Capital One to buy Chevy Chase Bank for $520 million

By Juan Lagorio

NEW YORK (Reuters) - Capital One Financial Corp (COF.N: Quote), a credit card issuer and bank, will acquire Chevy Chase Bank in a $520 million cash-and-stock deal, expanding its retail deposit base, the companies said on Thursday.

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

The deal will allow Capital One to expand its reach in the affluent suburbs of Washington, D.C., while 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."

He added, "Credit cards are going to be a really tough area. I believe they are really trying to shore up their balance sheet to weather the coming storm."

U.S. banks are broadly looking to expand their branch networks and amass pools of low-cost retail deposits after seeing how unreliable capital markets can be when times are tough.

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 credit mark of $1.75 billion for potential losses in Chevy Chase Bank's loan portfolio.