Reuters
May 17, 2008 - 12:00 a.m. EST

BANGALORE, May 16 (Reuters) - Flagstar Bancorp Inc (FBC.N: Quote, Profile, Research), one of the largest savings and loans based in the U.S. Midwest, said it will raise $100 million by selling equity stakes at a discount, in an effort to bolster its capital base.

Flagstar shares fell as much as 22 percent to $4.65, before recouping some losses to trade down $1.06 at $4.89 Friday afternoon on the New York Stock Exchange.

The company said it will sell about 11.4 million common shares to seven institutional investors at $4.25 each -- a discount of about 29 percent to the stock's Thursday close.

The sale comes three months after Flagstar suspended its common stock dividend, citing a need to conserve cash in a deteriorating residential real estate market.

Last month, the Troy, Michigan-based thrift posted a $10.6 million first-quarter loss. It ended Thursday with a market value of about $359 million, according to Reuters data.

"It's (the capital raise) diluting existing shareholders and existing book value to the tune of 18 percent," said Terry McEvoy, an analyst at Oppenheimer & Co. "That's putting pressure on the stock."

The company is issuing 23.3 million shares, increasing its share count by more than a third to 84.1 million, McEvoy said.

Flagstar joins a growing number of U.S. lenders that are raising capital as the nation's housing slump and slow economic growth cause loan losses to mount.

The company said it has $15.9 billion of assets as of March 31, and operated 167 banking offices in Michigan, Indiana and Georgia.

In addition to the common stock, the thrift said it will sell these investors about $48 million of preferred stock convertible into common stock at $4.25 per share.

Flagstar said it will also sell a total of 635,000 shares to Chairman Thomas Hammond and Chief Executive Mark Hammond at $5.88 each.

"Until such time as the capital markets normalize and the residential real estate market shows signs of improvement, we plan to operate at capital levels that are higher than our historic norms," Mark Hammond said in a statement.

Oppenheimer's McEvoy said it is "prudent" to raise capital, given market uncertainty.

He added that management was "very upfront" last month on a conference call discussing the quarterly loss that a capital raising was possible. Flagstar said it will seek shareholder approval for the convertible offering. It said holders of 45 percent of its common stock have already agreed to the offering.

Lehman Brothers Inc arranged the offerings. (Editing by Jarshad Kakkrakandy, Amitha Rajan)