Highlights for the Quarter Include:
* Incurs non-cash impairment charge on Government Sponsored
Enterprise ("GSE") securities of $37.4 million
* Agrees to merger with Hampton Roads Bankshares, Inc.
* Asset Quality Remains Strong - Net Charge-offs at 0.14%
year-to-date, NPL's at 0.43% of Loans Outstanding
* Net Interest Margin improved to 3.20% from 3.03% in 2nd quarter
* Paid a Quarterly Cash Dividend of $0.08 per share
* All Regulatory Capital Ratios in Excess of Well-capitalized
VIRGINIA BEACH, Va., Oct. 29, 2008 (GLOBE NEWSWIRE) -- Gateway Financial Holdings, Inc. (Nasdaq:GBTS), the holding company for Gateway Bank & Trust Co., reported a net loss for the third quarter of 2008 of $37.4 million, as compared with net income of $4.2 million for the third quarter of 2007. The net loss for the quarter included an other-than-temporary impairment charge of $37.4 million ($36.8 million, net of $521,000 of limited capital gain tax benefit) on its investments in perpetual preferred securities issued by the Federal National Mortgage Association ("Fannie Mae") and the Federal Home Loan Mortgage Corporation ("Freddie Mac"), collectively the "GSE securities." This determination was made as a result of the action taken by the United States Treasury Department and the Federal Housing Finance Agency on September 7, 2008, which placed Fannie Mae and Freddie Mac into conservatorship and suspended future dividends. Additionally, the third quarter of 2008 included approximately $1.34 million of non-recurring, non-interest expenses associated with the pending merger with Hampton Roads Bankshares, Inc., potential capital raises that were discontinued, and a potential acquisition that was abandoned. The third quarter earnings were further affected by a loan loss provision of $5.4 million, which was $4.65 million higher than the loan loss provision for the third quarter of 2007, and $3.2 million higher than the second quarter of this year.
The loss per diluted share was $3.02 for the third quarter of 2008, as compared with diluted earnings per share of $0.32 for the third quarter of the prior year, reflecting the other-than-temporary impairment charge related to the GSE securities in the third quarter of 2008, higher loan loss provision, and the non-recurring non-interest expenses discussed above.
For the first nine months of 2008, the Company reported a net loss of $32.3 million, as compared with net income of $8.7 million reported for the year-earlier nine-month period. The loss per diluted share was $2.70 for the 2008 nine-month period compared with diluted earnings per share of $0.72 for the nine months ended September 30, 2007. Year-to-date results also reflected the $37.4 million other-than-temporary impairment charge related to the investments in Fannie Mae and Freddie Mac preferred securities, the $1.34 million of non-recurring non-interest expenses, and higher loan loss provision incurred during the third quarter of 2008.
Commenting on these results, D. Ben Berry, Chairman, President and CEO of Gateway Financial Holdings, stated, "Our industry is going through the most trying and challenging times since I have been associated with banking. Unfortunately, the nationwide housing downturn and depressed housing values moved Fannie Mae and Freddie Mac to be placed into conservatorship, requiring us to take an other-than-temporary impairment charge related to their preferred stock to earnings in the third quarter. At the time these investments were made earlier this year, they were the highest grade (AA+) preferred stock that one could acquire.
"It is important to note, however, despite this impairment charge and some non-recurring non-interest expenses that we incurred during the third quarter, our core banking operations continue to perform very well. Our net-interest margin continues to improve -- up to 3.20% in the third quarter from 3.03% in the second quarter of this year, and our asset quality is holding up well in these difficult economic times and as compared with our peer group. We continue to operate in solid and stable markets and remain confident in our ability to generate solid operating performance in the midst of the current credit cycle."
The aforementioned other-than-temporary impairment charge and gain on the disposition of property have been reported as a component of non-interest income, and the non-recurring expenses have been reported as a component of non-interest expenses in accordance with GAAP. Additionally, the third quarter of 2007 included a fair value gain and net cash settlements on the economic hedge of $1.34 million which was reported as a component of non-interest income in the third quarter of 2007 (there was no such item in 2008 as the economic hedge position was terminated in September 2007). Due to the volatility and lack of comparability caused by the other-than-temporary impairment charge, fair value gain and net cash settlements related to the economic hedge, gain on disposition of property, and the non-recurring non-interest expenses, management believes presentation of adjusted, non-GAAP proforma information throughout this press release (including non-interest income, total revenues, percentage of non-interest income to total revenues, and efficiency ratio) that excludes the effect of these items (collectively referred to as the "non-GAAP items") provides useful information to investors.
Merger with Hampton Roads Bankshares, Inc.
On September 24, 2008, Hampton Roads Bankshares, Inc., the financial holding company for Bank of Hampton Roads and Shore Bank, and Gateway Financial Holdings, Inc. jointly announced that the board of directors of each company approved the execution of, and the parties have executed, a definitive agreement in which Gateway Financial Holdings will merge with and into Hampton Roads Bankshares.
Under the terms of the merger agreement, Hampton Roads Bankshares will acquire all of the outstanding shares of Gateway Financial Holdings. Gateway Financial Holdings' shareholders will receive 0.67 shares of Hampton Roads Bankshares common stock for each share owned of Gateway Financial Holdings. Seven members of the Gateway Financial Holdings Board of Directors will join the Hampton Roads Bankshares Board of Directors. The companies value the deal at $101 million based upon the 20-day weighted average closing price of Hampton Roads Bankshares' stock through September 12, 2008, of $11.91.
