Capital One to buy Chevy Chase Bank for $520 mln

* Deal will expand Cap One’s Washington, Baltimore presence

* Citigroup, JPMorgan also bid for Chevy Chase -- sources

* Capital One shares rise 1.3 percent

(Adds comment by Merrill Lynch, savings and costs from the deal, stock movement)

By Juan Lagorio

NEW YORK (Reuters) - Capital One Financial Corp COF.N, a credit card issuer and bank, agreed to buy Chevy Chase Bank for $520 million, expanding its retail deposit base, the companies said on Thursday.

The cash and stock deal will allow Capital One to expand its reach in the affluent suburbs of Washington, while somewhat reducing its reliance on credit cards, where growth is slowing and credit losses are mounting.

“The hidden message in there is that they need capital,” said Robert Lutts, president and chief investment officer of Cabot Money Management in Salem, Massachusetts. “Capital One is in the wrong place right now. If there is one part of the financial business where you don’t want to be in the next 12 months, I think it’s credit cards.”

U.S. banks are broadly looking to expand their branch networks to boost their reliance on stable funding from deposits as borrowing in debt markets becomes increasingly expensive.

Citigroup Inc C.N and JPMorgan Chase & Co JPM.N were also bidding for closely held Chevy Chase Bank, according to sources familiar with the matter.

McLean, Virginia-based Capital One will buy Chevy Chase Bank for $445 million in cash and 2.56 million shares, valued at $75 million based on Tuesday’s closing price.

Capital One said it would take a net writedown of $1.75 billion for potential losses in Chevy Chase Bank’s loan portfolio, which Merrill Lynch said could be “light, especially given the bank’s exposure to adjustable rate mortgages.”

Assuming that writedown is equal to about $1.1 billion after taxes, and adding the $520 million of cash and stock, as well as $225 million of restructuring costs, Capital One is paying about $1.85 billion for $11.6 billion of deposits, or about 16 cents for every dollar of deposits. In good times, banks often pay more than 20 cents.

So Capital One is paying less than it would have likely paid in 2006, but evaluating whether 16 cents is reasonable in this environment is difficult given the scarcity of comparable deals and the uncertain economic outlook, analysts said.

Tough times spurred Capital One to forecast last month that defaults on credit cards would rise. It also set aside more money for bad loans in the third quarter, contributing to a 53 percent plunge in earnings from continuing operations.


Capital One once specialized in credit cards, but expanded into branch banking in recent years after acquiring Louisiana’s Hibernia Corp and New York’s North Fork Bancorp Inc, which ensured the bank was less dependent on borrowing in secured and unsecured bond markets and could rely more on deposit funding.

But the deals came with problems, too. Last year, Capital One shut down its Greenpoint Mortgage unit, an “Alternative A” lender acquired as part of the North Fork purchase, after huge losses.

Bethesda, Maryland-based Chevy Chase Bank expands Capital One’s presence in the Washington and Baltimore areas with more than $15.5 billion in assets and 1 million clients.

The combined company will have deposits of more than $110 billion -- eighth-largest in the United States -- as well as a managed loan portfolio of more than $159 billion, and 983 branches.

Capital One estimated the transaction will add to operating earnings per share in 2009 and to net earnings per share in 2010. The deal is subject to regulatory approval and is expected to close in the first quarter of 2009.

Credit Suisse Securities (USA) LLC and Centerview Partners LLC advised Capital One, while Citigroup Global Markets Inc advised Chevy Chase. Capital One shares were up 41 cents or 1.3 percent at $32.00 on Thursday afternoon on the New York Stock Exchange.