Bank in Virginia Beach hit hard by Fannie, Freddie slump

Staff and wire reports

Gateway Financial Holdings Inc., the community bank based in Virginia Beach, is among many small lenders holding shares of Fannie Mae and Freddie Mac and now facing a loss of that capital since the government bailout of the mortgage companies stripped most of the value of those stocks.

Gateway and other banks bought preferred shares of Fannie and Freddie, which offer investors a higher dividend and greater bankruptcy protection than common stock. The government takeover of the companies, announced Sunday, sharply reduced the value of all shares.

Banks that held the shares as part of their reserves, the cushion of money that regulators require banks to keep on hand, must now raise money to replace the lost funds. Those lenders that don't maintain minimum capital levels against losses may face curbs on their business, dividends and management, and in some cases can be shut down.

Gateway, parent company of Gateway Bank & Trust Co., had invested $40 million in Fannie and Freddie stock as of June 30, according to its second-quarter report, released last month. Those investments are now worth $4.2 million based on the closing prices for those preferred shares on Wednesday.

Gateway's shares, in turn, have dropped 26 percent to close at $5.26 each on Wednesday from $7.10 on Friday, before the government announced its bailout of Fannie and Freddie.

Gateway officials, including president and chief executive Ben Berry, didn't return calls late Wednesday afternoon.

But they did release, in contrast to the gloomy Fannie and Freddie outlook, an upbeat announcement late Wednesday that investment bank Sandler O'Neill and Partners LP had named Gateway one of the nation's top performing small-cap financial institutions. For its list, Sandler O'Neill evaluates 574 publicly traded banks and thrifts with a market capitalization of less than $2 billion and focuses on those institutions' growth, profitability, credit quality and capital strength, Gateway said.

"It puts us in an elite group that is being noted for performance," Berry said in the release. "This recognition confirms that our focus on expansion, credit quality, non-interest income, hiring the best bankers, market diversification, and corporate citizenship is a solid strategy that achieves results."

Gateway Bank & Trust Co. has 37 bank branches, with 22 in Hampton Roads and northeastern North Carolina.

On Wednesday, Fannie Mae said the government would allow it to pay its previously announced Sept. 30 dividends on its preferred shares, though the takeover is expected to eliminate future dividends.

Banking regulators and representatives of minority-owned banks met Tuesday at the Treasury Department to discuss the possible impact on small minority-owned banks and thrifts with dangerously large holdings of Fannie and Freddie preferred stock. Because banks hold the preferred shares as part of their core capital, they likely will have to write off those losses.

"Of the very few banks with significant exposure, if the bank is otherwise healthy, we'll give them a reasonable time to work on their capital plan process," said Kevin Mukri, a spokesman for the Office of the Comptroller of the Currency, the Treasury agency that oversees national banks, on Tuesday.

In late July, Gateway filed with the Securities and Exchange Commission to raise as much as $50 million from the possible sales of common stock, preferred stock and debt securities.

In a shelf registration with the SEC, Gateway said it might use the proceeds for acquisitions, to reduce or refinance debt, buy back shares or other purposes.

A shelf registration allows a publicly traded company to reduce administrative expenses by filing a single registration statement for planned securities offerings and then going to the market when the timing for offerings is optimal.

Shares in Fannie and Freddie have plummeted by about 99 percent from their highest trading in the past 52 weeks on the New York Stock Exchange. Fannie's closed Wednesday at 74 cents a share, and Freddie's at 66 cents each.

Fannie Mae and Freddie Mac were created by the federal government to increase the supply and reduce the cost of mortgage loans. The companies borrowed money at a low cost because the government involvement gave investors a sense of security. Fannie Mae and Freddie Mac used that money to buy loans from banks and other lenders, allowing those companies to make more loans.

Banks bought shares of Fannie Mae and Freddie Mac because their regular dividends offered a steady income stream. There were also tax advantages. But most important for many banks, under a system used to assess the risk of a bank's investments, the Office of the Comptroller of the Currency assigned Fannie Mae and Freddie Mac shares the least risky grade possible.

"We certainly took that into consideration," Berry told The Washington Post. The company is regulated by the Federal Reserve, but Berry said he still felt reassured by the OCC's judgment.

Berry said the government-chartered companies had relied on banks to raise money and the government should have protected those investments, according to the Post. The loss could force the bank to raise more money to meet regulatory requirements, but Berry said he was confident the bank would remain adequately capitalized.

The Associated Press, Bloomberg News, The Washington Post and Virginian-Pilot staff writer Carolyn Shapiro contributed to this report.