The merger is anticipated to close in the fourth quarter of 2008 or the first quarter of 2009, and is in the due diligence phase as outlined by the merger agreement. As part of the merger agreement, Gateway Financial Holdings raised approximately $37.3 million in additional capital in the form of Series B non-convertible, non-cumulative, perpetual preferred stock, closing on the offering on September 29. Subsequent to the completion of the merger, Gateway Bank & Trust Co. will operate as a wholly owned subsidiary of Hampton Roads Bankshares. The companies anticipate that Gateway Bank & Trust Co.'s offices in Virginia Beach, Chesapeake, Norfolk and Suffolk, Virginia, will be converted to Bank of Hampton Roads locations with the additional consolidation of overlapping market locations. Gateway Bank & Trust Co.'s offices outside of South Hampton Roads will continue to operate as Gateway Bank & Trust Co. locations.
As indicated above, the merger agreement established a fair value of the Company, estimated at 0.67 of $11.91, or $7.98. Since this price is less than the book value of the Company at September 30, 2008, there is an indication that goodwill impairment exists. As a result, the Company is performing an evaluation of goodwill through the allocation of the implied value to its assets and liabilities. Additionally, the precise amount of the impairment is uncertain at this time, given the uncertainties in the marketplace and significant actions taken by the Federal government since the end of the third quarter that impact this evaluation. Once the evaluation is complete, related goodwill impairment charges will be reflected in the fourth quarter financial statements.
Revenues, Net Interest Margin, and Non-interest Income
Total revenue, defined as net interest income and non-interest income (and excluding the other-than-temporary charge related to the GSE securities and a gain from the sale of property during the quarter) was $20.3 million for the third quarter of 2008, an increase of 10.5% above the $18.3 million reported for the third quarter of 2007 (excluding the impact from the $1.34 million gain and net cash settlements from the economic hedge).
Net interest income for the third quarter of 2008 was $15.5 million, a $2.0 million or 14.4% increase over the $13.5 million reported for the third quarter of 2007. The increase in net interest income was primarily attributable to $416.7 million or 30.3% increase in average loans to $1.79 billion for the third quarter of 2008, from $1.38 billion for the 2007 third quarter. While net interest income increased due to the aforementioned growth in loans, the net interest margin decreased 29 basis points from 3.49% for the third quarter of 2007 to 3.20% for the third quarter of 2008. The margin compression resulted from the 325 basis points drop in interest rates that occurred since September of last year, including a 125 basis point reduction that occurred during an eight-day period in January. The reduction in interest rates had an immediate effect on revenue related to variable loans (which approximated 64% of the loan portfolio) during the first half of the year. However, the loan yield stabilized during the second quarter and increased slightly during the third quarter as a result of interest rate floors that have been added to renewing variable loans during the year. As a result of the repricing of higher rate certificates of deposit to lower rates and obtaining lower cost transaction account balances during the third quarter, we experienced a 28 basis point reduction in our cost of funds from June 2008 to September 2008, and our cost of funds has decreased 94 basis points since March 2008. This cost of funds reduction resulted in an improvement in our net interest margin of 17 basis points on a linked quarter basis from 3.03% for the second quarter to 3.20% for the third quarter. As a result of the expected continued reduction in our cost of funds, coupled with adding interest rate floors to the majority of new and renewing loans, as well as increased spreads on new loans, we expect to see continued margin improvement. Our net interest margin for the first nine months of 2008 was 3.06% as compared with 3.53% for the prior year nine-month period.
Non-interest income for the third quarter of 2008 was a loss of $32.4 million, as compared with income of $6.1 million for the third quarter of the prior year. Excluding the impact of the aforementioned other-than-temporary impairment charge of $37.4 million and the gain from the sale of property of $243,400, proforma (non-GAAP) non-interest income was $4.8 million for the third quarter of 2008, which was in line with the proforma non-interest income for the third quarter of 2007, which excluded the impact of the economic hedge. Non-interest income for the first nine months of 2008 was a loss of $20.6 million, as compared with income of $13.9 million for the nine months ended September 30, 2007. Excluding the impact of the aforementioned other-than-temporary impairment charge of $37.4 million and the gain from the sale of property of $243,400, proforma (non-GAAP) non-interest income was $16.5 million for the first nine months of 2008, which was a $3.2 million increase or 23.8% over the proforma non-interest income of $13.3 million for the same period of 2007, (which excluded the impact of the economic hedge). A comparison of proforma (non-GAAP) non-interest income for the third quarter and first nine months of 2008 as compared with the same periods in 2007 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
2008 2007 2008 2007
------- ------- ------- -------
Service charges on accounts $ 1,320 $ 1,047 $ 3,372 $ 2,922
Mortgage operations 744 780 2,382 2,445
Insurance operations 1,187 1,287 4,243 4,126
Brokerage operations 97 210 291 672
Gain on sales of securities
and trading gains 133 97 930 519
Fair value gain on trust
preferred securities 376 576 2,218 626
Other 895 778 3,035 1,990
------- ------- ------- -------
$ 4,752 $ 4,775 $16,471 $13,300
======= ======= ======= =======
The increase in service charge revenue in the third quarter and first nine months of 2008 as compared with the same periods of the prior year was the result of increased transaction accounts from the expansion of six financial centers since September 2007 and a concentrated effort to increase fee income throughout 2008.
The decrease from Gateway's insurance operations in the third quarter of 2008 as compared with the same period of 2007 resulted from $22,600 less revenues from its title agency and a softening in property and casualty premiums during the third quarter of 2008 as compared to 2007. The increase from Gateway's insurance operations for the nine months ended September 30, 2008 as compared with the prior year nine-month period resulted from higher performance bonuses received during the first quarter of this year as compared with the prior year, which has more than offset the decrease in $43,600 in title revenues and softening in property and casualty premiums.
The decrease in revenue from the mortgage operation in the third quarter and nine-month period of 2008 as compared with the same periods of the prior year resulted from the nationwide housing market slowdown, lack of credit availability, and the softening of the economy; all of which has negatively affected the sale of loans into the secondary markets throughout 2008.
The decrease in brokerage operations in the third quarter and first nine months of 2008 as compared with the same periods of the prior year was the result of the departure of a broker from our North Carolina operations at the end of the third quarter of last year.
