(Reuters) - U.S. small-business lender CIT Group Inc said it would buy California bank OneWest Bank NA for $3.4 billion in cash and stock, a deal that will give CIT a more reliable source of funding.
Shareholders of IMB Holdco LLC, OneWest's parent company that CIT is acquiring, will get $2 billion in cash and the rest through the issuance of 31.3 million CIT shares, assuming a stock price of $44.33, CIT said in a statement.
"The selling shareholders very much wanted to get stock. They view the stock as undervalued and that there is lot of appreciation in it," Chief Executive John Thain said in an interview.
The lender also said it would buy back up to $500 million in common stock, sending its shares up as much as 14 percent in early trading.
CIT's stock was up 11 percent at $48.69 by mid-day.
OneWest was created in March 2009 by investors, including Paulson & Co, JC Flowers & Co, and MSD Capital, a private investment firm that manages the capital of Michael Dell and his family.
The firm bought many assets of IndyMac, a mortgage lender that went bust in 2008 in one of the largest banking failures in the country. The privately owned bank operates 73 retail branches in Southern California.
Before the financial crisis, CIT relied heavily on bond market borrowing to fund its assets, but lost access to that funding during the crisis. It received $2.3 billion of bailout money, but still filed for bankruptcy in November 2009.
John Thain, who headed Merrill Lynch before it was sold to Bank of America Corp at the height of the financial crisis, was appointed CEO in February 2010 to get CIT back on track and his efforts seem to be paying off.
Since emerging from bankruptcy in December 2009, CIT has increased its reliance on deposit funding and has wiped out more than $30 billion of high-cost debt, reducing its funding costs.
Up to Monday's close, CIT's stock had jumped 42 percent since Thain's appointment.
The combined company will have assets of $67 billion after the deal closes. Institutions with assets more than $50 billion are classified as systemically important financial institution (SIFI) and subjected to stricter regulatory requirements.
"We've been planning for that for the last several years and we believe that we're well positioned to satisfy all of the criteria of being a SIFI institution," Thain said on a post-earnings conference call.
Thain said the regulatory approval for the deal will take about nine months and that there is no significant likelihood of another bank deal. He also expects more than half of CIT's assets to be funded by deposits, once the transaction is closed.
The purchase of OneWest boosts CIT's lending to middle market companies, which refers to businesses generating operating earnings of about $50 million a year.
CIT also posted a better-than-expected profit for the second quarter, helped by strong gains at its aerospace and railcar leasing business.
Financing and leasing assets at its aerospace business rose 13 percent to $10.54 billion during the quarter, while overall railcar leasing assets jumped about 33 percent to $5.72 billion.
J.P. Morgan was CIT's financial adviser on the deal, while Goldman Sachs, Bank of America Merrill Lynch and Cleary, Gottlieb, Steen & Hamilton LLP were advising IMB Holdco.
(Editing by Rodney Joyce and Saumyadeb Chakrabarty)