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Capital One To Buy Local Banking Icon Chevy Chase

By Zachary A. Goldfarb and Binyamin Appelbaum
Washington Post Staff Writer
Thursday, December 4, 2008

Capital One, a leading credit card company, plans to announce today that it will buy Chevy Chase Bank, a landmark Washington financial firm with branches throughout the region, according to sources familiar with the matter.

The deal would be another sign of how the financial crisis is fueling consolidation in the banking industry. Capital One, which would pay $520 million in cash and stock, has received a $3.56 billion investment from the Treasury Department as part of the government's effort to stabilize the banking industry.

Sources said the deal should not have any immediate effect on Chevy Chase depositors or borrowers, and that no layoffs are currently planned. Chevy Chase, which faced massive losses on its portfolio of risky home loans made to borrowers during the housing bubble, was founded 39 years ago by B.F. Saul, a local businessman, and it is still controlled by his family.

Capital One, a McLean firm, would get Chevy Chase's 250 branches -- the wealthy region's largest branch network. Capital One has pursued a strategy in recent years of buying regional banks to get access to their deposits, which the company uses as a cheap source of funding for its credit card operations.

As part of this banking strategy, Capital One has acquired two banks in Louisiana and New York. Chevy Chase would bring with it $11 billion in deposits, potentially increasing Capital One's deposit base by about 10 percent.

"What's going on right now is that the strong banks are eating the weak banks," said Howard Shapiro, an analyst with Fox-Pitt Kelton. "Capital One is one of the alpha banks that will survive this financial crisis with enhanced market share and enhanced pricing power."

Sources said Capital One was attracted to Chevy Chase by the quality of its local banking operation and planned to wind down its national mortgage lending business.

The transaction is expected to close in the first three months of next year, sources said. The deal would be subject to approval by federal banking regulators. Capital One would recognize a loss of $1.75 billion largely on the value of risky mortgage loans it would acquire with Chevy Chase, the sources said.

The sale of Chevy Chase would mark the end of a local institution. The bank's brick branches, with white-columned porticos, dot the Washington suburbs, a landscape that Chevy Chase helped create through billions of dollars in lending to developers and homeowners.

Chevy Chase has weathered serious troubles in the past. In 1985, the Saul family agreed to inject $50 million into Chevy Chase to stabilize its finances, allowing the bank to survive the first savings-and-loan crisis.

In 1994, Chevy Chase paid $11 million to settle federal allegations that it had improperly avoided making mortgage loans in minority neighborhoods, a practice known as redlining. The bank denied wrongdoing.

But Chevy Chase proved unable to survive what has become a second savings-and-loan crisis. More than half a dozen of the country's largest savings-and-loans, including Washington Mutual and Countrywide Financial, have failed or have been forced to sell in the past year because of problems related to mortgage lending.

The savings-and-loans, including Chevy Chase, concentrated on a particular kind of risky mortgage loan called an option adjustable-rate mortgage, which allowed a borrower to defer part of the required monthly payment for up to several years. As those payments come due, many borrowers are defaulting, leaving Chevy Chase without the money it expected to collect. Its non-performing assets more than tripled to $490 million between September 2007 and June 2008, the most recent results the bank reported.

Chevy Chase reported a modest profit of $8 million for the second quarter of this year, but only because it projected that it would be able to collect about $18 million in deferred mortgage payments.

The bank tried to survive by shrinking. It closed mortgage lending offices around the country, shut 54 bank branches in Washington area Giant Food stores, and reduced its portfolio of mortgages and other assets.

But Chevy Chase still holds about $4 billion in option ARM loans.

Chevy Chase branches would be rechristened under the Capital One logo. In New York, where Capital One bought North Fork Bank, the company's branches reflect the personality of the neighborhood they are in. For instance, a branch in trendy Tribeca in lower Manhattan is a former art gallery, and the one in Union Square features pictures from the nearby farmers' market.

Chevy Chase customers would also get access to a variety of programs Capital One is introducing to local banking customers, such as a suite of credit cards and other financial products. Capital One has made a major advertising blitz in New York, decorating the transit system and flooding television stations with ads. Capital One has 50 million credit card customers and is best known for its mantra, "What's in your wallet?"

Saul is expected to remain with Capital One for a transition period, sources said. Chevy Chase would be part of a banking division of Capital One overseen by New York-based Lynn Pike, a former Bank of America and Wells Fargo executive who joined the firm to help run its new banking operation.

After spending more than $18 billion on banks in recent years, Capital One executives said earlier this year that they were not planning to move into new areas.

Sources said the courting of Chevy Chase began several weeks ago as it became clear that Chevy Chase was struggling. Citigroup also had expressed interest in Chevy Chase but was unable to pursue the deal after its stock price plummeted.

Capital One was spun out of Richmond-based Signet Bank in 1994 and quickly became one of the country's best known credit card companies. It pioneered a data-driven strategy for sending mass numbers of credit card offers with differing terms to potential customers.

Capital One's founding chief executive, Richard Fairbank, has said his goal is to build "one of the nation's great banks."

Chevy Chase and Capital One said they could not comment.

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