The increase in other income for the third quarter of 2008 as compared with the third quarter of 2007 was the result of gains of $181,600 higher income from BOLI that resulted from $14 million of additional BOLI purchased during January of 2008. The increase in other income for the nine months ended September 30, 2008 as compared with the same period of 2007 was the result of gains of $347,400 related to the sale of government sponsored loans in 2008 as compared with $37,100 for the nine-month period in 2007, and $495,800 higher income from the BOLI.
Gateway recognized a gain in the fair value of certain of its trust preferred securities of $2.2 million during the first nine months of 2008 as compared with $625,500 for the same nine-month period of 2007. Gateway elected the fair value option for certain trust preferred securities effective January 1, 2007, and under the accounting standards are required to mark these securities to market through the income statement as a component of non-interest income. As a result of the unusual credit conditions that the financial industry faced over the past year, the credit spreads on these debt securities started widening significantly beginning in the third quarter of 2007, resulting in a gain related to the fair value of the securities. At the time the fair value option was elected at the beginning of 2007, credit spreads on these types of securities were approximately 135 to 155 basis points over 3-month LIBOR. Currently, the credit spreads are approximately 475 basis points over 3-month LIBOR, and the markets are very illiquid.
For the third quarter of 2008, proforma non-interest income comprised 23.5% of proforma total revenues as compared with 26.0% for the third quarter of 2007. For the nine months ended September 30, 2008, proforma non-interest income comprised 28.2% of proforma total revenues of $58.3 million as compared with 27.4% for the same period in 2007.
Non-interest Expenses
Non-interest expense was $16.1 million for the third quarter of 2008, up $3.7 million or 30.3% from the $12.4 million reported for the third quarter of last year. Non-interest expense was $43.3 million for the nine months ended September 30, 2008, up $11.0 million or 34.0% from the $32.3 million reported for the same period in 2007. Of the $3.7 million increase in the third quarter, $1.34 million (or 35.8%) was related to expenses associated with the pending merger with Hampton Roads Bankshares, Inc., professional expenses related to potential capital raises that were discontinued at the time the merger was announced, and costs associated with an acquisition that was abandoned.
A comparison of non-interest expense for the third quarter and first nine months of 2008 as compared with the similar periods in 2007 is as follows (in thousands):
Three Months Ended Nine Months Ended
September 30, September 30,
---------------- ----------------
2008 2007 2008 2007
------- ------- ------- -------
Salaries and benefits $ 8,149 $ 6,935 $22,926 $17,920
Occupancy and equipment 2,499 2,164 7,372 5,981
Data processing fees 627 538 1,907 1,417
Other 4,822 2,716 11,073 6,978
------- ------- ------- -------
$16,097 $12,353 $43,278 $32,296
======= ======= ======= =======
The increase in salaries and benefits for the third quarter of 2008 as compared with the third quarter of 2007 was primarily related to expansion activities over the past 12 months. The Bank opened six new de novo financial centers and a loan production office over the last 12 months. Additionally, to support the growth over the last 12 months, credit administration and operational staff has increased. As a result, full-time equivalents ("FTE's) have increased from 413 at the end of the third quarter of 2007 to 514 at the end of the third quarter of 2008. The increase in salaries and benefits for the first nine months of 2008 as compared with the same period of 2007 was primarily related to expansion activities and The Bank of Richmond acquisition (in which 2008 included a full nine months of salaries and benefits, as compared with 2007 which only included four months of The Bank of Richmond expenses).
The increase in occupancy and equipment and data processing costs for the third quarter and the first nine months of 2008 was directly the result of adding the six de novo financial centers since September 2007 and The Bank of Richmond financial centers added in June of 2007.
The increase in other expenses for the third quarter and first nine months of 2008 as compared with the same periods of 2007 was primarily related to the $1.34 million of aforementioned non-recurring expenses related to the pending merger, capital raises, and abandoned acquisition; as well as higher FDIC insurance premiums associated with the growth in deposits, higher franchise taxes that have resulted from the franchise expansion in Virginia, and higher costs associated with other real estate owned.
Gateway's proforma efficiency ratio for the third quarter of 2008 was 72.82%, up from 66.63% for the third quarter of 2007 (both ratios were computed using proforma total revenues and proforma non-interest expenses as defined above). As a percentage of average assets, proforma non-interest expense (excluding the non-GAAP non-recurring expenses) dropped from 2.86% for the third quarter of 2007 to 2.73% for the third quarter of 2008 as Gateway continues to gain economies of scale from its maturing financial centers.
Loan and Asset Growth
Loans grew $91.1 million or 5.2% in the third quarter and have increased $435.2 million or 30.9% since September 30, 2007. Overall assets increased $152.9 million or 7.1% in the third quarter and have increased $542.0 million (31.2%) since September 30, 2007. At September 30, 2008, total assets were $2.28 billion. The growth in loans and assets is reflective of the Company's pre-existing investments in infrastructure (in particular Raleigh and Wilmington, North Carolina, and the Hampton Roads area and Richmond, Virginia).
Mr. Berry emphasized, "Despite the adverse economic and competitive climate, we are still in the business of lending money and our loan pipeline in the third quarter was aided by the retreat from lending activity by some large competitors as well as steady demand in most of our markets. As a percentage of the total loans outstanding, construction, acquisition and development loans have been steadily declining over the past year -- from 40.2% at September 30, 2007, to 38.2% at June 30, 2008, to 37.6% at September 30, 2008. We view this reduction as a prudent step, given current economic conditions, and expect this category to decline further in future quarters. Overall our markets remain solid and steady, as their local economies reflect consistent growth."
