, companies like IndyMac and Countrywide were trading at six to eight times earnings, while the rest of the industry was closer to 12 to 14," Garrett said. "The market doesn't like all that volatility."

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