Two companies seek capital from $700b bailout

NORFOLK

Hampton Roads Bankshares Inc. and Gateway Financial Holdings Inc., which are preparing to merge, plan to seek an infusion of capital from the Treasury Department's $700 billion bank-rescue plan, the two banking companies said in a filing with the Securities and Exchange Commission.

There are no assurances that either company will get any capital from the Treasury's Troubled Asset Relief Program, the two said in a preliminary proxy statement filed with the SEC on Monday. The proxy statement describes the terms of a merger agreement that Norfolk-based Hampton Roads Bankshares and Virginia Beach-based Gateway announced in late September, but it doesn't disclose how much capital the two companies might seek.

In an effort to stabilize the nation's financial system, the Treasury promoted a plan in September that called for buying mortgage-related securities and other hard-to-sell assets from banks. In recent weeks, however, the Treasury has chosen to invest in strong institutions to foster lending. Some are using the capital to buy weaker banks. The Treasury provides the capital by buying non voting preferred shares from the banks.

Gateway reported last week that it lost $37.4 million in the third quarter because the value of its investments in Fannie Mae and Freddie Mac evaporated when the two mortgage finance companies were seized by the Treasury Department.

Shortly after the Treasury put Fannie and Freddie into conservatorship, Hampton Roads Bankshares approached Gateway's president and chief executive officer to discuss a possible merger but was rebuffed, according to the SEC filing. Jack Gibson, vice chairman, president and CEO of Hampton Roads Bankshares, and Ben Berry, Gateway's president and CEO, had talked informally over the years about a possible combination, the filing says.

The document also describes how conversations that Hampton Roads Bankshares directors had with Gateway directors led to merger discussions and the eventual agreement.

Hampton Roads Bankshares agreed to an exchange of common and preferred shares in a deal that the proxy statement values at almost $137 million. This includes $76 million of Hampton Roads Bankshares common stock and $60.8 million in two classes of new preferred stock.

Hampton Roads Bankshares, with assets of $917.8 million, is the parent of Bank of Hampton Roads and Shore Bank on the Eastern Shore. Gateway, whose assets total $2.28 billion, is the parent of Gateway Bank & Trust Co., which operates in southeastern and central Virginia and in eastern and central North Carolina.

Berry will become president of Hampton Roads Bankshares after the merger and will have a seat on Hampton Roads Bankshares' board, according to the merger agreement. Gateway will designate six others currently on its board for seats on the expanded board, the SEC filing says.

As part of their preparation for a merger, Hampton Roads Bankshares refinanced $31 million in loans that Gateway had with J.P. Morgan/Chase Bank and helped Gateway raise $37.55 million of capital late in the third quarter, the SEC filing says. The merger agreement is still subject to approval by both companies' shareholders.

Hampton Roads Bankshares stock price closed Tuesday at $9.10 a share, down 87 cents for the day. Gateway's share price fell 15 cents to close at $5.26.

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