Gateway Bank sold, hurt by Frannie preferreds

When Fannie Mae and Freddie Mac went bust, a number of major players were stung as the value of Fannie and Freddie preferred shares plummeted. Principal amongst these players was Gateway Bank, which had a huge percentage of bank capital tied up in the preferreds.

Now Gateway has arranged a takeover by a rival smaller bank, Hampton Roads Bankshares. Given the options, this is a positive outcome.

Gateway Bank, the coastal lender that took a major hit after the government bailout of Fannie Mae and Freddie Mac, is being swallowed up by a smaller competitor.

The buyer is Hampton Roads Bankshares Inc. (Nasdaq: HMPR), a Norfolk company that’s the parent of the Bank of Hampton Roads and Shore Bank. In the all-stock deal, each share of Gateway (Nasdaq: GBTS) will be traded for 0.67 shares of Hampton Roads.

The companies say they’re valuing the deal at $101 million, based on the 20-day weighted average closing price of Hampton Roads’ stock.

In the transaction, Gateway is being embraced by a significantly smaller company. Gateway’s total assets currently total more than $2 billion, while Hampton Roads Bankshares said it had $845 million in assets as of June 30.

The shotgun wedding was likely prompted by Gateway’s announcement Sept. 11 that it would need to raise capital to stay “well capitalized” under federal rules after writing down a substantial chunk of the value of its $40.4 million in Fannie and Freddie shares. Stock in both Fannie and Freddie sank after the giant mortgage lenders were put under government control earlier this month.

“We believe it is quite remarkable that one of the stronger earning asset growth stories that we cover was relegated to being taken over by a much smaller institution,” Stifel, Nicolaus & Co. analyst P. Carter Bundy wrote in a note Wednesday. “In our view, Gateway’s aggressive investments in Fannie Mae and Freddie Mac placed (the bank) in a rather precarious position.”

Bundy estimates that Gateway shareholders will have about 39 percent of the pro forma company while contributing between 71 percent and 72 percent of loans, deposits and assets.

On Wednesday, Gateway said it still needs to raise some $30 million in capital. If it can do so, and if Gateway and Hampton Roads can get regulatory and stockholder approval, the deal is expected to close in the fourth quarter.

Gateway has five branches in the Triangle: three in Raleigh, one in Chapel Hill and one in Wake Forest. Those branches, as well as the bank’s coastal branches in North Carolina, would continue to operate under the Gateway name if the deal closes.

The combined bank would have about $3 billion in assets.

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Reeling from Fannie and Freddie, Gateway to be bought by rival half its size – Triangle Business Journal

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