Hampton Roads Bankshares Inc. has agreed to acquire Gateway Financial Holdings Inc. — which was walloped of late by its Fannie Mae and Freddie Mac investments — in a $101 million deal that will merge the regional banks into a $3 billion Virginia-based banking company.

Hampton, which had 18 branches and $845 million in assets as of June 30, is much smaller than Gateway, with its 37 locations and $2.1 billion in assets. But Hampton is in the stronger position, as witnessed by its market capitalization as of Tuesday being nearly double Gateway's, whose stock lost more than half its value between mid-August and mid-September.

Under the terms of the deal, expected to close in the fourth quarter, Gateway shareholders will get 0.67 of a Hampton Roads share for each share of Gateway. Based on Tuesday's close, that values Gateway at $6.83 a share, a 16% premium. Preferred shareholders will get comparable shares in the combined company.

The deal is also contingent on Gateway raising about $30 million in additional capital.

After closing, some Gateway locations in Virgina will be rebranded and others closed. Remaining offices in the state and North Carolina will continue operating either as Gateway or The Bank of Richmond. Gateway Chief Executive D. Ben Berry will be Hampton's president and one of seven Gateway directors joining Hampton's board.

Berry said, "The chance to join Hampton Roads Bankshares was one that was simply too good to pass up for our customers, communities, employees and shareholders."

Gateway has been hurt by its exposure to mortgage giants Fannie Mae and Freddie Mac, which were taken over by the government two weeks ago. Gateway has perpetual preferred investments included in securities available for sale at a cost of $20.2 million each for Freddie and Fannie, and has said it expects to record a third-quarter write-down connected with the exposure.

Hampton Roads closed Tuesday at $10.20, while Gateway closed at $5.90. There was no premarket activity in either stock.

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