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Capital One Awoke To Its Dream Deal

Long out of reach, Chevy Chase is being bought by Capital One for $520 million in cash and stock.
Long out of reach, Chevy Chase is being bought by Capital One for $520 million in cash and stock. (By Bill O'leary -- The Washington Post)
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By Zachary A. Goldfarb and Michael S. Rosenwald
Washington Post Staff Writers
Friday, December 5, 2008

The vision of buying Chevy Chase Bank came to Richard Fairbank six weeks ago in a dream.

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For years, the chief executive of Capital One had looked out from his 14th-floor office in McLean toward a tower on the horizon, desirous of the landmark Washington bank, but he thought the privately held company was out of reach. Then, just a day after telling his business associates about what he had dreamed, Fairbank learned that a New York investment banker had called with news: Chevy Chase was on the block.

"I was a bit spooked by that prophesy that this might be possible," Fairbank said, recalling the episode.

The possibility became reality yesterday when Capital One announced that it was acquiring Chevy Chase for $520 million in cash and stock. Under a new Treasury Department regulation meant to spur strong banks to buy weaker ones, Capital One stands to record tax relief of up to $607 million over time -- more than what it is paying for the bank. Capital One said tax savings was not a big driver and that it raised private capital for the deal.

The deal stands to change the Washington banking landscape, with Capital One, a credit card company that has recently been buying regional banks, gaining a firm hold in its home region. Capitol One has hundreds of bank branches in New York and Louisiana and now adds Bethesda-based Chevy Chase's 244 local branches.

Capital One said it doesn't have plans to lay off employees or change how Chevy Chase branches operate. In a letter to employees, B.F. Saul, 76, the discreet local businessman who started Chevy Chase Bank 39 years ago, wrote that "while this represents the end of one chapter in the highly successful Chevy Chase Bank story, it also marks the beginning of another as the bank we have built joins with one of the leading brands in the financial services industry."

The deal is subject to regulatory approval and is expected to close by the end of March.

Some customers expressed consternation yesterday about the loss of their local bank. At a Chevy Chase branch in Rockville, Joe Lamari, 53, remembered the days when local banks provided such personal service that if your account was overdrawn, someone from the local branch called. "Everything has gotten bigger," he said. "You miss the teller that knows you. It's all computers now."

At Chevy Chase, the decision to seek potential buyers came about three months ago. The bank had a well-known brand in a wealthy area and $11 billion in cash deposits. At a time when banks were struggling to raise funding, "it would be a time to take advantage of [the fact that] a deposit-taking franchise would be very valuable to people," said Thomas McCormick, the bank's general counsel and Saul's right-hand man.

But the bank was also running into mounting problems. Into the middle of 2007, later than most, Chevy Chase had been selling a risky type of mortgage in parts of the country such as California and Florida. The adjustable-rate mortgages, known as an option ARM, allowed a borrower to defer part of the required monthly payment for several years. As payments came due, many borrowers defaulted.

Chevy Chase's distressed assets tripled to $490 million from September 2007 to June. This was reflected in the sale price. Capital One is spending about a quarter of the average price paid in recent years for banks of its size.

Yesterday, Capital One said it was assuming that $1.75 billion of Chevy Chase's portfolio of loans would go bad in coming years. Most of that loss was associated with the option-ARM portfolio. The calculation suggests that 75 percent of borrowers with option-ARMs will fail to pay off their mortgages.


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