Chevy Chase Bank Deal Advances Capital One Diversification Strategy

Capital One’s recent acquisition of Chevy Chase Bank was an attempt to grab deposits and further diversify away from being a credit-focused bank into one with a growing number of business lines, according to a banking analyst.

Capital One (NYSE: COF) made its name in the credit card business, but the financial services company has recently been aggressive in building a more diversified financial services firm, acquiring Hibernia Inc. in mid-2005, North Fork Bancorporation  Inc. in late 2006 and Chevy Chase this year (subject to regulatory approval).

Though Capital One will not specifically say that it intends use any of the Troubled Asset Relief Program (TARP) funds for the acquisition, it did receive about $3.55 million of the bailout money from the government. According to a published report, Capital One would qualify for another $450 million — Chevy Chase’s share — as a result of the deal.

Under terms of the agreement, Capital One will acquire Chevy Chase in a cash and stock transaction valued at approximately $520 million. With the addition of Chevy Chase’s $11 billion in deposits, Capital One — the largest retail depository institution headquartered in the Washington, D.C. region — will also have the largest branch and ATM network in the area.

Capital One will purchase Chevy Chase for $445 million in cash and 2.56 million Capital One shares, valued at $75 million, based on the closing price of Capital One stock as of Dec. 2, 2008. Capital One expects this transaction will be accretive to operating earnings per share in 2009 and accretive to GAAP earnings per share in 2010. Capital One will take a net credit mark of $1.75 billion for potential losses in Chevy Chase’s loan portfolio.

“The need for deposits [which provide a low-cost source of funds] is critical,” said Nancy Atkinson, senior analyst with Aite Group. “Capital One was out there looking to find an acquisition to grow their retail banking acquisition. They were looking at a diversification strategy to help offset the risk from their credit card business.”

The acquisition also gives Capital One a strong presence in the Washington, D.C. market, which has two of the wealthiest five communities in the U.S., according to Atkinson. “This gives them opportunity for growth in the Mid-Atlantic market,” she said

The combined company will have deposits of more than $110 billion, a managed loan portfolio of more than $159 billion, and 983 branches. The $110 billion combined deposit portfolio is the 8th largest in the U.S.

As part of the transaction, the selling shareholders of Chevy Chase will retain certain assets currently owned by the bank, including ASB Capital Management, Chevy Chase Trust, and Chevy Chase’s headquarters building in Bethesda, Md.