A casualty of the subprime mortgage meltdown has proven to be a lifeline for CapitalSource Inc.
In 2008, the Maryland-based bank operator took control of $5 billion in deposits from failed Fremont General Corp. of Brea.
Fremont once was one of the country’s largest lenders to homebuyers with imperfect credit before many of those loans went bad.
The company came under fire in early 2008 after regulators told Fremont to raise money or sell off its banking arm.
What’s left of Fremont, now Fremont Reorganizing Corp., is working its way through bankruptcy.
In the summer of 2008, CapitalSource paid about $58 million for the deposits and 22 branches of Fremont’s banking arm.
It used the operation to start Los Angeles-based CapitalSource Bank, where deposits now serve as the main source of funding for loans to businesses.
CapitalSource saw Fremont’s deposits and branches as a more stable way to bankroll lending. Before, CapitalSource would make loans, bundle them together and then sell them as bonds to Wall Street investors.
But the market for loans sold as bonds largely dried up after the mortgage crash that started in 2007 and last year’s larger economic meltdown.
Deposits now fund all of CapitalSource’s new loans, according to Tad Lowery, chief executive of CapitalSource Bank.
Newer loans funded by deposits make up about a third of CapitalSource’s $6.2 billion in loans as of June 30, he said.
Without the deposits, CapitalSource likely would have struggled like competitors that relied on bundling and selling loans for funding.
“We’d been wanting to have a traditional banking model for a couple of years,” Lowery said.
$4.5 Billion
CapitalSource had $4.5 billion in deposits as of June 30. Depositors mostly are individuals with certificates of deposit and money market and savings accounts.
The deposits are used for commercial real estate loans and lines of credit for midsize businesses in healthcare, media, technology and other industries.
CapitalSource also works with private equity investors to finance deals.
The bank employs about 120 people in Brea in a 42,000-square-foot building it recently leased.
In the past year it’s added about 30 people in Brea, mostly in technology, human resources and in its compliance and legal divisions.
None of Fremont’s lending workers were retained. They once ran into the hundreds at Fremont’s former headquarters, which was comprised of 105,000 square feet of office space in Brea.
CapitalSource eventually wants to buy other banks, according to Lowery. First, it’ll have to get a change to its charter approved.
It’s now a California industrial bank, a charter inherited from Fremont that only allows it to have branches in the state. CapitalSource is looking to switch to a federal charter.
Changing the charter could pave the way to becoming more of a traditional commercial bank, like Bank of America Corp. or Wells Fargo & Co.
That would allow CapitalSource to offer more services to depositors, Lowery said.
With a tough lending market, Capital-Source hasn’t been as active as it would like to as it struggles to find credit-worthy borrowers, Lowery said.
Many businesses have pulled back from borrowing amid the slowdown or become risky for banks because of struggling sales and profits.
“It’s a waiting game of staying power,” he said.
CapitalSource also is trying to become a Small Business Administration lender under the government financing program.
Many of CapitalSource’s customers are in OC. Lowery declined to name any.
Fremont was based in Santa Monica before relocating to Brea in 2007 when banking executive Stephen Gordon took over in a bid to save the company.
In 2006, Gordon sold Irvine-based Com-mercial Capital Bancorp Inc. to Washington Mutual Inc.
Gordon tried to revive Fremont as a community bank but couldn’t turn around the company before regulators lowered the boom.
