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Executives

D. Ben Berry - Chairman & Chief Executive Officer

Theodore L. Salter - Senior Executive Vice President & Chief Financial Officer

J. Frank Horne - Senior Executive Vice President & Chief Credit Officer

Matthew D. White - Senior Executive Vice President & Chief Risk/Investment Officer

Myles W. H. Gaythwaite - Senior Executive Vice President & Chief Information Officer

Analysts

Samuel Caldwell - Keefe, Bruyette & Woods

Christopher Marinac - FIG Partners, LLC

Dave [Callen] – Private investor

Ted Davis – Private investor

Allan Bach - Davenport & Company

Tom [Zonie] -[Beckett] Capital

David Welsh - River Oaks Capital

Gateway Financial Holdings, Inc. (GBTS) Q2 2008 Earnings Call July 18, 2008 10:00 AM ET

Operator

Welcome to the Gateway Financial Holdings Incorporated second quarter 2008 results conference call. (Operator Instructions)

Before we begin today’s call, I would like to remind everyone that this call may involve certain forward-looking statements such as projections of revenue, earnings, and capital structure, as well as statements on the plans and objectives of the company or its management, statements on economic performance, and statements regarding the underlying assumptions of the company’s business.

The company’s actual results could differ materially from any forward-looking statements made today due to several important factors described in the company’s latest Security and Exchange Commission filings. The company assumes no obligation to update any forward-looking statements made during this call.

If anyone does not already have a copy of the press release issued by Gateway today, you can access it at the company’s website at www.gbsh.com. On the conference today from Gateway Financial Holdings Inc. we have Ben Berry, Chairman and CEO, and Teddy Salter, CFO. We will begin this call with management’s prepared remarks then open the call up for questions.

At this point I would like to turn the call over to Mr. Berry.

D. Ben Berry

I’d like to also mention we have Frank Horne, our Chief Credit Officer here, Matt White, our Chief Risk and Investment Officer, and Myles Gaythwaite, our Chief Information Officer here.

I’m pleased to report our second quarter results. Net income for the second quarter of 2008 was $2 million, in line with the street consensus of the first six months of 2008. We reported net income of $5.1 million, up $550,000 from the $4.5 million reported in the year earlier period. I do want to point out that these numbers do reflect the additional shares that we issued from the Bank of Richmond transaction.

I previously indicated that our second quarter results will reflect the ongoing impact of unprecedented interest rate reductions and the prime rate of the past six months. We entered the third quarter with steadily improving margins. Our footprint is in a solid and stable workplace and our asset quality stands among the highest in our peer group. Our net interest margin increased to 3.12% in the month of June. We expect to see continued margin improvement during the second half of the year. Each basis point reduction in the cost of funds reduces our interest expense by approximately $168,000.

Our focus is on obtaining the primary deposit relationship from all of our borrowers and increasing our demand in transactional accounts to increase our core deposit base. That will reduce our funding costs. In addition, let me repeat, we are well-capitalized, and in this challenging environment we have been able to take advantage of many loan and deposit opportunities that have been created by the major banks shrinking their balance sheets during the first half of 2008. If we decide to access the capital markets, it will be to take advantage of growth and other opportunities that will enhance earnings and shareholder value. We have been assured by investment bankers that we have access to capital if we need it to execute our business plan.

We also intend to keep our current common stock dividend and hopefully it can be increased in future quarters as earnings increase in economic trends improve. I want to also point out that the rate of our growth in non-interest expense slowed in the second quarter of 2008 to 2.5% on a linked quarter basis. We do not plan to open additional financial centers other than the ones that we have committed to until we get a 1% ROA as our priority now is to vastly improve profitability.

On the loan side is the percentage of the total construction acquisition and development loans were reduced from 40.7% at the end of the quarter to 38.1% as of June 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. Nonperforming loans held steady as of June 30th as compared with March 30, 2008 at 40 basis points of loans outstanding.

