NEW YORK - CAPITAL One Financial said on Thursday it will acquire Chevy Chase Bank for US$520 million (S$794 million) in cash and stock, expanding its presence in its own backyard.

Under the terms of the agreement, McLean, Virginia-based Capital One will use US$445 million in cash and 2.56 million shares of Capital One valued at US$75 million, or about US$29.30 per share.

Shares of Capital One fell 60 cents, or 1.9 per cent, to close at US$30.99 on Thursday.

Rumors about a possible buyer for privately held Chevy Chase had been circulating for several weeks. Citigroup was among the bidders reportedly looking to acquire the Bethesda, Maryland-based regional bank. Citi at the time declined to comment on its interest in Chevy Chase.

Citi's sharp stock slide last month that required billions of dollars in support from the federal government to stave off a cash squeeze likely took it out of the running to acquire Chevy Chase Bank, according to one analyst.

'Citi's stock got crushed,' said Mr David Hendler of CreditSights.

'They couldn't do the stock deal anymore. They couldn't do it for cash given their capital. Citi has to work on its own internal situation to right its stock.'

Unlike Citi, Capital One has remained profitable during the ongoing credit crisis and has been able to tap capital markets in recent months to help boost its capital reserves.

Chevy Chase Bank, which has about US$11 billion in deposits, operates branches in Maryland, Virginia and Washington, D.C. Capital One had about US$98.9 billion deposits as of Sept 30.

Chevy Chase Bank is the latest in a string of regional banks Capital One has purchased in recent years as it expands to become a full-service banking operation after primarily operating as a credit card lender.

In November 2005, Capital One bought New Orleans-based Hibernia, which had branches in Texas and Louisiana. In December 2006, the company completed its acquisition of North Fork Bank, which operates banks in New York and New Jersey.

'The monolines, particularly those banks that are heavy in credit cards and heavy in subprime consumer (lending), are having to scramble here to diversify in this economy,' said Professor Tony Plath, a finance professor at the University of North Carolina at Charlotte.

'I think what they are doing is being strategic in terms of diversifying their loan portfolio and giving them a better mix of funding sources at the same time.'

Banks have been facing mounting defaults across many types of consumer loans and mortgages since the middle of 2007 as the credit crisis has deepened and the economy continues to falter.

When it completes the deal, Capital One said it expects to take a US$1.75 billion net credit charge to account for potential losses in Chevy Chase's loan portfolio.

Capital One is among the banks that received money from the federal government as part of a US$700 billion bank investment programme administered by the Treasury Department.

The plan is aimed as spurring banks to increase lending to each other and to consumers amid the seize-up in the credit markets. Capital One received about US$3.56 billion in return for preferred stock and warrants to purchase common stock.

In September, Capital One also raised more than US$700 million in additional capital through a stock offering that has helped to improve its capital position as it faced the prospect of further loan losses.

Capital One continued to beef up its loan-loss reserves during the third quarter as it braces for additional loan losses among customers. During the third quarter, Capital One increased its quarterly allowance for loan losses by US$208.6 million to US$3.5 billion.

The bank reported a profit of US$374.1 million, or US$1 per share, for the quarter.

Credit ratings agencies Moody's Investors Service and Fitch Ratings both affirmed their ratings for Capital One on Thursday after the deal was announced.

Fitch said in a statement it views Capital One's acquisition of Chevy Chase favorably because of the size of Chevy Chase's deposit base and 'attractive branch footprint.'

Capital One said the Chevy Chase deal will boost operating earnings in 2009. Capital One added that it expects to incur about US$225 million of charges tied to merger and integration costs.

It expects the deal to eventually reduce expenses by US$125 million.

The deal is expected to close during the first quarter. -- AP