A break-down of the loan composition on a linked quarter basis and over the past 12 months is as follows (in thousands):
Sept 30, 2008 June 30, 2008 Sept 30, 2007
--------------- --------------- ---------------
Percent Percent Percent
of of of
Amount Total Amount Total Amount Total
---------- ---- ---------- ---- ---------- ----
Construction,
acquisition, &
Development $ 693,418 37.6% $ 669,168 38.2% $ 567,181 40.2%
Commercial
real estate 414,114 22.5% 400,168 22.8% 309,151 22.0%
Commercial
and industrial 330,712 17.9% 299,639 17.1% 223,620 15.9%
Residential
mortgage 249,597 13.5% 238,803 13.6% 174,028 12.4%
Home equity 127,869 7.0% 119,013 6.8% 107,599 7.6%
Consumer 16,568 0.9% 19,204 1.1% 20,792 1.5%
Mortgage loans
held for sale 10,813 0.6% 6,012 0.4% 5,491 0.4%
---------- ---- ---------- ---- ---------- ----
Total loans $1,843,091 100% $1,752,007 100% $1,407,862 100%
========== ==== ========== ==== ========== ====
As indicated in the above table, commercial loans and residential mortgage represented the majority of the growth over the past 12 months. The increase in commercial loans was spread between construction, acquisition and development, commercial real estate, and commercial & industrial. This growth was concentrated mainly in the Raleigh, Wilmington, Richmond, and greater Hampton Roads areas. The increase in residential mortgage loans was primarily jumbo mortgages originated through our mortgage subsidiary.
Asset Quality
Non-performing loans ("NPLs") were $7.8 million at September 30, 2008 as compared with $7.1 million at June 30, 2008. Non-performing loans increased slightly to 0.43% of loans outstanding at September 30, 2008 as compared with June 30, 2008 at 0.40% of loans outstanding. A break-out of the non-performing loans at September 30, 2008 by geographic region is as follows:
# of
Region Amount % of NPLs Accounts
------ ------ --------- --------
Albemarle $2,151,000 27.4% 19
Hampton Roads $1,315,000 16.8% 3
Outer Banks $2,489,000 31.7% 12
Wilmington $1,427,000 18.2% 2
Richmond $19,000 0.2% 3
Raleigh Triangle $362,000 4.6% 2
Other $82,000 1.1% 1
---------- ---------- ----------
Total non-performing loans $7,845,000 100.00% 42
A break-out of the non-performing loans at September 30, 2008 by type is as follows:
% Loans # of
NPLs by Type Amount Outstanding Accounts
------------ ------ ----------- --------
HELOC $827,000 0.65% 5
1 - 4 Family $3,083,000 1.24% 9
Const & Development $2,764,000 0.40% 10
CRE $163,000 0.04% 3
C&I $915,000 0.28% 11
Consumer $93,000 0.56% 4
---------- ---------- ----------
Total non-performing loans $7,845,000 0.43% 42
Other real estate and repossessed assets was up slightly to $3.1 million at September 30, 2008, from $3.0 million in the prior quarter. The majority or 67.0% of the other real estate owned was located in the Outer Banks, with the remaining portion located in the Albemarle region of North Carolina. For the third quarter, net loan charge-offs were $820,000 or 0.18% annualized of average loans, as compared with net charge-offs in the second quarter of 2008 of $826,000 or 0.20%. For the nine months ended September 30, 2008, net charge-offs were 0.14% annualized of average loans as compared with 0.09% for the prior year nine-month period.
Total past dues were $7.2 million or 0.39% at September 30, 2008, up from 0.14% of loans outstanding at June 30, 2008. A break-out of the loan delinquencies at September 30, 2008 by type is as follows:
Percent
of Loans
Past dues by type Amount Outstanding
----------------- ------ -----------
HELOC $885,000 0.69%
1-4 Family Residential $1,060,000 0.42%
Const & Development $3,755,000 0.54%
CRE $242,000 0.06%
C&I $827,000 0.25%
Consumer $478,000 2.88%
----------
Total past dues $7,247,000 0.39%
At September 30, 2008, the allowance for loan losses was $22.8 million, or 1.24% of total loans (excluding loans held for sale), up from $15.3 million or 1.01% of total loans at the beginning of the year.
Mr. Berry added, "Given the ongoing turmoil in the financial marketplace, our credit quality numbers continue to hold up very well as compared to our peer group and national averages. We did see some increases in our delinquencies during the third quarter, and downgraded some existing credits to reflect the continuing softening of the economy and decreasing real estate values in some of our markets which negatively affected the fair value of the collateral for some of our potentially problem loans. These downgrades increased our potentially problem loans by approximately $4.2 million during the quarter. We have consistently been increasing our loan loss provision throughout the year, and added $5.4 million during the third quarter. The loan loss provision increase primarily reflects our loan growth for the quarter and the increase in our delinquencies and potentially problem loans. While our markets have been somewhat resilient to the problems felt throughout the rest of the country over the past year, we are not totally immune to these issues. The increase in our reserves is consistent with safe and sound banking practices, and we now have approximately 290% reserve coverage for the entire NPL balance. In this current environment our overall asset quality remains very good and continues to be a credit to the outstanding bankers and lenders we hire, as well as our conservative underwriting standards which speak to our fundamental strategy of competing on interest rate but not sacrificing on credit quality."
