Gateway bank's parent company looking for cash infusion

VIRGINIA BEACH

The parent of Gateway Bank & Trust Co., one of several financial institutions bloodied by the government takeover of Fannie Mae and Freddie Mac earlier this month, said it hopes to bolster its balance sheet by raising additional capital.

Gateway Financial Holdings Inc. said in a Sept. 11 filing with the Securities and Exchange Commission that it hired an investment banker and plans to raise enough capital to be judged "well capitalized" by regulators.

The Virginia Beach-based banking company didn't disclose how much would be required to meet that standard, which requires that a bank's total risk-based capital be at least 10 percent of its assets. Gateway also said its earnings for the current quarter would be hurt by the reduced value of its Fannie and Freddie investment but said the impact had not yet been determined.

The Treasury Department seized control of Fannie and Freddie earlier this month amid concerns that mounting difficulties at the mortgage giants would drag down the nation's housing industry. The two companies, which buy mortgages for their own portfolios and for sale to large investors, hold or insure about $5 trillion of the nation's home mortgages.

The values of Fannie and Freddie preferred shares plunged immediately after the Treasury's announcement of its takeover plans. Many banks invested in the stocks and used them as capital because of the hefty dividends that the two companies paid.

Citing a report by brokerage firm Keefe, Bruyette & Woods, news reports said earlier this month that Gateway was particularly vulnerable to an erosion of capital because its holdings of Fannie and Freddie stock amounted to 34 percent of its tangible capital. Gateway executives could not be reached for comment.

In a July report to the SEC on its second-quarter results, Gateway said it held 800,000 shares of Fannie Mae preferred stock with a value of $20.2 million and 800,000 shares of Freddie Mac preferred, also valued at $20.2 million. Gateway disclosed in the same report that it suffered an unrealized loss of $1.6 million on these shares during the quarter.

During a conference call with securities analysts on July 18, Gateway Chief Financial Officer Ted Salter said the value of those shares had been marked down to $38.5 million.

In July, the banking company also filed a "shelf registration" with the SEC to raise as much as $50 million from the sale of additional shares, debt securities or a combination. A shelf registration provides publicly traded companies with lower administrative costs and greater flexibility when tapping the public market for fresh capital.

On Tuesday, Gateway shares closed at $5.90, up 33 cents for the day but off $1.20, or 17 percent, since the takeover of Fannie and Freddie on Sept. 6.

Scores of the nation's banks, including several in Virginia, have notified the SEC in recent weeks that they owned preferred shares of Fannie and Freddie and planned to mark down their value. Community Financial Corp., whose Community Bank subsidiary has branches in Virginia Beach, disclosed that its board suspended the company's quarterly dividend because of the sharply reduced value of its Fannie and Freddie holdings. After marking down the shares' value, it no longer would meet regulators' requirements to be considered "well capitalized," the Staunton-based banking company said in a Sept. 12 filing with the SEC. Community Financial also said it will be in violation of covenants on a $5 million line of credit that it has with a commercial bank.

In its filing, Community Financial said the value of its Fannie and Freddie shares on Sept. 11 had plunged to $720,000 from $11.75 million at the end of June.

Community Financial's share price closed Tuesday at $5.20, up 15 cents for the day but down $2.20, or 30 percent, since the takeover of Fannie and Freddie.

Tom Shean, (757) 446-2379, tom.shean@pilotonline.com