Total past dues were $2.4 million, only 14 basis points as of June 30th, down from 56 basis points of loans outstanding as of March 31, 2008. As of June 30, the allowance for loan loss was $18.2 million or 1.04% 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.

Given the ongoing turmoil in the financial marketplace, our credit quality numbers continue to speak to our fundamental strategy of competing on interest rate but not sacrificing on credit quality. We have consistently been increasing our loan loss provision, adding $2.2 million during the second quarter.

Despite a difficult operating environment with quality assets, a vibrant market, a solid competitive position, and improving margin, Gateway is well positioned to post improving earnings in the second half of 2008 and beyond, while we continue to measure strategic growth of our franchise.

At this time I’ll turn the meeting over to Ted Salter, our Chief Financial Officer to cover the results in detail.

Theodore L. Salter

It’s been indicated we earned $2 million for the quarter, and although on the surface these earnings didn’t appear as extraordinary, they’re very solid earnings in this tough operating environment and underlying these results is some very good strong fundamental in key areas and are having a very positive affect on our performance. In addition, they’re establishing some important trends for the rest of the year, and that’s what I’m going to spend some of my time this morning. I’m going to focus on some of these key areas and trends.

First I want to focus on our revenue and our balance sheet growth. Our loan growth has remained steady in the second quarter. It grew 7.1% or $116.7 million and it has grown $230 million or 15.1% since the beginning of the year. The majority of this growth is coming from the Greater Hampton Roads area in Richmond, Virginia, as well as in Raleigh, Wilmington, and the Northeastern Corridor in North Carolina. The economy in these areas appears to be holding up very well and we continue to see a steady pipeline of opportunities from these regions.

As a result of the 43% growth in our earning assets over the past year, which has principally been in the loans, net interest income has increased $3.2 million or 12.5% over the second quarter of the prior year and overall revenues have increased $3.7 million or 25% over the second quarter of last year. These increases are in spit of the 325 basis point drop in interest rates since September of last year that have negatively affected our net interest, interest income, and net interest margin. As we had indicated last quarter that we thought the worst was behind us in terms of the margin compression, and I want to spend a few minutes to address where we currently are with our interest rate margin.

Our interest margin was 2.97% for the quarter which was a decrease of 53 basis points as compared with the second quarter of last year; however, on a linked quarter basis it was a 6 basis point improvement from the first quarter. What’s even more important in the quarter-to-quarter improvement is the improvement that we’ve made in our margin since the end of the first quarter.

Our interest rate margin for the month of March was 2.7% and has been indicated a few minutes ago, our interest rate margin for the month of June was 3.12%. That’s a 35 basis point improvement in margin in just three months, which at our current level of average earning assets, would represent approximately $6.7 million of pre-tax profit improvement on an annualized basis from where we were at the end of March. We refer to this internally as the Power of the Basis Point.

We’ve been able to achieve this improvement through repricing of our Certificates of Deposit, continuing to obtain low cost wholesale money market funding, and increasing our balances in lower cost transaction deposit accounts. The cost of funds on our deposit accounts has dropped from 3.92% for the month of March to 3.25% for the month of June.

That’s a 67 basis point reduction in our deposit cost of funds in one quarter and we discussed in the past that even though we are very short term asset sensitive, and thus our margin got hammered for the last couple of quarters, we’re now beyond that and we’re actually at liability sensitive with our CDs and other liabilities repricing lower on a month to month basis. We would expect this trend to continue into the second half of the year.

We’re also doing some other things with our balance sheet management that would include reviewing credit relationships for all our renewing loans with the objective of putting 6% to 6.5% floors or converting into fixed rate loans in the 7.5% range as they mature. In addition, we have the same pricing strategy on new loans.

Therefore, we’re still in the business of lending money, but we’re going to do it more on our terms and earn a decent spread. We will continue to find a portion of our growth and replace maturing broker CDs with wholesale money market funding at a cost of 16 basis points over the Fed funds rate. This has and will continue to provide a natural hedge against our variable loan portfolio.