Deposit Growth and Borrowings
Deposits increased $215.8 million or 13.3% during the third quarter of 2008, and have increased $481.0 million, or 35.5%, over the past twelve months to $1.83 billion. Core deposits (including retail CDs) were up $95.8 million or 10.7% since September 30, 2007 to $992.2 million, and jumbo CDs were up $18.9 million, or 6.8% over the past 12 months to $295.9 million at September 30, 2008. Brokered deposits, which historically have been used to fund loan growth in the loan production offices, and more recently to provide lower cost funding and liquidity, grew $366.3 million over the past 12 months to $546.2 million at September 30, 2008. The mix of our brokered deposits changed significantly to provide a lower cost of funding during the period of significant interest rate decreases, as well as build cash balances during the third quarter. During the first nine months of 2008, $279.5 million of brokered money market accounts that carry an interest rate of 16 basis points over the effective fed funds rate have been obtained to replace $54.8 million of higher cost brokered CDs and fund a portion of the loan growth during 2008 at a variable rate that has decreased with the declining fed funds rate. These brokered accounts are less expensive than retail deposits, and have acted as a natural hedge against our variable loan portfolio during the falling rate environment we experienced during the first half of the year. Additionally, the Company began utilizing the Certificate of Deposit Account Registry Service or "CDARS" brokered deposit program during 2008. CDARS is a deposit swapping service that enables banks to provide their customers with access to millions of dollars of FDIC-insured CDs. CDARS allows banks to exchange customer deposits with one another (in sub-$100,000 increments) so that their customers can obtain FDIC protection while the banks can utilize the full amount of the large deposits for funding loans and adding liquidity. The Company gathered $95.6 million of the CDARS brokered deposits during 2008. Of the $336.3 million in brokered deposit growth, $224.6 million was related to the third quarter and was used primarily to repay $63.5 million of short-term borrowing and increase cash balances $96 million to provide excess liquidity during these turbulent times of bad publicity and bank failures in the third quarter. Core deposits comprised 54.1% of total deposits at September 30, 2008, jumbo CDs were 16.1%, and brokered deposits were 29.8%.
Borrowings, including junior subordinated debentures, totaled $273.9 million at September 30, 2008, up $42.4 million from twelve months ago, however, were $63.4 million lower than June 30, 2008 as brokered deposits were used to pay down short-term debt. On September 30, 2008, the Company obtained loans in the aggregate amount of approximately $31.0 million from Hampton Roads Bankshares, Inc. and its subsidiaries as part of its merger agreement. The loans are payable on demand and were used to terminate the Company's credit agreement with JPMorgan Chase Bank, N.A. dated May 30, 2008.
Stockholders' Equity
Stockholders' equity at September 30, 2008 totaled $163.5 million, an increase of $22.4 million, or 15.9%, from September 30, 2007. The increase was primarily related to an issuance of $23.2 million of Series A non-cumulative, perpetual preferred stock in December 2007 and $37.3 million of Series B non-convertible, non-cumulative, perpetual preferred stock in September 2008. The additional capital provided through this preferred stock was partially offset by the loss in the third quarter of this year that resulted primarily from the impairment charge of $37.4 million related to the investment in GSE preferred stock. As a result of favorable tax provisions included in the Emergency Economic Stabilization Act of 2008 ("EESA") that converted the loss on the preferred investments from a capital loss to an ordinary loss, the Company expects to realize a Federal tax benefit from the loss of approximately $12.7 million. However, since the Act was not passed until October 3, 2008, for GAAP purposes the tax benefit cannot be recognized until the fourth quarter of 2008; and, therefore, is not included in the third quarter financial statements. The federal banking and thrift regulatory agencies announced on October 17, 2008 that they will allow banks and bank holding companies to recognize the effect of the tax change included in the EESA in their third quarter 2008 regulatory capital calculations. At September 30, 2008, the Company had a total risk-based ratio of 10.53% and the Bank has a total risk-based ratio of 11.21%. All regulatory capital ratios remain in excess of the "well-capitalized" regulatory threshold.
Mr. Berry concluded, "Our ability to raise $37.3 million in capital in a short time period in this challenging environment is reflective of the investor confidence in our strong management team, our ability to produce solid financial performance year after year, and the strategic opportunity that the merger with Hampton Roads Bankshares will provide."
About the Company
Gateway Financial Holdings, Inc. is the parent company of Gateway Bank & Trust Co., a regional community bank with thirty-seven full-service financial centers -- twenty-one in Virginia: Virginia Beach (7), Richmond (6), Chesapeake (3), Suffolk, Norfolk, Charlottesville and Emporia (2); and sixteen in North Carolina: Elizabeth City (3), Edenton, Kitty Hawk (2), Moyock, Nags Head, Plymouth, Roper, Wake Forest, Wilmington, Chapel Hill, and Raleigh (3). The Bank provides insurance through its Gateway Insurance Services, Inc. subsidiary, brokerage services through its Gateway Investment Services, Inc. subsidiary, title insurance through its Gateway Title Agency, Inc. subsidiary, and mortgage banking services through its Gateway Bank Mortgage, Inc. subsidiary. The common stock of the Corporation is traded on the Nasdaq Global Select Market under the symbol GBTS. For further information, visit the Corporation's web site at http://www.gwfh.com/.
The Gateway Financial Holdings, Inc. logo is available athttp://www.globenewswire.com/newsroom/prs/?pkgid=5269
Forward-Looking Statements
Statements contained in this news release, which are not historical facts, are forward-looking statements, as that term is defined in the Private Securities Litigation Reform Act of 1995. Amounts herein could vary as a result of market and other factors. Such forward-looking statements are subject to risks and uncertainties which could cause actual results to differ materially from those currently anticipated due to a number of factors, which include, but are not limited to, factors discussed in documents filed by the Company with the Securities and Exchange Commission from time to time. Such forward-looking statements may be identified by the use of such words as "believe," "expect," anticipate," "should," "planned," "estimated," and "potential." Examples of forward-looking statements include, but are not limited to, estimates with respect to the financial condition, expected or anticipated revenue, results of operations and business of the Company that are subject to various factors which could cause actual results to differ materially from these estimates. These factors include, but are not limited to, general economic conditions; changes in interest rates, deposit flows, loan demand, real estate values, and competition; changes in accounting principles, policies, or guidelines; changes in legislation or regulation; and other economic, competitive, governmental, regulatory, and technological factors affecting the Company's operations, pricing, products, and services. The Company undertakes no obligation to update or clarify forward-looking statements, whether as a result of new information, future events, or otherwise.
