Beach-based bank company stands to recover millions

VIRGINIA BEACH

Gateway Financial Holdings Inc., which suffered heavy losses last month on its holdings in mortgage-finance companies Fannie Mae and Freddie Mac, said it expects to recoup $12.7 million of federal tax benefits from the losses.

The benefits became available to Gateway and other financial institutions through the Emergency Economic Stabilization Act, the bailout and bank-rescue bill that President Bush signed into law Friday.

Scores of banks, including the Virginia Beach-based parent of Gateway Bank & Trust Co., were battered by capital losses in September when the Treasury Department took control of Fannie and Freddie and values of their shares plunged. Between July and late September, the value of Gateway's preferred shares of Fannie and Freddie sank by $37.4 million, to $3 million, the company said Monday in a Securities and Exchange Commission filing on its expected tax benefit.

After the takeover of Fannie and Freddie last month, Gateway said it had hired an investment banker and planned to raise fresh capital. That led to a merger agreement two weeks ago with Hampton Roads Bankshares Inc., the Norfolk-based parent of Bank of Hampton Roads.

The Emergency Economic Stabilization Act, which was designed to shore up banks holding billions of dollars of troubled mortgage-backed securities, includes a provision that allows Gateway and other financial institutions to convert capital losses on the preferred stock of Fannie and Freddie to ordinary losses, making them eligible for a tax break.

Gateway said that it also expects to receive a state-tax benefit from its losses on Fannie and Freddie shares but had not yet determined the amount.

Gateway also disclosed in the SEC filing that it borrowed $31 million from Hampton Roads Bankshares on Sept. 30 to repay a combination of term loan, line of credit and subordinated debt that it borrowed in May from JPMorgan Chase Bank.

One condition in its merger agreement with Hampton Roads Bankshares called for Gateway to raise $30 million of additional capital. Gateway said last week that it brought in $37.55 million of fresh capital from the sale of 37,550 preferred shares at $1,000 each. The shares will pay a 12 percent annual dividend. Some or all of the shares can be redeemed, or bought back, after Oct. 1, 2009.

Gateway and Hampton Roads Bankshares said they expect to complete their merger by the end of the year. The agreement still is subject to approval by both companies' shareholders and by regulators.

Gateway's shares closed Tuesday at $5.05, down 40 cents.

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