We also feel a steeper yield curve during the second half of the year will allow us to earn a great spread on structured leverage transactions as well as other investments. I want to leave you with a clear indication that our margin is improving and we expect it to continue to improve and as we said repeatedly, we had a short-term margin in interest and through our balance sheet management, have now got that behind us.

I want to switch gears and discuss another key factor in our earnings that Ben alluded to a second go and that’s [inaudible] expense control in our maturing financial centers as we continue to grow our business. We currently have 36 full service financial centers of which 27 are over 2 years old which represents 75% maturity as compared with a couple yeas ago when only about 50% of our financial centers were mature.

As a result, our non-interest expenses as a percentage of assets has dropped to 2.69% for the second quarter from 2.86% for the second quarter of last year. Just as important was the fact that our non-interest expense on a linked quarter basis only increased $329,000 or 2.5%. Our net interest income increased 8.6%. We continue to gain from these maturing financial centers and even though our non-interest expense is slightly higher from a dollar standpoint associated with this franchise growth, we are steadily reducing as a percentage of our revenues and asset size.

Ben focused on the asset quality statistics but I’d like to re-emphasize these because despite our steady loan growth we have had over the last couple years, our asset quality remains exceptional, especially in light of the huge chargeoffs within our industry that have continued into the second quarter of this year.

Net loan charge-offs were 20 basis points of average loans outstanding for the quarter and year to date this year have been 11 basis points of average loans outstanding as compared to 13 basis points. Last year’s nonperforming loans held steady at 40 basis points of loan outstanding as compared to the first quarter and most significantly, our delinquency fell to 14 basis points, down from over 50 basis points last quarter, and even with these outstanding statistics, we still recorded a loan loss provision of $2.2 million for the second quarter which was a $600,000 increase over the first quarter.

This provision was a direct result of the loan growth and adhering to our conservative [inaudible] principal. The provision was 2.47 times our chargeoffs and we have increased our reserve to 1.04% of loans outstanding from 1.01% at the beginning of the year. The loan loss reserve currently provides a 25% coverage of our existing NPL balance.

Lastly, I just wanted to emphasize that the bank remains well-capitalized with a total risk based capital ratio of approximately 10.84% at June 30, with $23.2 million of additional capital we raised in December of last year in the form of the [inaudible] perpetual preferred stock and the $20 million of [PR2 sub] debt that was obtained during the second quarter of this year has enabled us to continue to strategically grow and execute our business plan. With this strong capital position and well-managed balance sheet, excellent asset quality, and improving interest rate margin, we are well positioned to strategically grow and look forward to navigating through what continues to be a very challenging operating environment for the rest of the year.

I appreciate your time this morning and I’m going to turn it back over to Ben now for some wrap up and questions.

D. Ben Berry

Obviously we feel like we’ve had a good quarter under the trying economic circumstances. Obviously we feel like we’re well positioned going forward and our asset quality numbers remain excellent. Also looking at ways to decrease our funding costs are certainly beginning to work as you see our margins expanding and again we have a slogan around here, “The Power of the Basis Point” so our people are incented to bring in low cost transactional deposits so with that we will now open the floor up for questions.

Question-and-Answer Session

Operator

(Operator Instructions) Your first question comes from Sam Caldwell - KBW.

Samuel Caldwell - Keefe, Bruyette & Woods

I wanted to ask a question about Fannie Mae and Freddie Mac preferred stock. I know in your, I believe it was in your K, you hinted at the fact that you had some of this on your balance sheet, but I just wanted to know if you could detail what your exposure to Fannie Mae and Freddie Mac preferred stock was.

D. Ben Berry

In fact, Sam, the amount is actually in our first quarter Q but we have $40 million, $20 million of Fannie and $20 million of Freddie.

Samuel Caldwell - Keefe, Bruyette & Woods

Have you marked that down at all?

D. Ben Berry

At June 30 the market value of that was approximately $38.5 million, and yes it was marked at $38.5 million at June 30th.

