The race among several rivals to build a regional bank franchise on the West Coast just got more interesting.

PacWest Bancorp (PACW) announced Monday that it would acquire CapitalSource (CSE), a commercial finance company that has spent the last six years trying to become a full-fledged bank. Both are based in Los Angeles.

The $6.7 billion-asset PacWest said in a press release that it would pay $2.47 in cash and 0.2837 shares of its stock for each share of CapitalSource. The deal is valued at $2.3 billion, or 169% of CapitalSource's tangible book value at the end of the first quarter.

It is the biggest bank deal of the year, ahead of Banco de Credito e Inversiones' agreement in May to pay $882.8 million for City National Bank of Florida.

Realizing the value of deposits, CapitalSource began searching for a way into banking in 2007, when it was based in Chevy Chase, Md. It applied for an industrial loan charter and regulators eventually approved the request when CapitalSource agreed to buy $5.6 billion in deposits from the undercapitalized Fremont General in 2008, avoiding what at the time would have been the largest bank failure in roughly 15 years.

Since then, CapitalSource has been transitioning its assets to the ILC, which had $8.7 billion in assets at June 30 and 21 branches in southern and central California. Its efforts to convert its ILC charter to a full bank charter and to become a bank holding company have been drawn out.

CapitalSource wants to convert so that it can lower its capital ratios. ILCs are required to maintain a total risk-based capital ratio of 15%, while the bank would be able to drop that ratio down to at least 12%, the company told American Banker in June 2012. The company said in its first-quarter regulatory filing that it expected the approval this year.

CapitalSource in early 2011 hired JPMorgan Chase (JPM) to help it explore its strategic options, sources said at the time.

The deal announced Monday with PacWest, which is set to close in the first quarter, would create a company with $15.4 billion in assets and 96 branches throughout California. It would be the eighth-largest commercial bank headquartered in California, PacWest and CapitalSource said.

PacWest is one of several banks, many of which are backed by private-equity firms, attempting to build large community banks or regional banks. Others include: AmericanWest Bank in Spokane, Wash.; Grandpoint Capital in Los Angeles; Banc of California (BANC) in Los Angeles; Opus Bank in Irvine, Calif.; Sterling Financial (STSA) in Spokane, Wash.; and Umpqua Holdings in Portland, Ore.

Executives at PacWest and Capital Source said the deal is compelling because it pairs CapitalSource's lending strengths with PacWest's low-cost deposits.

"CapitalSource has built an enviable lending platform and growth engine," Matt Wagner, CEO of PacWest Bancorp, said in a press release. "PacWest has a valuable community banking franchise and a low-cost deposit base driven by our high percentage of noninterest bearing demand deposits. The combination of these two franchises will create a formidable company going forward, with a strong balance sheet and capital base, attractive margins and good earnings momentum."

Wagner would be CEO of the combined company, which would still be called PacWest.

James J. Pieczynski, the CEO of CapitalSource, would become president of the new CapitalSource division of PacWest's Pacific Western Bank. John Eggemeyer, the chairman of PacWest, would be chairman of the combined company. Tad Lowrey, the chairman and CEO of CapitalSource Bank, would become non-executive chairman of Pacific Western Bank.

"We have worked hard over the last five years to build a high-performing bank and we are proud of our success," Lowrey said.. "PacWest is the perfect partner to accelerate and expand our capacity to serve the credit needs of middle market and small businesses and to broaden the products and services we can offer to our deposit customers here in California."

John Delaney, who founded CapitalSource in 2000, stepped down as chairman late last year after winning election to the U.S. House. He ran as a Democrat in Maryland's 6th District.

JP Morgan Securities LLC acted as financial advisor to CapitalSource Inc. in the transaction and delivered a fairness opinion to the Board of Directors of CapitalSource. Wachtell, Lipton, Rosen & Katz served as legal counsel to CapitalSource. Jefferies LLC acted as lead financial advisor to PacWest Bancorp and delivered a fairness opinion to the Board of PacWest. Castle Creek Financial and Goldman Sachs & Co. also acted as financial advisors to PacWest. Sullivan & Cromwell LLP served as legal counsel to PacWest.

JPMorgan Securities was CapitalSource's financial advisor; Wachtell, Lipton, Rosen & Katz was the CapitalSource's legal counsel. Jefferies was lead financial advisor to PacWest, which also received advisory services from Castle Creek Financial and Goldman Sachs (GS). Sullivan & Cromwell LLP served as legal counsel to PacWest.

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