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Fremont to Sell Bank Branches to CapitalSource

Fremont Generalsaid Monday it was selling its bank branches and deposits to CapitalSource, several weeks after U.S. regulators ordered the struggling California lender to raise capital or put itself up for sale.

The sale will rescue depositors that had some $5.6 billion of assets at Fremont Investment & Loan, a thrift that the Federal Deposit Insurance Corp (FDIC) called "undercapitalized" late last month.

CapitalSource will add 22 branches and secure cheaper and more dependable funding for its commercial finance activities. The company's

shares rose $1.55, or 14.8 percent, to $12.03 in midday trading.

Fremont , based in Brea, California, was one of the 10 largest U.S. subprime mortgage lenders until the FDIC ordered it in March 2007 to stop making risky home loans.

In March 2008, Fremont said it had received default notices related to mortgages it had sold, and had hired Credit Suisse and Sandler O'Neill & Partners to explore options. By late March, the FDIC told Fremont that it must raise capital or sell assets, an unusual move for government regulators.

CapitalSource will pay a 2 percent premium for deposits and a 3 percent discount for commercial real estate loans. Other assets will be sold at net book value.

The company will also pay another $58 million at closing and lend up to $200 million to cover any funding shortfalls. It is not buying Fremont's loan servicing operations or residential mortgage assets.

Finance companies such as CapitalSource that fund themselves in the bond markets have found their borrowing costs rising, in some cases to prohibitively high levels, amid the credit crunch.

CapitalSource had been looking to buy a bank or thrift for some time. Last year, it agreed to buy Nebraska savings bank TierOne for about $652 million. That deal fell apart in March.

In addition to the Fremont deposits and bank branches, CapitalSource is taking on $3 billion of cash and short-term investments and a commercial real estate loan interest with $2.7 billion principal outstanding.