Operator

Your next question comes from Christopher Marinac - FIG Partners.

Christopher Marinac - FIG Partners, LLC

Ben and Ted, I was curious if you could just give a little more color about from a standpoint of your construction borrowers and just the general folks that you work with within your footprint, how healthy do you think they are today versus 3 or 6 months ago. Do you see any signs that their business is a little softer than it would have been? Just curious of any additional color beyond the numbers you just went through.

D. Ben Berry

Chris, I would say that we feel like our markets have, the Outer Banks is probably the softest market we have, but we see in that market, let me address the markets, and I may be deviating from your specific question, but restaurant receipts are up, rentals are up, all of the non-real estate things are doing well in that particular market. Values have declined a little bit but what we see is the construction area and those markets has continued to do okay because those loans are repaid from cash flow. They have proper equity in them.

Cash flow numbers, liquidity, and they’ve been the type of borrowers that we have always sold. From the construction loan thing, specifically throughout the system we have actually, I don’t know if we put it in the release or we do have some of the specific numbers, we’ve seen actually more issues in the [inaudible] portfolio than we have in the construction loan portfolio, but we’ve underwritten our construction loan borrowers on a global cash flow basis.

We require equity in projects. We require most of [inaudible] and while things are slower, it’s still our borrowers, we feel like are the people we’ve known forever that know how to weather the economic downturns, so we feel good about our portfolio. We made a decision, though, on a risk management basis, not a credit quality basis, to decrease that portfolio down to hopefully 35% or less by the end of the year, and next year get it down to 28%, because what’s happening now in the market is the large banks now, and I won’t name specifics though, are shrinking their balance sheet as I alluded to earlier.

We’re getting a lot of at-bats with clients we normally would not have gotten an at-bat with because our bank size and legal lending limit allows us to entertain those requests, but a lot of that is commercial industrial loans, it’s owner occupied loans, it’s operating loans, the stuff that’s coming with nice demand deposit relationships, sweep accounts, and the opportunity to cross-sell a lot of our bank services, so that’s the down and dirty of where we see things, and I hope that answers your question.

Christopher Marinac - FIG Partners, LLC

As you look at just overall real estate and construction relative to your capital levels, do you want that as a percentage to decline the next several quarters, are there any thoughts on how you want to manage the ship going forward?

D. Ben Berry

We want to, like super jumbo lot mortgage loans is a big demand, and for those in the Raleigh, Charlottesville, Richmond, Hampton Roads area, they are only 50% risk weighted. We were able to price those right now Chris in the 7.25% to 7.5% fixed range for 5 year with 30 year [ams] to people who have FICA scores in excess of 730 and down payments in excess of 30% that are generally professionals and obviously you can match fund them with Federal home loan bank advances and that is less of a constraint against capital so that’s the line of business that we certainly had been fairly aggressive in those key markets, but again there’s a lot of excellent companies that have been around a long period of time, operating companies that need permanent working capital and other lines of credit that we have had the opportunity to deal with that’s been created by the big boys shrinking their balance sheets.

Operator

Your next question comes from Dave [Callen], a private investor.

Dave [Callen] - Private investor

As I watch the stock, and obviously in my opinion, it’s moving down with the rest of the sector, not based on your fundamentals but on other sector fundamentals, and one thing I notice if you look at the estimates for Citibank, Merrill Lynch, JP Morgan, Wachovia, 60 days ago they were all going to make $0.60. Citibank, the analysts dropped it down to a loss of $0.60, Merrill Lynch to a loss of $1.91, Wachovia to a loss of $0.78, so these analysts turned these things all around so they set them up for success when they beat the estimate that they continue to do nothing but revise it down.

Now I look at what the analysts did on your end and no one revised it down, they held you at $0.11, so I just don’t feel like we’re getting a fair shake being a public company anymore. We’re just getting beaten down with the big boys and we’re not getting the benefits that they get, and wonder, is it time to take the company private?

