CapitalSource Buying Fremont General Branches

CHEVY CHASE, Md. (AP) — CapitalSource is acquiring the retail banking operations of Fremont General, a move that will shore up and diversify its portfolio as credit markets tighten, the commercial lender said Monday.

The deal gives CapitalSource access to the distressed California bank's 22 branches and $5.6 billion in deposits. CapitalSource will pay a 2 percent premium on the bank's deposits, receive a discount on retained interest in certain real estate loans the bank holds and pay an additional $58 million to Fremont for the branches.

Shares of Chevy Chase, Md.-based CapitalSource Inc. soared $1.53, or 14.6 percent, to $12.01 in late morning trading. Fremont General Corp. shares were up 8 cents, of 17.8 percent, to 53 cents.

CapitalSource has tried before to buy a bank, but its plan to acquire TierOne Bank, negotiated last May, fell apart in March due to the turmoil in credit markets and regulatory delays. Falling stock prices trimmed the value from $652 million when it was announced to $322 million when TierOne's parent company backed out of the deal.

CapitalSource said in a news release Monday that the Fremont deal will strengthen its liquidity, allowing it to continue to make loans for mid-market business. The company plans to sell $2.5 billion of CapitalSource loans to the new bank.

''We have long sought deposit funding as a way to further diversify and strengthen our funding platform,'' CapitalSource Chief Financial Officer Thomas Fink said in a statement.

CapitalSource will only be taking over the bank branches, not acquiring the whole company or any liabilities associated with Fremont General, which is based in Santa Monica, Calif.

In March, regulators gave Fremont 60 days to raise new capital or sell its banking subsidiary because the bank was considered ''undercapitalized.'' Fremont focused on mortgage lending until early last year, when regulators forced it to cease originating mortgages, saying it did not have proper risk management oversight. Fremont later sold its mortgage assets.

The company said last month that it received default notices on $3.15 billion in subprime mortgages it sold to investors a year ago.

The deal is scheduled to close in the third quarter.