Gateway Financial OKs merger with smaller Bankshares

By Tom Shean

The Virginian-Pilot

Hobbled financially by losses on Fannie Mae and Freddie Mac securities, Gateway Financial Holdings Inc. has agreed to be acquired by a much smaller financial institution, Hampton Roads Bankshares Inc.

The Virginia Beach-based parent of Gateway Bank & Trust Co. and Hampton Roads Bankshares announced Wednesday that they planned to merge in an all-stock transaction valued at $104 million.

Hampton Roads Bankshares, the Norfolk-based parent of Bank of Hampton Roads and Shore Bank on the Eastern Shore, is less than half the size of Gateway, which has assets of $2.1 billion.

Their agreement came in the midst of financial turmoil that's made it increasingly difficult for companies, including banks, to borrow or raise fresh capital. Gateway disclosed two weeks ago that the value of its holdings in mortgage-finance giants Fannie Mae and Freddie Mac had been severely reduced after the Treasury Department took control of the two companies. Gateway said at the time that it had hired an investment banker and hoped to raise sufficient capital to make up for the losses on its preferred stock in Fannie and Freddie.

In July, Gateway said its 800,000 preferred shares of Fannie and 800,000 preferred shares of Freddie were valued at $38.5 million. Those holdings are now worth $3.74 million.

Because of the sharp decline in value, Gateway "was expected to take a huge hit to capital," the brokerage firm Keefe, Bruyette & Woods said in a report to investors Wednesday. Gateway "was already thin on capital given its aggressive growth strategy in recent years," it said.

"Based on the current environment, we believe Gateway was forced into" a merger, the report said.

The combination of Gateway and Hampton Roads Bankshares would create a banking company with assets of almost $3 billion and become the largest financial institution based in Hampton Roads. Portsmouth-based TowneBank, with assets of $2.72 billion, currently is the largest financial institution based in the region.

Jack W. Gibson, vice chairman, president and chief executive officer of Hampton Roads Bankshares, said Wednesday that he had been aware of Gateway's investment in Fannie and Freddie and approached its chairman and CEO about a possible merger when the Treasury Department took control of the mortgage companies.

He and Gateway's CEO, Ben Berry, "have had a cordial relationship and had preliminary discussions about joining forces" before Gateway suffered the blow to its capital, Gibson said.

Hampton Roads Bankshares found Gateway attractive because of its strong banking presence in northeastern North Carolina and its fee-generating businesses, including insurance agencies, Gibson said.

Berry did not return phone calls on Wednesday.

Their merger agreement still must be approved by shareholders of both companies and by banking regulators. The transaction is also contingent on Gateway raising $30 million in fresh capital.

Gibson said a vote by shareholders would likely be held in early December, and the transaction probably would close by year-end.

According to their agreement, Gateway stockholders will receive 0.67 shares of Hampton Roads Bankshares for each of Gateway's 12.7 million common shares. At Wednesday's closing price of $12.22 for Hampton Roads Bankshares, that worked out to $8.19 a share, a 32 percent premium over Gateway's Tuesday closing share price of $5.90.

Gateway's shares rose 32 cents in heavy trading Wednesday to close at $6.22, while Hampton Roads Bankshares' stock jumped $2.02 to $12.22.

Gateway has grown rapidly in eastern Virginia and eastern North Carolina, often by hiring lending officers who could bring large loan portfolios with them. Last year, it expanded to the Richmond and Charlottesville areas by buying the Bank of Richmond.

In March, Gateway announced plans to move its Virginia Beach headquarters to a building under development in Town Center that would bear its name. Gibson said the details of that agreement and several other matters involving the two companies still have to be examined.

However, the two companies' networks of bank branches overlap in only a few areas, so cutbacks in employees and offices will be modest, Gibson predicted. Gateway Bank offices in Hampton Roads would be changed to Bank of Hampton Roads branches.

The merger agreement calls for Berry to become president of Hampton Roads Bankshares and to have a seat on its board. David Twiddy, senior executive vice president of Gateway is scheduled to become president and CEO of Gateway Bank & Trust. Gibson will remain vice chairman and CEO of Hampton Roads Bankshares.

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