D. Ben Berry

We feel like the market has been, we have been unfairly treated would be a comment, a lot of short sellers and things like that, and hopefully the SEC is going to arrange some of that in, but we do feel like if there was any knock on us as our exposure to the construction market, we’ve addressed that. We look at things from a risk management area and we’ve thought about it but right now it looks like that might not be an option because it will be cost-prohibitive, but it’s something that.... I think every bank at some point or public company has thought about in these times where the markets are not rational.

Dave [Callen] - Private investor

In addition, you’re the only bank that steps up and puts your personal money behind the company, while all the others sold at the peak. You are stepping up and continue to buy. At what point do... To me, I’m pretty certain I know who’s lending out shares and in my opinion, I just want to see these guys get the squeeze and whether that’s raising the dividend and holding them accountable for that because they are on the hook as being short, and I just want to see you taking some aggressive steps to get a fair valuation of the company.

D. Ben Berry

And we certainly agree with you. I think, again, it’s been a very irrational market. I think you hear certain analysts on CNBC and then later at night and I won’t call any names, make just some statements that are just not credible, but it tends to bother us that are in the industry, but again, we know that when earnings drop, the stock price, you heard Teddy, our CFO, talk about the continued improvement in our expense controls. We had a margin issue, not a credit issue or other type of issue and you can manage through a margin issue.

A couple of quarters of pain we’ve endured, and we feel like we’re well positioned with our earnings growth. You heard me comment other than the financial centers that are on the drawing board, we feel like we pretty much have built a lot of our franchises in place, and when we hit a 1% ROA then we’ll look at, after the ones that we’re committed to are done, then we’ll come back and back and fill but more on a maximizing our franchise and doing as I said more with less. But again, I hear you, and every morning I get up, all those things are on my mind, so I appreciate your comments.

Dave [Callen] - Private investor

Hopefully the analysts will recognize the great job you’re doing. Again, I just think it’s comical that Citigroup 60 days ago was supposed to make $0.36 then the analysts dropped it down to a loss of $0.60 and today they get rewarded for beating that almost $1.00 swing in estimates, and here you come in strong, you hit the number, so hopefully these analysts will start to upgrade you and you can pick up some new research coverage and get a fair valuation, so again, thanks for doing a great job and hopefully the stock will catch up to where it should be.

Operator

Your next question comes from Ted Davis, a private investor.

Ted Davis – Private investor

I was calling mainly for Frank on the increased regulator supervision. I wanted to see if the mood had settled down or what his thoughts were.

J. Frank Horne

I don’t know that the mood is really settled down. I think it’s been fairly consistent for some time. They’ve been talking about commercial real estate concentrations and I think they’re just changing focus to new construction and development. Their mood with us has always been fairly consistent because I think we’ve always worked well with the regulators. It’s going to be interesting to see how their mood is going forward and especially in today’s light.

D. Ben Berry

I’d like to add too, the regulators, as long as you underwrite credits properly and to acceptable standards, they have not gotten what I would call out of control, overzealous, of anything like that. They’re just looking to follow the normal processes that a bank our size should follow in credit underwriting and again, our lenders, our average lender, has over 20 years experience.

They all learn how to underwrite their credits when the banks that we were with previously and we don’t have lenders that do what I call box lending which is credit scoring lending that is based on some model. These are manually underwritten. They thoroughly understand the credit. They’re involved in the write ups, the underwriting, and we’ve spent a lot of money creating a, quite frankly, a big bank underwriting system to measure and monitor things, plus Matt White, our Chief Risk Officer, does what I call cross over into the commercial loan area and all our loans and Matt’s an ex-Federal Reserve regulator.

In addition, we’ve hired independent appraisers that work with us and they actually don’t report anybody in the credit area, they report directly to Matt, and Matt has absolutely no loan authority, so he has oversight on the risk issues there.

Operator

Your next question comes from Allan Bach - Davenport and Company.

