Count Gateway Financial Holdings Inc. as another casualty in the government takeover of Fannie Mae and Freddie Mac.

By all accounts the $2.1 billion-asset Virginia Beach, Va., banking company has been a good performer, boasting fast growth and strong asset quality. But late last year it bought $40.4 million of Fannie Mae and Freddie Mac preferred stock that became nearly worthless when the government took them over this month.

Its capital depleted, Gateway agreed to sell itself to the $845 million-asset Hampton Roads Bankshares Inc. in Norfolk, Va., for the bargain price of $101 million.

The deal, announced Tuesday, hinges on Gateway's being able to raise $30 million in capital first.

Jack W. Gibson, the president and chief executive officer of Hampton Roads, said in an interview that the two competitors had talked casually over the years about teaming up but that they got serious now mainly because of Gateway's exposure to the troubled government-sponsored enterprises.

"I think the GSE situation helped facilitate this and make the transaction very affordable for the shareholders of both companies," Mr. Gibson said.

D. Ben Berry, Gateway's chairman and chief executive officer, did not return a call seeking comment.

Each Gateway share would be exchanged for 0.67 of a Hampton Roads share. This prices Gateway at $6.83 a share — a 15.8% premium over its closing price on Monday but well below its 52-week high of $16.25.

Carter Bundy, an analyst at Stifel, Nicolaus & Co. Inc., said the deal is "quite remarkable" because the growth-focused Gateway, with 37 branches in Virginia and North Carolina, would be taken over by a much smaller company.

Mr. Bundy said he expects Gateway to report a $33.6 million loss this quarter after taking an estimated $38 million writedown on its Fannie and Freddie stock.

"It's a good company, in good markets, with good asset quality," he said. "But they were in a precarious position. Where they once needed capital for growth's sake, now they need capital to continue to operate and get through this."

Samuel Caldwell, an analyst at KBW Inc.'s Keefe, Bruyette & Woods Inc., said Gateway's writedown would lower its tangible capital ratio to 4.6% from 5.5%, forcing it to act.

"I don't think Gateway had very many options," he said. "Given the deal price, obviously Gateway was selling from a position of weakness."

The deal price works out to slightly less than Gateway's book value as of the end of the second quarter, Mr. Bundy said. But he estimated that the price would work out to about 1.57 times book value after the big writedown.

The price also represents a 2.34% premium to core deposits, which is "much lower" than what buyers typically pay.

"I can promise you they wouldn't have been selling at these levels, say, nine months ago," Mr. Bundy said, "because the capital markets weren't as dry then and the Fannies and Freddies weren't even on their balance sheet."

If the deal closes, Gateway would contribute about 71% of Hampton Road's total assets, but its shareholders would own only about 39% of the company, he said.

One other company — the $354 million-asset State of Franklin Bancshares Inc. in Johnson City, Tenn. — also was forced to sell itself because the plunging value of its Fannie and Freddie holdings had depleted its capital. It announced this month that Jefferson Bancshares Inc. in Morristown, Tenn., was buying it for $10.9 million.

Analysts say they are unsure whether other sales might be coming. But Hampton Roads' Mr. Gibson said he expects some.

"I would really be surprised if there aren't more," he said. "The industry was due for consolidation anyway, and the GSE problems have just accelerated that."

Hundreds of banks and thrifts own the preferred shares, and their exposure could total $10 billion to $15 billion, the American Bankers Association said this week.

Midwest Banc Holdings Inc. in Melrose Park, Ill., is another company reeling from losses on Fannie and Freddie stock. The $3.7 billion-asset company announced last week that it plans to write down its $67 million exposure to zero. Midwest is now in the midst of a preferred stock offering that aims to raise $125 million in capital.

Mr. Gibson declined to comment on Gateway's need to raise capital. But he said Hampton Roads, a two-bank holding company, would not have announced its deal for Gateway without expecting it to get done.

Combining Hampton Roads and Gateway would create the second-largest banking company headquartered in Virginia, just behind the $3 billion-asset StellarOne Corp. in Charlottesville.

Gateway Bank and Trust would retain its name and operate as a subsidiary of Hampton Roads. Mr. Berry would become the president of Hampton Roads and join its board of directors.

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