Capital One's Northern Exposure

S&P reduces North Fork Bancorp's ranking, after shares rise sharply on news of its acquistion by 5-STAR Capital One Financial

Credit-card giant Capital One Financial (COF) gained some Northern exposure on Mar. 13 by agreeing to pay around $14.6 billion in cash and stock for Melville (N.Y.)-based North Fork Bancorp (NFB). The transaction, subject to shareholder and regulatory approval, values North Fork at roughly $31 per share, based on the Mar. 10 closing price for Capital One, and is expected to close during the fourth quarter of 2006.

With North Fork shares rising sharply on Mar. 13 after the deal was announced, we at Standard & Poor's Equity Research Services were prompted to reduce our ranking on the stock to 3 STARS (hold) from 5 STARS, based on valuation. We believe the deal fairly values North Fork, with a p-e multiple of roughly 15 times our 2006 earnings-per-share estimate of $2.08 and a price/book value ratio of 1.6 times. Our target price remains $30.

In our opinion, North Fork shares have been unpopular with investors recently due to the company's overexposure to residential mortgages -- following its acquisition of a national mortgage lender -- amid concerns about a slowdown in the housing market and a flat yield curve. We thought the recent weakness presented investors with an attractive entry point. Apparently, Capital One arrived at the same conclusion.


  North Fork had $58 billion in assets as of Dec. 31, 2005. Its primary subsidiary is North Fork Bank, which conducts commercial and consumer banking from approximately 360 retail bank branches in the New York City metropolitan area.

North Fork has grown organically as well as through acquisitions. Its most recent purchases include GreenPoint Financial, a $23 billion asset bank holding company with a national mortgage business and a New York retail bank, acquired on Oct. 1, 2004; and The Trust Company of New Jersey, a $4.3 billion bank, acquired on May 17, 2004. Combined, these transactions increased North Fork's market share in its primary Metro New York market while more than doubling its asset base.

We think North Fork has an attractive franchise in the Metro New York region. It operates primarily in the New York-Northern New Jersey-Long Island Metropolitan Statistical Area, where it has 355 branches and is ranked sixth, based on a deposit market share of approximately 4.8%.


  We reiterated our 5-STARS opinion on Capital One on Mar.13. While we are somewhat cautious due to the highly competitive nature of the New York region, we believe Capital One's marketing savvy, strong brand recognition, and extensive existing customer base will help grow North Fork's business.

Following the two companies' Mar. 13 conference call to discuss the planned acquisition, we remain optimistic about its long-term possibilities. We think the deal, pending needed approval, is consistent with Capital One's goal of national-scale lending combined with local-scale banking. The proposed deal is expected to realize $275 million in cost savings by 2008, but we remain focused on potential revenue growth, particularly in small business.

We think most of the valuation metrics for the acquisition mentioned earlier are in line or a bit less favorable than comparable deals, but we are focused on the increased diversification and potential revenue growth we believe the deal will bring. Our target price for Capital One stays at $100.


S&P STARS: Since January 1, 1987, Standard & Poor's Equity Research Services has ranked a universe of common stocks based on a given stock's potential for future performance. Under proprietary STARS (STock Appreciation Ranking System), S&P equity analysts rank stocks according to their individual forecast of a stock's future capital appreciation potential versus the expected performance of a relevant benchmark (e.g., a regional index (S&P Asia 50 Index, S&P Europe 350 Index or S&P 500 Index), based on a 12-month time horizon. STARS was designed to meet the needs of investors looking to put their investment decisions in perspective.

S&P Earnings & Dividend Rank (also known as S&P Quality Rank): Growth and stability of earnings and dividends are deemed key elements in establishing S&P's earnings and dividend rankings for common stocks, which are designed to capsulize the nature of this record in a single symbol. It should be noted, however, that the process also takes into consideration certain adjustments and modifications deemed desirable in establishing such rankings. The final score for each stock is measured against a scoring matrix determined by analysis of the scores of a large and representative sample of stocks. The range of scores in the array of this sample has been aligned with the following ladder of rankings:

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