Allan Bach - Davenport & Company

I know it’s not the hot topic of the day, but I wouldn’t mind if you wouldn’t mind touching on the insurance side of the business. I think you mentioned in your press release there’s a little bit of softening in that market. Any additional comments there?

Theodore L. Salter

Just from a revenue standpoint, the insurance business overall is just a little bit soft right now, but we’re still remaining very profitable. The division made somewhere in the $300,000 range for the quarter. We made around $900,000 year to date, so it’s just that revenues are off a little bit from where they have been, and it’s just the softening in the open market.

Allan Bach - Davenport & Company

The other thought was the tax rate going forward in the second half of the year. Any thoughts there, Ted, what we should be looking for?

Theodore L. Salter

The effective tax rate? I think you could probably use the first half of the year as a good guideline for that. I don’t see any significant changes in it.

Operator

Your next question comes from Tom [Zonie] from [Beckett] Capital.

Tom [Zonie] from [Beckett] Capital

I just wanted to follow up on the GSE preferred if I could. I was curious, first of all, although securities or carriers available for sale securities, is that correct?

D. Ben Berry

Correct.

Tom [Zonie] from [Beckett] Capital

And then at June 30 you had a cost basis of $40 million and a fair value of $38 million, is that correct?

D. Ben Berry

$38.5 million, yes.

Tom [Zonie] from [Beckett] Capital

So about $0.95 on the dollar in those securities. Any sense of the current market for those securities?

D. Ben Berry

No. I don’t know where it is right now.

Tom [Zonie] from [Beckett] Capital

You’re using it presumably broker bids for these securities at June 30th?

D. Ben Berry

Yes. They’re traded.

Tom [Zonie] from [Beckett] Capital

And any thoughts on potential other than temporary impairment if that has to happen at some point and the implications for other than temporary impairment?

Theodore L. Salter New Orleans normal

We really haven’t addressed that at this point. We don’t feel at this point they’re just temporarily impaired and we really don’t have any more information other than that at this point. We’re watching it just like everybody else is.

D. Ben Berry

And we expect when the legislation passes, which I’m on one of the ABA’s committees and we don’t guarantee anything even with politicians, but obviously we think that the proposals that Secretary Paulson and Chairman Bernackie have put in place are what needs to be done and we think once the market settles down and from the passes of that legislation, obviously the values in those things that should increase, but here again, that’s no guarantee, but we monitor the situation daily just like everybody else.

Again, I will say I think there’s a popular misconception out there that Freddie and Fannie loans, because we sell to them, we know how they underwrite those credits, and those loans are well underwritten and I think the market has really overreacted to certain analysts putting out certain things out there and again they’ve come out and said they’re adequately capitalized, the administration, President Bush has stated that it will work to ensure that Freddie and Fannie remain shareholder-owned companies.

What Paulson has said, and on and on and on, so they’re a major part of our economy, obviously, and we’ve even seen some investment banking groups have rated these buys now and in the last few days I think they’ve all reacted very favorably due to the pending legislation that’s in Congress.

Tom [Zonie] from [Beckett] Capital

Included in that $40 million, it’s all preferred securities, none of that is actually GSC.

Theodore L. Salter

It’s all preferred stock. It is the recent preferred stock. The 8.25 and 8 3/8 preferred. It’s not some of the old preferred that’s out there, it’s all the stuff that was in December and January.

Operator

Your next question comes from David Welsh - River Oaks Capital.

David Welsh - River Oaks Capital

The breakdown and Ben, you’re right, one of the things that people get concerned about is the construction acquisition and development, and we know it’s going to become a smaller percentage of the loan portfolio, but could you give us just some real rough numbers or percentages, however you’d like to do it? What’s raw land, what’s lot development, what’s developed lots, what’s vertical construction? Residential, commercial, etc.