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Consolidated Financial Highlights
3rd Qtr 2nd Qtr 1st Qtr 4th Qtr 3rd Qtr
2008 2008 2008 2007 2007
---------- ---------- ---------- ---------- ----------
(Dollar amounts in thousands, except share and per share data)
EARNINGS
Net interest
income $ 15,511 $ 13,720 $ 12,634 $ 13,778 $ 13,559
Provision for
loan losses $ 5,400 $ 2,200 $ 1,600 $ 1,600 $ 750
Non Interest
income
(loss) $ (32,356)$ 4,841 $ 6,878 $ 3,881 $ 6,118
Economic hedge
& OTTI
Adjustments
(1) $ (37,351)$ -- $ -- $ -- $ 1,343
Gain (loss) on
disposition
of premises
and
equipment $ 243 $ (8)$ 8 $ -- $ --
Proforma
non-interest
income (2) $ 4,752 $ 4,849 $ 6,870 $ 3,881 $ 4,775
Non Interest
expense $ 16,097 $ 13,755 $ 13,426 $ 12,645 $ 12,353
Nonrecurring
Merger,
Acquisitions,
Capital
Expenses $ (1,342)$ -- $ -- $ -- $ --
Proforma Non
Int expense $ 14,755 $ 13,755 $ 13,426 $ 12,645 $ 12,353
Pre-tax
income
(loss) $ (38,342)$ 2,606 $ 4,486 $ 3,414 $ 6,574
Net income
(loss) $ (37,427)$ 1,960 $ 3,123 $ 2,270 $ 4,216
Basic earnings
(loss) per
share $ (3.02)$ 0.12 $ 0.21 $ 0.17 $ 0.33
Diluted
earnings
(loss) per
share $ (3.02)$ 0.11 $ 0.20 $ 0.17 $ 0.32
Proforma
diluted
earnings per
share (3) $ (0.03)$ 0.11 $ 0.20 $ 0.17 $ 0.26
Weighted
average basic
shares
outstanding 12,557,631 12,535,189 12,502,990 12,589,210 12,630,561
Weighted
average
diluted
shares 12,557,631 12,852,137 12,863,436 13,000,662 13,096,695
PERFORMANCE RATIOS
Return on
average
assets -6.92% 0.38% 0.65% 0.51% 0.98%
Proforma
return on
average
assets (3) 0.01% 0.38% 0.65% 0.51% 0.78%
Return on
average
common
equity -154.41% 4.12% 7.38% 6.18% 11.96%
Proforma
return on
average
common
equity (3) -1.76% 4.12% 7.38% 6.18% 9.58%
Net interest
margin
(fully tax-
equivalent) 3.20% 3.03% 2.91% 3.40% 3.49%
Non-interest
income to
total revenue N/A 26.08% 35.25% 21.98% 31.09%
Proforma
non-interest
income to
total
proforma
revenue (2) 23.50% 26.11% 35.22% 21.98% 26.05%
Non-interest
expense to
average
assets 2.97% 2.69% 2.79% 2.82% 2.86%
Efficiency
ratio N/A 74.11% 68.81% 71.61% 62.09%
Proforma
efficiency
ratio (2) 72.82% 74.08% 68.84% 71.61% 66.63%
Full-time
equivalent
employees 514 485 460 420 413
CAPITAL
Period-end
equity to
assets 7.17% 7.69% 8.31% 8.80% 8.12%
Tier 1
leverage
capital ratio 8.61% 8.40% 9.00% 9.76% 8.57%
Tier 1
risk-based
capital ratio 9.35% 8.88% 9.40% 10.43% 9.65%
Total
risk-based
capital ratio 10.53% 10.89% 10.33% 11.40% 11.12%
Book value
per common
share (2) $ 8.08 $ 11.06 $ 11.25 $ 11.24 $ 11.15
Cash dividend
per share $ 0.08 $ 0.08 $ 0.08 $ 0.08 $ 0.08
ASSET QUALITY
Gross loan
charge-offs $ 827 $ 830 $ 123 $ 350 $ 50
Net loan
charge-offs $ 820 $ 826 $ 110 $ 307 $ 44
Net loan
charge-offs
to average
loans
(annualized) 0.18% 0.20% 0.03% 0.08% 0.01%
Allowance for
loan losses $ 22,783 $ 18,203 $ 16,829 $ 15,339 $ 14,046
Allowance for
loan losses
to total
loans 1.24% 1.04% 1.04% 1.01% 1.00%
Nonperforming
loans $ 7,845 $ 7,056 $ 6,574 $ 3,407 $ 2,817
NPL to total
loans 0.43% 0.40% 0.40% 0.22% 0.20%
Other real
estate and
repossessed
assets $ 3,089 $ 2,985 $ 623 $ 482 $ 350
END OF PERIOD BALANCES
Loans (before
allowance) $1,843,091 $1,752,007 $1,635,318 $1,522,401 $1,407,861
Total earning
assets
(before
allowance) $1,981,730 $1,919,577 $1,796,664 $1,688,914 $1,572,937
Total assets $2,279,684 $2,127,725 $1,992,685 $1,868,185 $1,737,245
Deposits $1,834,324 $1,618,541 $1,554,997 $1,408,919 $1,353,297
Stockholders'
equity $ 163,544 $ 163,684 $ 165,505 $ 164,407 $ 141,101
AVERAGE BALANCES
Loans (before
allowance) $1,793,470 $1,700,029 $1,581,520 $1,453,957 $1,376,807
Total earning
assets
(before
allowance) $1,946,382 $1,859,981 $1,745,212 $1,607,473 $1,543,071
Total assets $2,153,004 $2,059,814 $1,938,216 $1,781,477 $1,711,453
Interest
-Bearing
Deposits $1,853,795 $1,464,419 $1,358,445 $1,224,835 $1,268,285
Stockholders'
