Updated from 1:57 p.m. ET with later market information and comments from an interview with FIG Partners analyst Christopher Marinac. NEW YORK ( TheStreet) -- Investors are applauding the merger of PacWest Bancorp ( PACW) and CapitalSource ( CSE). The two Los Angeles banks late on Monday announced a deal under which shareholders of Capital Source will receive $2.47 in cash and 0.2837 PacWest shares for each CapitalSource share they hold. Based on PacWest's closing share price of $32.32 on Friday, the deal values CapitalSource at $11.64 a share. The transaction is valued at $2.3 billion, making it the largest bank merger deal so far this year. It was no surprise to see CapitalSource's shares on Tuesday rise from their closing price of $9.83 on Monday at least to the value of the offering, but the shares were actually 21.5% late Tuesday afternoon to $11.94. PacWest's shares were also up Tuesday afternoon, by 7% to $34.75. PacWest is the smaller of the companies, with $6.7 billion in total assets for its main subsidiary Pacific Western Bank. CapitalSource's main subsidiary CapitalSource Bank has about $8.7 billion in total assets. But even though PacWest will only hold 45% of the combined company's shares, it will appoint eight members to the combined company's 13-member board of directors, with CapitalSource appointing five members. PacWest CEO Matt Wagner will be CEO of the combined company, while CapitalSource CEO James Pieczynski will continue to run "all current CapitalSource lending operations." PacWest's chairman John Eggemeyer will stay on as chairman of the combined company. Jefferies LLC acted as PacWest's adviser for the transaction, while JPMorgan Chase was the adviser for CapitalSource. While having a smaller balance sheet, PacWest has the larger retail network, with 75 branches, while CapitalSource only has 21 branches. PacWest has successfully completed several banking deals over recent years, most recently completing its acquisition of First California Financial Group of Westlake Village, Calif., with $2 billion in assets and 15 branches. The merger of PacWest and CapitalSource is subject to votes by both company's shareholders. As of March 31, mutual funds managed by Fidelity Investments held 9.8% of PacWest's shares and 10.4% of CapitalSource's shares. The deal is expected to be completed during the first quarter of 2014. Retaining Pieczynski to manage his CapitalSource's lending team after the merger is completed, could go a long way in retaining lending staff and building upon CapitalSource's national business lending platform.
PacWest will also have to transition CapitalSource's deposit base more toward a lower-priced checking account model. According to the companies' combined presentation announcing the merger, noninterest bearing deposits made up 45% of PacWest's deposits, as of June 30, while CapitalSource had no noninterest-bearing deposits. Meanwhile, relatively expensive jumbo time deposits made up just 5% of PacWest's deposits, but 49% of CapitalSource's deposits. Both banks had strong net interest margins during the second quarter, although PacWest's was higher at 5.33%. CapitalSource's net interest margin was 4.74%. Sterne Agee analyst Todd Hagerman rates PacWest a "buy," with a $30 price target, and in a Tuesday note to clients wrote "this transformational deal ranks PACW as the eighth largest bank in CA and creates a more balanced and formidable competitor. Upon close, the deal is expected to be meaningfully accretive to both tangible book and earnings-significant positives in our view." Hagerman added "Our preliminary analysis suggests the deal will be approximately 8% accretive to our current '14E of $2.40 (pro forma ~$2.55-$2.60) and ~10% accretive to our '14E tangible book ($16.07)." FIG Partners analyst Christopher Marinac says that the current regulatory evolution for the banking industry helped propel this deal. "CapitalSource has an industrial bank charter, which is an old relic in the regulatory framework," he says, adding that "the bank charter is important because there really is a new world order now where companies in the financial services industry have to be in the bank domain." Key non-bank financial servicing companies, including Goldman Sachs ( GS) and Morgan Stanley ( MS) were forced to convert to bank holding companies at the height of the credit crisis, and benefited from doing so, receiving government bailout funds, but paying the price of greatly enhanced regulatory and political scrutiny. "This is a very interesting deal because it is a company with an asset generating capacity, merging with a company with deposit base," Marinac says. "Even though PacWest is effectively running CapitalSource at the end of the day, it really is a marriage that works quite well." -- Written by Philip van Doorn in Jupiter, Fla. >Contact by Email. Follow @PhilipvanDoorn