D. Ben Berry

That’s a good question and I apologize, I probably should have covered it in my remarks totally, but it’s on the call report which is what you report these statistics. There’s about 5 categories of loans and actually on our lot loans, we actually carry a type of insurance we affectionately refer to as a PMI insurance on a lot of those credits that actually protects us against any downside but Frank Horne, our Chief Credit Officer, has these statistics, and he’s laughing, because his feelings were going to be hurt if somebody didn’t ask that question. So Frank, the floor’s all yours for this gentleman.

J. Frank Horne

I was expecting this question. We have, and you’re right, the way it’s reported, it’s all added together, but from a 1 to 4 family construction, it’s about $166 million. Residential land development is about $180 million. Commercial construction is about $130 million. We’ve got about $22 million in commercial development loans and raw land is $45 million. We’ve got a little shy of $10 million in farm land. Developed lots, not as opposed to A&D, just developed lots, to individuals, is about $130 million, and then non-farm, non-residential is about $335 million.

Operator

Your next question comes from Christopher Marinac - FIG partners.

Christopher Marinac - FIG Partners, LLC

Frank, I was wondering if you could just extend what you just gave to David for where the $2.6 million of construction and development falls into if you break it into these categories, even if it’s just a rough breakout.

J. Frank Horne

What category are you looking at? All of it?

Christopher Marinac - FIG Partners, LLC

If you broke the $2.624 construction and development, how would it break into 1 to 4 family construction, the residential land, etc.

J. Frank Horne

In terms of markets?

Christopher Marinac - FIG Partners, LLC

In terms of which buckets. Inside of construction, the non-accruals that you have, where do those?

J. Frank Horne

Non-accruals, okay. Bear with us just a minute Chris, we will get you an answer. From a non-accrual standpoint... I think that’s in the press release. It’s got $1,250,000 on non-accrual for HELOCS [inaudible]. We finally understand your question, Chris.

D. Ben Berry

About $500,000 of that $2.6 million is a construction loan and the balance is, we’ve got about $300,000 which is a lot to the builder and the balance are other lots.

Christopher Marinac - FIG Partners, LLC

So those would fall into the residential land, the $180 million that you talked about.

Theodore L. Salter

They would fall into the lot loan category, developed lots.

D. Ben Berry

Even though they’re consider construction loans, for our report purposes, there are more lot loans in there, Chris, there’s only one $500,000 actual construction loan.

J. Frank Horne

We have not seen many problems with our construction loans, period. We’ve have a couple but they’re limited to a small number of them and a smaller number of actual builders.

D. Ben Berry

And I want to reiterate, we cut off lending, making lot loans like in the Outer Banks and in any market we perceived to be soft, three years ago. So we have really, we know our markets well, and know when to hold them and when to fold them, so to speak. So our exposure there is limited plus a lot of these lot loans have a type of insurance coverage that will help them when and if, and hopefully they don’t, default, but if they do, it does give us a backstop.

Christopher Marinac - FIG Partners, LLC

So again, it’s $2.1 million in non-performing on the lot side and that compares to $130 million in the portfolio.

D. Ben Berry

That’s correct.

Christopher Marinac - FIG Partners, LLC

And the other $500,000 just ties back to the 1 to 4 family construction, I imagine.

D. Ben Berry

That’s correct.

Operator

There are no further questions at this time.

D. Ben Berry

I would like to thank all of you this morning for your interest in our company. Again, with margins widening, we feel like we’re well positioned for the second half of ’08. We feel very good about our markets right now relative to other parts of the country. We feel like we’re continuing to build a very solid franchise and we look forward again to building asset quality, it’s always job one with me. I think we’ve demonstrated it over ten years, and we can parade all the statistics out if anybody wants to see it, but in addition to asset quality, enhancing profitability and expense containment is certainly a priority of management as well as increasing our core deposit base and lowering our funding costs.

So that’s where we are. We’ll always look for opportunities that enhance shareholder value but again we feel well positioned and we plan to keep our dividend at the level it is and hopefully increase in the months that come. So again, thank you very much, and we appreciate your interest in our company.

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Source: Gateway Financial Holdings, Inc. Q2 2008 Earnings Call Transcript
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