equity $ 158,562 $ 165,351 $ 165,509 $ 145,656 $ 139,815
Year to Date
9 Mos. 9 Mos.
2008 2007
----------- -----------
(Dollar amounts in thousands, except share and per share data)
EARNINGS
Net interest income $ 41,865 $ 35,307
Provision for loan losses $ 9,200 $ 3,300
Non Interest income (loss) $ (20,637) $ 13,884
Economic hedge & OTTI Adjustments (1) $ (37,351) $ 584
Gain (loss) on disposition of premises
and equipment $ 243 $ --
Proforma non-interest income (2) $ 16,471 $ 13,300
Non Interest expense $ 43,278 $ 32,296
Nonrecurring Merger, Acquisitions,
Capital Expenses $ (1,342) $ --
Proforma Non Int expense $ 41,936 $ 32,296
Pre-tax income (loss) $ (31,250) $ 13,595
Net income (loss) $ (32,344) $ 8,749
Basic earnings (loss) per share $ (2.70) $ 0.74
Diluted earnings (loss) per share $ (2.70) $ 0.72
Proforma diluted earnings per share (3) $ 0.29 $ 0.69
Weighted average basic shares outstanding 12,532,031 11,749,204
Weighted average diluted shares 12,532,031 12,116,100
PERFORMANCE RATIOS
Return on average assets -2.11% 0.80%
Proforma return on average assets (3) 0.34% 0.76%
Return on average common equity -44.29% 9.55%
Proforma return on average
common equity (3) 4.76% 9.15%
Net interest margin (fully tax-equivalent) 3.06% 3.53%
Non-interest income to total revenue N/A 28.22%
Proforma non-interest income to total
proforma revenue (2) 28.24% 27.36%
Non-interest expense to average assets 2.82% 2.94%
Efficiency ratio N/A 65.02%
Proforma efficiency ratio (2) 71.89% 67.39%
Full-time equivalent employees 514 413
CAPITAL
Period-end equity to assets 7.17% 8.12%
Tier 1 leverage capital ratio 8.61% 8.57%
Tier 1 risk-based capital ratio 9.35% 9.65%
Total risk-based capital ratio 10.53% 11.12%
Book value per common share (2) $ 8.08 $ 11.15
Cash dividend per share $ 0.24 $ 0.21
ASSET QUALITY
Gross loan charge-offs $ 1,780 $ 805
Net loan charge-offs $ 1,756 $ 781
Net loan charge-offs to
average loans (annualized) 0.14% 0.09%
Allowance for loan losses $ 22,783 $ 14,046
Allowance for loan losses to total loans 1.24% 1.00%
Nonperforming loans $ 7,845 $ 2,817
NPL to total loans 0.43% 0.20%
Other real estate and repossessed assets $ 3,089 $ 350
END OF PERIOD BALANCES
Loans (before allowance) $ 1,843,091 $ 1,407,861
Total earning assets (before allowance) $ 1,981,730 $ 1,572,937
Total assets $ 2,279,684 $ 1,737,245
Deposits $ 1,834,324 $ 1,353,297
Stockholders' equity $ 163,544 $ 141,101
AVERAGE BALANCES
Loans (before allowance) $ 1,691,861 $ 1,197,841
Total earning assets (before allowance) $ 1,851,432 $ 1,337,613
Total assets $ 2,049,835 $ 1,470,092
Interest-Bearing Deposits $ 1,747,629 $ 1,225,628
Stockholders' equity $ 162,966 $ 122,532
(1) These non-GAAP adjustments include the other than temporary
impairment (OTTI) of the GSE preferred stock and the gain and net
cash settlement on the economic hedge.
(2) Proforma non-interest income and proforma efficiency ratio are
non-GAAP measures that exclude the gain (loss) and net cash
settlements on economic hedge, OTTI on GSE preferred stock and
loss on disposition of premises and equipment, that management
believes provides more comparable, useful information
to investors.
(3) Proforma diluted earnings per share, ROAA, and ROAE are non-GAAP
measures that exclude the gain (loss) and net cash settlements
on economic hedge and loss on disposition of premises and
equipment, net of income taxes using a 37.5% blended rate; and
the OTTI of the GSE preferred stock, net of $465,000 of income
taxes that management believes provides more comparable, useful
information to investors.
(4) Book value per common share calculation subtracts the liquidation
value of the non-cumulative, perpetual preferred stock
from net assets.
