CapitalSource Buys Calif. Bank

By Thomas Heath

CapitalSource, a commercial lender based in Chevy Chase, has reached an agreement to buy most of a California community bank with 22 branches and $5.6 billion in deposits.

The deal to acquire the assets of Fremont Investment & Loan, based in Brea, Calif., would provide CapitalSource with a well of cash that can be used to make loans to customers. That's important because CapitalSource's business is based on borrowing money from the credit markets and then lending the funds to middle-market businesses at higher rates, giving CapitalSource a profit from the spread.

In recent months, turmoil in those markets has made it more expensive to borrow the money it wants to lend.

"Bank funding will improve our profitability and allow us to increase our lending in today's tight market," said CapitalSource chief executive John K. Delaney.

Fremont Investment & Loan is a 70-year-old community bank operating in central and southern California. It is a wholly-owned subsidiary of Fremont General Corp., a publicly traded company that has been battered by the real estate downturn.

In March, Fremont announced it had sold its residential real estate mortgage servicing unit. Last week, Fremont said it had received written notice from the New York Stock Exchange that the exchange reserved the right to take "accelerated action" against the company if the share price continued to remain below $1.

Fremont General shares closed at 45 cents on Friday.

Terms of the deal were not disclosed. But CapitalSource only acquired Fremont's assets, not its liabilities, according to Delaney. CapitalSource plans to rename the bank but has yet to disclose what it will call the brand.

The transaction is scheduled to close in the third quarter of this year.

CapitalSource lends money for corporate buyouts, real estate deals and other purposes. It clients include high-end shoe retailer Jimmy Choo and Steve Case's vacation company Exclusive Resorts. All told, its asset portfolio as of Dec. 31 was approximately $20.9 billion. It had approximately 560 employees at end of last year, located in offices across the United States and in Europe.

CapitalSource isn't the only local company that is diversifying into banking.

McLean-based Capital One Financial, the largest independent issuer of credit cards in the U.S., bought Hibernia National Bank of New Orleans for $4.9 billion in November 2005. In December 2006, it bought North Fork Bank for $13.2 billion.

CapitalSource has been trying to get into banking for about a year. Its proposed acquisition of Nebraska-based TierOne Bank, negotiated in the days of easy credit last spring, was terminated by the CapitalSource board last month due to ongoing problems in the credit market that led to a reduction in TierOne's stock price.

CapitalSource shares are owned by prominent institutions, including Farallon Capital, a San Francisco-based hedge fund run by Thomas F. Steyer. Another investor is Madison Dearborn Partners, a large private equity fund based in Chicago

Shares of CapitalSource closed at $10.48 Friday, down more than 50 percent from its 52-week high of $27.40.

By Dan Beyers  |  April 14, 2008; 8:03 AM ET  | Category:  Finance
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