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statement of Operations
Three Months Ended
September 30
------------
2008 2007
---- ----
Unaudited Unaudited
(Dollar amounts in
thousands, except share
and per share data)
INTEREST INCOME
Loans, including fees $ 28,824 $ 28,483
Trading account securities 47 626
Investment securities - taxable 1,614 1,186
- tax-exempt 116 119
Interest-earning bank deposits 27 145
Other interest and dividends 207 200
---------- ----------
Total interest income 30,835 30,759
---------- ----------
INTEREST EXPENSE
Money market, NOW and savings 4,139 3,351
Time deposits 7,910 11,582
Short-term debt 206 147
Long-term debt 3,069 2,120
---------- ----------
Total interest expense 15,324 17,200
---------- ----------
Net interest income 15,511 13,559
Provision for loan losses 5,400 750
---------- ----------
Net interest income after provision
for loan losses 10,111 12,809
---------- ----------
NON INTEREST INCOME (LOSS)
Service charges on accounts 1,320 1,047
Mortgage operations 744 780
Insurance operations 1,187 1,287
Brokerage operations 96 210
Gain on sale of securities
available for sale 146 --
Gain and net cash settlements
on economic hedge -- 1,343
Other than temporary impairment
of GSE securities (37,351) --
Gain (loss) from trading securities (13) 97
Fair value gain on trust preferred securities 376 576
Gain on disposition of property 243 --
Other income 896 778
---------- ----------
Total non interest income (loss) (32,356) 6,118
---------- ----------
NON INTEREST EXPENSE
Salaries and benefits 8,149 6,935
Occupancy and equipment 2,499 2,164
Data processing fees 627 538
Other expense 4,822 2,716
---------- ----------
Total non interest expense 16,097 12,353
---------- ----------
Income (loss) before income taxes (38,342) 6,574
Income tax expense (benefit) (915) 2,358
---------- ----------
Net income (loss) $ (37,427) $ 4,216
Dividends on preferred stock 512 --
---------- ----------
Net income (loss) available
to common shareholders $ (37,939) $ 4,216
========== ==========
Basic earnings (loss) per share $ (3.02) $0.33
Diluted earnings (loss) per share $ (3.02) $0.32
Weighted avg. basic shares outstanding 12,557,631 12,630,561
Weighted average diluted shares 12,557,631 13,096,695
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Consolidated Statement of Operations
Nine Months Ended
September 30
------------
2008 2007
---- ----
Unaudited Unaudited
(Dollar amounts in
thousands, except share
and per share data)
INTEREST INCOME
Loans, including fees $ 83,354 $ 72,981
Trading account securities 451 1,487
Investment securities - taxable 5,014 2,705
- tax-exempt 350 305
Interest-earning bank deposits 78 317
Other interest and dividends 746 591
---------- ----------
Total interest income 89,993 78,386
---------- ----------
INTEREST EXPENSE
Money market, NOW and savings 10,788 8,217
Time deposits 27,938 27,302
Short-term debt 642 965
Long-term debt 8,760 6,595
---------- ----------
Total interest expense 48,128 43,079
---------- ----------
Net interest income 41,865 35,307
Provision for loan losses 9,200 3,300
---------- ----------
Net interest income after provision
for loan losses 32,665 32,007
---------- ----------
NON INTEREST INCOME (LOSS)
Service charges on accounts 3,372 2,922
Mortgage operations 2,382 2,445
Insurance operations 4,243 4,126
Brokerage operations 291 672
Gain on sale of securities
available for sale 946 163
Gain and net cash settlements
on economic hedge -- 584
Other than temporary impairment
of GSE securities (37,351) --
Gain (loss) from trading securities (16) 356
Fair value gain on trust preferred securities 2,218 626
Gain on disposition of property 243 --
Other income 3,035 1,990
---------- ----------
Total non interest income (loss) (20,637) 13,884
---------- ----------
NON INTEREST EXPENSE
Salaries and benefits 22,926 17,920
Occupancy and equipment 7,372 5,981
Data processing fees 1,907 1,417
Other expense 11,073 6,978
---------- ----------
Total non interest expense 43,278 32,296
---------- ----------
Income (loss) before income taxes (31,250) 13,595
Income taxes 1,094 4,846
---------- ----------
Net income (loss) $ (32,344) $ 8,749
Dividends on preferred stock 1,524 --
---------- ----------
Net income (loss) available
to common shareholders $ (33,868) $ 8,749
========== ==========
Basic earnings (loss) per share $ (2.70) $ 0.74
Diluted earnings (loss) per share $ (2.70) $ 0.72
Weighted avg. basic shares outstanding 12,532,031 11,749,204
Weighted average diluted shares 12,532,031 12,116,100
GATEWAY FINANCIAL HOLDINGS, INC. AND SUBSIDIARY
Consolidated Balance Sheets
Sept 30, Dec 31, Sept 30,
2008 2007 * 2007
---------- ---------- ----------
Unaudited Unaudited
(Dollar amounts in thousands)
ASSETS
Cash and due from banks $ 129,559 $ 19,569 $ 20,752
Interest-earnings deposits
in other banks 377 1,092 3,401
---------- ---------- ----------
Total cash and cash equivalents 129,936 20,661 24,153
Trading securities -- 23,011 44,007
Securities available for sale 120,610 126,750 103,481
Federal Home Loan Bank stock 10,954 10,312 8,850
Federal Reserve Bank stock 6,698 5,348 5,337
Mortgage loans held for sale 10,813 5,624 5,491
Loans 1,832,278 1,516,777 1,402,370
Allowance for loan losses (22,783) (15,339) (14,046)
---------- ---------- ----------
Total loans, net 1,809,495 1,501,438 1,388,324
Premises and equipment, net 74,294 73,614 56,300
Bank owned life insurance policies 41,397 26,105 25,847
Goodwill and intangible assets 50,612 51,075 51,865
Accrued interest receivable 8,394 12,330 12,817
Real estate owned 3,089 482 350
Other assets 13,392 11,435 10,423
---------- ---------- ----------
Total assets $2,279,684 $1,868,185 $1,737,245
========== ========== ==========
LIABILITIES AND
STOCKHOLDERS' EQUITY
Deposits:
Noninterest-bearing $ 124,556 $ 123,885 $ 127,909
Interest-bearing 1,709,768 1,285,034 1,225,388
---------- ---------- ----------
Total deposits 1,834,324 1,408,919 1,353,297
Short-term debt 30,965 33,000 14,500
Long-term debt 242,885 249,102 216,937
Accrued expenses
and other liabilities 7,966 12,757 11,410
---------- ---------- ----------
Total liabilities 2,116,140 1,703,778 1,596,144
STOCKHOLDERS' EQUITY
Non-Cumulative, Perpetual
Preferred Stock 23,182 23,182 --
Series B Non-Convertible Non
Cumm Perpetual Pref Stock 37,301 -- --
Common stock 128,121 127,258 128,341
Retained earnings (deficit) (22,131) 14,991 13,812
Accumulated other
comprehensive loss (2,929) (1,024) (1,052)
---------- ---------- ----------
Total stockholders' equity 163,544 164,407 141,101
---------- ---------- ----------
Total liabilities
and stockholders' equity $2,279,684 $1,868,185 $1,737,245
========== ========== ==========
* Derived from audited financial statements.